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EX-32.2 - EX-32.2 - TOROTEL INCttlo-20181031ex32289b9c8.htm
EX-32.1 - EX-32.1 - TOROTEL INCttlo-20181031ex321148ffa.htm
EX-31.2 - EX-31.2 - TOROTEL INCttlo-20181031ex31210375c.htm
EX-31.1 - EX-31.1 - TOROTEL INCttlo-20181031ex31193d29b.htm

UNITED STATES SECURITIES AND EXCHANGE

COMMISSION

 

Washington, D.C.  20549

 

FORM 10-Q

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

For the quarterly period ended October 31,  2018 

 

or

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

For the transition period from _____ to _____

 

Commission File No. 001-8125

 

TOROTEL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

MISSOURI

 

44-0610086

(State or other jurisdiction of incorporation or

organization)

 

(I.R.S. Employer Identification No.)

 

 

 

520 N. ROGERS ROAD, OLATHE,

KANSAS

 

66062

(Address of principal executive offices)

 

(Zip Code)

 

(913) 747-6111

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 13(a) of the Exchange Act.   ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  Yes ☐  No ☒

 

As of December  13, 2018, there were 5,995,750 shares of Common Stock, $0.01 par value, outstanding.

 

 

 


 

 

TOROTEL, INC. AND SUBSIDIARIES

 

INDEX

 

Part I.    Financial Information (Unaudited) 

 

3

 

 

 

 

 

 

 

Item 1 

 

  Financial Statements

 

3

 

 

 

  Consolidated Condensed Balance Sheets

 

3

 

 

 

  Consolidated Condensed Statements of Operations

 

4

 

 

 

  Consolidated Condensed Statements of Cash Flows

 

5

 

 

 

  Note 1 - Basis of Presentation

 

6

 

 

 

  Note 2 - Nature of Operations

 

8

 

 

 

  Note 3 - Inventories

 

8

 

 

 

  Note 4 - Financing Agreements

 

9

 

 

 

  Note 5 - Income Taxes

 

10

 

 

 

  Note 6 - Restricted Stock Agreements

 

10

 

 

 

  Note 7 - Stockholders' Equity

 

11

 

 

 

  Note 8 - Earnings per Share

 

11

 

 

 

  Note 9 - Contract Assets and Liabilities

 

12

 

 

 

  Note 10 - Concentrations of Credit Risk

 

12

 

 

 

  Note 11 - Commitments and Contingencies

 

13

 

 

 

 

 

 

 

Forward-Looking Information 

 

14

 

 

 

 

 

Item 2 

 

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

 

15

 

 

 

  Overview

 

15

 

 

 

  Business and Industry Considerations

 

15

 

 

 

  Results of Operations

 

16

 

 

 

  Financial Condition and Liquidity

 

18

 

 

 

  Critical Accounting Policies

 

19

 

 

 

 

 

 

 

Item 3 

 

  Quantitative and Qualitative Disclosures About Market Risk

 

19

 

 

 

 

 

 

 

Item 4 

 

  Controls and Procedures

 

19

 

 

 

 

 

 

 

Part II.  Other Information 

 

20

 

 

 

 

 

Item 6 

 

  Exhibits

 

20

 

 

 

 

 

 

 

Signatures 

 

21

 

 

 

2


 

PART I.   FINANCIAL INFORMATION

 

Item 1.   Financial Statements

 

CONSOLIDATED CONDENSED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

    

(Unaudited)

 

 

 

 

 

 

October 31, 2018

 

April 30, 2018

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash

 

$

147,000

 

$

575,000

 

Trade receivables, net

 

 

2,158,000

 

 

2,193,000

 

Inventories

 

 

3,289,000

 

 

2,362,000

 

Prepaid expenses

 

 

245,000

 

 

238,000

 

Contract assets

 

 

365,000

 

 

 —

 

Property held for sale

 

 

694,000

 

 

694,000

 

 

 

 

6,898,000

 

 

6,062,000

 

 

 

 

 

 

 

 

 

Buildings and improvements

 

 

1,114,000

 

 

616,000

 

Equipment

 

 

4,008,000

 

 

3,951,000

 

 

 

 

5,122,000

 

 

4,567,000

 

Less accumulated depreciation

 

 

3,878,000

 

 

3,235,000

 

Property, plant and equipment, net

 

 

1,244,000

 

 

1,332,000

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

68,000

 

 

68,000

 

Other assets

 

 

153,000

 

 

209,000

 

 

 

 

 

 

 

 

 

Total Assets

 

$

8,363,000

 

$

7,671,000

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

925,000

 

$

1,706,000

 

Trade accounts payable

 

 

1,594,000

 

 

1,045,000

 

Accrued liabilities

 

 

1,077,000

 

 

817,000

 

Contract liabilities

 

 

27,000

 

 

219,000

 

 

 

 

3,623,000

 

 

3,787,000

 

Long-term debt, less current maturities

 

 

841,000

 

 

130,000

 

Stockholders' equity:

 

 

 

 

 

 

 

Common stock; par value $0.01; 6,000,000 shares authorized; 5,995,750 shares issued and outstanding

 

 

60,000

 

 

60,000

 

Capital in excess of par value

 

 

12,491,000

 

 

12,437,000

 

Accumulated deficit

 

 

(8,652,000)

 

 

(8,743,000)

 

 

 

 

3,899,000

 

 

3,754,000

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders' Equity

 

$

8,363,000

 

$

7,671,000

 

 

The accompanying notes are an integral part of these statements.

3


 

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

    

October 31, 2018

    

October 31, 2017

    

October 31, 2018

    

October 31, 2017

 

Net sales

 

$

4,874,000

 

$

4,684,000

 

$

9,347,000

 

$

9,214,000

 

Cost of goods sold

 

 

3,200,000

 

 

3,322,000

 

 

6,194,000

 

 

6,596,000

 

Gross profit

 

 

1,674,000

 

 

1,362,000

 

 

3,153,000

 

 

2,618,000

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Engineering

 

 

313,000

 

 

273,000

 

 

615,000

 

 

539,000

 

Selling, general and administrative

 

 

1,290,000

 

 

1,358,000

 

 

2,501,000

 

 

2,644,000

 

 

 

 

1,603,000

 

 

1,631,000

 

 

3,116,000

 

 

3,183,000

 

Income (loss) from operations

 

 

71,000

 

 

(269,000)

 

 

37,000

 

 

(565,000)

 

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

24,000

 

 

13,000

 

 

48,000

 

 

25,000

 

Income (loss) before income tax expense (benefit)

 

 

47,000

 

 

(282,000)

 

 

(11,000)

 

 

(590,000)

 

Income tax expense (benefit)

 

 

15,000

 

 

(111,000)

 

 

 —

 

 

(226,000)

 

Net income (loss)

 

$

32,000

 

$

(171,000)

 

$

(11,000)

 

$

(364,000)

 

Basic income (loss) per share

 

$

0.01

 

$

(0.03)

 

$

(0.00)

 

$

(0.07)

 

 

The accompanying notes are an integral part of these statements.

4


 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

    

October 31, 2018

    

October 31, 2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(11,000)

 

$

(364,000)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Stock compensation cost amortized

 

 

54,000

 

 

54,000

 

Depreciation

 

 

169,000

 

 

149,000

 

Deferred income taxes

 

 

 —

 

 

(226,000)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Trade receivables

 

 

35,000

 

 

(115,000)

 

Inventories

 

 

(927,000)

 

 

(202,000)

 

Prepaid expenses and other assets

 

 

49,000

 

 

54,000

 

Trade accounts payable

 

 

549,000

 

 

(201,000)

 

Accrued liabilities

 

 

260,000

 

 

200,000

 

Contract assets and liabilities

 

 

(455,000)

 

 

(22,000)

 

Net cash used in operating activities

 

 

(277,000)

 

 

(673,000)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

 

(81,000)

 

 

(51,000)

 

Net cash used in investing activities

 

 

(81,000)

 

 

(51,000)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Principal payments on long-term debt

 

 

(1,625,000)

 

 

(66,000)

 

Payments on capital lease obligations

 

 

(85,000)

 

 

(11,000)

 

Proceeds from long-term debt

 

 

815,000

 

 

 —

 

Proceeds from line of credit

 

 

825,000

 

 

750,000

 

Net cash provided by (used in) financing activities

 

 

(70,000)

 

 

673,000

 

Net decrease in cash

 

 

(428,000)

 

 

(51,000)

 

Cash, beginning of period

 

 

575,000

 

 

298,000

 

Cash, end of period

 

$

147,000

 

$

247,000

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

Interest

 

$

44,626

 

$

25,000

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Equipment financed with proceeds from capital lease

 

$

 —

 

$

225,000

 

 

The accompanying notes are an integral part of these statements.

 

 

5


 

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

NOTE 1 — BASIS OF PRESENTATION

 

The consolidated condensed balance sheet as of October 31, 2018, which has been derived from the audited financial statements of Torotel, Inc. ("Torotel" or the “Company”), is accompanied by the unaudited interim consolidated condensed financial statements, which reflect the normal recurring adjustments that in the opinion of management are necessary to present fairly Torotel’s consolidated financial position at October 31, 2018, and the consolidated results of operations and cash flows for the three and six months ended October 31, 2018, and 2017, respectively. 

 

The unaudited interim consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC").  Certain information and note disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although management believes the disclosures made are adequate to make the information not misleading. The financial statements contained herein should be read in conjunction with Torotel’s consolidated financial statements and related notes filed on Torotel's Form 10-K/A for the year ended April 30, 2018 as filed with the SEC on July 12, 2018.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 requires expanded disclosures about the nature and terms of lease agreements and is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. Torotel is currently evaluating the potential impact of this standard on its consolidated financial statements. Torotel anticipates the impact will be material to the consolidated financial statements for reporting periods beginning after December 15, 2018, due to the amendment to the lease for Torotel’s manufacturing facility that was executed on October 31, 2016. The status of the implementation effort is in the preliminary stage. No significant implementation matters have been identified as needing to be addressed.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASC 606). ASU 2014-09 supersedes the revenue recognition requirements in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new revenue recognition standard also requires disclosures that sufficiently describe the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. This ASU was amended by ASU No. 2015-14, issued in August 2015, which deferred the original effective date by one year; the effective date of this ASU is for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017, using one of two retrospective application methods. In addition, the FASB issued other amendments during 2016 to ASC 606, which include implementation guidance to principal versus agent considerations, guidance to identifying performance obligations and licensing guidance and other narrow scope improvements. The Company adopted this new guidance on May 1, 2018 using the modified retrospective application method. As part of the Company's implementation plan for this new standard, the Company assessed the impact of these new standards on its business processes, business and accounting systems, and consolidated financial statements and related disclosures by evaluating the terms and conditions of samples of both standard and non-standard contracts across the Company's in-scope business segments in light of the new standards. Specifically, the Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings of $102,000 as of May 1, 2018. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

 

 

6


 

Torotel has two primary product revenue streams. Over 90% of our revenue is derived from product revenue in the aerospace and defense industries. Under this revenue stream, control is transferred as products are completed and closed to finished goods.  Torotel’s industrial and commercial product revenue makes up less than 7% of total revenue. Under this revenue stream, control is transferred as the products are shipped. The remainder of Torotel revenue consists of product fees and engineering and design services. With product fees, control transfer is determined by the revenue stream of the associated product. Percentage-of-completion revenue recognition is utilized when revenue recognized exceeds the amount billed to the customer for any project-related services, utilizing labor as the input method.  Torotel recognizes revenue when control has been transferred to the customer. Under the previous revenue recognition accounting standard, Torotel product revenue was recognized upon shipment or delivery of goods. Over 90% of Torotel revenue is derived from contracts with performance obligations satisfied over time.  Performance obligations under long-term agreements are considered to be under contract at the time that authorization to ship has been obtained from the customer. Performance obligations under standalone purchase orders are considered to be under contract at the time that the purchase order is received. Parts manufactured for customers in our aerospace and defense product revenue stream must be built to certain specifications that are then qualified by the customer. Due to the proprietary nature of our custom-built products designed for a specific use by our aerospace and defense customers, control is considered to be with the customer as the products are finalized and placed into finished goods.  For our commercial customers, control of the underlying product design is retained by Torotel, therefore the products are considered in our control until the moment of shipment. Torotel’s warranty obligations fall under Topic 460, and are not considered to be within the scope of Topic 606.

 

The following table summarizes the cumulative effect of the changes to our consolidated condensed balance sheet as of May 1, 2018 from the adoption of ASC 606:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Adjustments due to

 

 

 

 

April 30, 2018

 

ASC 606

 

May 1, 2018

Assets

 

 

 

 

 

 

 

 

 

Contract assets

 

$

 —

 

$

102,000

 

$

102,000

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

$

(8,743,000)

 

$

102,000

 

$

(8,641,000)

 

In accordance with the new revenue recognition requirements relative to the revenue recognition requirements under ASC 605, the disclosure of the impact of adoption on our consolidated condensed balance sheet, consolidated condensed statement of operations, and consolidated condensed statement of cash flows as of and for the six months ended October 31, 2018 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Balances Without Adoption

 

 

 

 

 

 

 

of ASC 606

 

Effect of Change

 

 

As Reported

 

as of October 31, 2018

 

Higher/(Lower)

Balance Sheet

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Contract assets

 

$

365,000

 

$

 —

 

$

365,000

 

Our contract liabilities, previously reported as customer deposits, represent customer prepayments and are recognized in the same manner under both ASC 606 and ASC 605.  Therefore, contract liabilities are not included in the adoption table above.

 

7


 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

    

Balances Without Adoption

 

 

 

 

 

 

 

of ASC 606

 

Effect of Change

 

 

As Reported

 

October 31, 2018

 

Higher/(Lower)

Statement of Operations

 

 

 

 

 

 

 

 

 

Net sales

 

 

4,874,000

 

 

4,406,000

 

 

468,000

Cost of goods sold

 

 

3,200,000

 

 

2,995,000

 

 

205,000

Gross profit

 

 

1,674,000

 

 

1,411,000

 

 

263,000

Income (loss) from operations

 

 

71,000

 

 

(192,000)

 

 

263,000

Income (loss) before benefit for income taxes

 

 

47,000

 

 

(216,000)

 

 

263,000

Benefit for income taxes

 

 

15,000

 

 

15,000

 

 

 —

Net income (loss)

 

 

32,000

 

 

(231,000)

 

 

263,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

    

Balances Without Adoption

    

 

 

 

 

 

 

of ASC 606

 

Effect of Change

 

 

As Reported

 

October 31, 2018

 

Higher/(Lower)

Statement of Operations

 

 

 

 

 

 

 

 

 

Net sales

 

 

9,347,000

 

 

8,879,000

 

 

468,000

Cost of goods sold

 

 

6,194,000

 

 

5,989,000

 

 

205,000

Gross profit

 

 

3,153,000

 

 

2,890,000

 

 

263,000

Income (loss) from operations

 

 

37,000

 

 

(226,000)

 

 

263,000

Loss before benefit for income taxes

 

 

(11,000)

 

 

(274,000)

 

 

263,000

Income tax expense

 

 

 —

 

 

 —

 

 

 —

Net loss

 

 

(11,000)

 

 

(274,000)

 

 

263,000

 

 

 

 

 

 

 

 

 

 

Statement of Cash Flows

 

 

 

 

 

 

 

 

 

Net loss

 

 

(11,000)

 

 

(274,000)

 

 

263,000

Contract assets and liabilities

 

 

(455,000)

 

 

(192,000)

 

 

(263,000)

Net cash provided (used) in operating activities

 

 

(277,000)

 

 

(277,000)

 

 

 —

 

 

 

 

NOTE 2 — NATURE OF OPERATIONS

 

Torotel conducts business primarily through its wholly owned subsidiary, Torotel Products, Inc. (“Torotel Products”). Torotel Products specializes in the custom design and manufacture of a wide variety of precision magnetic components, consisting of transformers, inductors, reactors, chokes, toroidal coils, high voltage transformers, dry-type transformers and electro-mechanical assemblies, for use in commercial, industrial and military electronics.

 

NOTE 3—INVENTORIES

 

The following table summarizes the components of inventories:

 

 

 

 

 

 

 

 

 

 

 

    

 

October 31, 2018

    

 

April 30, 2018

 

Raw materials

 

$

1,800,000

 

$

1,278,000

 

Work in process

 

 

1,023,000

 

 

635,000

 

Finished goods

 

 

466,000

 

 

449,000

 

 

 

$

3,289,000

 

$

2,362,000

 

 

 

8


 

NOTE 4—FINANCING AGREEMENTS

 

Torotel Products had a financing agreement (the “previous financing agreement”) with Commerce Bank, N.A. that provided for a revolving line of credit, a guidance line of credit, and a real estate term loan. Torotel was the guarantor to all promissory notes under the previous financing agreement.  On October 19, 2018, the debt that was outstanding under the previous financing agreement was fully repaid and extinguished, with an aggregate payoff amount of approximately $1,625,000 and an immaterial early prepayment fee. 

 

On October 19, 2018, Torotel entered into three new business loan agreements (the “financing agreements”) with Cornerstone Bank (the “Bank”).  The financing agreements provide for an asset-backed revolving line of credit, a guidance line of credit, and a real estate term loan.  A summary of the notes issued under the financing agreements is provided below:

 

 

 

 

 

 

 

 

 

 

 

 

October 31, 2018

 

 

April 30, 2018

6.00% asset-based line of credit with a maturity date of October 19, 2019

 

$

781,000

 

$

 -

6.00% guidance line of credit with a maturity date of October  19, 2019

 

 

54,000

 

 

 -

5.35% mortgage note payable in monthly installments of $5,573, including interest, with final payment of $690,829 due October 19, 2023

 

 

806,000

 

 

 

Capital lease obligations (see Note 11)

 

 

125,000

 

 

170,000

4.05% mortgage note payable in monthly installments of $4,873, including interest, with final payment of $349,000 due January 27, 2019

 

 

 -

 

 

373,000

4.00% working capital line of credit with a maturity date of October 20, 2018

 

 

 -

 

 

751,000

4.00% building line of credit with a maturity date of October  20, 2018

 

 

 -

 

 

465,000

Borrowings under an equipment financing line of credit:

 

 

 

 

 

 

4.75% note payable in monthly installments of $2,269, including interest, with final payment made on May 27, 2018

 

 

 -

 

 

2,000

4.05% note payable in monthly installments of $3,680, including interest, with final payment due January 10, 2020

 

 

 -

 

 

75,000

Total long-term debt

 

 

1,766,000

 

 

1,836,000

Less current installments

 

 

925,000

 

 

1,706,000

Long-term debt, excluding current installments

 

$

841,000

 

$

130,000

 

The asset-based revolving line of credit is intended to be used for working capital purposes and has a capacity of $1,000,000.  The asset-based revolving line of credit is renewable annually upon mutual agreement of Torotel and the Bank. The associated interest rate is equal to the greater of the floating Cornerstone Bank Corporate Base Rate (currently 6%) or a floor of 5% (as listed above).  Monthly repayments of interest only are required under the asset-based revolving line of credit promissory note with the principal due at maturity.  The borrowing base of the revolving line of credit is limited to 80% of eligible accounts receivable, plus 50% of eligible inventory, plus 80% of eligible equipment.  This asset-based revolving line of credit is cross collateralized and cross defaulted with all other financing agreements of Torotel with the Bank and is secured by a first lien on all business assets of Torotel pursuant to the Commercial Security Agreement. Under the revolving line of credit, if the aggregate principal amount of the outstanding advances exceeds the applicable borrowing base, Torotel must pay the Bank an amount equal to the difference between the outstanding principal balance of the revolving line of credit and the borrowing base.

 

The equipment note is a guidance line of credit to be used for equipment purchases and has a capacity of $250,000 with a 12-month term that is renewable annually upon mutual agreement of Torotel and the Bank. Monthly repayments of interest are required, with principal due at maturity.  The associated advance rate is equal to the greater of the floating Cornerstone Bank Corporate Base Rate (currently 6%) or a floor of 5% (as listed above). Monthly repayments of interest only are required, with the principal due at maturity.  This note is cross collateralized and cross defaulted with all other financing agreements of Torotel and is secured by a purchase money security interest in the assets purchased as well as a first lien on all business assets of Torotel.  Upon execution of the agreement, Torotel received initial advances of $54,000 under the guidance line of credit.

 

9


 

The real estate term loan is in the principal amount of $815,000 and contains a 5-year with a 20-year amortization period, with the balance at maturity on October 19, 2023.  The associated interest rate is fixed at 5.35%.  Monthly repayments of approximately $5,573, consisting of both interest and principal, are required.  The final payment of approximately $690,829 is due on the maturity date.  This real estate term loan is cross collateralized and cross defaulted with the other financing agreements.  Pursuant to a Commercial Security Agreement dated October 19, 2018, between Torotel and the Bank (the “Commercial Security Agreement”), which was entered into in connection with the financing agreements, the real estate term loan is secured by a first lien priority real estate mortgage on the property located at 620 North Lindenwood Drive in Olathe, Kansas.

 

The financing agreements contain customary representations, warranties, and covenants of Torotel for the benefit of the Bank, as well as customary default provisions.  Other than the borrowing base limitations under the asset-based revolving line of credit, none of the financing agreements requires Torotel to comply with any financial covenants.  Prepayments are allowed without penalty under all of the financing agreements.

 

 

Irrevocable Standby Letter of Credit

 

Under the terms of a lease amendment for its manufacturing facility located in Olathe, Kansas (see Note 11), Torotel provided the landlord an irrevocable standby letter of credit in the original amount of $300,000 as additional security. The balance under the letter of credit will automatically reduce in accordance with the below schedule if not drawn upon:

 

 

 

 

 

 

Date of Reduction

 

Amount of Reduction

 

Balance of Letter of Credit

January 1, 2020

$

75,000

$

225,000

January 1, 2021

 

75,000

 

150,000

January 1, 2022

 

75,000

 

75,000

January 1, 2023

 

75,000

 

 -

 

 

 

NOTE 5—INCOME TAXES

 

As of October 31,  2018, the federal tax returns for the fiscal years ended 2016 through 2018 are open to audit until the statute of limitations closes for the years in which our net operating losses are utilized. We would recognize interest and penalties accrued on unrecognized tax benefits as well as interest received from favorable tax settlements within income tax expense. As of October 31, 2018, we recorded no accrued interest or penalties related to uncertain tax positions. We expect no significant change in the amount of unrecognized tax benefit, accrued interest or penalties within the next twelve months.

 

NOTE 6—RESTRICTED STOCK AGREEMENTS

 

Restricted Stock Agreements, and stock awards thereunder, are authorized by the Compensation and Nominating Committee (the "Committee") and the Board of Directors of Torotel (the "Board"). The terms of the Restricted Stock Agreements afford the grantees all of the rights of a stockholder with respect to the award shares, including the right to vote such shares and to receive dividends and other distributions payable with respect to such shares since the date of award. Under the terms of each agreement, the non-vested shares are restricted as to disposition and subject to forfeiture under certain circumstances. The Restricted Stock Agreements further provide, subject to certain conditions, that if prior to all of the restricted shares having vested, we undergo a change in control, then all of the restricted shares shall be vested and no longer subject to restrictions under the Restricted Stock Agreements. The restricted shares are treated as non-vested stock; accordingly, the fair value of the restricted stock at the date of award is offset against capital in excess of par value in the accompanying consolidated balance sheets under stockholders' equity.

 

10


 

Restricted Stock Grants

 

 On September 21, 2016, we entered into Restricted Stock Agreements (“2016 Agreements”) with three key employees for the grant of an aggregate total of 730,000 restricted shares of the Company's common stock (the “Shares”).  The Shares were granted, and the 2016 Agreements were entered into, pursuant to the Company’s Stock Award Plan (the “Plan”).  The award of the Shares was authorized by both the Committee and the Board as a whole on September 19, 2016.   Except for the number of shares granted to each recipient, the terms of each of the 2016 Agreements are identical.

 

The Shares were granted subject to restrictions that prohibit them from being sold, assigned, pledged or otherwise disposed of until the restrictions lapse.  The restrictions will lapse on the fifth anniversary of the date of grant if during the five year restriction period, (1) the Company's cumulative annual growth in revenue is at least 10%, and (2) the average economic value added as a percentage of revenue is at least 2%. The economic value added, which attempts to capture the true economic profit, will be calculated as the operating profit less the cost of capital with adjustments made for taxes. The restrictions will also lapse, if prior to the fifth anniversary of the date of grant, (1) the grantee's employment with the Company is terminated by reason of disability, (2) the grantee dies, or (3) the Committee, in its sole discretion, terminates the restrictions.  If the restrictions on the Shares have not lapsed by the fifth anniversary of the date of grant, the Shares will be forfeited to the Company.

 

Stock Compensation Costs and Restricted Stock Activity

 

Total stock compensation cost for the six months ended October 31, 2018 and 2017 was $54,000 and $54,000, respectively.

 

Restricted stock activity for each six month period through October 31 is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

2017

 

 

    

Restricted

    

Weighted

    

Restricted

    

Weighted

 

 

 

Shares 

 

Average 

 

Shares 

 

Average 

 

 

 

Under 

 

Grant 

 

Under 

 

Grant 

 

 

 

Option

 

Price

 

Option

 

Price

 

Outstanding at May 1

    

730,000

    

$

0.740

    

730,000

    

$

0.740

 

Granted

 

 —

 

 

 —

 

 —

 

 

 —

 

Forfeited

 

 —

 

 

 —

 

 —

 

 

 —

 

Outstanding at October 31

 

730,000

 

$

0.740

 

730,000

 

$

0.740

 

 

 

NOTE 7—STOCKHOLDERS' EQUITY

 

The shares of common stock outstanding as of October 31 of each year are summarized as follows:

 

 

 

 

 

 

 

 

 

    

2018

 

2017

 

Balance, May 1

 

5,995,750

 

5,995,750

 

Shares released from treasury for restricted stock grants

 

 —

 

 —

 

Newly issued shares for restricted stock grants

 

 —

 

 —

 

Shares reverted to treasury for restricted stock forfeitures

 

 —

 

 —

 

Balance, October 31

 

5,995,750

 

5,995,750

 

 

 

NOTE 8—EARNINGS PER SHARE

 

Basic and diluted earnings per share are computed using the two-class method. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Per share amounts are computed by dividing net income attributable to common shareholders by the weighted average shares outstanding during each period.

11


 

 

The basic earnings per common share were computed as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

    

October 31, 2018

    

October 31, 2017

    

October 31, 2018

    

October 31, 2017

 

Net earnings (loss)

 

$

32,000

 

$

(171,000)

 

$

(11,000)

 

$

(364,000)

 

Amounts allocated to participating securities (nonvested restricted shares)

 

 

(2,000)

 

 

 —

 

 

 —

 

 

 —

 

Net income (loss) attributable to common shareholders

 

$

30,000

 

$

(171,000)

 

$

(11,000)

 

$

(364,000)

 

Basic weighted average common shares

 

 

5,265,750

 

 

5,265,750

 

 

5,265,750

 

 

5,265,750

 

Earnings (loss) per share attributable to common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

0.01

 

$

(0.03)

 

$

(0.00)

 

$

(0.07)

 

 

ASC 260, Earnings per Share, provides that unvested share-based payment awards that contain non-forfeitable rights to dividends are considered to be participating securities and must be considered in the computation of earnings per share pursuant to the two-class method.  Diluted earnings per share is not presented as we do not have any shares considered incremental and dilutive.

 

 

 

NOTE 9—CONTRACT ASSETS AND LIABILITIES

 

For each of our contracts, the timing of revenue recognition, customer billings, and cash collections results in a net contract asset or liability at the end of each reporting period. Contract assets consist of unbilled receivables typically resulting from revenue recognition under contracts when either control has passed to the customer but the product has not yet shipped or the percentage-of-completion of revenue recognition is utilized when revenue recognized exceeds the amount billed to the customer for any project-related services, utilizing labor as the input method.  Contract liabilities (formerly referred to on the balance sheet as customer deposits) include advance payments and billings in excess of revenue recognized.  Contract assets and contract liabilities were as follows:

 

 

 

 

 

 

 

 

 

 

    

October 31, 2018

    

April 30, 2018

 

Contract assets

 

$

365,000

 

$

 —

 

Contract liabilities

 

$

27,000

 

$

219,000

 

 

 

Contract assets increased $365,000 between April 30, 2018 and October 31, 2018 due to the adoption of the new revenue standard, and relates to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations for which we have not yet billed.

 

Contract liabilities decreased $192,000 between April 30, 2018 and October 31, 2018 due to the recognition of revenue on advance payments exceeding additional advance payment receipts.

 

NOTE 10 — CONCENTRATIONS OF CREDIT RISK

 

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable.  We grant unsecured credit to most of our customers.  We do not believe that we are exposed to any extraordinary credit risk as a result of this policy.  At various times cash balances exceeded federally insured limits. However, we have incurred no losses in the cash accounts and we do not believe we are exposed to any significant credit risk with respect to our cash.

 

12


 

NOTE 11 — COMMITMENTS AND CONTINGENCIES

 

Torotel is obligated under several capital leases for the lease of various information technology equipment that expire at various dates during the next three years.  All of these leases are non-cancellable and are presented in the accompanying consolidated financial statements as long-term debt.  At October 31, 2018 and April 30, 2018, the gross amount of equipment under capital lease was $225,000.  Related accumulated depreciation recorded under capital lease were $54,000 and $48,000, respectively.

 

Amortization of assets held under capital lease is included with depreciation expense.

 

On August 30, 2017, Torotel entered into a Third Amendment (“Amendment”) to the lease for its manufacturing facility located in Olathe, Kansas. The Amendment reconfigured the Suite 520 entry design, and granted Torotel a $37,500 lump sum net base rent abatement, applied at $18,750 per month from September 1, 2017 through October 31, 2017.  The Amendment also reduced the current letter of credit requirement from $350,000 to $300,000.  The Amendment did not change the term of the lease, which continues through December 31, 2026 (subject to early termination options and two separate options to extend the lease term for additional five year periods).

 

Future minimum lease payments on the amended operating lease and future minimum capital lease payments as of October 31, 2018 are as follows:

 

 

 

 

 

 

 

Capital

Operating

Fiscal Years Ending April 30,

Leases

Leases

2019

$

30,000

$

212,000

2020

 

75,000

 

415,000

2021

 

27,000

 

410,000

2022

 

 —

 

430,000

2023

 

 —

 

442,000

2024

 

 —

 

452,000

2025

 

 —

 

456,000

2026

 

 —

 

467,000

2027

 

 —

 

350,000

 

 

132,000

 

3,634,000

Less: Amounts representing interest

 

(7,000)

 

 —

Total

$

125,000

$

3,634,000

 

 

 

 

13


 

Forward-Looking Information

 

This report, as well as our other reports filed with or furnished to the Securities and Exchange Commission (the “SEC”), contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “estimate,” “anticipate,” “project,” “intend,” “expect,” “plan,” “outlook,” “forecast,” “may,” “should,” “predict,” and similar expressions are intended to identify forward-looking statements. Statements regarding expectations, including performance assumptions and estimates relating to capital requirements, as well as other statements that are not historical facts, are forward-looking statements. This report contains forward-looking statements regarding, among other topics, our expected financial position, results of operations, cash flows, strategy, budgets and management's plans and objectives. Accordingly, these forward-looking statements are based on management’s judgments based on currently available information and assumptions about a number of important factors. While we believe that our assumptions about such factors are reasonable, such factors involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These factors include,without limitation:

 

·

economic, political and legislative factors that could impact defense spending;

·

continued production of the Hellfire II missile system for which we supply parts;

·

loss of key customers and our relatively concentrated customer base;

·

risks in fulfilling military subcontracts;

·

our ability to finance operations;

·

our ongoing analysis of the effect on our financial position and results of operations from changes in tax law;

·

our ability to adequately pass through to customers unanticipated future increases in raw material and labor costs;

·

delays in developing new products;

·

markets for new products and the cost of developing new markets;

·

expected orders that do not occur;

·

our ability to adequately protect and safeguard our network infrastructure from cyber security vulnerabilities;

·

our on-going ability to satisfy our debt covenant requirements;

·

our ability to generate sufficient taxable income to realize the amount of our deferred tax assets; and

·

the impact of competition and price erosion as well as supply and manufacturing constraints;

 

In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this report will prove accurate, and actual results may differ materially from these forward-looking statements. We assume no obligation to update any forward-looking statements made herein.

 

14


 

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

 

Overview

 

Torotel, Inc. ("Torotel") conducts substantially all of its business primarily through its wholly owned subsidiary, Torotel Products, Inc. ("Torotel Products"). The terms “we,” “us,” “our,” and the “Company” as used herein include Torotel and all of its subsidiaries, including Torotel Products, unless the context otherwise requires. Torotel specializes in the custom design and manufacture of a wide variety of precision magnetic components consisting of transformers, inductors, reactors, chokes, toroidal coils, high voltage transformers, dry-type transformers and electro-mechanical assemblies for use in military, commercial aerospace and industrial electronic applications. These products are used to modify and control electrical voltages and currents in electronic devices. Torotel sells these products to original equipment manufacturers, which use them in applications such as:

 

·

aircraft navigational equipment;

·

digital control devices;

·

airport runway lighting devices;

·

medical equipment;

·

avionics systems;

·

radar systems;

·

down-hole drilling;

·

conventional missile guidance systems; and

·

other aerospace and defense applications.

 

Torotel markets its components primarily through an internal sales force and independent manufacturers’ representatives paid on a commission basis.  These commissions are earned when a product is sold and/or shipped to a customer within the representative’s assigned territory.  Torotel also utilizes its engineering department in its direct sales efforts for the purpose of expanding its reach into new markets and/or customers.

 

The industry mix of the customers that accounted for Torotel’s net sales for the first six months of the fiscal year ending April 30, 2019 (“fiscal year 2019”) was 44% defense, 51% commercial aerospace, and 5% industrial compared to 52% defense, 37% commercial aerospace, and 11% industrial for the same period in the fiscal year ending April 30, 2018 (“fiscal year 2018”).  Approximately 93% of Torotel’s sales during the first six months of fiscal year 2019 have been derived from domestic customers.

 

Torotel is an approved source for magnetic components used in numerous military and commercial aerospace systems, which means Torotel is automatically solicited for any procurement needs for such applications.  The magnetic components manufactured by Torotel are sold primarily in the United States, and most sales are awarded on a competitive bid basis.  The markets in which Torotel competes are highly competitive.  A substantial number of companies sell components of the type manufactured and sold by Torotel.  In addition, Torotel sells to a number of customers who have the capability of manufacturing their own electronic components.  The principal methods of competition for electronic products in the markets served by Torotel include, among other factors, price, on-time delivery performance, lead times, customized product engineering and technical support, marketing capabilities, quality assurance, manufacturing efficiency, and existing relationships with customers’ engineers.  While we believe magnetic components are generally not susceptible to rapid technological change, Torotel’s sales, which do not represent a significant share of the industry’s market, are susceptible to decline given the competitive nature of the market.

 

Business and Industry Considerations

 

Defense Markets

 

During the first six months of fiscal years 2019 and 2018, the amount of consolidated revenues derived from contracts with prime contractors of the U.S. Department of Defense (“DoD”) was approximately 44%  and 52%  

15


 

respectively. As a result, our financial results in any period could be impacted substantially by spending cuts or increases in the DoD budget and the funds appropriated for certain military programs.

 

Despite ongoing uncertainty associated with the DoD budget, we believe our overall defense business outlook remains favorable due to the present demand for the potted coil assembly and other existing orders from major defense contractors. As of October 31,  2018, our consolidated order backlog for the defense market was nearly $14.2 million, which included $7.2 million for the potted coil assembly.

 

Commercial Aerospace and Industrial Markets

 

We provide magnetic components and electro-mechanical assemblies for a variety of applications in the commercial aerospace and industrial markets. The primary demand drivers for these markets include commercial aircraft orders, oil and gas drilling exploration activity, and general economic growth. While domestic economic growth remains positive, the above demand drivers could be impacted by short-term changes in the economy such as spikes or declines in the price of oil, war, terrorism, or changes in regulation. Other threats to our anticipated positive near-term and long-term market outlook include delays on the development and production of new commercial aircraft and competition from international suppliers. As of October 31,  2018, our consolidated order backlog for the aerospace and industrial markets was $3.1 million. However, a material portion of our business has been converted to long-term agreements. Approximately $310,000 of revenue in the quarter ended October 31, 2018 was not on our backlog as of April 30, 2018.

 

Business Outlook

 

Our non-headcoil backlog as of October 31, 2018 as compared to October 31, 2017 increased from $3.6 million to $10.1 million, an 181% increase. This was due primarily to an increase in magnetics and assembly orders.  We anticipate that net sales for fiscal year 2019 will improve from net sales for fiscal year 2018. This is primarily due to the timing of newer program revenue that is projected to ship in fiscal year 2019.

 

Consolidated Results of Operations

 

The following management comments regarding Torotel’s results of operations and outlook should be read in conjunction with the Consolidated Condensed Financial Statements and Notes to the Consolidated Condensed Financial Statements included in Part I, Item 1 of this Quarterly Report.

 

This discussion and analysis of the results of operations include the operations of Torotel and its subsidiary Torotel Products as of October 31, 2018.  

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

    

October 31, 2018

    

October 31, 2017

 

    

October 31, 2018

    

October 31, 2017

 

Magnetic components

 

$

2,386,000

 

$

2,499,000

 

 

$

4,543,000

 

$

4,643,000

 

Potted coil assembly

 

 

1,586,000

 

 

1,443,000

 

 

 

2,865,000

 

 

2,813,000

 

Electro-mechanical assemblies

 

 

902,000

 

 

696,000

 

 

 

1,659,000

 

 

1,693,000

 

Large transformers

 

 

 —

 

 

46,000

 

 

 

280,000

 

 

65,000

 

Total

 

$

4,874,000

 

$

4,684,000

 

 

$

9,347,000

 

$

9,214,000

 

 

Consolidated net sales in the three and six months ended October 31,  2018 increased 4% or $190,000 and 1% or $133,000, respectively compared to the three and six months ended October 31, 2017.    Consolidated net sales increased primarily because of  increased demand in the potted coil assembly combined with an increase in the demand for the large transformers in the first quarter and electro-mechanical assemblies in the second quarter of fiscal year 2019.

 

16


 

Gross Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

    

October 31, 2018

    

October 31, 2017

 

 

    

October 31, 2018

    

October 31, 2017

 

Gross profit

 

$

1,674,000

 

$

1,362,000

 

 

$

3,153,000

 

$

2,618,000

 

Gross profit % of net sales

 

 

34

%  

 

29

%  

 

 

34

%  

 

28

%  

 

Consolidated gross profit increased by 23% or $312,000 and increased by 20% or $535,000, in the three and six months ended October 31,  2018 compared to the three and six months ended October 31, 2017.  Consolidated gross profit of Torotel increased primarily due to increased direct labor efficiencies during the first quarter of fiscal year 2019 coupled with lower costs associated with material in the second quarter of fiscal year 2019. 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

    

October 31, 2018

    

October 31, 2017

    

October 31, 2018

    

October 31, 2017

Engineering

 

$

313,000

 

$

273,000

 

$

615,000

 

$

539,000

Selling, general and administrative

 

 

1,290,000

 

 

1,358,000

 

 

2,501,000

 

 

2,644,000

Total

 

$

1,603,000

 

$

1,631,000

 

$

3,116,000

 

$

3,183,000

 

Engineering expenses increased 15%, or $40,000 and 14%, or $76,000 in the three and six months ended October 31,  2018 compared to the three and six months ended October 31, 2017.  The increase primarily resulted from an increase in salaries and wages.  

 

Selling, general and administrative expenses decreased 5%, or $68,000 and 5%, or $143,000 in the three and six months ended October 31,  2018 compared to the three and six months ended October 31, 2017.  The decrease resulted primarily from a decrease in advertising expenses, as well as a decrease in building repair and maintenance costs.

 

Earnings (loss) from Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

    

October 31, 2018

    

October 31, 2017

    

October 31, 2018

    

October 31, 2017

 

Torotel Products

 

$

259,000

 

$

(118,000)

 

$

363,000

 

$

(260,000)

 

Torotel

 

 

(188,000)

 

 

(151,000)

 

 

(326,000)

 

 

(305,000)

 

Total

 

$

71,000

 

$

(269,000)

 

$

37,000

 

$

(565,000)

 

 

For the reasons discussed under each of the Gross Profit, and Operating Expenses headings above, consolidated earnings (loss) from operations decreased by 126%, or $340,000 and 107%, or $602,000 for the three and six months ended October 31,  2018 when compared to the three and six months ended October 31, 2017.  

 

Other Earnings Items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

    

October 31, 2018

    

October 31, 2017

    

October 31, 2018

    

October 31, 2017

Earnings (loss) from operations

 

$

71,000

 

$

(269,000)

 

$

37,000

 

$

(565,000)

Interest expense

 

 

24,000

 

 

13,000

 

 

48,000

 

 

25,000

Earnings (loss) before income taxes

 

 

47,000

 

 

(282,000)

 

 

(11,000)

 

 

(590,000)

Income tax expense (benefit)

 

 

15,000

 

 

(111,000)

 

 

 —

 

 

(226,000)

Net earnings (loss)

 

$

32,000

 

$

(171,000)

 

$

(11,000)

 

$

(364,000)

 

17


 

We anticipate that our effective income tax rate for fiscal year 2019 will be 26.0%. However, the year-to-date effective income tax rate as of October 31, 2018 was 0.0% as a result of the year-to-date net loss.  The effective tax rate was 39.4% for the same period in the prior year. For additional discussion related to Income Taxes, see Note 5 of Notes to the Consolidated Financial Statements.

 

Financial Condition and Liquidity

 

Cash generated by operations together with the borrowing under our lines of credit are our primary sources of liquidity. The following table highlights the sources of liquidity available to us as of October 31,  2018 compared to October 31, 2017.

 

 

 

 

 

 

 

 

 

 

 

    

2018

    

 

2017

 

Cash

$

147,000

 

$

247,000

 

Amount available under our building line of credit

 

 -

 

 

35,000

 

Amount available under our equipment loan

 

196,000

 

 

378,000

 

Amount available under our working capital line of credit

 

229,000

 

 

500,000

 

Total funds available

$

572,000

 

$

1,160,000

 

 

Operating Activities

 

The following table compares net cash used in operating activities during the three and six months ended October 31, 2018 compared to the three and six months ended October 31, 2017.

 

 

 

 

 

 

 

 

 

 

    

2018

    

2017

 

Net cash used in operating activities

 

$

(277,000)

 

$

(673,000)

 

 

Net cash used in operating activities decreased $396,000 during the six months ended October 31, 2018 versus the comparable period of the 2018 fiscal year primarily due to increases in accounts payable and decreases in accounts receivable, deferred income taxes, and operating losses.

 

Investing Activities

 

 

 

 

 

 

 

 

 

 

 

    

2018

    

2017

 

Net cash used in investing activities

 

$

(81,000)

 

$

(51,000)

 

 

The increase of $30,000 in net cash used in investing activities during the six months ended October 31, 2018 compared to the comparable period of fiscal year 2018 was due to higher capital expenditures.  Capital expenditures during the six months ended October 31, 2019 were primarily related to the purchase of design engineering software.  We expect capital expenditure spending to rise moderately during the remainder of fiscal year 2019 which is consistent with the anticipated needs of our business.

 

Financing Activities

 

 

 

 

 

 

 

 

 

 

 

    

2018

    

2017

 

Net cash provided by (used in) financing activities

 

$

(70,000)

 

$

673,000

 

 

The change of $743,000 for the six month period of fiscal year 2019 from the comparable period in fiscal year 2018 is due primarily to proceeds from the line of credit in fiscal year 2018.  

 

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Capital Resources

 

We believe that the projected cash flow from operations, combined with existing cash balances and available borrowings under our existing financing arrangements to supplement our working capital needs, will be sufficient to meet our anticipated funding requirements for the foreseeable future, based on historical levels. As of October 31, 2018,  we had $781,000 drawn on the $1,000,000 asset-based revolving line of credit and $54,000 drawn on the $250,000 guidance line of credit.  As of October 31, 2018  our total borrowing capacity is approximately $1,250,000, of which approximately $835,000 has been drawn, under our existing financing arrangements, plus $147,000 of cash on hand.    

 

We believe that inflation will have only a minimal effect on future operations since such effects are expected to be offset by sales price increases, which are not expected to have a significant effect upon demand.

 

Critical Accounting Policies

 

We discuss our critical accounting policies and estimates in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K/A for the year ended April 30, 2018 filed with the SEC on July 12, 2018. We have made no significant change in our critical accounting policies since April 30, 2018.

 

Item 3.            Quantitative and Qualitative Disclosures About Market Risk

 

Not Applicable

 

 

Item 4.            Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Torotel’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Torotel’s disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report.  Effective May 1, 2018, we adopted Accounting Standards Codification 606, Revenue from Contracts with Customers.  As part of the adoption and evaluation, we implemented internal controls to ensure we adequately evaluated our contracts and properly assessed the impact of the new accounting standard. There were no significant changes to our internal control over financial reporting due to the adoption of the new standard. Based on such evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that Torotel’s disclosure controls and procedures are effective as of the end of the period covered by this report.

 

Changes in Internal Control

 

There were no significant changes in Torotel’s internal control over financial reporting or in other factors that in management’s estimates have materially affected, or are reasonably likely to materially affect, Torotel’s internal control over financial reporting during the fiscal quarter covered by this Quarterly Report on Form 10-Q.

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PART II.   OTHER INFORMATION

 

Item 6.   Exhibits

a)  Exhibits

 

 

 

 

Exhibit 3.1

  

Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 of Form 8-K filed with the SEC on September 25, 2009)

 

Exhibit 3.2

 

Amended and Restated By-laws (incorporated by reference to Exhibit 3.2 of Form 10-Q filed with the SEC on March 13, 2018)

 

Exhibit 10.1

 

Business Loan Agreement (asset based revolving line of credit) dated as of October 19, 2018, by and between the Company and the Bank (incorporated by reference to Exhibit 10.1 of Form 8-K filed with the SEC on October 25, 2018)

 

Exhibit 10.2

 

Business Loan Agreement (real estate term loan) dated as of October 19, 2018, by and between the Company and the Bank (incorporated by reference to Exhibit 10.2 of Form 8-K filed with the SEC on October 25, 2018)

 

Exhibit 10.3

 

Business Loan Agreement (guidance line of credit) dates as of October 19, 2018, by and between the Company and the Bank (incorporated by reference to Exhibit 10.3 of Form 8-K filed with the SEC on October 25, 2018)

 

Exhibit 31.1*

 

Officer Certification

 

Exhibit 31.2*

 

Officer Certification

 

Exhibit 32.1*

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32.2*

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 101.INS

 

XBRL Instance Document

 

Exhibit 101.SCH

 

XBRL Taxonomy Extension Schema Document

 

Exhibit 101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

Exhibit 101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

Exhibit 101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

Exhibit 101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

 

* Filed herewith

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SIGNATURES

 

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

 

 

 

 

Torotel, Inc.

December  13, 2018

/s/ Heath C. Hancock

Date

Heath C. Hancock

 

Chief Financial Officer

 

Principal Financial Officer

 

 

 

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