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EX-32.2 - EXHIBIT 32.2 - TEL INSTRUMENT ELECTRONICS CORPex_259589.htm
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EX-31.2 - EXHIBIT 31.2 - TEL INSTRUMENT ELECTRONICS CORPex_259587.htm
EX-31.1 - EXHIBIT 31.1 - TEL INSTRUMENT ELECTRONICS CORPex_259586.htm
EX-23.1 - EXHIBIT 23.1 - TEL INSTRUMENT ELECTRONICS CORPex_259585.htm
EX-21.1 - EXHIBIT 21.1 - TEL INSTRUMENT ELECTRONICS CORPex_259584.htm


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, 2021

 

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, 2020 (the last business day of our most recently completed second fiscal quarter) was $6,339,010 based on the closing price of $3.60 on September 30, 2020.

 

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 28, 2021.

 

 

 

 

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

11

     

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.

Selected Financial Data

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

24

     

Item 8.

Financial Statements and Supplementary Data

24

     

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

54

     

Item 9A.

Controls and Procedures

54

     

Item 9B.

Other Information

54

     

PART III.

   
     

Item 10.

Directors, Executive Officers and Corporate Governance

55

     

Item 11.

Executive Compensation

58

     

Item 12.

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

60

     

Item 13.

Certain Relationships and Related Transactions and Director Independence

63

     

Item 14.

Principal Accounting Fees and Services

64

     

PART IV.

   
     

Item 15.

Exhibits and Financial Statement Schedules

65

     

Signatures

67

 

 

 

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. Forward-looking statements include those that use forward-looking terminology, such as the words “potential”, continuing”, “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “project,” “plan,” “will,” “shall,” “should,” and similar expressions, including when used in the negative. Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, these statements involve risks and uncertainties, and we cannot assure you that actual results will be consistent with these forward-looking statements. 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.

 

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 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. (95% of flight-line test market)

 

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 $10,000 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 U.S.A.F.

 

TIC is also actively working on completing the SDR/OMNI this year with the initial product being a communication and navigation test set for the U.S. military. The communications test capability was moved up in our development schedule based on the negative impact of the COVID-19 pandemic on commercial aviation. 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.

 

Once the communications and navigation software are completed, TIC plans to introduce software APPS for the commercial transponder testing market. This will provide Transponder (Modes A, C, and S), ADS-B, and 978 MHz UAT capability for the large general aviation test market. This will allow us to compete with the IFR 4000 and 6000 test tests for our military and commercial aviation customers. 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.

 

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. The contract has been put on hold for at least the next four months due to LMCO funding issues, but we are hopeful that the contract will resume this fall. TIC has completed the majority of the development work on this new test set. If the funding issue is resolved, this could generate substantial recurring revenues for the Company and would position TIC for further development contracts with LMCO.

 

 

Item 1         Business

 

General (continued)

 

Company Response to COVID-19

 

Fiscal year 2021 resulted in a sharp reduction in revenues and profitability for the year due mainly to the COVID-19 pandemic which negatively impacted commercial sales and severe supply chain and manufacturing staffing issues which hampered our ability to ship units.

 

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.

 

The State stay-at-home orders generally required the closure of businesses that did not provide essential functions. Because the Company’s operations are as a supplier to the U.S. Military, and its manufacturing operations provide essential functions, the Company was able to continue shipping, receiving and manufacturing activities in the past year. This was extremely challenging due to manufacturing employee absences due to COVID-19 and/or quarantine requirements. The Company advised all other employees that could perform their job functions remotely to do so. As such, the Company’s operations, for the most part, remained operational, albeit at reduced staffing levels.

 

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.

 

Second Draw PPP loans made to eligible borrowers qualify for full loan forgiveness if during the 8- to 24-week covered period following loan disbursement:

 

 

o

Employee and compensation levels are maintained in the same manner as required for the First Draw PPP loan

 

o

The loan proceeds are spent on payroll costs and other eligible expenses; and

 

o

At least 60% of the proceeds are spent on payroll costs

 

A borrower can apply for forgiveness once all loan proceeds for which the borrower is requesting forgiveness have been used. Borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender. The Company plans to file for loan forgiveness of the second tranche of PPP funding during fiscal year ending March 31, 2022.

 

The COVID-19 outbreak and the uncertainty of economic conditions relating thereto negatively impacted the Company’s results of operations, cash flows and financial position in the past fiscal year but the Company expects improved results for FY 2022. Based on the operational and financial plans that management has developed, the Company expects to be able to meet its obligations as they become due over the next twelve months. 

 

Mode 5 Identification Friend or Foe (IFF) Products

 

T-47/M5 Dual Crypto Test Set

 

This new 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.

 

 

Item 1.          Business (continued)

 

General (continued)

 

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 $8 million of these test sets to Canada, Japan, Korea, U.K., Europe, and other international customers. We are also receiving interest from various U.S. customers. TIC believes this will be a key product supporting 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

 

We have delivered over 3,500 TS-4530A kits and test sets. We are seeing continued demand from both the U.S. military and international customers, and we continue to explore all opportunities for this market. 

 

Mode 5 Identification Friend or Foe (IFF) Products (continued)

 

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 $3.4 million of these test sets to Germany with $1.4 million of these test sets delivered in fiscal year 2021. We expect additional volume orders for this product in fiscal year 2022.

 

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.

 

 

Item 1.          Business (continued)

 

General (continued)

 

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.

 

Based on entirely new up-to-date technology and digital architecture, the AN/USM-708 is a leap forward in precision testing of the following systems:

 

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

Interrogator: Modes 1, 2, 3/A, C, 4, Mode S, Mode 5, TCAS & ETCAS, Shipboard Processor

ADS-B (Automatic Dependent Surveillance Broadcast) TX & RX

Navigation: VOR, ILS, LOC, GS, MB, TACAN

Sonobuoy

Link-4

VSWR

 

This program represented the culmination of a multi-year, multi-million dollar investment by the Company in Mode 5 technology and continues to provide a significant competitive advantage. Management believes that the CRAFT program also has potential for sales into the balance of the U.S. Military, NATO, and internationally, as the new Mode 5 IFF systems are installed in overseas aircraft platforms.

 

The contract for the AN/USM-708 and AN/USM-719 was a significant milestone for the Company because the development of this proprietary technology, which was funded by the Company, established Tel’s position as a leader in the industry. The CRAFT test set replaced seven obsolete U.S. Navy test sets that collectively cost approximately $300,000, making the CRAFT test set an excellent value to the government. This unit has been well-received by the end users. The core technology in the AN/USM-708 has been the foundation for additional military and commercial products.  

 

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

 

TIC is also actively working on completing the SDR/OMNI this year with the initial product being a communication and navigation test set for the U.S. military. 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. The communications test capability was moved up in our development schedule based on the negative impact of the COVID-19 pandemic on commercial aviation. 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.

 

 

Item 1.          Business (continued)

 

General (continued)

 

Once the communications and navigation software are completed, TIC plans to introduce software APPS for the commercial transponder testing market. This will provide Transponder (Modes A, C, and S), ADS-B, and 978 MHz UAT capability for the large general aviation test market. This will allow us to compete with the IFR 4000 and 6000 test tests for our military and commercial aviation customers. 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.

 

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. The contract has been put on hold for at least the next four months due to LMCO funding issues but we are hopeful that the contract will resume this fall. TIC has completed the majority of the development work on this new test set. If the funding issue is resolved, this could generate substantial recurring revenues for the Company and would 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. 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 and we have already delivered test sets into 18 international markets. The commercial avionics industry is undergoing a great deal of change,

 

and we believe our new hand-held products that we are planning to introduce this fiscal year, will generate increased market share at very attractive gross margin levels. We are also working closely with our military customers on new potential market opportunities that will be needed to maintain our sales and profitability.

 

The Company manufactures and sells commercial and military products as a single avionics business, and its designs and products cross both markets.

 

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 is dominated by two designers and manufacturers, the Company and Aeroflex, Inc., a division of Viavi Solutions, Inc. (NASDAQ: VIAV) (“Aeroflex”), with Aeroflex being substantially larger than Tel.  This market is relatively narrow and highly competitive.  Tel has been successful because of its high quality, new technology, user friendly products and competitive prices.  

 

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 two (2) direct commercial customers who accounted for more than 10% of commercial sales in fiscal year 2021 and zero in 2020.  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. U.S. and international Commercial sales represented 15% and 19% of total sales, respectively, for the fiscal years ended March 31, 2021, and 2020. Our commercial distributor represented approximately 5% and 20%, respectively, of commercial sales during fiscal years 2021 and 2020.

 

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, 2021, and 2020, sales to the U.S. Government, including shipments through the government’s logistics centers, represented approximately 38% and 30%, respectively, of total sales. 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 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 the Far East and is exploring distribution in other areas. For the years ended March 31, 2021, and 2020, total international sales were 52% and 54%, respectively, of sales, the notable decrease is due partially to the 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 the Far East. One international distributor accounted for 13% of total sales for the fiscal years ended March 31, 2020.

 

The Company has no material assets overseas. Tel also provides customers with calibration and repair services. Repairs and calibrations accounted for 10% and 10% of sales for the years ended March 31, 2021, and 2020, 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, 2021, and 2020:

 

   

Commercial

   

Government

   

Total

 
                         

March 31, 2021

  $ 291,687     $ 7,310,096     $ 7,601,783  

March 31, 2020

  $ 200,193     $ 3,824,984     $ 4,025,177  

 

Tel believes that most of its backlog on March 31, 2021, 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 2021, our supply chain had significant issues with deliveries being delayed with negatively impacted TIC’s revenues and profitability. The situation appears to be improving this calendar year and the Company is optimistic that it will be able to obtain purchased parts, as needed, at acceptable prices.

 

Patents and Environmental Laws

 

Tel 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, 2021, and 2020, Tel incurred expenses of $2,295,901 and $2,239,811, respectively, on the engineering, research, and development of new and improved products.   Engineering, research, and development expenditures in fiscal year 2021 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 28, 2021, Tel had 47 employees, comprised of 23 full-time employees in manufacturing, supply chain, and quality assurance, eight in administration and sales, including customer services and product support, and sixteen in engineering, research and development, none of whom belongs to a union. The Company also employs one part-time individual in manufacturing. From time to time, the Company also employs independent contractors to support its manufacturing, engineering, and sales organizations. As of June 28, 2021, the Company utilized three independent contractors in sales management and two Manufacturing temporary employees from an Employment agency. 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 $21,236.67. 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.  

 

 

Item 2.          Properties (continued)

 

The Company also leases a small office in Lawrence, Kansas under an operating lease agreement. In March 2021, the Company extended the lease term to March 31, 2022.

 

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

 

On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court located in Sedgwick County, Kansas, Case No. 09 CV 1141 (the “Aeroflex Action”), alleging that the Company and its two employees misappropriated Aeroflex’s proprietary technology in connection with the Company winning a substantial contract from the U.S. Army, to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5 (the “Award”). Aeroflex’s petition, seeking injunctive relief and damages, alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with Aeroflex’s business relationship; conspired to harm Aeroflex and tortiously interfered with Aeroflex’s contract.

 

The central basis of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology and confidential information in winning the Award.  In February 2009, subsequent to the Company winning the Award, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the U.S. Army Contracts Attorney and the U.S. Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed on Aeroflex’s proprietary technology in winning the Award and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest.

 

In December 2009, the Kansas District Court dismissed the Aeroflex Action on jurisdiction grounds. Aeroflex appealed this decision. In May 2012, the Kansas Supreme Court reversed the decision and remanded the Aeroflex Action to the Kansas District Court for further proceedings. The case then entered an extended discovery period in the District Court.

 

On May 23, 2016, the Company filed a motion for summary judgment based on Aeroflex’s lack of jurisdictional standing to bring the case. The motion asserts that Aeroflex does not own the intellectual property at issue since it is a bare licensee of Northrop Grumman. Northrop Grumman has declined to join this suit as plaintiff. The motion asserted Aeroflex lacks standing to sue alone. Also, the motion raises the fact that Aeroflex allowed the license to expire, Aeroflex’s claims are either moot or Aeroflex lacks standing to sue for damages alleged to have accrued after the license ended in 2011. The motion for summary judgment was denied.

 

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

 

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

 

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

 

 

Item 3.          Legal Proceedings (continued)

 

Aeroflex submitted a motion to the Court requesting that the judge award punitive damages at the maximum $5 million amount. In October 2017, the Court denied the Company’s motions and awarded Aeroflex an additional $2.1 million of punitive damages, which brings the total Tel damages awarded in this case to approximately $4.9 million. 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, 2020, the interest rate was 4.25% and cumulative interest as of fiscal year ended March 31, 2021, was $989,023. For the year starting July 1, 2021, the interest rate % has not been published to date. Interest on the $4,900,000 judgment started to accrue on November 22, 2017, the date the judgment was entered. As of March 31, 2021, the outstanding amount of the judgement and accrued interest is $5,889,023.

 

The Company filed post-trial motions to avoid damage duplication and inconsistency, and to secure judgment as a matter of law or a new trial. The trial court denied those motions. The Company appealed the verdict and the post-trial rulings to the Court of Appeals of the State of Kansas, Case No. 18-119,563. The Company posted a $2 million supersedeas bond. The Plaintiff filed a cross-appeal. The appeal and cross-appeal are fully briefed. The appellate court has not set a date to hear the appeal.

 

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 this calendar year, but this timing will likely be delayed due to the COVID-19 related shutdown of the Kansas court system. As such, the appeal process is expected to take another six months to a year 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. The Company currently has sufficient cash on hand and borrowing capability to pay off this liability if we lose the appeal.

 

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

 

Item 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 2021 and 2020 by the OTC.

 

Fiscal Year

               

Ended March 31,

               
   

High

   

Low

 

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  
                 

2020

               

First Quarter

  $ 4.00     $ 3.25  

Second Quarter

    3.60       2.25  

Third Quarter

    3.82       2.75  

Fourth Quarter

    4.50       3.15  

 

b) Holders

 

The Company has approximately 149 holders of its Common Stock as of June 28, 2021. This figure does not take into account 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, 2021, 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

    98,500     $ 3.19       151,500  

Total

    98,500     $ 3.19       151,500  

 

Rule 10B-18 Transactions

 

During the year ended March 31, 2021, there were no repurchases of the Company’s Common Stock by the Company.

 

Recent Sales of Unregistered Securities

 

During the year ended March 31, 2021, 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.          Selected Financial Data

 

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 it

 

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

 

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 together with its subsidiary.  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 2021 was extremely challenging for the Company. The COVID-19 pandemic materially impacted commercial sales and supply chain disruptions prevented us from shipping product on schedule. This led to substantially reduced revenues and profitability. The Company reported a 26.6% decline in sales to $11,582,520 for the year ended March 31, 2021, as compared to $15,774,943 for the previous year. Commercial sales decreased by 42.6% to $1,723,983 for the year ended March 31, 2021, as compared to $3,004,580 for the year ended March 31, 2020. The commercial airline industry has been devastated by the COVID pandemic and this led to a sharp reduction in commercial test set orders. Avionics government sales decreased by 22.6% to $9,858,537 for the year ended March 31, 2021, as compared to $12,737,362 for the year ended March 31, 2020. This decrease in sales is mainly the result of supply chain disruption due to the pandemic, the slowdown of purchased components significantly disrupted the TIC manufacturing of finished goods. Gross Margin decreased by $2.6 million in fiscal 2021 as compared to 2020 and the gross margin percentage declined by 6 percentage points to 41.3%. This was due to adverse manufacturing variances due to the lower volume and discounted sales prices to Germany and the U.K. to secure future business. Total operating expenses for the year declined by approximately $150,000due primarily to lower bonus amounts. This expense reduction was achieved despite one-time professional fees of $300,000 related to M&A discussions and a GAO government protest that was filed in the fourth quarter. Net income before taxes was $573,030 for fiscal year 2021 as compared to $2,087,210 in fiscal year 2020. The Company’s cash balance on March 31, 2021, was $5.5 million, including the $2 million of restricted cash to support the appeal bond. The Company’s backlog on March 31, 2021, was $7.6 million, which is $3.6 million higher than the year-ago period.

 

 

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

 

Overview (continued)

 

The Company continues to pursue opportunities 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. We have also been awarded a large contract from the U.S. military for our T-47NH product and are seeing solid demand for our other non-Mode 5 test sets. Our expectation is that we will continue to improve both our revenues and gross margins, but the timing of these new orders is largely out of our hands. Nonetheless, we are encouraged by the increasing activity we are seeing for military products. After a sharp drop in FY 2021, the Company is also seeing the beginning of a rebound in commercial test set business with orders in the first two months exceeding demand for all of FY2021. 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 considering a mid-life update of our CRAFT product line which could entail funded engineering starting next 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. The contract has been put on hold for at least the next four months due to LMCO funding issues, but we are hopeful that the contract will resume this fall. TIC has completed the majority of the development work on this new test set. If the funding issue is resolved, this could generate substantial recurring revenues for the Company and would position TIC for further development contracts 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. With the COVID pandemic, the Company focused all of its engineering efforts on developing a secure communications and navigation test set for the U.S. military. The communications test capability was moved up in our development schedule based on the negative impact of the COVID-19 pandemic on commercial aviation. 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.

 

Once the communications and navigation software are completed, TIC plans to introduce software APPS for the commercial transponder testing market. This will provide Transponder (Modes A, C, and S), ADS-B, and 978 MHz UAT capability for the large general aviation test market. This will allow us to compete with the IFR 4000 and 6000 test tests for our military and commercial aviation customers. 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 Aeroflex litigation (see Note 21 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).

 

 

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

 

Overview (continued)

 

As reflected in the accompanying consolidated balance sheet as of March 31, 2021, the Company has recorded estimated damages to date of $5.9 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 21). As of March 31, 2021, the Company has cash balances of $5.5 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 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.

 

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 June 30, 2021. The new agreement includes availability up to $690,000. Monthly payments will be interest only.

 

The Company’s interest rates were 3.86% and 4.74% on March 31, 2021, and 2020, respectively. During the year ended March 31, 2021, the Company repaid $680,000 against this line of credit. As of March 31, 2021, and 2020, the outstanding balances were $0 and $680,000, respectively.  As of March 31, 2021, the remaining availability under this line is $690,000. On March 31, 2021, Bank of America 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. As of March 31, 2021, the line of credit draw remains at zero, with $690K available (see Note 10 to the consolidated financial statements).

 

On March 31, 2021, the Company’s backlog of orders was approximately $7.6 million as compared to $4.0 million on March 31, 2020. 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 2021 Compared to 2020

 

Sales

 

For the year ended March 31, 2021, sales decreased $4,192,423 (26.6%) to $11,582,520 as compared to $15,774,943 for the year ended March 31, 2020. Commercial sales decreased $1,280,597 (42.6%) to $1,723,983 for the year ended March 31, 2021, as compared to $3,004,580 for the year ended March 31, 2020. The COVID-19 pandemic devastated the commercial airline industry and new orders declined by almost two thirds in the last fiscal year. Avionics government sales decreased $2,878,825 (22.6%) to $9,858,537 for the year ended March 31, 2021, as compared to $12,737,362 for the year ended March 31, 2020. This decrease in sales is mainly the result of Supply chain disruption due to the Pandemic, the slowdown of purchased components significantly disrupted the TIC manufacturing of finished goods.

 

Gross Margin

 

Gross margin decreased $2,627,402 (35.5%) to $4,782,499 for the year ended March 31, 2021, as compared to $7,409,901 for the year ended March 31, 2020, primarily as a result of the decrease in volume. The gross margin percentage for the year ended March 31, 2021, was 41.3%, as compared to 47.0% for the year ended March 31, 2020. The lower gross margin percentage is primarily attributable to additional discounts offered to international customers to secure sales orders as well as negative manufacturing variances related to the reduced volume levels.

 

 

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

 

Operating Expenses

 

Selling, general and administrative expenses, along with litigation expense, decreased $24,404 (7.8%) to $2,413,194 for the year ended March 31, 2021, as compared to $2,617,598 for the year ended March 31, 2020. This decrease is primarily attributed to the decrease in accrued profit sharing expense, outside commissions, consulting fees, litigation fees and travel expense, with some offset for an increase in legal fees.

 

Engineering, research and development expenses increased $56,090 (2.5%) to $2,295,901 for the year ended March 31, 2021, as compared to $2,239,811 for the year ended March 31, 2020. The increase is primarily due to increase in engineering staff to support the development of the Company’s SDR/OMNI and the Lockheed Martin MADL test set projects.

 

Income from Operations

 

As a result of the above, the Company recorded income from operations in the amount of $73,404 for the fiscal year ended March 31, 2021, as compared to income from operations of $2,552,492 for the year ended March 31, 2020.

 

Other Income(Expense)

 

For the year ended March 31, 2021, total other income was $499,626 as compared to an expense of $465,282 for the year ended March 31, 2020. This was primarily the result of the $722,577 SBA PPP loan forgiveness, offset by lower interest for the line of credit and the judgment.

 

Income before Income Taxes

 

As a result of the above, the Company recorded income before taxes of $573,030 for the year ended March 31, 2021, as compared to income before taxes of $2,087,210 for the fiscal year ended March 31, 2020.

 

Income Taxes

For the year ended March 31, 2021, the Company reported a tax benefit of $27,027, as a result of the Company’s taxable loss for the year as the forgiveness of the PPP loan is not a taxable event.

 

For the year ended March 31, 2020, the Company’s Federal and State provision requirements were offset by the reversal of a portion of the valuation allowance no longer deemed necessary. The Company recorded a net tax benefit of $2,649,280 which represents a reduction in our valuation allowance on tax attributes that are expected to be utilized based on management’s assessment and evaluation of historical and projected income.

 

Net Income

 

As a result of the above, the Company recorded net income of $600,057 for the year ended March 31, 2021, as compared to net income of $4,736,490 for the year ended March 31, 2020.

 

Liquidity and Capital Resources

 

On March 31, 2021, the Company had positive working capital of $3,159,731, as compared to working capital of $1,776,176 on March 31, 2020. This change is primarily the result of being awarded two PPP draws totaling $1,445,154, which has improved the Company’s cash position while also reducing its outstanding liabilities. The Company has $5.5 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.

 

As discussed in Note 21 of the Consolidated Financial Statements, the Company has recorded total damages of $5,889,023, 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 $989,023 as of March 31, 2021.

 

 

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

 

Liquidity and Capital Resources (continued)

 

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, 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, 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”) 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 $772,577. Second Draw PPP loans made to eligible borrowers qualify for full loan forgiveness if during the 8- to 24-week covered period following loan disbursement:

 

 

o

Employee and compensation levels are maintained in the same manner as required for the First Draw PPP loan

 

o

The loan proceeds are spent on payroll costs and other eligible expenses; and

 

o

At least 60% of the proceeds are spent on payroll costs

 

A borrower can apply for forgiveness once all loan proceeds for which the borrower is requesting forgiveness have been used. Borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender. The Company plans to file for loan forgiveness of the second tranche of PPP funding during fiscal year ending March 31, 2022.

 

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, 2021, the Company’s cash balance increased by $361,586 to $5,496,325, including restricted cash to support the appeal bond. The Company’s principal sources and uses of funds were as follows:

 

Cash (used in) provided operating activities. For the year ended March 31, 2021, the Company used $255,616 in cash for operations as compared to providing $2,921,030 in cash for operations for the year ended March 31, 2020.  This decrease in cash provided by operations is primarily attributed to the decline in revenue as a result of the global pandemic. In addition, $680,000 of cash was used to fully pay off the line of credit and $80,000 of dividends were also paid.

 

 

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

 

Liquidity and Capital Resources (continued)

 

Cash used in investing activities.  For the year ended March 31, 2021, the Company used $67,902 of its cash for investing activities, as compared to $133,682 for the year ended March 31, 2020, as result of less purchases of equipment during the current year.

 

Cash provided (used in) financing activities. For the year ended March 31, 2021, the Company provided $685,105 in cash for financing activities as compared to $243,336 in cash used by financing activities for the year ended March 31, 2020. This predominantly was a result of the two PPP loans the company received.

 

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, 2021.

 

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 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. 

 

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 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.

 

 

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

 

Critical Accounting Policies (continued)

 

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 taking into account 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, 2021.

 

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, 2021, approximately $408,219 is expected to be recognized from remaining performance obligations for extended warranties as compared to $413,554 on March 31, 2020. For the year ended March 31, 2021, the Company recognized revenue of $86,588 from amounts that were included in Deferred Revenue as compared to $85,311 for the year ended March 31, 2020.

 

The following table provides a summary of the changes in deferred revenues related to extended warranties for the year ended March 31, 2021:

 

Deferred revenues related to extended warranties on April 1, 2020

  $ 413,554  

Additional extended warranties

    81,253  

Revenue recognized for the year ended March 31, 2021

    (86,588

)

Deferred revenues related to extended warranties on March 31, 2021

  $ 408,219  

 

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, 2021, the Company has other deferred revenues of $74,920 and $58,746 for period ending March 31, 2020.

 

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.

 

 

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

 

Critical Accounting Policies (continued)

 

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, 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.

 

   

For the Year Ended

March 31, 2020

 
   

Commercial

   

Government

 

Sales Distribution

               

Test Units

  $ 918,720     $ 12,737,362  
    $ 918,720     $ 12,737,362  

 

The remainder of our revenues for the year ended March 31, 2020, are derived from repairs and calibration of $1,525,288 replacement parts of $460,103 and extended warranties of $85,311, and other revenues of $48,159.

 

In the following table, revenue is disaggregated by geography.

 

   

For the Year

Ended

March 31, 2021

   

For the Year

Ended

March 31, 2020

 

Geography

               

United States

  $ 5,511,516     $ 7,205,596  

International

    6,071,004       8,569,347  

Total

  $ 11,582,520     $ 15,774,943  

 

 

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

 

Critical Accounting Policies (continued)

 

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, 2021, warranty costs were $64,092 as compared to $51,858 for the year ended March 31, 2020 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, 2021, and 2020 approximately 38% and 30%, respectively, of the Company’s sales were to the U.S. Government.

 

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 takes into account 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, 2021.

 

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)

 

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.

 

Topic 740 by clarifying and amending existing guidance.  This ASU is effective April 1, 2021, and 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.

 

Item 7A.          Quantitative and Qualitative Disclosures about Market Risk

 

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

25

   

Consolidated Balance Sheets - March 31, 2021, and 2020

27

   

Consolidated Statements of Operations - Years Ended March 31, 2021, and 2020

28

   

Consolidated Statements of Changes in Stockholders’  Equity (Deficit) - Years Ended March 31, 2021, and 2020

29

   

Consolidated Statements of Cash Flows - Years Ended March 31, 2021, and 2020

30

   

Notes to Consolidated Financial Statements

32

 

 

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, 2021, and 2020, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended March 31, 2021, 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, 2021, and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended March 31, 2021, 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 Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate 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 critical audit matters 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

Going concern Assessing the Companys ability to continue as a going concern

 

Description of the Matter

 

The disclosure related to the Company’s liquidity and its ability to continue as a going concern for the twelve months from the issuance of these consolidated financial statements are described in Note 1 of the consolidated financial statements. The evaluation of the Company’s ability to continue as a going concern is a critical audit matter due to the estimation and execution uncertainty regarding the Company’s future cash flows and the risk of bias in management’s judgement and assumptions in estimating these cash flows.

 

 

How We Addressed the Matter in Our Audit

 

We reviewed the design and underlying factors relating to the preparation of forecasted information and considerations of the Company’s obligations; we tested the reasonableness of the forecasted revenue, operating expenses, and uses and sources of cash used in management’s assessment of whether the Company has sufficient liquidity to fund operations for at least one year from the financial statement issuance date. This testing included inquiries with management, comparison of prior period forecasts to actual results, consideration of positive and negative evidence impacting management’s forecasts, the Company’s financing arrangements in place as of the report date, market and industry factors and consideration of the Company’s relationships with its financing partners.

 

Income taxes Estimates surrounding the valuation allowance

 

Description of the Matter

 

As described in Note 8 of the consolidated financial statements, 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 its evaluation of a valuation allowance, the Company takes into account existing contracts and backlog and the probability that options under these contract awards will be exercised as well as sales of existing projects. We determined that the Company’s estimates surrounding the valuation allowance is a critical audit matter due to the amount of estimation required and the risk of bias in management’s judgement and assumptions in preparing this estimate.

 

How We Addressed the Matter in Our Audit

 

We evaluated the key assumptions utilized in the calculation of the valuation allowance, reviewed management’s tax provision, obtained and reviewed the Company’s tax returns, and assessed the reasonableness of forecasted taxable income used in management’s analysis. This testing additionally included inquiries with management, review for uncertain tax positions, and recalculation of the deferred tax asset and valuation allowance.

 

 

/s/ Friedman LLP

   

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

Marlton, New Jersey

June 29, 2021

 

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

Consolidated Balance Sheets

 

ASSETS

 

March 31, 2021

    March 31,2020   

Current assets:

               

Cash

  $ 3,485,275     $ 3,126,195  

Accounts receivable, net of allowance for doubtful accounts

of $7,500 and $7,500, respectively

    1,933,321       1,411,644  

Inventories, net

    3,437,989       3,092,679  

Restricted cash to support appeal bond

    2,011,050       2,008,544  

Prepaid expenses and other current assets

    263,067       447,195  

Total current assets

    11,130,702       10,086,257  
                 

Equipment and leasehold improvements, net

    200,769       263,750  

Operating lease right-of-use assets

    1,922,805       306,740  

Deferred tax asset, net

    2,675,040       2,648,013  

Other assets

    35,110       35,109  
                 

Total assets

  $ 15,964,426     $ 13,339,869  
                 

LIABILITIES AND STOCKHOLDERS’  EQUITY

               
                 

Current liabilities:

               

Line of credit

  $ -     $ 680,000  

Finance lease obligations – current portion

    -       49  

Operating lease liabilities – current portion

    201,883       214,793  

Accounts payable

    906,149       739,810  

Deferred revenues – current portion

    150,709       145,168  

Accrued expenses - vacation pay, payroll and payroll withholdings

    457,232       512,732  

Accrued legal damages

    5,889,023       5,657,549  

Accrued expenses – other

    365,975       295,213  

Total current liabilities

    7,970,971       8,245,314  
                 

Operating lease liabilities – long-term

    1,720,921       91,947  

Long Term Debt-PPP

    722,577       -  

Deferred revenues – long-term

    332,428       327,132  
                 

Total liabilities

    10,746,897       8,664,393  
                 

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       3,515,998  

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

issued and outstanding, par value $0.10 per share

    1,147,367       1,087,367  

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

    7,318,620       7,616,624  

Accumulated deficit

    (7,270,042

)

    (7,870,099

)

                 

Total stockholders equity

    5,217,529       4,675,476  
                 

Total liabilities and stockholders equity

  $ 15,964,426     $ 13,339,869  

 

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,

 
   

2021

   

2020

 
                 

Net sales

  $ 11,582,520     $ 15,774,943  
                 

Cost of sales

    6,800,021       8,365,042  
                 

Gross margin

    4,782,499       7,409,901  
                 

Operating expenses:

               

Selling, general and administrative

    2,165,190       2,477,548  

Litigation expenses

    248,004       140,050  

Engineering, research and development

    2,295,901       2,239,811  
                 

Total operating expenses

    4,709,095       4,857,409  
                 

Income from operations

    73,404       2,552,492  
                 

Other income (expense):

               

Interest income

    7,483       5,819  

Change in fair value of common stock warrants

    -       (73,000

)

Forgiveness of PPP Loan

    722,577       -  

Interest expense

    (29,779 )     (55,557

)

Interest expense – judgment

    (231,474

)

    (342,544

)

Other Income

    30,819       -  
                 

Total other (expense) income

    499,626       (465,282

)

                 

Income before income taxes

    573,030       2,087,210  
                 

Benefit for income taxes

    (27,027

)

    (2,649,280 )
                 

Net income

    600,057       4,736,490  
                 

Preferred dividends

    (320,000 )     (320,000

)

                 

Net income attributable to common shareholders

  $ 280,057     $ 4,416,490  
                 

Basic income per common share

  $ 0.09     $ 1.36  

Diluted income per common share

  $ 0.12     $ 0.95  
                 

Weighted average number of shares outstanding

               

Basic

    3,255,887       3,255,887  

Diluted

    5,073,165       4,960,665  

 

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

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

 

   

Series A Convertible

Preferred Stock

   

Series B Convertible

Preferred Stock

   

Common Stock

   

Additional 

                 
   

# of Shares

Issued

   

Amount

   

# of Shares

Issued

   

Amount

   

# of Shares

Issued

   

Amount

   

Paid-In

Capital

   

Accumulated

Deficit

   

Total

 

Balances on April 1, 2019

    500,000     $ 3,275,998       166,667     $ 1,007,367       3,255,887     $ 325,586     $ 7,914,955     $ (12,606,589

)

  $ (82,683

)

Stock Based Compensation

    -       -       -       -       -       -       21,669       -       21,669  

8% Dividends on Preferred Stock

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

)

    -       -  

Net income

    -       -       -       -       -       -       -       4,736,490       4,736,490  

Balances on March 31, 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  

 

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,

 
   

2021

   

2020

 

Cash flows from operating activities:

               

Net income

  $ 600,057     $ 4,736,490  

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

               

Deferred income taxes

    (27,027 )     (2,649,280

)

Depreciation and amortization

    125,120       104,652  

Amortization of right-of-use assets

    214,793       201,811  

Forgiveness of PPP Loan

    (722,577

)

    -  

Change in fair value of common stock warrant

    -       73,000  

Provision for inventory obsolescence

    25,000       52,000  

Non-cash stock-based compensation

    21,996       21,669  
                 

Changes in assets and liabilities:

               

(Increase) decrease in accounts receivable

    (521,677

)

    784,455  

 Increase in inventories

    (370,310

)

    (210,397

)

Decrease (increase) in prepaid expenses and other assets

    189,889       (107,198

)

 Increase (decrease) in accounts payable

    166,338       (318,494

)

 Increase in accrued legal damages

    231,474       345,464  

 Increase in deferred revenues

    10,839       110,509  

(Decrease) increase in accrued payroll, vacation pay & withholdings

    (55,500 )     118,436  

 Decrease in operating lease liabilities

    (214,793

)

    (201,811

)

 Increase (decrease) in accrued expenses – related party and other

    70,762       (140,276

)

Net cash (used in) provided by operating activities

    (255,616

)

    2,921,030  
                 

Cash flows from investing activities:

               

Acquisition of equipment

    (67,902

)

    (133,682

)

Net cash used in investing activities

    (67,902

)

    (133,682

)

                 

Cash flows from financing activities:

               

Payment of warrant liability

    -       (116,500

)

Payment of dividends

    (80,000

)

    -  

Proceeds from PPP loans

    1,445,154       -  

Repayment of line of credit

    (680,000

)

    (120,000

)

Repayment of capitalized lease obligations

    (50

)

    (6,836

)

Net cash provided by (used in) financing activities

    685,104       (243,336

)

                 

Net increase in cash and restricted cash

    361,586       2,544,012  

Cash and restricted cash at beginning of year

    5,134,739       2,590,727  

Cash and restricted cash at end of year

  $ 5,496,325     $ 5,134,739  
                 

End of year

               

Cash

  $ 3,485,275     $ 3,126,195  

Restricted cash

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

Beginning of year

               

Cash

  $ 3,126,195     $ 585,856  

Restricted cash

    2,008,544       2,004,871  
    $ 5,134,739     $ 2,590,727  

Supplemental cash flow information:

               

Taxes paid

  $ -     $ -  

Interest paid

  $ 19,497     $ 47,494  

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

Consolidated Statements of Cash Flow (continued) 

 

Supplemental disclosure of non-cash financing activities:

 

 

a)

 Upon adoption of ASC 842, Leases, on April 1, 2019, the Company recorded $508,551 of right-of-use assets and related operating leases liabilities . Additional ROU asset and liability was recorded after adoption. 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 PPP loan was forgiven by the SBA 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, 2021, the Company had positive working capital of $3,159,731, as compared to working capital of $1,776,176 on March 31, 2020. This included $5.5 million of cash including the $2 million supersedes appeal bond. The Company also has current borrowing capacity of $690,000. As discussed in Note 21 of the Consolidated Financial Statements, the Company has recorded total damages of $5,889,023, 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.

 

With a $7.6 million backlog on March 31, 2021,the Company expects that in fiscal year 2022, revenue and profitability will improve. This improvement should be apparent starting in the first quarter of the current fiscal year.

 

On March 31, 2021, Bank of America 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. As of March 31, 2021, 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”) 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 $772,577. A borrower can apply for forgiveness once all loan proceeds for which the borrower is requesting forgiveness have been used. Borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender. The Company plans to file for loan forgiveness of the second tranche of PPP funding during fiscal year ending March 31, 2022.

 

Based on the foregoing, we believe that our expected cash flows from operations 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.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements

 

1.                   Business, Organization, and Liquidity

 

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.

 

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 subsidiaries. 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.

 

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.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements

 

2.                  Summary of Significant Accounting Policies (continued)

 

Revenue Recognition (continued):

 

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 taking into account 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, 2021.

 

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, 2021, approximately $408,219 is expected to be recognized from remaining performance obligations for extended warranties as compared to $413,554 on March 31, 2020. For the year ended March 31, 2021, the Company recognized revenue of $86,588 from amounts that were included in Deferred Revenue as compared to $85,311 for the year ended March 31, 2020.

 

The following table provides a summary of the changes in deferred revenues related to extended warranties for the year ended March 31, 2021:

 

Deferred revenues related to extended warranties on April 1, 2020

  $ 413,554  

Additional extended warranties

    81,253  

Revenue recognized for the year ended March 31, 2021

    (86,588

)

Deferred revenues related to extended warranties on March 31, 2021

  $ 408,219  

 

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, 2021, the Company has other deferred revenues of $74,920 and $58,746 for the prior period ended March 31, 2020.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements

 

2.                  Summary of Significant Accounting Policies (continued)

 

Revenue Recognition (continued):

 

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.

 

Disaggregation of revenue

 

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

 

   

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. 

 

   

For the Year Ended

March 31, 2020

 
   

Commercial

   

Government

 

Sales Distribution

               

Test Units

  $ 918,720     $ 12,737,362  
    $ 918,720     $ 12,737,362  

 

The remainder of our revenues for the year ended March 31, 2020, are derived from repairs and calibration of $1,525,288, replacement parts of $460,103, extended warranties of $85,311 and other revenues of $48,159.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements

 

2.                  Summary of Significant Accounting Policies (continued)

 

Revenue Recognition (continued):

 

In the following table, revenue is disaggregated by geography.

 

   

For the Year

Ended

March 31, 2021

   

For the Year

Ended

March 31, 2020

 

Geography

               

United States

  $ 5,511,516     $ 7,205,596  

International

    6,071,004       8,569,347  

Total

  $ 11,582,520     $ 15,774,943  

 

Fair Value of Financial Instruments:

 

The Company estimates that the fair value of all financial instruments on March 31, 2021, and March 31, 2020, as defined in Financial Accounting Standards Board (“FASB”) ASC 825 “Financial Instruments”, does not differ materially, except for the items discussed below, from the aggregate carrying values of its financial instruments recorded in the accompanying consolidated balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value.

 

The carrying amounts reported in the consolidated balance sheets as of March 31, 2021, and March 31, 2020, for cash, accounts receivable, restricted cash used for the appeal bond, and accounts payable approximate the fair value because of the immediate or short-term maturity of these financial instruments.  Each reporting period we evaluate market conditions including available interest rates, credit spreads relative to our credit rating and liquidity in estimating the fair value of our debt. After considering such market conditions, we estimate that the fair value of debt approximates its carrying value. 

 

Cash: Cash primarily consists of deposits held at major banks.

 

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, 2021, 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.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements

 

2.                  Summary of Significant Accounting Policies (continued)

 

Equipment and Leasehold Improvements:

 

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, 2021, and 2020, deferred revenues totaled $483,139 and $472,300, respectively. See above for additional information regarding our revenue recognition policies.

 

Net Income (Loss) per Common Share Attributable to Common Shareholders:

 

Net income (loss) per share attributable to common stockholders has been computed according to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC 260”), “Earnings per Share,” which requires a dual presentation of basic and diluted income (loss) per share (“EPS”). Basic EPS attributable to common stockholders represents net income (loss) less preferred dividends divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS attributable to common stockholders reflects the potential dilution that could occur if securities, including preferred stock, warrants and options, were converted into common stock. The dilutive effect of outstanding warrants and options is reflected in earnings per share by use of the treasury stock method. The dilutive effect of preferred stock is reflected in earnings per share by use of the if-converted method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amounts of average unrecognized compensation.

 

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 takes into account 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.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements

 

2.                  Summary of Significant Accounting Policies (continued)

 

Income Taxes (continued):

 

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.

 

During the years ended March 31, 2021, and 2020 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, 2021, and 2020. The Company’s tax years remain open for examination by the tax authorities primarily beginning 2018 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 17 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, 2021, and 2020, 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.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements

 

2.                  Summary of Significant Accounting Policies (continued)

 

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, 2021, warranty reserve costs were $64,092 as compared to $51,858 for the year ended March 31, 2020 and are included in Cost of Sales in the accompanying consolidated statement of operations. See Note 7 for warranty reserves.

 

Risks and Uncertainties:

 

The Company’s operations are subject to a number of risks, including but not limited to changes in the general economy, demand for the Company’s products, the success of its customers, research and development results, reliance on the government and commercial markets, litigation, and the renewal of its line of credit.  The Company has major contracts with the U.S. Government, which like all government contracts are subject to termination.

 

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.

 

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 is effective April 1, 2021, and 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,

 
   

2021

   

2020

 

Government

  $ 1,700,907     $ 1,095,131  

Commercial

    239,914       324,013  

Less: Allowance for doubtful accounts

    (7,500

)

    (7,500

)

    $ 1,933,321     $ 1,411,644  

 

 

TEL-INSTRUMENT ELECTRONICS CORP. 

 

Notes To Consolidated Financial Statements (Continued)

 

4.                   Inventories

 

Inventories consist of:

 

   

March 31,

 
   

2021

   

2020

 

Purchased parts

  $ 2,912,599     $ 3,011,072  

Work-in-process

    1,020,402       597,166  

Finished goods

    79,988       34,441  

Less: Allowance for obsolete inventory

    (575,000

)

    (550,000

)

    $ 3,437,989     $ 3,092,679  

 

Work-in-process inventory includes $1,003,514 and $516,431 for government contracts on March 31, 2021, and 2020, respectively.

 

5.                  Equipment and Leasehold Improvements

 

Equipment and leasehold improvements consist of the following: 

 

   

March 31,

 
   

2021

   

2020

 

Leasehold improvements

  $ 127,655     $ 118,992  

Machinery and equipment

    1,924,902       1,879,397  

Automobiles

    23,712       23,712  

Sales equipment

    595,475       595,475  

Assets under finance leases

    637,189       637,189  

Less: Accumulated depreciation & amortization

    (3,108,164

)

    (2,991,015

)

    $ 200,769     $ 263,750  

 

Depreciation and amortization expense related to the assets above for the years ended March 31, 2021, was $125,120 and $104,652 respectively (see Note 12 for additional information on finance leases).

 

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 21).

 

7.                   Accrued Expenses

 

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

 

   

March 31,

 
   

2021

   

2020

 
                 

Accrued vacation pay

  $ 403,759     $ 336,039  

Accrued profit sharing

    -       110,894  

Accrued compensation and payroll withholdings

    53,473       65,799  
    $ 457,232     $ 512,732  

 

 

TEL-INSTRUMENT ELECTRONICS CORP. 

 

Notes To Consolidated Financial Statements (Continued)

 

7.                   Accrued Expenses (continued)

 

Accrued vacation pay, payroll and payroll withholdings include $55,474 and $135,105 on March 31, 2021, and 2020, respectively, which is due to officers.

 

Accrued expenses - other consist of the following:

 

   

March 31,

 
   

2021

   

2020

 
                 

Accrued commissions

  $ 14,918     $ 32,181  

Accrued legal costs

    10,519       47,772  

Accrued consulting fees

    -       5,050  

Warranty reserve

    90,752       118,734  

Accrued purchase

    218,032       71,530  

Other

    31,754       19,946  
                 
    $ 365,975     $ 295,213  

 

The following table provides a summary of the changes in warranty reserves for the years ended March 31, 2021, and 2020:

 

   

March 31,

 
   

2021

   

2020

 

Warranty reserve, at beginning of period

  $ 118,734     $ 118,014  

Warranty expense

    64,092       51,858  

Warranty deductions

    (92,074

)

    (51,138

)

Warranty reserve, at end of period

  $ 90,752     $ 118,734  

 

8.                   Income Taxes

 

On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). The TJCA made broad changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) eliminating the corporate alternative minimum tax; (3) creating a new limitation on deductible interest expense; (4) creating the base erosion and anti-abuse tax, a new minimum tax; (5) limitation on the deductibility of certain executive compensation; (6) enhancing the option to claim accelerated depreciation deductions on qualified property, and (7) changing the rules related to uses and limitations of NOLs in tax years beginning after December 31, 2017.

 

Income tax benefit:

 

   

Fiscal Year Ended

 
   

March 31,

   

March 31,

 
   

2021

   

2020

 

Current:

               

Federal

  $ -     $ -  

State and local

    -       -  
                 

Total current tax provision

    -       -  
                 

Deferred:

               

Federal

    (26,788 )     -  

State and local

    (239 )     (409 )

Release of valuation allowance

    -       (2,648,871 )
                 

Total deferred tax benefit

    (27,027

)

    (2,649,280 )
                 

Total benefit

  $ (27,027

)

  $ (2,649,280 )

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements (Continued)

 

8.                   Income Taxes (continued)

 

The approximate values of the components of the Company’s deferred taxes on March 31, 2021, and 2020 are as follows:

 

   

March 31,

   

March 31,

 
   

2021

   

2020

 

Deferred tax assets (liabilities):

               

Net operating loss carryforwards

  $ 849,387     $ 845,898  

Tax credits

    329,032       329,032  

Charitable contributions

    716       126  

Legal damages

    1,243,370       1,194,268  

Allowance for doubtful accounts

    1,576       1,575  

Reserve for inventory obsolescence

    120,815       115,517  

Inventory capitalization (Net of section481A)

    -       48,750  

Vacation accrual

    87,579       76,878  

Warranty reserve

    19,068       24,938  

Deferred revenues

    101,514       99,197  

Stock options

    15,689       15,683  

AMT credit

    -       -  

Gain on Sale of Asset

    345       -  

Depreciation

    5,949       (3,849

)

Deferred tax asset

    2,775,040       2,748,013  

Less valuation allowance

    (100,000

)

    (100,000

)

                 

Deferred tax asset, net

  $ 2,675,040     $ 2,648,013  

 

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 approximately $4,044,698 as of March 31, 2021. These carryforward losses are available to offset future taxable income and begin to expire in the year 2027. New Jersey State NOL carryforwards approximate $2,752,043 as of March 31, 2021. 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 benefit provision at the statutory Federal tax rate of 21% for the years ended March 31, 2021, and 2020, respectively, to the income tax benefit provision recognized in the financial statements is as follows:

 

   

March 31,

   

March 31,

 
   

2021

   

2020

 
                 

Income tax provision  – statutory rate

  $ 120,704     $ 438,314  

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

    (14 )     67  

Permanent items

    4,864       5,865  

PPP Loan Forgiveness

    (151,741

)

    -  

Change in value of warrants – permanent difference

    -       15,330  

True-up of prior year’s deferred taxes

    -       (36,164 )

Valuation allowance

    -       (3,059,107

)

Other

    (840 )     (13,585 )

Income tax benefit

  $ (27,027

)

  $ (2,649,280 )

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements (Continued)

 

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 $121,769 and $145,376 for the years ended March 31, 2021, and 2020, respectively. On March 31, 2021, $7,700 was due this individual, which is included in accounts payable in the accompanying consolidated balance sheet.

 

10.                 Line of Credit

 

During June 2019, Bank of America agreed to extend the Company’s line of credit until March 31, 2020. The new Loan Modification Agreement (the “Amended Loan Modification Agreement”) with the bank contains the following provisions:

 

1)

The Company to make an additional principal payment of $10,000 at closing. 

2)

Borrowing base calculation tied to accounts receivable.

3)

The Amended Loan Modification Agreement expires March 31, 2020. 

4)

Interest on any outstanding balances is payable monthly at an annual interest rate equal to the LIBOR (London Interbank Offered Rates) Daily Floating plus 3.75 percentage points.

5)

The line is collateralized by substantially all of the assets of the Company. 

6)

The Company will make principal payments of $10,000 per month until March 31, 2020.

7)

The covenant for the debt service ratio is deleted.

 

In March 2020, Bank of America extended the line of credit from March 31, 2020, to January 31, 2021. The new agreement includes open availability up to $690,000. Monthly payments are interest only.

 

During the year ended March 31, 2021, the Company repaid $680,000 against this line of credit. As of March 31, 2021, and March 31, 2020, the outstanding balances were $0 and $690,000, respectively. The interest rate on March 31, 2021, was 3.86%.

 

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.

 

11.                 Commitments

 

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 $59,177 and $34,047 as its matching contribution to the Company’s 401k Plan for the years ended March 31, 2021, and 2020, respectively.

 

12.                Finance and Capital Lease Obligations

 

The Company has entered into lease commitments for equipment that meet the requirements for capitalization. The equipment has been capitalized and shown in equipment and leasehold improvements in the accompanying consolidated balance sheets.  The related obligations are also recorded in the accompanying consolidated balance sheets and are based upon the present value of the future minimum lease payments with an interest rate of 9%. The net book value of equipment acquired under capitalized lease obligations amounted to $0 and $4,802 on March 31, 2021, and 2020, respectively. There were no new capital lease obligations during the years ended March 31, 2021, and 2020. As of March 31, 2021, and 2020, accumulated amortization under capital leases was $637,189 and $632,387, respectively.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements (Continued)

 

13.                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, 2021, and was renewed for an additional 12 months, expiring on March 31, 2022.

 

The Company also has an operating lease for office equipment with monthly payments of $523 which expired in May 2021 and has been renewed for an additional 48 months. The expired monthly lease payment of $523 will stay in effect until new backordered units are delivered. 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 used incremental borrowing rates as of April 1, 2019, for operating leases that commenced prior to that date. 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% and 6.25% on March 31, 2021, and 2020, 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, 2021:

 

2022

  $ 242,038  

2023

    254,840  

2024

    254,840  

2025

    254,840  

2026

    267,767  

Thereafter

    946,415  

Total undiscounted future minimum lease payments

    2,220,740  

Less: Difference between undiscounted lease payments and discounted lease liabilities

    (297,936

)

Present value of net minimum lease payments

    1,922,804  

Less current portion

    (201,883

)

Operating lease liabilities – long-term

  $ 1,720,921  

 

Total rent expense for the years ended March 31, 2021, and 2020 were $364,582 and $358,328, respectively

 

14.                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 two (2) direct commercial customers who represented 15% and 20% of commercial sales in fiscal year 2021 and zero in 2020.  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. Commercial sales represented 15% and 19% of total sales, respectively, for the fiscal years ended March 31, 2021, and 2020. Our commercial distributor represented approximately 5% and 20%, respectively, of commercial sales during fiscal years 2021 and 2020. This distributor also accounted for 1% and 4% of total sales for the years ended March 31, 2021, and 2020, respectively.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements (Continued)

 

14.                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, 2021, and 2020, sales to the U.S. Government, including shipments through the government’s logistics centers, represented approximately 38% and 30%, respectively, of total sales. 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 $6,071,004 and $8,569,347 for the years ended March 31, 2021, and 2020, respectively.  All other sales were to customers located in the U.S. The following table presents net sales by U.S. and foreign countries:

 

   

2021

   

2020

 

United States

  $ 5,511,516     $ 7,205,596  

Foreign countries

    6,071,004       8,569,347  

Total Avionics Sales

  $ 11,582,520     $ 15,774,943  

 

Net sales related to any single foreign country did not comprise more than 10% of consolidated net sales. The Company had no assets outside the United States.

 

Receivables from the U.S. Government represented approximately 5.2% and 27%, respectively, of total receivables on March 31, 2021, and 2020, respectively. 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. As of March 31, 2020, two individual customers represented in total 24% of the Company’s outstanding accounts receivable, ranging between 11% and 13% of the Company’s outstanding accounts receivable. No other customers represented more than 10% of outstanding accounts receivable for the years ended March 31, 2021, and 2020.

 

15.                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 Preferred shall accumulate whether or not declared by the Board and shall remain accumulated dividends until paid. As of March 31, 2021 the Company recognized $750,667 as deemed dividends and are included in the carrying value of the Series A Convertible Preferred Stock. The Holders will vote together with the holders of the Company’s Common Stock on an as-converted basis on each matter submitted to a vote of holders of Common Stock (whether at a meeting of shareholders or by written consent). Effective beginning on the third anniversary of the Original Issue Date, and upon 30 days’ written notice to the Holders of Series A Preferred, the Company may, in its sole discretion, redeem the Series A Preferred at the aggregate Series A Stated Value plus any accrued and accumulated but unpaid dividends. During the year ended March 31, 2021 the Company paid dividends of $20,000.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements (Continued)

 

16.                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, 2021, the Company recognized $179,111 as deemed dividends and are included in the carrying value of the Series B Convertible Preferred Stock. The Holders will vote together with the holders of the Company’s Common Stock on an as-converted basis on each matter submitted to a vote of holders of Common Stock (whether at a meeting of shareholders or by written consent). Effective beginning on the third anniversary of the Original Issue Date, and upon 30 days’ written notice to the Holders of Series B Preferred, the Company may, in its sole discretion, redeem the Series B Preferred at the aggregate Series B Stated Value plus any accrued and accumulated but unpaid dividends. During the year ended March 31, 2021, the Company paid dividends of $60,000.

 

17.                Stock Option Plans

 

In December 2016, the Board adopted the 2016 Stock Option Plan (the “2016 Plan”) which reserved for issuance options to purchase up to 250,000 shares of its Common Stock.  The stockholders approved the Plan at the January 2017 annual meeting. Shareholders had previously adopted the 2006 Stock Option Plan, under which substantially all of the options have been granted. Therefore, the Board approved the 2016 Plan, and the terms are substantially the same as under the 2006 Employees Stock Option. The 2016 Plan reserves for issuance options to purchase up to 250,000 shares of its common stock. All employees, directors and consultants are eligible to receive stock option grants under this plan. The 2016 Plan, which has a term of ten years from the date of adoption, is administered by the Board or by a committee appointed by the Board. The selection of participants, allotment of shares, and other conditions related to the grant of options, to the extent not set forth in the Plan, are determined by the Board. 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, for the most part, 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.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements (Continued)

 

17.                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, 2021, and 2020 were $1.03 and $1.05, 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

2021

    0.0

%

    0.5

%

    37.32

%

 

5 years

2020

    0.0

%

    2.28

%

    33.15

%

 

5 years

 

A summary of the status of the Company’s stock option plans for the fiscal years ended March 31, 2021, and 2020 and changes during the years are presented below (in number of options):

 

   

Number of

Options

   

Average

Exercise Price

 

Average Remaining

Contractual Term

 

Aggregate

Intrinsic Value

 

Outstanding options on April 1, 2019

    42,500     $ 5.40            

Options granted

    76,000     $ 3.19            

Options exercised

    -     $ -            

Options canceled/forfeited

    -     $ -            
                           

Outstanding options on March 31, 2020

    118,500     $ 3.98  

2.8 years

  $ 13,295  

Options granted

    15,000     $ 3.11            

Options exercised

    -     $ -            

Options canceled/forfeited

    (35,000

)

  $ 5.85            
                           

Outstanding options on March 31, 2021

    98,500     $ 3.19  

3.3 years

  $ 30,835  
                           

Vested Options:

                         

March 31, 2021:

    19,700     $ 3.22  

2.8 years

  $ 5,567  

March 31, 2020:

    38,000     $ 5.65  

0.3 years

  $ 2,734  

 

Remaining options available for grant were 151,500 and 166,500 as of March 31, 2021, and 2020, respectively.

 

For the years ended March 31, 2021, and 2020, the unamortized compensation expense for stock options was $60,013 and $61,592, respectively. Unamortized compensation expense is expected to be recognized over a weighted-average period of approximately 1.4 years.

 

A summary of the Company’s non-vested shares as of March 31, 2021, and changes during the year ended March 31, 2021, is presented below:

 

Non-vested Shares

 

Shares

   

Weighted-Average

Grant-Date

Fair value

 
                 

Non-vested on April 1, 2020

    80,500     $ 3.20  

Granted

    15,000     $ 3.11  

Vested

    (16,700

)

  $ 3.20  

Forfeited

    -     $ -  

Non-vested on March 31, 2021

    78,800     $ 3.18  

 

The compensation cost that has been charged was $21,996 and $21,669 for the fiscal years ended March 31, 2021, and 2020, respectively.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements (Continued)

 

18.                 Net Income (Loss) per Share

 

Net income (loss) per share attributable to common stockholders has been computed according to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC 260”), “Earnings per Share,” which requires a dual presentation of basic and diluted income (loss) per share (“EPS”). Basic EPS attributable to common stockholders represents net income (loss) less preferred dividends divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS attributable to common stockholders reflects the potential dilution that could occur if securities, including preferred stock, warrants and options, were converted into common stock. The dilutive effect of outstanding warrants and options is reflected in earnings per share by use of the treasury stock method. The dilutive effect of preferred stock is reflected in earnings per share by use of the if-converted method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amounts of average unrecognized compensation.

 

   

March 31, 2021

   

March 31, 2020

 

Basic net income per share computation:

               

Net income

  $ 600,057     $ 4,736,490  

Less: Preferred dividends

    (320,000

)

    (320,000

)

                 

Net income attributable to common shareholders

    280,057       4,416,490  

Weighted-average common shares outstanding

    3,255,887       3,255,887  

Basic net income per share

  $ 0.09     $ 1.36  

Diluted net income per share computation

               

Net income attributable to common shareholders

  $ 280,057     $ 4,416,490  

Add: Preferred dividends

    320,000       320,000  

Diluted income attributable to common shareholders

  $ 600,057     $ 4,736,490  

Weighted-average common shares outstanding

    3,255,887       3,255,887  

Incremental shares attributable to the assumed conversion of preferred stock

    1,817,278       1,704,778  

Total adjusted weighted-average shares

    5,073,165       4,960,665  

Diluted net income per share

  $ 0.12     $ 0.95  

 

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

 

   

March 31, 2021

   

March 31, 2020

 

Stock options

    98,500       118,500  
      98,500       118,500  

 

19.                Segment Information

 

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

 

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

 

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

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements (Continued)

 

19.                Segment Information (continued)

 

The tables below present information about reportable segments for the years ended March 31:

 

                      Corporate/          
   

Avionics

   

Avionics

   

Avionics

   

Reconciling

         

2021

 

Government

   

Commercial

   

Total

   

Items

   

Total

 

Net sales

  $ 9,858,537     $ 1,723,983     $ 11,582,520     $ -     $ 11,582,520  

Cost of Sales

    5,474,587       1,325,434       6,800,021       -       6,800,021  
                                         

Gross Margin

    4,383,950       398,549       4,782,499       -       4,782,499  
                                         

Engineering, research, and development

                    2,295,901       -       2,295,901  

Selling, general, and administrative

                    767,579       1, 397,611       2,165,190  

Litigation expenses

                    -       248,004       248,004  

Forgiveness of PPP Loan

                            (722,577 )     (722,577 )

Other income

                            (30,819 )     (30,819 )

Interest income

                    -       (7,483 )     (7,483

)

Interest expense - judgment

                            231,474       231,474  

Interest expense - other

                    -       29,779       29,779  
                      3,063,480       1,145,989       4,209,469  

Income (loss) before income taxes

                  $ 1,719,019     $ (1,145,989

)

  $ 573,030  
                                         

Segment Assets

  $ 4,920,076     $ 451,234     $ 5,371,310     $ 10,593,116     $ 15,964,426  

 

                      Corporate/          
   

Avionics

   

Avionics

   

Avionics

   

Reconciling

         

2020

 

Government

   

Commercial

   

Total

   

Items

   

Total

 

Net sales

  $ 12,770,363     $ 3,004,580     $ 15,774,943     $ -     $ 15,774,943  

Cost of Sales

    6,606,622       1,758,420       8,365,042       -       8,365,042  
                                         

Gross Margin

    6,163,741       1,246,420       7,409,901       -       7,409,901  
                                         

Engineering, research, and development

                    2,239,811       -       2,239,811  

Selling, general, and administrative

                    941,514       1,536,034       2,477,548  

Litigation expenses

                    -       140,050       140,050  

Change in fair value of common stock warrant

                    -       73,000       73,000  

Interest income

                    -       (5,819

)

    (5,819

)

Interest expense - judgment

                            342,544       342,544  

Interest expense - other

                    -       55,557       55,557  
                      3,181,325       2,141,366       5,322,691  

Income (loss) before income taxes

                  $ 4,228,576     $ (2,141,366

)

  $ 2,087,210  
                                         

Segment Assets

  $ 3,301,607     $ 1,202,716     $ 4,504,323     $ 8,835,546     $ 13,339,869  

 

20.                Fair Value Measurements

 

FASB ASC 820, “Fair Value Measurements” defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and prescribes disclosures about fair value measurements.

 

 

TEL-INSTRUMENT ELECTRONICS CORP.

 

Notes To Consolidated Financial Statements (Continued)

 

20.                Fair Value Measurements (continued)

 

As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

 

The three levels of the fair value hierarchy defined by ASC 820 are as follows:

 

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

 

Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

 

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

 

The valuation techniques that may be used to measure fair value are as follows:

 

Market approach — Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities

 

Income approach — Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method

 

Cost approach — Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost)

 

The carrying value of the Company’s borrowings is a reasonable estimate of its fair value as borrowings under the Company’s credit facility have variable rates that reflect currently available terms and conditions for similar debt.

 

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

 

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of March 31, 2021, and March 31, 2020. As required by FASB ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

The Company had warrants with an outside investor to purchase 50,000 shares of the Company’s common stock at an exercise price of $3.35 per share or exercising the “put option” to the Company.  These warrants expired September 10, 2019 and were convertible at a purchase price of $3.35 per share or the cash put option. On September 3, 2019, the holder of the warrant informed the Company that it had elected to exercise its “put option”, thereby requiring the Company to purchase the warrants held by holder. Total warrants were to purchase a total of 50,000 shares of the Company’s common stock.

 

50