TIKK 10-Q Quarter ended Dec. 31, 2023

Note 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.

The Company is publicly traded and was quoted on the Over the Counter Marketplace (“OTCQB”) under the symbol “TIKK.”

Liquidity

On December 31, 2023, the Company had positive net working capital of $ 3,723,705 , as compared to working capital of $ 3,058,638 at March 31, 2023.

The Bank of America line of credit has been extended from December 31, 2023 maturity to June 30, 2024 maturity. As of December 31, 2023, the $ 690,000 line of credit was fully used.

On December 31, 2023, the Company had $ 220,791 of cash on hand.

The Company had a $ 6 million sales backlog on December 31, 2023.

The Company had recorded total damages of $ 6,559,233 including interest of $ 1,659,233 as a result of the jury verdict associated with the Aeroflex litigation as well as the Court’s decision on punitive damages. A decision on the case was rendered and released on July 21, 2023, the Kansas Appeals Court rejected each of TIC’s appeal arguments. TIC paid the full judgement amount of $ 6,559,233 on September 15, 2023.

The Employee Retention Credit (ERC) is a refundable tax credit for businesses that continued to pay employees while shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020 to December 31, 2021. Eligible employers can claim the ERC on an original or adjusted employment tax return for a period within those dates. The Company filed adjusted employment tax returns for quarters one and two of calendar year 2021, and $628,401 of income was recognized during the nine month period ended December 2022. The refund of $ 628,401 was received on June 1, 2023.

Moving forward, we believe that our expected cash flows from operations and fulfillment of our $6 million open orders will be sufficient to operate in the normal course of business for at least the next 12 months from the issuance date of these unaudited condensed consolidated financial statements.

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

Note 2 – Summary of Significant Accounting Policies

Note 3 – Accounts Receivable, net

The following table sets forth the components of accounts receivable:

Note 4 – Inventories, net

Inventories consist of:

Note 5 – 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 14). In September 2023, the restricted cash account funds of $ 2,011,083 which included interest earned, were used to make payment towards the final judgment. At December 31, 2023, the restricted cash balance was $ 0 .

Note 6 – Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of:

In March 2020, the Coronavirus Aid, Relief, and Economic Security Act was signed into law, providing numerous tax provisions and other stimulus measures, including the Employee Retention Tax Credit (“ERTC”): a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERTC. We qualified for the ERTC in the first two quarters of 2021. During year ended March 31, 2023, we recorded an aggregate benefit of $ 628,401 in our consolidated financial statements and the receivable for the ERTC benefit as of March 31, 2023 is in other current assets, which was received on June 1, 2023.

Note 7 – Line of Credit

The Company has a line of credit with Bank of America with open availability up to $ 690,000 , with monthly payments of interest only. The borrowing base calculation is tied to accounts receivable collateralized by substantially all of the assets of the Company . Interest on any outstanding balance is payable monthly at an annual interest rate equal to the sum of the greater of the BSBY (Bloomberg Short-Term Bank Yield Index rate) daily float plus 3.75 percentage points.

Bank of America renewed the Company’s line of credit with a maturity date of July 30, 2023 and had extended the maturity date to December 31, 2023. In January 2024, the line of credit was further extended to June 30, 2024. The annual interest rate was amended as part of the renewal agreement. Effective October 12, 2023, interest on any outstanding balance is payable monthly at an annual interest rate equal to the sum of the greater of the BSBY daily float or 1.25% plus 4.62 percentage points .

As of December 31, 2023, and March 31, 2023, the outstanding balances were $ 690,000 , respectively. The interest rate on December 31, 2023, was 10.04 %.

Note 8 – Right of Use Assets and Operating Lease Liability

The Company leases its facility in East Rutherford, NJ with monthly payments of $ 21,237 until August 2025. Thereafter, monthly payments are $ 23,083 for the balance of the 8 year lease agreement expiring August 2029.

The Company's leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company estimated its incremental borrowing rate based on its credit quality, line of credit agreement and by comparing interest rates available in the market for similar borrowings. The Company used a discount rate of 3.90 % for both December 31, 2023 and March 31,2023. The weighted average remaining lease term is 5.67 years.

Note 9 – Stockholder’s Equity

Series B 8% Convertible Preferred Stock

In September 2023, the Company entered into a definitive subscription agreement pursuant to which an accredited investor purchased 66,667 shares of the Company’s Series B Preferred Stock (the “Series B Preferred”) for $ 400,000 . These funds were used for working capital purposes to support the orders received and expected in the near term.

The shares of Series B Preferred to 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, December 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. During the 9 months ended December 31, 2023, the Company recognized $ 69,333 for dividends, which have not been paid.

Series C 8% Convertible Preferred Stock

In September 2023, the Company entered into a definitive subscription agreement pursuant to which two accredited investors purchased 53,500 shares of the Company’s Series C Preferred Stock (the “Series C Preferred”) in total for $ 321,000 . These funds were used for working capital purposes to support the orders received and expected in the near term (one accredited investor is a member of the Board of Directors who invested $ 171,000 and the other accredited investor is a related party who invested $ 150,000 ).

Note 10 – Stock Options Plans

The Board of Directors (the “Board”) adopted on January 18, 2017, and ratified by the shareholders at the Annual Meeting on January 18, 2017, the Company’s 2016 Stock Option Plan (the “Plan”). The Plan provides for the granting of incentive stock options, by a committee to be appointed by the Board (both the Board and the Committee are referred to herein as the “Committee”) to directors, officers, and employees (excluding directors and officers who are not employees) to purchase shares of the Common Stock of the Company, par value $ 0.10 per share (the “Stock”), in accordance with the terms and provisions. The 2016 Plan reserves for issuance, options to purchase up to 250,000 shares of its common stock. Options granted under the plan are exercisable up to a period of five years from the date of grant at an exercise price which is not less than the fair market value of the common stock at the date of grant, except to a shareholder owning 10% or more of the outstanding common stock of the Company, as to which the exercise price must be not less than 110% of the fair market value of the common stock at the date of grant. Options are exercisable on a cumulative basis, 20% at or after each of the first, second, and third anniversary of the grant and 40% after the fourth year anniversary.

A summary of the status of the Company’s stock option plans for the fiscal year ended March 31, 2023, and year to date December 30, 2023, and changes during the year are presented below (in number of options):

Remaining options available for grant were 151,000 as of December 31, 2023.

At December 31, 2023, the unamortized compensation expense for stock options was $ 10,508 . Unamortized compensation expense is expected to be recognized over a weighted-average period of approximately 2.36 years.

For the three months ended December 31, 2023, the Company recorded stock compensation costs of $ 1,942 , as compared to $ 6,234 for the three months ended December 31, 2022. The Company recorded stock compensation costs of $ 7,156 for the nine months ended December 31, 2023 as compared to $ 18,703 for the nine months ended December 31, 2022.

Note 11 – Income Taxes

FASB ASC 740-10, “Accounting for Uncertainty in Income Taxes” (“ASC 740-10”) 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. The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company does not have any unrecognized tax benefits.

The tax effect of temporary differences, primarily net operating loss carryforwards, asset reserves and accrued liabilities, gave rise to the Company’s deferred tax asset. Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reverse. The Company had approximately $ 2.6 million in deferred tax assets at December 31, 2023 and approximately $ 2.6 million in deferred tax assets at March 31, 2023. 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.

Note 12 – Net income (loss) per Share

Net income (loss) per share 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 per share (“EPS”). Basic EPS represents net income (loss) divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS to common stockholders reflects the potential dilution that could occur if securities, including preferred stock and options, were converted into common stock. The dilutive effect of outstanding 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. For the nine months ended December 31, 2023 and 2022, since the Company has a net loss, the effect of common stock equivalents is anti-dilutive, and as such, common stock equivalents have been excluded from this calculation.

Note 13 – 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.

The tables below present information about reportable segments within the avionics business for the three and nine months ended December 31, 2023, and 2022: