Forward Looking Statements
This Quarterly Report on Form 10-Q and other reports filed by the Company from
time to time with the SEC (collectively the "Filings") contain or may contain
forward-looking statements 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 "may," "will," "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 are intended to identify
forward-looking statements. Such statements reflect the current view of the
Company with respect to future events and we caution you that these statements
are not guarantees of future performance or events and are subject to risks,
assumptions, and other factors. 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 unaudited condensed consolidated 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
unaudited condensed consolidated 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
The Company reported net loss of $232,869 and net sales of $2,253,757 for the
three months ended June 30, 2022. This compared to net income of $575,501 and
net sales of $4,132,393 for the same three period in the prior fiscal year.
The net loss for the three months ended June 30, 2022 was primarily caused by
supply chain procurement issues. Sales declined approximately $1.9 million and
gross margin percentage decreased 12% for the current versus prior three month
period in the prior fiscal year or 37% versus 49%, respectively. Long supplier
lead lines have been unprecedented, preventing the timely production of finished
units being shipped to customers. Additionally, inflationary prices have
resulted in costs in many cases increasing up to 34% for the same components
purchased the same time in the prior year.
Backlog orders on June 30, 2022, were $2.7 million versus $6.1 million on June
30, 2021. The Company's backlog on March 31, 2022, was $3.5 million. The decline
is due to substantially reduced international bookings compared to the last
several years. It is expected that a contract with the U.S. Navy to upgrade the
CRAFT test set will be issued in August which will increase the back-log by $2.8
million.
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 expect a large follow-on order from the German government
this year. We continue to receive orders from the U.S. Government and Lockheed
Martin for our AN/USM-708 and 719 ("CRAFT") Mode 5 test sets. Our expectation is
that orders and back-log will improve this fiscal year as several large
production and engineering development contracts are expected. The mid-life
update of our CRAFT product line will entail $2.8 million of funded engineering
starting this fiscal year. This should also generate significant production
revenues over the next three to seven years as key PCB's are upgraded to remove
obsolescence. We are also in preliminary negotiations with the U.S. Army on a
funded software upgrade to the TS-4530A product.
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Overview (continued)
TIC is also exploring new avenues to broaden its product portfolio including
designing a high frequency test set for the Lockheed Martin F-35 program. This
contract takes advantage of our expertise in RF technology. This is a completely
new market for TIC as it involves high frequency communication signals. This
contract includes non-recurring engineering funding and expected annual
production revenues in the $600,000 range. TIC has completed the test readiness
review ("TRR") and is almost done with the required environmental testing. The
development contract should be completed in the current fiscal quarter TIC will
continue to explore funded engineering programs of this nature as this is high
margin business that helps diversify and expand our product portfolio.
The main focus area for the Company is moving into the secure communications
testing. The key for long-term sustained growth will be to supplement our strong
position in military Mode 5 transponder testing with dominant product offerings
in the much larger commercial and military communications and navigation test
set market. TIC has spent several years and millions of dollars in developing
our ground-breaking SDR/OMNI product which is meant to address both the
commercial market for transponder and navigation test sets as well as competing
in the military secure comm test set market. The SDR/OMNI supports a wide
frequency range to accommodate new commercial and military waveforms in an
industry leading 4-pound package. This is approximately half the weight of
competitive test sets. It is also the only new multi-purpose test set which
meets the Class 1 military environmental specifications. 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. The
engineering design on this test set has been completed and we are currently in
the process of demonstrating this product to customers and performing product
verification. The Company has begun taking customer orders with production
deliveries expected to commence in the September/October timeframe. There are
several companies competing in this market space, but we believe that our
SDR/OMNI design will be extremely competitive, particularly for military
applications.
The Aeroflex litigation 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 filed for an
appeal during 2019. The Company has posted a $2 million bond for the appeal.
This $2 million bond amount will remain in place during the appeal process. The
appeal process has effectively been in limbo for several years due to the Kansas
Supreme Court moving to remote work. The case documents are sealed, and the
court has not responded to our repeated scheduling update requests. We believe
we have strong appeal grounds, and the plan is to wait for the eventual decision
despite the negative impact of the interest accruals on our financial results.
The best case scenario is that the award is vacated while the worst-case
scenario would be a dismissal which would require TIC to pay the judgement
amount plus accrued interest.
Results of Operations
Sales
Net sales were $2,253,757 for the three months ended June 30, 2022, as compared
to $4,132,393 for the same three month period in the prior fiscal year. The
decrease in sales of $1,878,636 (45%) was due primarily to supply chain issues,
where supplier lead times have increased from several months to over six months
in some cases. In particular, chip components have been especially difficult to
receive on a timely basis by our PCB vendors.
Gross Margin
For the three months ended June 30, 2022, total gross margin decreased
$1,179,562 (12%) to $835,185 as compared to $2,014,747 for the three months
ended June 30, 2021. The gross margin percentage for the three months ended June
30, 2022, was 37% as compared to 49% for the three months ended June 30, 2021.
The decrease in gross margin percentage was primarily volume related with the
fixed production costs spread over a lower revenue base, and parts component
costs for hard to find obsolete parts rising sharply over the last 12 months had
a significant impact on the Company's gross margins.
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Operating Expenses
Selling, general and administrative expenses increased $2,178 for the three
months ended June 30, 2022 to $556,209, as compared to $554,031 for the three
months ended June 30, 2021. The nominal net increase is a result of lower sales
commissions, consultant fees, and profit sharing accruals, offset by the
resuming of travel and trade show participation.
Aeroflex litigation costs were nominal at $724 for the three months ended June
30,2022 as compared to $1,181 for the same period in the previous year. With
respect to the Aeroflex litigation, the Company has appealed the $4.9 million
judgement and has set aside $2 million in cash to support an appeal bond. The
Company is optimistic about the prospects of its appeal for a judgment as a
matter of law. The appeal decision has been delayed due to the COVID-19 related
shutdown of the Kansas court system and the inability of court staff to work
remotely on confidentiality issues. During August 2021, in an effort to move the
appeal forward, all parties agreed to supply the appeal information to the court
on a dedicated and secured laptop that would be used by the research attorney
remotely. The Company has the ability to settle this case at its sole discretion
by withdrawing the appeal and paying the judgment plus interest amount. The
Company currently has sufficient cash on hand to pay off this liability if the
appeal is lost. On January 28, 2022, Aeroflex filed a Motion to Require
Supplemental Appeal Bond with the Court of Appeals of the State of Kansas,
seeking a bond from the Company in the amount of $6 million to supplement the
existing bond of $2 million. The Company has filed a response and we are
confident that this motion will be denied.
Engineering, research, and development expenses decreased $171,472 (25%) to
$522,103 for the three months ended June 30, 2022, as compared to $693,575 for
the three months ended June 30, 2021. Total engineering expense decreased
primarily as a result of the restart of the Lockheed Martin MADL program which
reduced engineering costs in the current quarter by $110,514, with the balance
of the decrease a result of cost efficiencies.
Income (Loss) from Operations
As a result of the above, the Company recorded a loss from operations of
$243,851 for the three months ended June 30, 2022, as compared to income from
operations of $765,960 for the three months ended June 30, 2021.
Other Expenses, Net
For the three ended June 30, 2022, total other expenses, net was ($50,934) as
compared to $(37,343) for the three months ended June 30, 2021.The $13,591(36%)
increase in expense is primarily a result of non-repeat federal COVID payroll
tax credits totaling $9,999 and $4,500 of other income during the three months
ended June 30, 2021.
Income before Income Taxes
The Company recorded a net loss before taxes of $294,785 for the three months
ended June 30, 2022, as compared to income before taxes of $728,617 for the
three months ended June 30, 2021.
Income Tax (Benefit) Expense
For the three months ended June 30, 2022, the Company recorded an income tax
benefit of $61,916 and related increase in its deferred tax asset, as a result
of the Company's net loss for the respective quarter, as compared to $153,116
tax expense for the three months ended June 30, 2021.
Net Income (Loss)
The Company recorded a net loss of $232,869 for the three months ended June 30,
2022, as compared to net income of $575,501 for the three months ended June 30,
2021.
Liquidity and Capital Resources
At June 30, 2022, the Company had net working capital of $3,274,114 including
accrued legal damages related to the Aeroflex litigation of $6,149,193, as
compared to working capital of $3,671,667 at March 31, 2022. This change is due
primarily to the decline in sales revenue and profitability.
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During the three months ended June 30, 2022, the Company's cash balance
(including the $2 million in restricted cash for the appeal) decreased by
$699,896 to $6,260,844. The Company's principal sources, and uses of funds were
as follows:
Cash (used in) provide by operating activities. For the three months ended June
30, 2022, $608,163 in cash from operations was used, as compared to the three
months ended June 30, 2021, the Company provided $1,353,544. This decrease in
cash provided for operations is mostly attributed to the net loss for the
quarter, an increase in accounts receivable, and a decrease in accounts payable.
Cash used in investing activities. For the three months ended June 30, 2022, the
Company used $11,733 in equipment asset activities as compared to zero for the
three months ended June 30, 2021.
Cash used in financing activities. For the three months ended June 30, 2022, the
Company used $80,000 in cash from financing activities as compared to the same
amount of $80,000 for the three months ended June 30,2021. The funds were used
to pay dividends in both the current and prior comparative periods.
The Bank of America line of credit was renewed and will mature July 30, 2023. As
of June 30, 2022, the line of credit draw remained at zero.
On June 30, 2022, the Company had $6.3 million of cash on hand which included $2
million of restricted cash supporting the appeal bond.
As of June 30, 2022, the Company had recorded total damages of $6,149,193
including accrued interest, as a result of the jury verdict associated with the
Aeroflex litigation as well as the Court's decision on punitive damages. The
Company has recorded accrued interest of $1,249,193 as of June 30, 2022.
The Company is very optimistic about the prospects of its appeal for a judgment
as a matter of law. Due to the three-month COVID-19 related shutdown of the
Kansas court system and subsequent partial reopening of the court system, a
major backlog has resulted. As such, the appeal process is expected to take at
least another 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. The Company currently has
sufficient cash on hand to pay off this liability if we lose the appeal.
Moving forward, we believe that our expected cash flows from operations and
current cash balances, which amounted to approximately $6.3 million, including
the approximately $2 million in restricted cash will be sufficient to operate in
the normal course of business for next 12 months from the issuance date of these
unaudited condensed financial statements, including any payments for settlement
of the litigation.
Currently, the Company has no material future capital expenditure requirements.
These unaudited condensed consolidated financial statements should be read in
conjunction with the Company's Annual Report on For 10-K for the fiscal year
ended March 31, 2022, filed with the SEC on June 17, 2022 (the "Annual Report").
Off-Balance Sheet Arrangements
As of June 30, 2022, 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. There have been no changes in our critical accounting policies. Our
significant accounting policies are described in our notes to the 2022
consolidated financial statements included in our Annual Report.
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