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Tel Instrument Electronics Corp (TIKK) SEC Filing 10-K Annual Report for the fiscal year ending Thursday, March 31, 2022

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Tel Instrument Electronics Corp

CIK: 96885 Ticker: TIKK

Exhibit 99.1

 

Tel-Instrument Electronics Corp. Reports Net Sales

of $3.17 Million for Third Quarter 2022

 

East Rutherford, NJ – February 11, 2022 – Tel-Instrument Electronics Corp. (“Tel” or the “Company”) (OTCQB: TIKK), a leading designer and manufacturer of avionics test and measurement solutions, today reported net income of $195K ($0.04 per common share) on revenues of $3.17 million for the third quarter of fiscal year 2022 ended December 31, 2021.

 

Highlights include:

 

 

Revenues for the third quarter increased to $3.17 million, a 19% increase from the year-ago quarter.

 

Quarterly operating expenses decreased 10% to $1.1 million due to tight cost controls and a funded engineering project.

 

Operating income increased to $293K for the current quarter as compared to a loss of $224K in the year-ago quarter.

 

Nine-month operating income increased to $1.4 million versus $327K in the year-ago period.

 

Nine-month net income increased to $1.77 million, or $0.47 per common share.

 

Cash balances improved to $7.3 million, compared to $5.5 million at the start of the fiscal year.

 

Net worth improved to $6.8 million compared to $5.2 million at the start of the fiscal year.

 

Mr. Jeffrey O’Hara, Tel-Instrument’s President and CEO commented, “The Company recorded a profitable third quarter despite ongoing supply chain interruptions. Vendor lead times doubling and tripling in some cases with no sign of improvement in sight. This is causing ongoing issues in manufacturing and will negatively impact fourth quarter revenues. We are ordering additional components from our vendors to take the extended lead times into account. The positive news is that we are in a strong financial position to weather this supply disruption. We are also excited by the positive initial reception we have seen from customers on the SDR/OMNI test set. We are still working through component shortages on this test set, but initial production deliveries are still expected to commence in the second quarter of calendar year 2022. We believe that this will be a strong competitor in both commercial and military avionic and communication test set markets. The Lockheed Martin F-35 MADL development program had a successful Critical Design Review (“CDR”) in December. This contract will generate non-recurring engineering revenues over the next several quarters and should result in ongoing production revenues in what is essentially a new market for TIC. We are also actively working with the U.S. Navy on a “mid-life” update of our CRAFT test sets which could result in significant revenues over the next three to seven years.

 

With respect to the Aeroflex litigation, the Kansas Appeals Court is still working remotely and is not able to access the documents due to security restrictions. Aeroflex recently filed a motion with the Appeals Court to substantially increase the Bond Amount from the $2 million existing amount. We have filed a strong counter to this motion and expect it to be denied.

 

 

The following information was filed by Tel Instrument Electronics Corp (TIKK) on Tuesday, February 15, 2022 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-K Annual Report statement of earnings and operation as management may choose to highlight particular information in the press release.


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 


 

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended March 31, 2022

 

Commission File No. 001-31990

 

TEL-INSTRUMENT ELECTRONICS CORP.

(Exact name of Registrant as specified in its charter)

 

New Jersey

22-1441806

(State of incorporation)

(IRS Employer Identification Number)

 

 

One Branca Road

East Rutherford, New Jersey

07073

(Address of principal executive offices)

(Zip Code)

 

Registrants telephone number, including area code: (201) 933-1600

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

N/A

 

N/A

 

N/A

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock $.10 par value

(Title of class)

 

Indicate by checkmark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

 

Indicate by checkmark if registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No

 

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

 

 

 

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

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

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

 

The aggregate market value of the voting and non-voting common stock held by non-affiliates on September 30, 2021 (the last business day of our most recently completed second fiscal quarter) was $2,324,023 based on the closing price of $3.15 on September 30, 2021.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

3,255,887 shares of common stock, par value $0.10 per share, were outstanding as of June 16, 2022.

 

 

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

TABLE OF CONTENTS

 

PART I.

 

Page

 

 

 

Item 1.

Business

5

 

 

 

Item 1A.

Risk Factors

11

 

 

 

Item 1B.

Unresolved Staff Comments

11

 

 

 

Item 2.

Properties

12

 

 

 

Item 3.

Legal Proceedings

12

 

 

 

Item 4.

Mine Safety Disclosures

13

 

 

 

PART II.

 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

14

 

 

 

Item 6.

Reserved

15

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

23

 

 

 

Item 8.

Financial Statements and Supplementary Data

24

 

 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

51

 

 

 

Item 9A.

Controls and Procedures

51

 

 

 

Item 9B.

Other Information

51

     

Item 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

51

 

 

 

PART III.

 

 

 

 

 

Item 10.

Directors, Executive Officers, and Corporate Governance

52

 

 

 

Item 11.

Executive Compensation

55

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

57

 

 

 

Item 13.

Certain Relationships and Related Transactions and Director Independence

60

 

 

 

Item 14.

Principal Accounting Fees and Services

61

 

 

 

PART IV.

 

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

62

 

 

 

Item 16. Form 10-K Summary 63

 

 

 

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Included in this Annual Report on Form 10-K are “forward-looking” statements, within the meaning of Section 27A and Section 21E of the Securities Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties, as well as historical information. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that the expectations reflected in these forward-looking statements will prove to be correct. Our actual results could differ materially from those anticipated in forward-looking statements as a result of certain factors.. All statements other than statements of historical fact could be deemed forward-looking statements. Statements that include words such as “may,” “will,” “might,” “projects,” “expects,” “plans,” “believes,” “anticipates,” “targets,” “intends,” “hopes,” “aims,” “can,” “should,” “could,” “would,” “goal,” “potential,” “approximately,” “estimate,” “pro forma,” “continue” or “pursue” or the negative of these words or other words or expressions of similar meaning may identify forward-looking statements. For example, forward-looking statements include any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing. Important factors that could cause our actual results, performance, or achievements to differ from these forward-looking statements include the following:

 

the availability and adequacy of our cash flow to meet our requirements;

 

the financial impact of the Aeroflex litigation;

 

our ability to manage general economic, business, and geopolitical conditions, including the impacts of natural disasters, pandemics and outbreaks of contagious diseases and other adverse public health developments, such as the COVID-19 pandemic;

 

the recovery of market conditions, including our dependence on customers' capital budgets for sales of products and services, and adverse impacts on costs and the demand for our products as a result of factors such as the COVID-19 pandemic and the implementation of tariffs;

 

economic, competitive, demographic, business, and other conditions in our local and regional markets;

 

changes in our business and growth strategy;

 

changes or developments in laws, regulations, or taxes in the electronics/aerospace industry;

 

actions taken or not taken by third-parties, including our vendors, customers, and competitors;

 

the availability of additional capital; and

 

other factors discussed elsewhere in this Annual Report.

 

These forward-looking statements are found at various places throughout this Annual Report on Form 10-K and the other documents referred to and relate to a variety of matters. These forward-looking statements should not be relied upon as predictions of future events and Tel-Instrument Electronics, Corp. (the “Company”) cannot assure you that the events or circumstances discussed or reflected in these statements will be achieved or will occur. Furthermore, if such forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by the Company or any other person that the Company will achieve its objectives and plans in any specified timeframe, or at all. These forward-looking statements should, therefore, be considered in light of various important factors, including those set forth in “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K.

 

All forward-looking statements attributable to us are expressly qualified in their entirety by these and other factors. We undertake no obligation to update or revise these forward-looking statements, whether to reflect events or circumstances after the date initially filed or published, to reflect the occurrence of unanticipated events or otherwise unless required by applicable law.

 

 

PART I

 

Item 1. Business

 

General

 

Tel-Instrument Electronics Corp. (“Tel,” “TIC” or the “Company”) has been in business since 1947, is a certified small business, and is a leading designer and manufacturer of avionics test and measurement solutions for the global commercial air transport, general aviation, and government/military aerospace and defense markets. The Company designs, manufactures and sells instruments to test and measure, and also calibrates and repairs a wide range of airborne navigation and communication equipment.

 

The Company’s strategy over the years has been to invest heavily in research and development to design products significantly better than its competition. Our products provide the stimulus and signals necessary for certification, verification, fault finding and diagnosis of airborne military and commercial navigation and communication systems. Our products incorporate high levels of integration by combining more test functions into a single unit, and thereby reducing customer acquisition, training, and life-cycle support costs than legacy systems. The Company offers avionic test sets for:

 

 

Identification Friend or Foe (IFF) transponders and interrogators.

 

 

Tactical Air Navigation (TACAN)

 

 

Commercial Air Traffic Control

 

 

Navigation

 

 

Communication

 

Tel-Instrument Electronics Corp. an industry leader in developing, producing, selling, and supporting field-tested, rugged avionic flight line (ramp) and maintenance (bench) test sets for demanding military and commercial customers that range in list price from $12,000 to $90,000. Founded in 1947 and based in East Rutherford NJ, Tel-Instrument is an OTCQB listed public company trading under ticker symbol TIKK.

 

The Company has built a very solid position in the Mode 5 IFF and TACAN test set market. The Company is successfully extending its dominant market position in Mode 5 test sets in the U.S. defense industry to international partners. We believe that we are well positioned as our CRAFT and TS-4530A flight-line test sets have been endorsed by the U.S. military. Internationally, the Company has been very successful in capturing the lion’s share of the Mode 5 test set business with TIC’s T-47/M5 test set being selected by many international customers including: Canada; the U.K.; Japan; South Korea; and Australia. The Company continues to be in the forefront on Mode 5 research and development and has demonstrated test capability for Mode 5 Level 2B, which provides enhanced secure navigation data to military pilots. The U.S. Army has indicated that they plan to move to this new navigation technology in the next several years. This could entail substantial software upgrade revenues for the thousands of TS-4530A test sets sold to the U.S. Army and the U.S.A.F.

 

TIC is also working with the Navy on an ECP contract to upgrade all of the CRAFT 708 and 719 units in its inventory to remove product obsolescence and make other required software changes. TIC expects to receive a contract this summer from the Navy for engineering design work and the KIT replacement of all of the active components in the fielded CRAFT test sets. This should result in substantial recurring revenue once the design work is completed which is currently estimated at 24 months.

 

TIC is introducing the SDR/OMNI multi-purpose avionics test set this summer for the commercial and military markets. This will provide Transponder (Modes A, C, and S), ADS-B, and 978 MHz UAT capability as well as communication and navigation test functionality as well as distance to fault measurements. The SDR-Omni product is a game changer in the commercial and military avionics test market as it will allow customers to replace multiple competitive test sets with one unit that is smaller and provides more capabilities at a fraction of the cost. This new technology could provide us with the opportunity to expand out of our relatively narrow avionics test market niche and enter the much larger secure military and homeland security radio test market which is many times the size of our existing avionics test market. The secure military test set market is very large, and we are anticipating several large competitive DOD solicitations to take place in the next several years. The SDR/OMNI is the only test set on the market with full Class 1 military environmental compliance.

 

 

Item 1. Business (continued)

 

General (continued)

 

TIC is also working with Lockheed Martin (LMCO) on a new MADL test set. TIC was awarded this contract after winning a competitive solicitation. MADL is a secure communications radio for the F-35. This operates in a much higher frequency range than our other test sets and could represent a further diversification out of our core markets. TIC has completed the Test Readiness Review (“TRR”)     and will be commencing environmental and qualification testing this month . It is expected that this product will generate approximately $600k of recurring annual revenues and will position TIC for further development contracts with LMCO.

 

Company Response to COVID-19

 

Fiscal year 2022 operations continued to be affected by the ongoing outbreak of the Coronavirus disease 2019 (“COVID-19”) and its variants. While the business is still strong, the Company has been impacted by the pandemic in its commercial business and delays in orders from some of its military customers. The pandemic has also impacted its supply chain and labor force with disruptions to both the delivery of critical inventory components and personnel shortages due to COVID quarantines, which have hampered our ability to ship units under normal lead times

 

The subsequent spread of COVID-19 to the U.S. and many other parts of the world led the World Health Organization to characterize COVID-19 as a pandemic on March 11, 2020. Thereafter, most U.S. states imposed “stay-at-home” orders on their populations to stem the spread of COVID-19. Of specific interest to the Company, stay-at-home orders were imposed in the states of New Jersey and Kansas.

 

On May 4, 2020, the Company secured a Paycheck Protection Program (the “PPP”) loan, which, among other things is included in the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) in the amount of $772,577. TIC qualified for full loan forgiveness on the initial tranche on December 18, 2020. On January 6, 2021, updated PPP guidance outlining program changes to enhance its effectiveness and accessibility was released on in accordance with the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act. This was available to companies that recorded greater than a 25% sales reduction in any quarter compared to the prior year. The Company qualified for this second round of funding and on March 15, 2021, the company secured a Second Draw PPP loan in the amount of $772,577. The Company applied for forgiveness of the Second Draw Loan in accordance with the terms of the PPP Legislation. The Second Draw Loan was fully approved for the forgiveness, including the associated interest on September 17, 2021.

 

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. The funds related to the grant were received from the NJEDA on August 30, 2021, and were recognized as other income during fiscal year ended March 31, 2022.

 

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. The vast majority of TIC employees are fully vaccinated, and TIC is preparing for full compliance of the Executive Order should it apply.

 

The Department of Defense (DoD) also issued a memorandum stating that its contracting officers shall not enforce Defense Federal Acquisition Regulation Supplement (DFARS) 252.223-7999, Ensuring Adequate COVID-19 Safety Protocols for Federal Contractors. DoD instructed its contracting officers not to include the DFARS clause in existing contracts, task orders, and delivery orders. In addition, the memo directs that DoD contracting officers shall not include the class deviation clause in new contracts or orders and must not amend existing contracts or orders to incorporate the clause.

 

 

Item 1. Business (continued)

 

General (continued)

 

Mode 5 Identification Friend or Foe (IFF) Products

 

T-47/M5 Dual Crypto Test Set

 

This test set has been well-received in the market, especially in the international market. It is designed as a KIV 77/KIV78 Mode 5 upgrade for the approximately 2,000 AN/APM-480A and T-47 series Mode 4 IFF test sets that the Company has sold both domestically and internationally. This will be a cost-efficient upgrade to Mode 5 for our large installed customer base. The T-47/M5 capabilities allow full testing, simulation, and analysis of the following systems: Interrogator/Transponder Test set for Modes 1, 2, 3A, C, S, EHS, ADS-B TX and RX with 4 and Mode 5, TACAN, TCAS I, II and E-TCAS. The T-47/M5 utilizes the KIV-77, SIT 2010 or the KIV-78 Crypto applique (not included) for Mode 5 testing and built in USB connection available for remote diagnostic testing and download of test results to a PC.

 

The T-47/M5 performs the following tests:

 

Comprehensive Interrogator and Transponder test Modes 1, 2, 3A, C, S, EHS, Mode 4 and Mode 5

 

Multi Crypto Capable - Out of the Box - No Mods or added options needed

 

Full TACAN testing of A/A, G/A, and A/A BCN on all 252 TACAN channels X and Y

 

TCAS I, TCAS II and E-TCAS airborne systems intruder simulations

 

Mode 5 testing with a built in powered bay for the KIV-77, SIT 2010 and KIV-78 Crypto Applique’

 

Full Testing of ADS-B in compliance with RTCA DO-260 A and B requirements

 

Light Weight compact package in a MILSPEC Class 1 Container

 

Long Lasting Battery

 

Supports Remote Client testing utilizing USB connection to any laptop or desktop computer

 

Large Full Color Display with User Friendly easy to navigate interface

 

We have already sold approximately $13 million of these test sets to both domestically and internationally. TIC believes this product will continue to support our future growth and profitability. Tel has also received U.S. DOD AIMS certification for the T-47/M5 Test Set.

 

TS-4530A IFF Test Set

 

The TS-4530A test set provides simple to use GO/NO-GO operation. The TS-4530A, developed under a U.S. Army contract, now tests IFF Mode 5, ADS-B, EHS, and TCAS. The TS-4530A includes a large 8 line, color display and a new 3-button switch assembly that adds a 4-way directional toggle action for improved usability. The upper housing includes a built-in KIV-77 CCI appliqué enclosure.

 

Based on a new, highly integrated digital architecture; the TS-4530A performs the following tests:

 

Transponder: Modes 1, 2, 3/A, C, 4 Mode S, EHS (Enhanced Surveillance) and Mode 5 (Levels 1 & 2)

 

ADS-B In and Out (transmit and receive) testing

 

Built in GPS with integrated GPS antenna provides accurate Date, TOD and LAT/LONG for positioning

 

Simple to use GO/NO-GO operation

 

Selected Mode S BDS register information

 

 

Item 1. Business (continued)

 

General (continued)

We have delivered over 3,520 TS-4530A kits and test sets. We are seeing modest  demand from both the U.S. military and international customers, and we continue to explore all opportunities for this market.

 

T-4530i IFF Test Set

 

This new test is a software/hardware upgrade of the TS-4530A product. The lead customer for this test is the German military. This unit includes extended life Ni-MH batteries and significantly expanded manual Mode 5 test capability using a seven-year indefinite-delivery-indefinite quantity (“IDIQ”) contract to our European distributor, Muirhead Avionics (“Muirhead”) for T-4530i test sets. In total, TIC has delivered $3.5 million of these test sets to Germany.

 

Communications/Navigation (COMM/NAV) Radio Frequency (RF) Avionics Flight line Tester) (CRAFT) (AN/USM-708 and AN/USM-719)

 

The AN/USM-708 multi-purpose test set was developed by the Company in conjunction with the U.S. Navy. The AN/USM-708 large 6.0 inch color LCD screen and surrounding soft-keys and keyboard provides easy and quick access to a multiple of test screens menus, and display options affording single man operation, instant results, and a host of pre-programmed and manually variable parameters to meet the most demanding requirements for testing of airborne avionic and communication equipment.

 

The AN/USM-708 has been and continues to be a key product for the Company as it represents a new generation technology product. The Company delivered approximately $40 million in orders, representing over 1,200 test sets, for the AN/USM-708 and AN/USM-719 (IFF only) test sets to the U.S. Military. The AN/USM-708 CRAFT unit combines advanced IFF (including Mode 5 encryption technology) navigation, communication, and sonobuoy test capabilities in a portable test set, which will utilize a flexible and expandable digital-signal-processing-based architecture. Both the AN/USM-708 and the AN/USM-719 have been certified by the AIMS Program Office.

 

TIC is currently working with the Navy on an ECP contract to upgrade all of the CRAFT 708 and 719 units in its inventory to remove product obsolescence and make other required software changes. TIC expects to receive a contract this summer from the Navy for engineering design work and the KIT replacement of all of the active components in the fielded CRAFT test sets. This should result in substantial recurring revenue once the design work is completed which is currently estimated at 24 months.

 

The joint Strike Fighter (“JSF”) program continues to generate CRAFT orders as this program ramps up production. The Company has already received orders from Lockheed Martin for the AN/USM-708 units, for the JSF Program, totaling approximate $8 million. Sikorsky has also indicated that it will be ordering CRAFT test sets for its new helicopters. The Company also believes it will receive orders from other customers for this product.

 

Please visit www.telinstrument.com for a complete listing of all of the Companys different military and commercial products.

 

New Products

 

SDR/OMNI/MIL

 

TIC has spent the last several years developing the SDR/OMNI avionics test set which currently operates in the 1 MHz to 2.2 GHz range. This test set will enter full-rate production this summer. This new test set utilizes true software-designed radio technology that enables it to test all common avionics functions in one 4.5- pound test set, which is half the weight of competitive test sets. The SDR/OMNI has very wide frequency to accommodate new commercial and military waveforms. It utilizes the latest touch screen technology and has the capability to replace all TIC commercial test sets with one handheld product. At less than five pounds, this test set will be the smallest and most rugged test set available in the market with full Class 1 MIL-PRF-28800 environmental compliance including temperature ranges from -40 degrees to +55 degrees centigrade. The U.S. military will need to upgrade thousands of existing communication and navigation test sets over the next several years to address the new frequency and waveform requirements for military radios and we believe the SDR/OMNI is well positioned to capture a large portion of this business. This new technology could provide us with the opportunity to expand out of our relatively narrow avionics test market niche and enter the much larger secure military and homeland security radio test market which is many times the size of our existing avionics test market. The secure military test set market is very large, and we are anticipating several large competitive DOD solicitations to take place in the next several years.

 

 

Item 1. Business (continued)

 

General (continued)

 

MADL TEST SET

 

TIC is also working with Lockheed Martin (LMCO) on a new MADL test set. TIC was awarded this contract after winning a competitive solicitation. MADL is a secure communications radio for the F-35. This operates in a much higher frequency range than our other test sets and could represent a further diversification out of our core markets. TIC has completed the TRR and will be commencing environmental and qualification testing this summer. It is expected that this product will generate approximately $600k of recurring annual revenues and will position TIC for further development contracts with LMCO.

 

Future Prospects

 

The Company has built a very solid position in the Mode 5 IFF and TACAN test set market. The planned Navy ECP for CRAFT should generate substantial recurring revenues with the KIT upgrade of all of the Navy units and potentially units sold to other customers. We currently have the majority of the Mode 5 IFF flight-line test market and expect to continue to dominate this market segment with our commitment to self-funded research such as adding Mode 5 Level 2B to our T-47/M5 product.

 

We believe our new SDR/OMNI will do very well in the world-wide commercial avionics market although we are facing new competition from Aeroflex and a Canadian company. This should generate increased market share at very attractive gross margin levels. The real focus for the SDR/OMNI is in the military arena for Nav/Comm testers and communication test sets. This market has been dominated by Aeroflex for the last 30 years and TIC has not had a viable competitive product until now. The SDR/OMNI is ideally suited for these markets as it is the only test set on the market with full Class 1 DOD environmental compliance. The secure military test set market is very large, and we are anticipating several large competitive DOD solicitations to take place in the next several years.

 

Competition

 

The general aviation market consists of some 1,000 avionics repair and maintenance service shops at private and commercial airports in the United States that purchase test equipment to assist in the repair of aircraft electronics. The commercial aviation market consists of approximately 80 domestic and foreign commercial airlines.

 

The civilian market for avionic test equipment has been dominated by Aeroflex Inc., a division of Viavi Solutions, Inc. (NASDAQ: VIAV). They have dominated the commercial market with their IFR 4000 and 6000 test sets which were first introduced in 2004. They have sold thousands of these units over the last 18 years. These are becoming obsolete and will need to be replaced. Aeroflex has recently introduced a new test set called the 10K which combines the two test sets into one unit. A Canadian company, CCX Technologies, has recently introduced a competitive product which appears to be doing well in the market. The SDR/OMNI is smaller, more rugged, and easier to use than these two test sets and we are very optimistic that it will greatly improve our market share.

 

The military market is large and is dominated by large corporations with substantially greater resources than the Company, including Aeroflex. Tel competitively bids for government contracts based on the engineering quality and innovation of its products, competitive price, and “small business set asides” (i.e., statutory provisions requiring the military to entertain bids only from statutorily defined small businesses), and on bids for sub-contracts from major government suppliers. There are a limited number of competitors who are qualified to bid for “small business set asides.” The military market consists of many independent purchasing agencies and offices. The process of awarding contracts is heavily regulated by the U.S. Department of Defense.

 

Over the last fifteen years, the Company has won several large, competitively bid contracts from the military and has become the primary supplier for the U.S. Military, as well as the NATO countries, of flight line IFF test equipment. The CRAFT AN/USM-708, CRAFT AN/USM-719, TS-4530A, TS-4530i and TR-47/M5 test sets, discussed previously, involve a new generation of technology, including the next generation of IFF testing, and is expected to enable the Company to continue to be a major supplier of avionics test equipment to the military for years to come. Tel believes its new technology will also allow it to increase sales to the commercial avionics market in the future and expand into the very large secure communication test market.

 

 

Item 1. Business (continued)

 

General (continued)

 

Marketing and Distribution

 

Domestic commercial sales are made throughout the U.S. to commercial airlines and general aviation businesses directly or through distributors. There were $2,482,424 in domestic commercial sales in fiscal year 2022 and there was one (1) direct commercial customer who accounted for more than 10% of domestic commercial sales, Aero Express (14%). 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 14% and 5%, respectively, of commercial sales during fiscal years 2022 and 2021.

 

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, 2022, and 2021, sales to the U.S. Government, including shipments through the government’s logistics centers, represented approximately 26% and 38%, respectively, of total sales. 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. For the year ended March 31, 2021, two (2) direct customers represented 10% and 33% of total sales and 12% and 39% of government sales, respectively. No international distributor represented 10% of total sales or 10% of government sales for the year ended March 31, 2021.

 

International sales are made throughout the world to government and commercial customers, directly through American export agents, or through the Company’s overseas distributors at a discount reflecting a 15% to 22% selling commission, under written or oral, year-to-year arrangements. The Company has an exclusive distribution agreement with Muirhead Avionics Ltd (“Muirhead”) and Accessories, Ltd (“Muirhead”), based in the United Kingdom, to represent the Company in parts of Europe, and with Milspec Services in Australia and New Zealand. Tel also sells its products through exclusive distributors in Spain, Portugal, and East Asia and is exploring distribution in other areas. For the years ended March 31, 2022, and 2021, total international sales were 37% and 52%, respectively, of sales, the notable decrease is due partially to the Covid-19 Pandemic. Additionally, the Company has an agreement with M.P.G. Instruments s.r.l., based in Italy, wherein this distributor has the exclusive sales rights for DME/P ramp and bench test units. The Company continues to explore additional marketing opportunities in other parts of the world, including East Asia.

 

The Company has no material assets overseas. Tel also provides customers with calibration and repair services. Repairs and calibrations accounted for 15% and 10% of sales for the years ended March 31, 2022, and 2021, respectively.

 

Future domestic market growth, if any, will be affected in part by whether the U.S. Federal Aviation Administration (“FAA”) implements additional plans to upgrade the U.S. air traffic control system regulations and by continuing recent industry trends towards more sophisticated avionics systems, both of which would require the design and manufacture of new test equipment. Currently, the T-47/M5 has been upgrade for continued support of NATO customers and we continue to develop the Mode 5L2B Flight Line Test. This technology will be supported in our T-47/M5 and T-4530i product lines. Military contracts are awarded and implemented by extensive government regulation. The Company believes its test equipment is recognized by its customers for its quality, durability, reliability, affordability, and by its advanced technology.

 

Backlog

 

Set forth below is Tel’s avionics backlog on March 31, 2022, and 2021:

 

 

 

Commercial

 

 

Government

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2022

 

$

275,242

 

 

$

3,216,299

 

 

$

3,491,541

 

March 31, 2021

 

$

291,687

 

 

$

7,310,096

 

 

$

7,601,783

 

 

Tel believes that most of its backlog on March 31, 2022, will be delivered during the next 12 months. The backlog is pursuant to purchase orders. Historically, the Company obtains orders which are required to be filled in less than 12 months, and therefore, backlog amounts at the end of the period do not reflect delivered or future orders.

 

 

Item 1. Business (continued)

 

General (continued)

 

Suppliers

 

TIC obtains its purchased parts from a number of suppliers. In fiscal year 2022, our supply chain had significant issues with deliveries being delayed which negatively impacted TIC’s revenues and profitability. The situation has been slow in improving this calendar year and the Company is placing orders earlier to allow for longer lead times to obtain purchased parts, as needed, at acceptable prices.

 

Patents and Environmental Laws

 

TIC has no patents or licenses which are material to its business, and there are no material costs incurred to comply with environmental laws.

 

Engineering, Research, and Development

 

In the fiscal years ended March 31, 2022, and 2021, Tel incurred expenses of $2,548,626 and $2,295,901, respectively, on the engineering, research, and development of new and improved products. Engineering, research, and development expenditures in fiscal year 2022 were made primarily for the development of the Company’s SDR/OMNI hand-held product line utilizing CRAFT and TS-4530A technology, the MADL test set for LMCO, and T-4530i, and the incorporation of other product enhancements in existing designs. The Company owns all of these designs with the exception of the AN/ARM-206 product. Tel’s management believes that continued significant expenditures for engineering, research, and development are necessary to enable Tel to expand its products, sales, and profits, and to remain competitive.

 

Personnel

 

As of June 16, 2022, Tel had 44 employees, comprised of 20 full-time and 1 part-time employees in manufacturing, supply chain, and quality assurance, 6 full-time and 1 part-time employees in administration and sales, including customer services and product support, and 14 full-time and 2 part-time employees in engineering, research, and development, none of whom belongs to a union. From time to time, the Company also employs independent contractors to support its manufacturing, engineering, and sales organizations. As of June 16, 2022, the Company utilized 2 independent contractors in sales management. Tel has been successful in attracting skilled and experienced management, sales, and engineering personnel, although the market for senior engineering talent is becoming very competitive. We have not experienced any work stoppages and we consider our relationship with our employees to be good.

 

Where You Can Find More Information

 

The public may read and copy any materials the Company files with the U.S. Securities and Exchange Commission (the “SEC”) at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030. The SEC maintains an Internet website (sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

 

Item 1A. Risk Factors

 

We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

 

Item 1B. Unresolved Staff Comments

 

Not Applicable.

 

 

Item 2. Properties

 

The Company leases its general office and manufacturing facility in East Rutherford, NJ (approximately 27,000 square feet). In April 2021, the Company extended the lease term for another eight years until August 31, 2029, at an initial monthly rate of $21,237. 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.

 

The Company also leases a small office in Lawrence, Kansas under an operating lease agreement. In March 2022, the Company extended the lease term to March 31, 2023.

 

We believe that our facilities are adequate for our needs for the foreseeable future. Tel is unaware of any environmental problems in connection with its location and because of the nature of its manufacturing activities, does not anticipate any such problems.

 

Item 3. Legal Proceedings

 

Contingencies are recorded in the audited 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 found that the Company tortiously interfered with a prospective business opportunity and awarded damages of $1.3 million for lost profits. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees and awarded damages of $1.5 million for lost profits, resulting in total damages against the Company of $2.8 million. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex and awarded damages against these two individuals totaling $525,000. The jury also decided that punitive damages should be allowed against the Company.

 

 

Item 3. Legal Proceedings (continued)

 

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

 

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

 

Aeroflex submitted a motion to the Court requesting that the judge award punitive damages at the maximum $5 million amount. In October 2017, the Court denied the Company’s motions and awarded Aeroflex an additional $2.1 million of punitive damages, which brings the total Tel damages awarded in this case to approximately $4.9 million. 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 interest rate which is modified annually based on market interest rates.

 

For the year starting July 1, 2021, the interest rate was 4.25 %. Cumulative interest on the $4.9 million judgment started to accrue on November 22, 2017, the date the judgment was entered. As of March 31, 2022, the outstanding amount of the judgement and accrued interest is $6.1 million.

 

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 in 2019 and the post-trial rulings to the Court of Appeals of the State of Kansas, Case No. 18-119,563. The Company posted a $2 million supersedeas bond. The Plaintiff filed a cross-appeal. The appeal and cross-appeal are fully briefed. The appellate court has not set a date to hear the appeal.

 

The Company is optimistic about the prospects of its appeal for a judgment as a matter of law. The appeal decision has been delayed due to the COVID-19 related shutdown of the Kansas court system and the inability of court staff to work remotely on confidentiality issues. During August 2021, in an effort to move the appeal forward, all parties agreed to supply the appeal information to the court on a dedicated and secured laptop that would be used by the research attorney remotely. The Company has the ability to settle this case at its sole discretion by withdrawing the appeal and paying the judgment plus interest amount. The Company currently has sufficient cash on hand to pay off this liability if the appeal is lost. 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.

 

Other than disclosed above, there are no other actions, suits, proceedings, inquiries or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 

PART II

 

Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

a) Market Information

 

The common stock, $0.10 par value per share, of the registrant (“Common Stock”) is traded on the OTCQB under the symbol “TIKK”. The following table sets forth the high and low per share sale prices for our Common Stock for the periods indicated as reported for fiscal years 2022 and 2021 by the OTC.

 

Fiscal Year

               

Ended March 31,

               
   

High

   

Low

 

2022

               

First Quarter

  $ 3.63     $ 2.80  

Second Quarter

    3.75       2.76  

Third Quarter

    3.55       2.90  

Fourth Quarter

    3.15       2.80  
                 

2021

               

First Quarter

  $ 3.95     $ 2.56  

Second Quarter

    4.80       3.13  

Third Quarter

    5.95       2.76  

Fourth Quarter

    3.85       2.85  

 

b) Holders

 

The Company has approximately 144 holders of its Common Stock as of June 16, 2022. This figure does not consider those shareholders whose certificates are held in the name of broker-dealers or other nominees.

 

c) Dividends

 

We have not declared or paid any dividends on our Common Stock and intend to retain any future earnings to fund development and growth of our business. Therefore, we do not anticipate paying dividends on our common stock for the foreseeable future. There are no restrictions on our present ability to pay dividends to stockholders of our common stock, other than those prescribed by law.

 

d) Securities Authorized for Issuance under Equity Compensation Plans

 

The following table provides information as of March 31, 2022, regarding compensation plans under which equity securities of the Company are authorized for issuance. See “Equity Compensation Plan Information” under Item 12 below.

 

Plan category

 

Number of securities to be issued

upon exercise of outstanding options

   

Weighted average exercise

price of outstanding options

   

Number of options remaining available for future issuance under Equity Compensation Plans

 

Equity Compensation Plans approved by shareholders

    111,500     $ 3.14       138,500  

Total

    111,500     $ 3.14       138,500  

 

Rule 10B-18 Transactions

 

During the year ended March 31, 2022, there were no repurchases of the Company’s Common Stock by the Company.

 

Recent Sales of Unregistered Securities

 

During the year ended March 31, 2022, we have not issued any securities that were not registered under the Securities Act and not previously disclosed in the Company’s Quarterly Reports on Form 10-Q or Current Reports on Form 8-K.

 

 

Item 6. Reserved

 

The Company is a smaller reporting company as defined in Item 10 (f) of Regulation S-K and therefore is not required to provide the information under this item.

 

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion and analysis of our financial condition and results of our operations together with our financial statements and the notes thereto appearing elsewhere in this Annual Report. This discussion contains forward-looking statements reflecting our current expectations, whose actual outcomes involve risks and uncertainties. Actual results and the timing of events may differ materially from those stated in or implied by these forward-looking statements due to a number of factors, including those discussed in the section relating to Forward-Looking Statements below and elsewhere in this Annual Report. Please see the notes to our Financial Statements for information about our Critical Accounting Policies and Recently Issued Accounting Pronouncements.

 

Forward Looking Statements

 

A number of the statements made by the Company in this report may be regarded as “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1965.

 

Forward-looking statements include, among others, statements concerning the Company’s outlook, pricing trends and forces within the industry, the completion dates of projects, expected sales growth, cost reduction strategies and their results, long-term goals of the Company and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.

 

All predictions as to future results contain a measure of uncertainty and accordingly, actual results could differ materially. Among the factors that could cause a difference are changes in the general economy; changes in demand for the Company’s products or in the costs and availability of its raw materials; the actions of competitors; the success of our customers, technological change; changes in employee relations; government regulations; litigation, including its inherent uncertainty; difficulties in plant operations and materials transportation; environmental matters; and other unforeseen circumstances, including the current COVID-19 pandemic. A number of these factors are discussed in the Company’s filings with the SEC.

 

General

 

Management’s discussion and analysis of results of operations and financial condition is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position of the Company . This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying financial notes, and with the Critical Accounting Policies noted below. The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references in this document to a particular year shall mean the Company’s fiscal year ending on March 31.

 

Overview

 

Fiscal year 2022 operations continued to be affected by the ongoing outbreak of COVID-19 and its variants. While the business is still strong, the Company has been impacted by the pandemic in its commercial business and delays in orders from some of its military customers. The pandemic has also impacted its supply chain and labor force with disruptions to both the delivery of critical inventory components and personnel shortages due to COVID quarantines, which have hampered our ability to ship units under normal lead times. Although the Company has been negatively impacted by the pandemic, there was an increase in sales during fiscal 2022.

 

The Company reported net income of $1,309,738 and net sales of $12,932,790 for the fiscal year ended March 31, 2022. This compared to net income of $600,057 and net sales of $11,582,520 in the prior fiscal year. Net income for the current and prior fiscal years each included $722,577 gains on forgiveness of PPP loans. Excluding the $722,577 gain on PPP forgiveness, net income (loss) for the years ended March 31, 2022, and 2021 were $587,161 and $(122,520), respectively. The Company reported a 11.7% increase in sales to $12,932,790 for the year ended March 31, 2022, as compared to $11,582,520 for the previous year. Commercial sales increased by 49% to $2,568,959 for the year ended March 31, 2022, as compared to $1,723,983 for the year ended March 31, 2021. The commercial airline industry was devastated by the COVID pandemic during prior fiscal year, and has been on a steady recovery. Avionics government sales increased by 5.1% to $10,363,831 for the year ended March 31, 2022, as compared to $9,858,537 for the year ended March 31, 2021. This increase in government sales is the gradual return of government workers to their jobs post shutdowns from the COVID pandemic issues. Gross margin increased by $982,841 in fiscal 2022 as compared to 2021 and the gross margin percentage improved by 3.3 percentage points to 44.6%. The improvement to gross margin was primarily due to a decrease in manufacturing variances due to lower volume and a decrease of discounts being granted. Total operating expenses for the year increased by $121,488, primarily due to engineering, research, and development expenses from increased engineering activities primarily with the SDR-OMNI hand-held product line final development plans to begin production in the summer of 2022 and the restart of the Lockheed Martin MADL program. The Lockheed Martin MADL test set project was offset by reimbursed engineering costs of approximately $120,000. Net income before taxes was $1,483,293 for fiscal year 2022 as compared to $573,030 in fiscal year 2021. The Company’s cash balance on March 31, 2022, was $7 million, including the $2 million of restricted cash to support the appeal bond. The Company’s backlog on March 31, 2022, was $3.5 million.

 

 

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Overview (continued)

 

The Company continues to pursue  in the domestic and international market for our Mode 5 test sets with good results. We continue to receive volume orders from South Korea, Australia, Canada, the U.K., and Germany for our Mode 5 test sets. We also are receiving volume orders from the U.S. Government and Lockheed Martin for our AN/USM-708 and 719 (“CRAFT”) Mode 5 test sets. Our expectation is that we will continueprofitable operations in fiscal year 2023, but the timing of these new orders is largely out of our hands. After a sharp drop in FY 2021, the Company is also seeing the beginning of a rebound in commercial test set business. Tel Instrument is also working on the next generation of Mode 5 called Mode 5 Level 2B. This could potentially lead to substantial software upgrades in the future for our domestic and international Mode 5 customers. The Navy is also in the process of awarding a contract for the ECP upgrade of all of its test sets to remove parts obsolesce. This should entail funded engineering starting in the 2023 fiscal year. This is an important product for the Company, and this should ensure an additional 10 years of product life.

 

The Company is also actively looking at expanding out of its current core avionics market area. TIC is working with Lockheed Martin (LMCO) on a new MADL test set. TIC was awarded this contract after winning a $956,000 competitive solicitation. MADL is a secure communications radio for the F-35. This operates in a much higher frequency range than our other test sets. TIC has finished the design and is getting ready to commence environmental qualification testing. This should generate ongoing recurring revenues for the Company and will position TIC for further engineering work with LMCO.

 

The main focus area for the Company is moving into the secure communications testing with our new DSR/OMNI test set. The world’s first “All-in-One” Avionics Test Set utilizes true software-designed radio technology that enables it to test all common avionics functions in one 4.5 pound test set. The SDR/OMNI has very wide frequency to accommodate new commercial and military waveforms in an industry leading 4.5-pound package. This is half the weight of competitive test sets. 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. he U.S. military will need to upgrade thousands of existing communication and navigation test sets over the next several years to address the new frequency and waveform requirements for military radios and we believe the SDR/OMNI is well positioned to capture a large portion of this business.

 

The Aeroflex litigation (see Note 19 to the consolidated financial statements) 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 has filed for the appeal. The Company has posted a $2 million bond for the appeal. This $2 million bond amount will remain in place during the appeal process (See Note 6).

 

As reflected in the accompanying consolidated balance sheet as of March 31, 2022, the Company has recorded estimated damages to date of $6.1 million, including interest, as a result of a jury verdict associated with the Aeroflex litigation. The Company has filed for an appeal (see Notes 6 and 19). As of March 31, 2022, the Company has cash balances of $7 million, including $2 million of restricted cash as well as $690,000 of borrowing capacity. We expect to continue to have sufficient cash and borrowing capacity to fully cover the Aeroflex damages amount.

 

The Company is very optimistic about the prospects of its appeal for a judgment as a matter of law. The Company was hoping for a decision from the court this calendar year, but this timing will likely be delayed due to the three month COVID-19 related shutdown of the Kansas court system. As such, the appeal process is expected to take at least another six months to a year to complete unless a settlement can be reached. The Company has the ability to settle this case at its sole discretion by withdrawing the appeal and paying the judgment plus interest amount.

 

 

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Overview (continued)

 

On March 21, 2016, the Company entered into a line of credit agreement with Bank of America. The line is collateralized by substantially all of the assets of the Company. The line provided a revolving credit facility with borrowing capacity of up to $1,000,000. There were no covenants or borrowing base calculations associated with this line of credit. On August 29, 2018, the Company entered a Loan Modification Agreement (the “Agreement”) with the bank to extend the Agreement until May 31, 2019, which included a debt service ratio “covenant”. In June 2019, Bank of America agreed to extend the Company’s line of credit until March 31, 2020, including monthly principal payments of $10,000, and eliminating the covenant for the debt service ratio. In March 2020, the Company extended its line of credit until January 31, 2021, then extended to March 31, 2021, and then subsequently to July 31, 2022. The new agreement includes availability up to $690,000. Monthly payments will be interest only. As of March 31, 2022, the line of credit draw remains at zero, with $690,000 available (see Note 10 to the consolidated financial statements). On March 31, 2022, the Company’s backlog of orders was approximately $3.5 million as compared to $7.6 million on March 31, 2021. Historically, the Company obtains orders which are required to be filled in less than 12 months, and therefore, these anticipated orders are not reflected in the backlog.

 

The Company believes it has sufficient cash on hand and expected cash flow from operations for the next twelve months due to the increase in business and the opportunities that exist for the next few years.

 

Results of Operations 2022 Compared to 2021

 

Sales

 

For the year ended March 31, 2022, sales increased $1,350,270 (11.7%) to $12,932,790 as compared to $11,582,520 for the year ended March 31, 2021. Commercial sales increased $844,976 (49%) to $2,568,959 for the year ended March 31, 2022, as compared to $1,723,983 for the year ended March 31, 2021. The commercial airline industry which was devastated by the COVID pandemic the prior fiscal year, has been showing signs of a recovery. Avionics government sales increased $505,294 (5.1%) to $10,363,831 for the year ended March 31, 2022, as compared to $9,858,537 for the year ended March 31, 2021. This increase in government sales is the gradual return of government workers to their jobs post shutdowns from the COVID pandemic issues.

 

Gross Margin

 

Gross margin increased $982,841 (20.6%) to $5,765,340 for the year ended March 31, 2022, as compared to $4,782,499 for the year ended March 31, 2021, primarily as a result of a decrease in manufacturing variances due to lower volume and a decrease of discounts being granted. The gross margin percentage for the year ended March 31, 2022, was 44.6%, as compared to 41.3% for the year ended March 31, 2021.

 

Operating Expenses

 

Selling, general and administrative expenses, along with litigation expense, decreased $133,139 (5.5%) to $2,280,055 for the year ended March 31, 2022, as compared to $2,413,194 for the year ended March 31, 2021. This decrease is primarily attributed to one-time legal fees from prior fiscal year ended March 31, 2021.

 

Engineering, research, and development expenses increased $252,725 (11.0%) to $2,548,626 for the year ended March 31, 2022, as compared to $2,295,901 for the year ended March 31, 2021. The increase is primarily due to increase in engineering staff to support the development of the Company’s SDR/OMNI hand-held product line final development plans to begin production summer 2022 and the restart of Lockheed Martin MADL test set projects, which was offset by reimbursed engineering costs of approximately $120,000.

 

Income from Operations

 

As a result of the above, the Company recorded income from operations in the amount of $936,659 for the fiscal year ended March 31, 2022, as compared to income from operations of $73,404 for the year ended March 31, 2021.

 

Other Income

 

For the year ended March 31, 2022, total other income was $548,532 as compared to $499,626 for the year ended March 31, 2021. This was primarily the result of lower interest for the line of credit.

 

 

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Income before Income Taxes

 

As a result of the above, the Company recorded income before taxes of $1,485,191 for the year ended March 31, 2022, as compared to income before taxes of $573,030 for the fiscal year ended March 31, 2021.

 

Income Taxes

 

For the year ended March 31, 2022, the Company reported $175,453 tax provision as compared to a tax benefit of $27,027 in the prior fiscal year. The forgiveness of the PPP loan in both comparative fiscal year ends are not a taxable event.

 

The differences between income taxes 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 fiscal year ended March 31, 2022. Taxable income was $762,614 for the year ended March 31, 2022, and a tax benefit resulted from the net loss $(149,547) for the year ended March 31, 2021. The forgiven PPP loans were non-taxable.

 

Net Income

 

As a result of the above, the Company recorded net income of $1,309,738 for the year ended March 31, 2022, as compared to net income of $600,057 for the year ended March 31, 2021.

 

Liquidity and Capital Resources

 

On March 31, 2022, the Company had positive working capital of $3,671,667, as compared to working capital of $3,159,731 on March 31, 2021. The Company has approximately $7.0 million of cash on hand at year-end including $2 million of restricted cash supporting the appeal bond.

 

On March 31, 2021, Bank of America further extended the maturity date of our line of credit from March 31, 2021, to June 30, 2021, to allow time for a full underwriting for the annual renewal period. The line of credit was subsequently renewed for $690,000 until July 30, 2022.

 

As discussed in Note 19 of the consolidated financial statements, the Company has recorded total damages of $6,097,273 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 $1,197,273 as of March 31, 2022.

 

The Company is very optimistic about the prospects of its appeal for a judgment as a matter of law. The Company was hoping for a decision from the court this calendar year, but this timing has been delayed due to the COVID-19 related shutdown of the Kansas court system. As such, the appeal process is expected to take at least another six to twelve months to complete. The Company has the ability to settle this case at its sole discretion by withdrawing the appeal and paying the judgment plus interest amount.

 

On March 27, 2020, former President Trump signed the Coronavirus Aid, Relief and Economic Security (the “CARES Act”), which, among other things, outlines the provisions of the Paycheck Protection Program (the “PPP”). The Company determined that it met the criteria to be eligible to obtain a loan under the PPP because, among other reasons, in light of the COVID-19 outbreak and the uncertainty of economic conditions related thereto, the loan was considered necessary to support the Company’s ongoing operations and retain all its employees. In addition, former President Trump signed into law the Paycheck Protection Program and Health Care Enhancement Act on April 24, 2020, which increased funding provided by the CARES Act. On May 4, 2020, the Company issued a promissory note (the “Note”) to Bank of America in the principal aggregate amount of $722,577 (the “PPP Loan”) pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The amount was deposited in our bank on May 4, 2020. On June 5, 2020, the Paycheck Protection Program Flexibility Act was signed into law and extended the program until December 31, 2020. TIC qualified for full loan forgiveness on the initial tranche on December 18, 2020.

 

On January 6, 2021, updated PPP guidance outlining program changes to enhance its effectiveness and accessibility was released on in accordance with the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act. This was available to companies that recorded greater than a 25% sales reduction in any quarter compared to the prior year. The Company qualified for this second round of funding and on March 15, 2021, the company secured a Second Draw PPP loan in the amount of $722,577. TIC qualified for full loan forgiveness on September 17, 2021.

 

 

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Liquidity and Capital Resources (continued)

 

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. We received these funds into our bank account on August 30, 2021, from NJEDA.

 

Based on the foregoing, we believe that our expected cash flows from operations, line of credit in place and current cash balances will be sufficient to operate in the normal course of business for next 12 months from the issuance date of these financial statements, including any payments for settlement of the Aeroflex litigation.

 

The Company continues to monitor the impact of the COVID-19 outbreak on its supply chain, manufacturing and distribution operations, customers, and employees, as well as the U.S. economy in general. The uncertainties associated with the COVID-19 outbreak include potential adverse effects on the overall economy, the Company’s supply chain, transportation services, employees, and customers. The COVID-19 outbreak could adversely affect the Company’s revenues, earnings, liquidity, and cash flows and may require significant actions in response, including expense reductions. Conditions surrounding COVID-19 change rapidly, and additional impacts of which the Company is not currently aware may arise. Based on past performance and current expectations, the Company believes that its anticipated cash flow from operations will be sufficient to fund the Company’s requirements for working capital, capital expenditures and debt service for at least the next 12 months.

 

During the year ended March 31, 2022, the Company’s cash balance increased by $1,464,415 to $6,960,740, including restricted cash to support the appeal bond. The Company’s principal sources, and uses of funds were as follows:

 

Cash provided (used in) operating activities. For the year ended March 31, 2022, the Company provided $1,800,483 in cash for operations as compared to used $255,616 in cash for operations for the year ended March 31, 2021. This increase in cash provided by operations is primarily attributed to the increase in sales as the economy slowly recovers from the global pandemic related issues and the retainment of cash allocated for inventory replenishment that was halted during the fiscal year ended March 31, 2022, due to severe supply chain issues and prolonged delivery lead times.

 

Cash (used in) investing activities. For the year ended March 31, 2022, the Company used a net $16,068 of its cash for investing activities, as compared to $67,902 used for investing activities for the year ended March 31, 2021.

 

Cash (used in) provided by financing activities. For the year ended March 31, 2022, the Company used $320,000 in cash for financing activities to pay preferred dividends as compared to providing $685,104 in cash by financing activities for the year ended March 31, 2021. This predominantly was a result of the two PPP loans the company received in fiscal year ended March 31, 2021, totaling $1,445,154 and the $680,000 repayment of the line of credit.

 

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

 

There was no significant impact on the Company’s operations as a result of inflation for the year ended March 31, 2022.

 

Critical Accounting Policies

 

In preparing the consolidated financial statements and accounting for the underlying transactions and balances, the Company applies its accounting policies as disclosed in Note 2 of our Notes to Consolidated Financial Statements. The Company’s accounting policies that require a higher degree of judgment and complexity used in the preparation of these consolidated financial statements include:

 

Revenue recognition – The Company accounts for revenue recognition in accordance with the Financial Accounting Standards Board (“FASB”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 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. 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.

 

 

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Critical Accounting Policies (continued)

 

The Company recognizes revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration which is expected to be received in exchange for those goods or services. The Company recognizes revenue following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

 

Nature of goods and services

 

The following is a description of the products and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each.

 

Test Units/Sets

 

The Company develops, and manufactures unit sets to test navigation and communication equipment, such as ramp testers and bench testers for 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, which is usually at the 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, 2022.

 

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, 2022, approximately $386,907 is expected to be recognized from remaining performance obligations for extended warranties as compared to $408,219 on March 31, 2021. For the year ended March 31, 2022, the Company recognized revenue of $75,791 from amounts that were included in Deferred Revenue as compared to $86,588 for the year ended March 31, 2021.

 

 

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Critical Accounting Policies (continued)

 

The following table provides a summary of the changes in deferred revenues related to extended warranties for the year ended March 31, 2022:

 

Deferred revenues related to extended warranties on April 1, 2021

  $ 408,219  

Additional extended warranties

    54,479  

Revenue recognized for the year ended March 31, 2022

    (75,791

)

Deferred revenues related to extended warranties on March 31, 2022

  $ 386,907  

 

Other Deferred Revenues

 

The Company sometimes receives payments in advance of shipment. These amounts are classified as other deferred revenues. For the year ended March 31, 2022, the Company has other deferred revenues of $21,999 and $74,920 for period ending March 31, 2021.

 

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. Company within 30 days of the related sales order fulfillment. Accordingly, management has determined that no change in accounting for costs to obtain a contract

will be required for the Company to conform to ASC 606.

 

Disaggregation of revenue

 

In the following tables, revenue is disaggregated by revenue category.

 

   

For the Year Ended

March 31, 2022

 
   

Commercial

   

Government

 

Sales Distribution

               

Test Units

  $ 409,594     $ 10,307,842  
    $ 409,594     $ 10,307,842  

 

 

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Critical Accounting Policies (continued)

 

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.

 

   

For the Year Ended

March 31, 2021

 
   

Commercial

   

Government

 

Sales Distribution

               

Test Units

  $ 325,195     $ 9,858,537  
    $ 325,195     $ 9,858,537  

 

The remainder of our revenues for the year ended March 31, 2021, are derived from repairs and calibration of $1,169,399 replacement parts of $142,801 and extended warranties of $86,588.

 

In the following table, revenue is disaggregated by geography.

 

   

For the Year

Ended

March 31, 2022

   

For the Year

Ended

March 31, 2021

 

Geography

               

United States

  $ 8,175,301     $ 5,511,516  

International

    4,757,489       6,071,004  

Total

  $ 12,932,790     $ 11,582,520  

 

Inventory reserves inventory reserves or write-downs are estimated for excess, slow-moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. These estimates are based on current assessments about future demands, market conditions and related management initiatives. If market conditions and actual demands are less favorable than those projected by management, additional inventory write-downs may be required. While such write-downs have historically been within our expectation and the provision established, the Company cannot guarantee that it will continue to receive positive results.

 

Warranty reserves – 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, 2022, warranty costs were $38,236 as compared to $64,092 for the year ended March 31, 2021, and are included in Cost of Sales in the accompanying consolidated statement of operations. See Note 7 for warranty reserves.

 

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 credits 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 our expectation and the provision established, the Company cannot guarantee that it will continue to receive positive results. For the years ended March 31, 2022, and 2021 approximately 26% and 38%, respectively, of the Company’s sales were to the U.S. Government.

 

 

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Critical Accounting Policies (continued)

 

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 in the books 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 its deferred tax assets in the future, the Company would reduce such amounts through a charge to income in the period in which that determination is made. Conversely, if it were determined that it would be able to realize the deferred tax assets in the future in excess of the net carrying amounts, TIC 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. The Company determined they will be able to realize the majority of its deferred tax assets as a result of its current projections on March 31, 2022.

 

Off Balance Sheet Arrangements

 

The Company is not party to any off-balance sheet arrangements that may affect its financial position or its results of operations.

 

New Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments -Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements. The amendment in this update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses on instruments within its scope, including trade receivables. This update is intended to provide financial statement users with more decision-useful information about the expected credit losses. The effective date of the new standard has been deferred to April 1, 2023. We do not expect the adoption of this standard to have a significant impact on our financial position and results of operations.

 

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Critical Accounting Policies (continued)

 

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

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, and are not required to provide the information under this Item. Nonetheless, we do not hold any derivative instruments and do not engage in any hedging activities.

 

 

Item 8. Financial Statements and Supplementary Data

 

 

Pages

(1) Financial Statements:

 

 

 

Report of Independent Registered Public Accounting Firm (PCAOB Firm ID: 711)

25

 

 

Consolidated Balance Sheets - March 31, 2022, and 2021

26

 

 

Consolidated Statements of Operations - Years Ended March 31, 2022 and 2021

27

 

 

Consolidated Statements of Changes in Stockholders’  Equity - Years Ended March 31 2022 and 2021

28

 

 

Consolidated Statements of Cash Flows - Years Ended March 31, 2022 and 2021

29

 

 

Notes to Consolidated Financial Statements

31

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Tel-Instrument Electronics Corp.

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Tel-Instrument Electronics Corp. (the “Company”) as of March 31, 2022 and 2021, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended March 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended March 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Inventory Valuation

 

Description of the Matter

 

At March 31, 2022, the Company’s net inventory balance was approximately $2.8 million. As discussed in Note 2 of the consolidated financial statements, the Company adjusts the inventory carrying value to the lower of cost or net realizable value, which includes an estimate of the allowance for obsolescence.

 

How We Addressed the Matter in Our Audit

 

Our audit procedures related to management’s judgments underlying the calculation of the allowance for obsolete inventory, included the following, among others:

 

 

We evaluated the appropriateness and consistency of management’s methods and assumptions used in developing the Company’s estimate of the allowance for obsolete inventory.

 

 

We evaluated the appropriateness of specific inputs supporting management’s estimate.

 

 

We tested the mathematical accuracy of the Company’s calculation of the allowance for obsolete inventory.

 

/s/ Friedman LLP

We have served as the Company’s auditor since 2019.

Marlton, New Jersey

June 17, 2022

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

Consolidated Balance Sheets

 

ASSETS

 

March 31, 2022

   

March 31, 2021

 

Current assets:

               

Cash

  $ 4,949,690     $ 3,485,275  

Accounts receivable, net of allowance for doubtful accounts of $7,425 and $7,500, respectively

    1,049,040       1,933,321  

Inventories, net

    2,820,497       3,437,989  

Restricted cash to support appeal bond

    2,011,050       2,011,050  

Prepaid expenses and other current assets

    244,040       263,067  

Total current assets

    11,074,317       11,130,702  
                 

Equipment and leasehold improvements, net

    115,338       200,769  

Operating lease right-of-use assets

    1,720,921       1,922,805  

Deferred tax asset, net

    2,499,587       2,675,040  

Other assets

    35,109       35,110  
                 

Total assets

  $ 15,445,272     $ 15,964,426  
                 

LIABILITIES AND STOCKHOLDERS’  EQUITY

               
                 

Current liabilities:

               

Operating lease liabilities – current portion

  $ 194,370     $ 201,883  

Accounts payable

    406,489       906,149  

Deferred revenues – current portion

    119,835       150,709  

Accrued expenses - vacation pay, payroll and payroll withholdings

    410,538       457,232  

Accrued legal damages

    6,097,273       5,889,023  

Accrued expenses – other

    174,145       365,975  

Total current liabilities

    7,402,650       7,970,971  
                 

Operating lease liabilities – long-term

    1,526,551       1,720,921  

Long term debt-PPP

    -       722,577  

Deferred revenues – long-term

    289,071       332,428  
                 

Total liabilities

    9,218,272       10,746,897  
                 

Commitments and contingencies

   
 
     
 
 
                 

Stockholders equity

               

Preferred stock, 1,000,000 shares authorized, par value $0.10 per share

   
 
     
 
 

Preferred stock, 500,000 shares 8% Cumulative Series A Convertible Preferred

issued and outstanding, par value $0.10 per share

    3,695,998       3,695,998  

Preferred stock, 166,667 shares 8% Cumulative Series B Convertible Preferred

issued and outstanding, par value $0.10 per share

    1,147,367       1,147,367  

Common stock, 7,000,000 shares authorized, par value $.10 per share,

3,255,887 and 3,255,887 shares issued and outstanding, respectively

    325,586       325,586  

Additional paid-in capital

    7,018,353       7,318,620  

Accumulated deficit

    (5,960,304

)

    (7,270,042

)

                 

Total stockholders equity

    6,227,000       5,217,529  
                 

Total liabilities and stockholders equity

  $ 15,445,272     $ 15,964,426  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

Consolidated Statements of Operations

 

   

For the years ended March 31,

 
   

2022

   

2021

 
                 

Net sales

  $ 12,932,790     $ 11,582,520  
                 

Cost of sales

    7,167,450       6,800,021  
                 

Gross margin

    5,765,340       4,782,499  
                 

Operating expenses:

               

Selling, general and administrative

    2,250,576       2,165,190  

Litigation expenses

    29,479       248,004  

Engineering, research, and development

    2,548,626       2,295,901  
                 

Total operating expenses

    4,828,681       4,709,095  
                 

Income from operations

    936,659       73,404  
                 

Other income (expense):

               

Interest income

    3,951       7,483  

Forgiveness of PPP loan

    722,577       722,577  

Interest expense

    -       (29,779

)

Interest expense – judgment

    (208,250

)

    (231,474

)

Other income, net

    30,254       30,819  
                 

Total other income

    548,532       499,626  
                 

Income before income taxes

    1,485,191       573,030  
                 

Provision (benefit) for income taxes

    175,453       (27,027

)

                 

Net income

    1,309,738       600,057  
                 

Preferred dividends

    (320,000

)

    (320,000

)

                 

Net income attributable to common shareholders

  $ 989,738     $ 280,057  
                 

Basic income per common share

  $ 0.30     $ 0.09  

Diluted income per common share

  $ 0.26     $ 0.12  
                 

Weighted average number of shares outstanding

               

Basic

    3,255,887       3,255,887  

Diluted

    5,095,665       5,073,165  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

Consolidated Statements of Changes in Stockholders’ Equity

 

   

Series A Convertible

Preferred Stock

   

Series B Convertible

Preferred Stock

   

Common Stock

   

Additional

Paid-In

Capital

     

Accumulated

Deficit

         
   

# of Shares

Issued

   

Amount

   

# of Shares

Issued

   

Amount

   

# of Shares

Issued

   

Amount

           

Total

 

Balances on April 1, 2020

    500,000     $ 3,515,998       166,667     $ 1,087,367       3,255,887     $ 325,586     $ 7,616,624     $ (7,870,099

)

  $ 4,675,476  

Stock based Compensation

    -       -       -       -       -       -       21,996       -       21,996  

8% Dividends on preferred stock

    -       240,000       -       80,000       -       -       (320,000

)

    -       -  

Dividend payments

    -       (60,000

)

    -       (20,000

)

    -       -       -       -       (80,000

)

Net income

    -       -       -       -       -       -       -       600,057       600,057  

Balances on March 31, 2021

    500,000       3,695,998       166,667       1,147,367       3,255,887       325,586       7,318,620       (7,270,042

)

    5,217,529  

Stock-based compensation

    -       -       -       -       -       -       19,733       -       19,733  

8% Dividends on preferred stock

    -       240,000       -       80,000       -       -       (320,000

)

    -       -  

Dividend payments

    -       (240,000

)

    -       (80,000

)

    -       -       -       -       (320,000

)

Net income

    -       -       -       -       -       -       -       1,309,738       1,309,738  

Balances on March 31, 2022

    500,000     $ 3,695,998       166,667     $ 1,147,367       3,255,887     $ 325,586     $ 7,018,353     $ (5,960,304

)

  $ 6,227,000  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

Consolidated Statements of Cash Flows

 

   

For the years ended March 31,

 
   

2022

   

2021

 

Cash flows from operating activities:

               

Net income

  $ 1,309,738     $ 600,057  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Deferred income taxes

    175,453       (27,027

)

Depreciation and amortization

    95,904       125,120  

Loss on sale of equipment

    5,596       -  

Non-cash lease expense

    201,884       214,793  

Forgiveness of PPP Loan

    (722,577

)

    (722,577

)

(Recovery of) provision for inventory obsolescence

    (61,932

)

    25,000  

Non-cash stock-based compensation

    19,733       21,996  
                 

Changes in assets and liabilities:

               

Decrease (increase) in accounts receivable

    884,281       (521,677

)

Decrease (increase) in inventories

    679,424       (370,310

)

Decrease in prepaid expenses and other assets

    19,027       189,889  

(Decrease) increase in accounts payable

    (499,660

)

    166,338  

Increase in accrued legal damages

    208,250       231,474  

(Decrease) increase in deferred revenues

    (74,231

)

    10,839  

(Decrease) in accrued payroll, vacation pay & withholdings

    (46,694

)

    (55,500

)

(Decrease) in operating lease liabilities

    (201,884

)

    (214,793

)

(Decrease) increase in accrued expenses

    (191,829

)

    70,762  

Net cash provided by (used in) operating activities

    1,800,483       (255,616

)

                 

Cash flows from investing activities:

               

Acquisition of equipment

    (16,068

)

    (67,902

)

Net cash used in investing activities

    (16,068

)

    (67,902

)

                 

Cash flows from financing activities:

               

Payment of dividends

    (320,000

)

    (80,000

)

Proceeds from PPP loans

    -       1,445,154  

Repayment of line of credit

    -       (680,000

)

Repayment of capitalized lease obligations

    -       (50

)

Net cash (used in) provided by financing activities

    (320,000

)

    685,104  
                 

Net increase in cash and restricted cash

    1,464,415       361,586  

Cash and restricted cash at beginning of year

    5,496,325       5,134,739  

Cash and restricted cash at end of year

  $ 6,960,740     $ 5,496,325  
                 

End of year

               

Cash

  $ 4,949,690     $ 3,485,275  

Restricted cash

    2,011,050       2,011,050  
    $ 6,960,740     $ 5,496,325  

Beginning of year

               

Cash

  $ 3,485,275     $ 3,126,195  

Restricted cash

    2,011,050       2,008,544  
    $ 5,496,325     $ 5,134,739  

Supplemental cash flow information:

               

Interest paid

  $ -     $ 19,497  

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

Consolidated Statements of Cash Flow (continued)

 

Supplemental disclosure of non-cash financing activities:

 

 

a)

 The Company recorded $1,830,858 of right-of-use assets and related operating leases liabilities for the year ended March 31, 2021.

 

 

b)

The Company’s first PPP loan was forgiven by the SBA during December 2020 in the amount of $722,577.

The Company’s second PPP loan was forgiven by the SBA during September 2021 in the amount of $722,577.

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

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, 2022, the Company had positive working capital of $3,671,667, as compared to working capital of $3,159,731 on March 31, 2021. This included $7.0 million of cash including the $2 million supersedes appeal bond. The Company also has current borrowing capacity of $690,000 under the Company’s line of credit agreement. As discussed in Note 19 of the consolidated financial statements, the Company has recorded total damages of $6,097,273, 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 $3.5 million sales order backlog on March 31, 2022.

 

Bank of America renewed our line of credit with a maturity date of July 30, 2022. As of March 31, 2022, the line of credit draw remains at zero, with $690,000 available.

 

On March 27, 2020, former President Trump signed the Coronavirus Aid, Relief and Economic Security (the “CARES Act”), which, among other things, outlines the provisions of the Paycheck Protection Program (the “PPP”). The Company determined that it met the criteria to be eligible to obtain a loan under the PPP because, among other reasons, in light of the COVID-19 outbreak and the uncertainty of economic conditions related thereto, the loan was considered necessary to support the Company’s ongoing operations and retain all its employees. In addition, former President Trump signed into law the Paycheck Protection Program and Health Care Enhancement Act on April 24, 2020, which increased funding provided by the CARES Act. On May 4, 2020, the Company issued a promissory note (the “Note”) to Bank of America in the principal aggregate amount of $772,577 (the “PPP Loan”). The amount was deposited in our bank on May 4, 2020. On June 5, 2020, the Paycheck Protection Program Flexibility Act was signed into law and extended the program until December 31, 2020. TIC qualified for full loan forgiveness on the initial tranche on December 18, 2020.

 

On January 6, 2021, updated PPP guidance outlining program changes to enhance its effectiveness and accessibility was released on in accordance with the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act. This was available to companies that recorded greater than a 25% sales reduction in any quarter compared to the prior year. The Company qualified for this second round of funding and on March 15, 2021, the company secured a Second Draw PPP loan in the amount of $722,577. TIC qualified for full loan forgiveness on September 17, 2021.

 

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. We received these funds into our bank account on August 30, 2021 from NJEDA.

 

Moving forward, we believe that our expected cash flows from operations and current cash balances, which amounted to approximately $7.0 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 fiscal Q4 ended March 31, 2022.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements

 

1. Business, Organization, and Liquidity (continued)

 

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.

 

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. The vast majority of TIC employees are fully vaccinated, and TIC is preparing for full compliance of the Executive Order should it apply.

 

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.

 

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.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements

 

2. Summary of Significant Accounting Policies (continued)

 

Revenue Recognition (continued):

 

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, 2022.

 

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, 2022, approximately $386,907 is expected to be recognized from remaining performance obligations for extended warranties as compared to $408,219 on March 31, 2021. For the year ended March 31, 2022, the Company recognized revenue of $75,791 from amounts that were included in Deferred Revenue as compared to $86,588 for the year ended March 31, 2021.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements

 

2. Summary of Significant Accounting Policies (continued)

 

Revenue Recognition (continued):

 

The following table provides a summary of the changes in deferred revenues related to extended warranties for the year ended March 31, 2022:

 

Deferred revenues related to extended warranties on April 1, 2021

  $ 408,219  

Additional extended warranties

    54,479  

Revenue recognized for the year ended March 31, 2022

    (75,791

)

Deferred revenues related to extended warranties on March 31, 2022

  $ 386,907  

 

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, 2022, the Company has other deferred revenues of $21,999 and $74,920 for the prior year ended March 31, 2021.

 

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, 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.

 

   

For the Year Ended

March 31, 2021

 
   

Commercial

   

Government

 

Sales Distribution

               

Test Units

  $ 325,195     $ 9,858,537  
    $ 325,195     $ 9,858,537  

 

The remainder of our revenues for the year ended March 31, 2021, are derived from repairs and calibration of $1,169,399, replacement parts of $142,801, extended warranties of $86,588.

 

In the following table, revenue is disaggregated by geography.

 

   

For the Year

Ended

March 31, 2022

   

For the Year

Ended

March 31, 2021

 

Geography

               

United States

  $ 8,175,301     $ 5,511,516  

International

    4,757,489       6,071,004  

Total

  $ 12,932,790     $ 11,582,520  

 

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, 2022, 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, 2022, and 2021, deferred revenues totaled $408,906 and $483,139, respectively. See above for additional information regarding our revenue recognition policies.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements

 

2. Summary of Significant Accounting Policies (continued)

 

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.

 

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.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements

 

2. Summary of Significant Accounting Policies (continued)

 

Income Taxes (continued):

 

During the years ended March 31, 2022, and 2021 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, 2022, and 2021. The Company’s tax years remain open for examination by the tax authorities primarily beginning 2019 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 16 below.

 

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, 2022, and 2021, 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, 2022, warranty reserve costs were $38,236 as compared to $64,092 for the year ended March 31, 2021, and are included in Cost of Sales in the accompanying consolidated statement of operations. See Note 7 for warranty reserves.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements

 

2. Summary of Significant Accounting Policies (continued)

 

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.

 

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 new standard has been deferred to April 1, 2023. We do not expect the adoption of this standard to have a significant impact on our financial position and results of operations.

 

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,

 
   

2022

   

2021

 

Government

  $ 697,731     $ 1,700,907  

Commercial

    358,734       239,914  

Less: Allowance for doubtful accounts

    (7,425

)

    (7,500

)

    $ 1,049,040     $ 1,933,321  

 

4. Inventories

 

Inventories consist of:

 

   

March 31,

 
   

2022

   

2021

 

Purchased parts

  $ 2,371,105     $ 2,912,599  

Work-in-process

    962,460       1,020,402  

Finished goods

    -       79,988  

Less: Allowance for obsolete inventory

    (513,068

)

    (575,000

)

    $ 2,820,497     $ 3,437,989  

 

Work-in-process inventory includes $838,490 and $1,003,514 for government contracts on March 31, 2022, and 2021, respectively.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements (Continued)

 

5. Equipment and Leasehold Improvements

 

Equipment and leasehold improvements consist of the following:

 

   

March 31,

 
   

2022

   

2021

 

Leasehold improvements

  $ 127,655     $ 127,655  

Machinery and equipment

    1,906,983       1,924,902  

Automobiles

    23,712       23,712  

Sales equipment

    595,475       595,475  

Assets under finance leases

    637,189       637,189  

Less: Accumulated depreciation & amortization

    (3,175,676

)

    (3,108,164

)

    $ 115,338     $ 200,769  

 

Depreciation and amortization expense related to the assets above for the years ended March 31, 2022, and 2021 was $95,904 and $125,120, respectively.

 

6. 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 19).

 

7. Accrued Expenses

 

Accrued vacation pay, payroll and payroll withholdings consist of the following:

 

   

March 31,

 
   

2022

   

2021

 
                 

Accrued vacation pay

  $ 185,735     $ 403,759  

Accrued profit sharing

    163,132       -  

Accrued compensation and payroll withholdings

    61,671       53,473  
    $ 410,538     $ 457,232  

 

Accrued vacation pay, payroll and payroll withholdings include $23,262 and $55,474 on March 31, 2022, and 2021, respectively, which is due to officers.

 

Accrued expenses - other consist of the following:

 

   

March 31,

 
   

2022

   

2021

 
                 

Accrued commissions

  $ 11,706     $ 14,918  

Accrued legal costs

    6,061       10,519  

Warranty reserve

    87,407       90,752  

Accrued purchase

    39,021       218,032  

Other

    29,950       31,754  
                 
    $ 174,145     $ 365,975  

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements (Continued)

 

7. Accrued Expenses (continued)

 

The following table provides a summary of the changes in warranty reserves for the years ended March 31, 2022, and 2021:

 

   

March 31,

 
   

2022

   

2021

 

Warranty reserve, at beginning of period

  $ 90,752     $ 118,734  

Warranty expense

    38,236       64,092  

Warranty deductions

    (41,581

)

    (92,074

)

Warranty reserve, at end of period

  $ 87,407     $ 90,752  

 

8. Income Taxes

 

Income tax provision (benefit):

 

   

Fiscal Year Ended

 
   

March 31,

   

March 31,

 
   

2022

   

2021

 

Current:

               

Federal

  $ -     $ -  

State and local

    -       -  
                 

Total current tax provision

    -       -  
                 

Deferred:

               

Federal

    178,780       (26,788

)

State and local

    (3,327 )     (239

)

Release of valuation allowance

    -       -  
                 

Total deferred tax provision (benefit)

    175,453       (27,027

)

                 

Total provision (benefit)

  $ 175,453     $ (27,027

)

 

The approximate values of the components of the Company’s deferred taxes on March 31, 2022, and 2021 are as follows:

 

   

March 31,

   

March 31,

 
   

2022

   

2021

 

Deferred tax assets (liabilities):

               

Net operating loss carryforwards

  $ 706,643     $ 849,387  

Tax credits

    329,032       329,032  

Charitable contributions

    52       716  

Legal damages

    1,291,734       1,243,370  

Allowance for doubtful accounts

    1,572       1,576  

Reserve for inventory obsolescence

    108,696       120,815  

Vacation accrual

    39,349       87,579  

Warranty reserve

    18,518       19,068  

Deferred revenues

    86,629       101,514  

Stock options

    15,819       15,689  

Gain on Sale of Asset

    350       345  

Depreciation

    1,193       5,949  

Deferred tax asset

    2,599,587       2,775,040  

Less valuation allowance

    (100,000

)

    (100,000

)

                 

Deferred tax asset, net

  $ 2,499,587     $ 2,675,040  

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements (Continued)

 

8. Income Taxes (continued)

 

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  $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 2027. New Jersey State NOL carryforwards were  $2,114,223 as of March 31, 2022. New Jersey State NOL carryforwards expire in 20 years, and certain of these amounts begin to expire in 2030.

 

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, 2022, and 2021, respectively, to the income tax benefit provision recognized in the financial statements is as follows:

 

   

March 31,

   

March 31,

 
   

2022

   

2021

 
                 

Income tax provision – statutory rate

  $ 311,492     $ 120,704  

Income tax expenses – state and local, net of federal benefit

    2,949       (14

)

Permanent items

    4,144       4,864  

PPP loan forgiveness

    (151,741

)

    (151,741

)

Other

    8,609       (840

)

Income tax provision (benefit)

  $ 175,453     $ (27,027

)

 

9. 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 $145,898 and $121,769 for the years ended March 31, 2022, and 2021, respectively. On March 31, 2022, $6,000 was due this individual, which is included in accounts payable in the accompanying consolidated balance sheet.

 

10. 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 LIBOR (London Interbank Offered Rates) daily float plus 3.75 percentage points.

 

During the year ended March 31, 2021, the Company repaid $680,000 against this line of credit. As of March 31, 2022, and March 31, 2021, the outstanding balances were $0 and $0, respectively. The interest rate on March 31, 2022, was 5%.

 

On March 31, 2021, Bank of America further extended the maturity date of our line of credit from March 31, 2021, to June 30, 2021, and thereafter renewed with a maturity date of July 30, 2022.

 

11. 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 $70,711 and $59,177 as its matching contribution to the Company’s 401k Plan for the years ended March 31, 2022, and 2021, respectively.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements (Continued)

 

12. 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 $1,830,858 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, 2022, and was renewed for an additional 12 months, expiring on March 31, 2023.

 

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, 2022, and 2021, respectively.

 

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, 2022:

 

2023

  $ 254,840  

2024

    254,840  

2025

    254,840  

2026

    267,767  

2027

    277,000  

Thereafter

    669,416  

Total undiscounted future minimum lease payments

    1,978,703  

Less: Difference between undiscounted lease payments and discounted lease liabilities

    (257,782

)

Present value of net minimum lease payments

    1,720,921  

Less current portion

    (194,370

)

Operating lease liabilities – long-term

  $ 1,526,551  

 

Total rent expense for the years ended March 31, 2022, and 2021 were $395,558 and $364,582, respectively

 

13. 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 $2,482,424 in domestic commercial sales in fiscal year 2022 and there was one (1) direct commercial customer who accounted for more than 10% of domestic commercial sales, DFAS (22%). 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 14% and 8%, respectively, of commercial sales during fiscal years 2022 and 2021.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements (Continued)

 

13. Significant Customer Concentrations (continued)

 

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, 2022, and 2021, sales to the U.S. Government, including shipments through the government’s logistics centers, represented approximately 26% and 38%, respectively, of total sales. 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. For the year ended March 31, 2021, two (2) direct customers represented 10% and 33% of total sales and 12% and 39% of government sales, respectively. No international distributor represented 10% of total sales or 10% of government sales for the year ended March 31, 2021.

 

Net sales to foreign customers, which, for the most part, are international distributors were $4,757,489 and $6,071,004 for the years ended March 31, 2022, and 2021, respectively. All other sales were to customers located in the U.S. The following table presents net sales by U.S. and foreign countries:

 

   

2022

   

2021

 

United States

  $ 8,175,301     $ 5,511,516  

Foreign countries

    4,757,489       6,071,004  

Total Avionics Sales

  $ 12,932,790     $ 11,582,520  

 

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%), none in the previous fiscal year. The Company had no assets outside the United States.

 

Receivables from the U.S. Government represented approximately 11% and 5.2%, respectively, of total receivables on March 31, 2022, and 2021, respectively. As of March 31, 2022, there was one individual customer that represented 11.2%  of the Company’s total outstanding accounts receivable. As of March 31, 2021, three individual customers represented in total 81% of the Company’s outstanding accounts receivable, ranging between 38% and 19% of the Company’s outstanding accounts receivable on March 31, 2021.

 

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.  Total sales by test set product that were more than 10% of consolidated net sales were the T-47/M5 (37%), AN/USM-708 (10%) and the T-47/NH (14%) for the year ended March 31, 2021. 

 

14. 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 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

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements (Continued)

 

14. Series A 8% Convertible Preferred Stock (continued)

 

Preferred shall accumulate whether or not declared by the Board and shall remain accumulated dividends until paid. As of March 31, 2022, the Company recognized $695,998 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, 2022 and 2021, the Company paid dividends of $240,000 and $20,000, respectively.

 

15. 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 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, 2022, the Company recognized $147,367 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, 2022 and 2021, the Company paid dividends of $80,000 and $60,000, respectively.

 

16. 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 2022, the Company granted 23,000 stock options at a price of $2.99 per share, the fair market value on the grant date.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements (Continued)

 

16. Stock Option Plans (continued)

 

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, and 2021 were $1.02 and $1.03, respectively, 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

%