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 sales of $2,012,758 and $4,266,515 for the three and
six months ended September 30, 2022. This compared and net sales of $3,610,863
and $7,743,256 for the same three and six-month period in the prior fiscal year.
The sharp decline in sales for the first six months of the current fiscal year
was primarily caused by supply chain procurement issues and unanticipated delays
in securing certain high dollar contracts. Long supplier lead lines for certain
high demand chips have been unprecedented, preventing the timely production of
finished units being shipped to customers. The supply chain situation is
gradually improving, and TIC has received sufficient parts to resume normal
production operations starting in third quarter of the current fiscal year.
The sharp reduction in revenues resulted in a net loss of $477,368 for the
second quarter and $710,237 for the first six months of the fiscal year. Gross
margin percentage for the current quarter declined to $553,472 (28%) which is
almost 20% lower than the three months ended September 30, 2021. This is
primarily attributable to fixed production costs being spread over much lower
volumes. This compares to net income of $999,676 and $1,575,177 for the three
and six months ended September 30, 2021. The prior year results were positively
impacted by the $722,000 PPP loan forgiveness.
Backlog orders on September 30, 2022, were $6.2 million compared to $3.5 million
as of March 31, 2022. The increase was primarily due to the $2.9 million Navy
contract to upgrade the CRAFT test set. This work will be completed over the
next two years and should result in significant production revenues when the
development work is completed.
The Company continues to pursue opportunities in the domestic and international
market for our Mode 5 test sets. The international market has been slow over the
last year due in part to the recent strength of the dollar. We are still
expecting 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 the SDR/OMNI test set enters
production. We are also in negotiations with the U.S. Army on a funded software
upgrade to the TS-4530A product which should be very profitable as the
engineering work has already largely been completed.
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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 required
environmental testing and is in the final customer acceptance stage. 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. TIC is
in the process of demonstrating this product to customers and finalizing product
verification. The Company has begun taking customer orders with production
deliveries expected to commence this month. 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 until October 14, 2022, when the Company
received an order from the Kansas appellate court of appeals lifting the
briefing stay that was entered on March 19, 2020. The order notifies the Company
that oral arguments for the appeal will take place in late February or early
March of 2023. 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 $2,012,758 and $4,266,515 for the three and six months ended
September 30, 2022, as compared to $3,610,863 and $7,743,256 for the same three
and six month period in the prior fiscal year, respectively. The decrease in
sales of $1,598,105 (44%) and $3,476,741 (45%) respectively, 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 printed circuit
board ("PCB") vendors.
Gross Margin
For the three ended September 30, 2022, total gross margin decreased $1,114,435
to $553,472 as compared to $1,667,907 for the three months ended September 30,
2021. For the six ended September 30, 2022, total gross margin decreased
$2,293,997 to $1,388,657 as compared to $3,682,654 for the six months ended
September 30, 2021.
The gross margin percentage for the three months ended September 30, 2022, was
28% as compared to 46% for the three months ended September 30, 2021 and for the
six months September 30, 2022, was 33% as compared to 48% for the same period in
the prior year. The decrease in gross margin percentage was primarily volume
related with the fixed production costs spread over a lower revenue base plus
higher parts component costs for hard to find obsolete parts. TIC will be
increasing its selling prices in January to offset these added costs.
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Operating Expenses
Selling, general and administrative expenses decreased $117,860 (20%) to
$478,758 and $115,684 (10%) to $1,034,967 for the three and six months ended
September 30, 2022, as compared to $596,618 and $1,150,651, respectively for the
three and six months ended September 30, 2021. The three and six months decrease
of $117,860 and $115,684, respectively are a result of lower sales commissions,
consultant fees, and profit sharing accruals, partly offset by the resumption of
travel and trade show participation.
Aeroflex litigation costs decreased by $2,725 to $495 for the three months ended
September 30, 2022, as compared to $3,220 for the three months ended September
30, 2021. Litigation costs decreased $3,181 to $1,219 for the six months ended
September 30, 2022, as compared to $4,400 for the six months ended September 30,
2021. This is a direct result of decreased activity related to the litigation
(see Notes 4 and 11 to the unaudited condensed consolidated financial
statements). 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 appeal submissions are now complete. We continue to believe
that the trial judge erred in his legal ruling on standing and other issues
during the trial and that we have strong grounds for the award to be vacated or
reduced. The Company has received an order that oral arguments for the appeal
will take place in late February or early March of 2023.
Engineering, research, and development expenses decreased $73,216 (11%) to
$609,636 and $244,688 or (18%) to $1,131,739 for the three and six months ended
September 30, 2022, as compared to $682,852 and $1,376,427 for the three and six
months ended September 30, 2021, respectively. 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 $73,577 and
$184,092 for the six months ended September 30, 2022, 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
$535,417 and $779,268 for the three and six months ended September 30, 2022, as
compared to income from operations of $385,217 and $1,151,176 for the three and
six months ended September 30, 2021.
Other Expense, Net
For the three and six months ended September 30, 2022, total other net expense
was $68,879 and $119,813 as compared to other net income of $693,342 and
$656,000 for the three and six months ended September 30, 2021, primarily the
result of the Second Draw PPP loan in the amount of $722,577 being fully
forgiven on September 17, 2021 and on August 24, 2021, TIC, and the New Jersey
Economic Development Authority (NJEDA) signed a small business emergency
assistance grant agreement in the amount of $20,000.
Income before Income Taxes
The Company recorded a net loss before taxes of $604,296 and $899,081 for the
three and six months ended September 30, 2022, as compared to income before
taxes of $1,078,559 and $1,807,176 for the three and six months ended September
30, 2021.
Income Tax (Benefit) Expense
For the three and six months ended September 30, 2022, the Company recorded
income tax benefits of $126,928 and $188,844, and related increase in its
deferred tax asset, as a result of the Company's net loss respectively, as
compared to an income tax expense of $78,883 and $231,999 for the three and six
months ended September 30, 2021, respectively. The differences between income
taxes, in the prior year, expected at the U.S. federal statutory income tax rate
of 21 percent and the reported income tax expense are due to the recognition of
non-taxable PPP funds of $722,577 as other income during the three months ended
September 30, 2021. Taxable income was $355,982 and $1,084,599 for the three and
six months ended September 30, 2021.
Net (Loss) Income
The Company recorded net loss of $477,368 and $710,237 for the three and six
months ended September 30, 2022, as compared to net income of $999,676 and
$1,575,177 for the three and six months ended September 30, 2021.
Liquidity and Capital Resources
At September 30, 2022, the Company had net working capital of
$2,657,638 including accrued legal damages related to the Aeroflex litigation of
$6,220,209, 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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Liquidity and Capital Resources continued
During the six months ended September 30, 2022, the Company's cash balance
(including the $2 million in restricted cash for the appeal) decreased by
approximately $1.5 million to $5,447,416. The Company's principal sources, and
uses of funds were as follows:
Cash (used in) provided by operating activities. For the six months ended
September 30, 2022, $1,421,592 in cash from operations was used, as compared to
the six months ended September 30, 2021, the Company provided $1,484,043. This
decrease in cash provided for operations is mostly attributed to the net loss
for the previous two quarters, an increase in accounts receivable, and an
increase in inventories as we build stock for the SDR/OMNI release.
Cash used in investing activities. For the six months ended September 30, 2022,
the Company used $11,732 for purchases of equipment as compared to the six
months ended September 30, 2021, the Company used $861.
Cash (used in) financing activities. For the six months ended September 30,
2022, the Company used $80,000 in cash from financing activities as compared to
$160,000 for the six months ended September 30,2021. This decrease is due to
dividend payments of $80,000 not being made in the current period.
The Bank of America line of credit was renewed and will mature July 30, 2023. As
of September 30, 2022, the line of credit draw remained at zero.
On September 30, 2022, the Company had approximately $5.5 million of cash on
hand which included $2 million of restricted cash supporting the appeal bond.
As of September 30, 2022, the Company has recorded total damages of $6,220,209
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 $1,320,209 as of September 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 and borrowing capability 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 $5.5 million, including
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 September 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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