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TIK > SEC Filings for TIK > Form 10-Q on 14-Feb-2014All Recent SEC Filings

Show all filings for TEL INSTRUMENT ELECTRONICS CORP

Form 10-Q for TEL INSTRUMENT ELECTRONICS CORP


14-Feb-2014

Quarterly Report


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

Forward Looking Statements

This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the SEC contain or may contain forward-looking statements (collectively the "Filings") and information that are based upon beliefs of, and information currently available to, the Company's management as well as estimates and assumptions made by Company's management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words "anticipate", "believe", "estimate", "expect", "future", "intend", "plan", or the negative of these terms and similar expressions as they relate to the Company or the Company's management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the "Risk Factors" section of the Company's Annual Report on Form 10-K for the year ended March 31, 2013, filed with the SEC on July 16, 2013, relating to the Company's industry, the Company's operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.

Overview

For the nine months ended December 31, 2013, the Company recorded operating income of $456,589 as compared to an operating loss of $2,196,354 for the nine months ended December 31, 2012. For the nine months ended December 31, 2013, the Company recorded a loss before taxes of $252,336 as compared to a loss before taxes of $2,559,585 for the nine months ended December 31, 2012. Excluding the non-cash loss on the change in the valuation of the common stock warrants, the Company has a profit before taxes of $20,163. The Company hopes to continue this positive trend. If the Company is unable to obtain a full rate production release on the TS-4530A program within a reasonable period of time, earnings growth could be delayed.

For the nine months ended December 31, 2013, sales increased $5,401,327 (91.2%) to $11,323,585 as compared to $5,922,258 for the nine months ended December 31, 2012. This increase is mostly attributed the shipment of units and kits for the TS-4530A program against a partial release from the U.S. Army, resumption of shipments on the CRAFT program as well as an increase in revenues for the Company's legacy products. The Company had received $1.3 million in orders for its legacy products, of which a portion was shipped in the quarter ended December 31, 2013 with the balance to be shipped in the fourth quarter of the current fiscal year. The Company has received final AIMS certification for this TS-4530A, but a full production release on this contract will not be provided until the remaining logistics documentation items (e.g., technical manual) are approved by the U.S. Army. The Company has completed the major portion of the documentation and is working closely with the U.S. Army to secure a full production release as it has shipped most of the units and kits required under the initial production release. It is critical that the Company receives this production release to continue the growth and profitability it is starting to achieve. In the last few months the Company has received additional orders under this contract totaling approximately $4.1 million. The Company currently has $19.7 million of existing TS-4530A orders on this Indefinite-Delivery-Indefinite Quantity ("IDIQ") contract program. The commencement of TS-4530A volume shipments will augment the Company's liquidity position as the Company has a substantial amount of the material in house to commence production.


Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Overview (continued)

In October 2013, the Company received an additional contract for the CRAFT program with a maximum value of $9.5 million. The order is a not-to-exceed $9.5 million fixed-price, indefinite-delivery/indefinite-quantity ("IDIQ") contract for the manufacture and delivery of communications/navigation radio frequency avionics flight line tester CRAFT AN/USM-708 and/or AN/USM-719. This contract is in support of the U.S. Navy, U.S. Marine Corps, U.S. Army and various Foreign Military Sales customers under the Foreign Military Sales program. This follow-on contract further strengthens our position in the industry as the predominant supplier of Mode 5 test equipment. The CRAFT unit has been well received by the end users and we look forward to working with the U.S. Navy on this program, and believe it will be the Mode 5 test set of choice for a number of years. The Company has received three delivery orders against this new contract for the additional test sets at a total value of $4.1 million. The Company currently has $11.2 million of existing orders on the CRAFT program and an option to purchase up to $5.4 million of additional units.

During the first nine months of fiscal year 2014, the Private Investor converted the outstanding principal of $600,000, penalty of $25,000 and accrued interest for the month of May 2013 in the amount of $12,400 for a total of $637,400 into 200,000 shares of the Company's common stock at a price of $3.19 per share.

In June 2013 a related party received a note payable from the Company in exchange for $100,000, which the Company used for working capital needs. On July 24, 2013, the related party converted its note payable in the amount of $100,000 into 31,348 shares of the Company's common stock at a price of $3.19 per share.

In consideration for the waiver for non-compliance of the financial covenants at March 31, 2013, on July 12, 2013, BCA received warrants to purchase 20,000 shares of the Company's common stock. The common stock underlying the warrant is exercisable at a price of $3.33 per share and the warrants expire on September 10, 2019.

In consideration for the waiver for non-compliance of the financial covenants at June 30, 2013, on August 12, 2013, BCA received warrants to purchase 20,000 shares of the Company's common stock. The common stock underlying the warrants is exercisable at a price of $3.69 per share and the warrants expire on September 10, 2019.

In consideration for the waiver for non-compliance of the financial covenants at September 30, 2013, on November 12, 2013, the Company incurred an incremental fee of $10,000.

As a result of the substantial operating losses incurred in the last year, the Company is not currently in compliance with the NYSE-MKT's (the "Exchange") continued listing standards. Based on the information provided by the Company on August 15, 2013, the Exchange has determined, based on the information provided and the improved first quarter results that the Company had made a reasonable demonstration of its ability to regain compliance by the end of the revised plan period which is now February 20, 2014. As such, the Company listing is being continued pursuant to an extension and will continue to be monitored against this plan.

The Company also received a letter from the staff of the Exchange that, based on the Company's financial statements at March 31, 2013, the Company was no longer in compliance with the minimum stockholders' equity requirement of $4.0 million, and had also reported net losses in three of its last four fiscal years, as set forth in Section 1003(a)(ii) of the NYSE MKT Company Guide. The Company was afforded the opportunity to submit a plan of compliance to the Exchange and based on information provided by the Company, the Exchange notified the Company that it accepted the Company's plan of compliance and granted an extension until November 7, 2014.

The Company is optimistic that it will demonstrate sufficient progress to maintain our NYSE-MKT listing.

In June 2013, the Company received a performance-based payment from the government in the amount of $858,050, which was used to pay old outstanding accounts payable of a significant vendor. The Company made solid progress during the first nine months of the current fiscal year in working down outstanding payables to its vendors. Based on existing and expected production releases, the Company believes that it will have adequate liquidity, and backlog to fund operating plans for at least the next twelve months. Currently, the Company has no material future capital expenditure requirements.

If the Company is unable to obtain a full rate production release on the TS-4530A program within a reasonable period of time and/or our vendors or lenders begin to pursue legal action demanding payments, it would result in a material adverse effect on the Company's operations and its ability to pay its obligations. As such, the Company may need to pursue additional sources of financing and/or additional progress payments. There can be no assurances that the Company can secure additional financing.

At December 31, 2013, the Company's backlog was approximately $36.0 million as compared to approximately $36.9 million at December 31, 2012.


Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Results of Operations

Sales

For the three and nine months ended December 31, 2013, sales increased $1,739,039 (74.0%) and $5,401,327 (91.2%), respectively, to $4,089,059 and $11,323,585 for the three and nine months ended December 31, 2013 as compared to $2,350,020 and $5,922,258 for the three and nine months ended December 31, 2012.

Avionics government sales increased $1,968,331 (107.6%) and $5,827,582 (137.9%), respectively, to $3,797,272 and $10,054,033 for the three and nine months ended December 31, 2013 as compared to $1,828,941 and $4,226,451 for the three and nine months ended December 31, 2012. This increase is mostly attributed to the shipment of units and kits for the TS-4530A program against a partial release from the U.S. Army, resumption of shipments on the CRAFT program as well as an increase in revenues for the Company's legacy products.

Commercial sales decreased $229,322 (44.0%) and $426,255 (25.1%), respectively, to $291,757 and $1,269,552 for the three and nine months ended December 31, 2013, as compared to $521,079 and $1,695,807 for the three and nine months ended December 31, 2012. The decrease in sales is primarily attributed to parts availability issues and lower sales from the overhaul and repairs business. The economic conditions in the commercial market remain depressed.

Gross Margin

Gross margin increased $942,319 (207.8%) and $2,518,109 (188.0%), respectively to $1,395,687 and $3,857,594 for the three and nine months ended December 31, 2013, as compared to $453,368 and $1,339,485 for the three and nine months ended December 31, 2012. Gross profit was favorably impacted by the increase in sales volume as a result of the increase in shipments of units and kits for the TS-4530A program against a partial release from the U.S. Army, resumption of shipments on the CRAFT program as well as an increase in revenues for the Company's legacy products. The gross margin percentage for the three months ended December 31, 2013 was 34.1%, as compared to 19.3% for the three months ended December 31, 2012. The gross margin percentage for the nine months ended December 31, 2013 was 34.1%, as compared to 22.6%, for the nine months ended December 31, 2012.

Operating Expenses

Selling, general and administrative expenses increased $110,773 (18.9%) and $95,199, (4.9%), respectively, to $697,919 and $2,022,579 for the three and nine months ended December 31, 2013, as compared to $587,146 and $1,927,380 for the three and nine months ended December 31, 2012. For the three months ended December 31, 2013, the increase was primarily attributed to an increase in outside commission expenses associated with higher sales of the Company's legacy products. For the nine months ended December 31, 2013, the increase was attributed to higher outside commission expenses, increased program management fees offset partially with lower personnel costs.

Engineering, research and development expenses decreased $31,578 (6.6%) and $230,033 (14.3%), respectively, to $449,477 and $1,378,426 for the three and nine months ended December 31, 2013 as compared to $481,055 and $1,608,459 for the three and nine months ended December 31, 2012, primarily as a result of a decrease in personnel costs as a result of the Company finalizing the engineering efforts on the CRAFT and TS-4530A programs.

Income (Loss) From Operations

As a result of the above, the Company recorded operating income of $248,291 and $456,589, respectively, for the three and nine months ended December 31, 2013, as compared to operating losses of $614,833 and $2,196,354, respectively, for the three and nine months ended December 31, 2012.

Other Income (Expense), Net

For the three months ended December 31, 2013, total other expense was $335,372 as compared to other expense of $234,132 for the three months ended December 31, 2012. This change is primarily due to the higher non-cash loss on the change in the valuation of common stock warrants as compared to the prior period last year offset partially by lower interest expense, amortization of debt discount and financing costs. For the three months ended December 31, 2013 the Company recorded a loss on the change in the valuation of common stock warrants in the amount of $229,726, primarily as a result of the higher stock price, as compared to a gain in the valuation of common stock warrants in the amount of $19,710 for the three months ended December 31, 2012, an unfavorable change of $249,436.


Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Results of Operations (continued)

Other Income (Expense), Net (continued)

For the nine months ended December 31, 2013, total other expense was $708,295 as compared to other expense of $363,231 for the nine months ended December 31, 2012. This change is primarily due to the higher non-cash loss on the change in the valuation of common stock warrants as compared to the prior period last year offset partially by lower interest expense, amortization of debt discount and financing costs. For the nine months ended December 31, 2013 the Company recorded a non-cash loss on the change in the valuation of common stock warrants in the amount of $272,499, primarily as a result of the higher stock price, as compared to a gain in the valuation of common stock warrants in the amount of $268,767 for the nine months ended December 31, 2012, an unfavorable change of $541,266.

Income (Loss) before Income Taxes

As a result of the above, the Company recorded a loss before income taxes of $87,081 for the three months ended December 31, 2013, as compared to a loss before taxes of $848,965 for the three months ended December 31, 2012. The Company also recorded a loss before income taxes of $252,336 for the nine months ended December 31, 2013, as compared to loss before income taxes of $2,559,585 for the nine months ended December 31, 2012. The Company would have recorded a profit before taxes of $142,645 for the three months ended December 31, 2013, excluding the non-cash loss on the change in the valuation of common stock warrants in the amount of $229,726, and a profit before taxes of $20,163 for the nine months ended December 31, 2013, excluding the non-cash loss on the change in the valuation of common stock warrants in the amount of $272,499.

Income Taxes

For the nine months ended December 31, 2013, the Company recorded a provision for income taxes in the amount of $51,843 as compared to an income tax benefit of $915,903 for the nine months ended December 31, 2012. These amounts represent the statutory federal and state tax rate on the Company's income (loss) before taxes. For the nine months ended December 31, 2013, the Company recorded a provision for income taxes as the Company recorded a profit before taxes because the non-cash loss on the change in the valuation of common stock warrants is not deductible for tax purposes.

Net Income (Loss)

As a result of the above, the Company recorded a net loss of $145,933 for the three months ended December 31, 2013, as compared to a net loss of $545,177 for the three months ended December 31, 2012. The Company also recorded a net loss of $304,179 for the nine months ended December 31, 2013, as compared to a net loss of $1,643,682 for the nine months ended December 31, 2012.

Liquidity and Capital Resources

At December 31, 2013, the Company had net working capital of $1,821,929 as compared to $1,008,849 at March 31, 2013. This change is primarily the result of the conversion of short-term debt into equity and a reduction in accounts payable offset partially by a decline in inventories.

During the nine months ended December 31, 2013, the Company's cash balance decreased by $93,950 to $216,347. The Company's principal sources and uses of funds were as follows:

Cash provided by (used in) operating activities. For the nine months ended December 31, 2013, the Company provided $274,476 in cash for operations as compared to using $1,671,121 in cash for operations for the nine months ended December 31, 2012. This improvement is the result of the improvement in operating income, decrease in inventories and the increase in progress billings partially offset by the decrease in accounts payable and accounts receivable.

Cash used in investing activities. For the nine months ended December 31, 2013, the Company used $11,595 of its cash for investing activities, as compared to $60,816 for the nine months ended December 31, 2012 as result of lower purchases of equipment.

Cash (used in) provided by financing activities. For the nine months ended December 31, 2013, the Company used $356,831 in financing activities as compared to providing $1,417,536 for the nine months ended December 31, 2012. For the nine months ended December 31, 2012, the Company received net proceeds from the sale of common stock and proceeds from the issuance of long-term debt in the amount of $1,488,662 as compared to $100,000 for the nine months ended December 31, 2013. Additionally, the Company repaid debt and capital lease obligations of $470,201 for the nine months ended December 31, 2013 as compared to $175,556 for the nine months ended December 31, 2012.


Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Liquidity and Capital Resources (continued)

During the first nine months of the current fiscal year, the Private Investor converted the outstanding principal of $600,000, penalty of $25,000 and accrued interest for the month of May 2013 in the amount of $12,400 for a total of $637,400 into 200,000 shares of common stock at a price of $3.19 per share.

In June 2013, a related party received a note payable from the Company in exchange for $100,000, which the Company used for working capital needs. On July 24, 2013, the related party converted its note payable in the amount of $100,000 into 31,348 shares of the Company's common stock at a price of $3.19 per share.

In consideration for the waiver for non-compliance of the financial covenants at March 31, 2013, on July 12, 2013, BCA received warrants to purchase 20,000 shares of the Company's common stock. The common stock underlying the warrant is exercisable at a price of $3.33 per share and the warrants expire on September 10, 2019.

In consideration for the waiver for non-compliance of the financial covenants at June 30, 2013, on August 12, 2013, BCA received warrants to purchase 20,000 shares of the Company's common stock. The common stock underlying the warrants is exercisable at a price of $3.69 per share and the warrants expire on September 10, 2019.

In consideration for the waiver for non-compliance of the financial covenants at September 30, 2013, on November 12, 2013, the Company incurred an incremental fee of $10,000.

As a result of the substantial operating losses incurred in the last year, the Company is not currently in compliance with the Exchange's continued listing standards. Based on the information provided by the Company on August 15, 2013, the Exchange has determined, based on the information provided and the improved first quarter results that the Company had made a reasonable demonstration of its ability to regain compliance by the end of the revised plan period which is now February 20, 2014. As such, the Company listing is being continued pursuant to an extension and will continue to be monitored against this plan.

The Company also received a letter from the staff of the Exchange that, based on the Company's financial statements at March 31, 2013, the Company was no longer in compliance with the minimum stockholders' equity requirement of $4.0 million, and had also reported net losses in three of its last four fiscal years, as set forth in Section 1003(a)(ii) of the NYSE MKT Company Guide. The Company was afforded the opportunity to submit a plan of compliance to the Exchange and based on information provided by the Company, the Exchange notified the Company that it accepted the Company's plan of compliance and granted an extension until November 7, 2014.

The Company is optimistic that it will demonstrate sufficient progress to maintain our NYSE-MKT listing.

In June 2013, the Company received a performance-based payment from the government in the amount of $858,050, which was used to pay old outstanding accounts payable of a significant vendor. The Company made solid progress during the first nine months of the current fiscal year in working down outstanding payables to its vendors.

Based on existing and expected production releases, the Company believes that it will have adequate liquidity, and backlog to fund operating plans for at least the next twelve months. Currently, the Company has no material future capital expenditure requirements.

If the Company is unable to obtain a full rate production release on the TS-4530A program within a reasonable period of time and/or our vendors or lenders begin to pursue legal action demanding payments, it would result in a material adverse effect on the Company's operations and its ability to pay its obligations. As such, the Company may need to pursue additional sources of financing and/or additional progress payments. There can be no assurances that the Company can secure additional financing.

There was no significant impact on the Company's operations as a result of inflation for the nine months ended December 31, 2013. These financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2013, filed with the SEC on July 16, 2013.


Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Off-Balance Sheet Arrangements

As of December 31, 2013, the Company had no off-balance sheet arrangements.

Critical Accounting Policies

Our critical accounting policies are described in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended March 31, 2013, as filed with the SEC on July 16, 2013. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2013 consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2013, as filed with the SEC on July 16, 2013.


Table of Contents

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