10-Q 1 ttlo-20200131x10q.htm 10-Q ttlo_Current_folio_10Q

UNITED STATES SECURITIES AND EXCHANGE

COMMISSION

 

Washington, D.C.  20549

 

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2020 

 

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

 

Commission File No. 001-8125

 

TOROTEL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

MISSOURI

 

44-0610086

(State or other jurisdiction of incorporation or

organization)

 

(I.R.S. Employer Identification No.)

 

 

 

520 N. ROGERS ROAD, OLATHE,

KANSAS

 

66062

(Address of principal executive offices)

 

(Zip Code)

 

(913) 747-6111

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

Trading Symbol

Name of each exchange on which registered

None

N/A

N/A

 

Indicate by check mark 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 of 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 13(a) of the Exchange Act.   ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  Yes ☐  No ☒

 

As of  March  16, 2020, there were 5,995,750 shares of Common Stock, $0.01 par value, outstanding.

 

 

 

TOROTEL, INC. AND SUBSIDIARIES

 

INDEX

 

Part I.    Financial Information (Unaudited) 

 

3

 

 

 

 

 

 

 

Item 1 

 

  Financial Statements

 

3

 

 

 

  Consolidated Condensed Balance Sheets

 

3

 

 

 

  Consolidated Condensed Statements of Operations

 

4

 

 

 

  Consolidated Condensed Statements of Changes in Stockholders’ Equity

 

5

 

 

 

  Consolidated Condensed Statements of Cash Flows

 

6

 

 

 

  Notes to Consolidated Condensed Financial Statements

 

7

 

 

 

 

 

 

 

Forward-Looking Information 

 

20

 

 

 

 

 

Item 2 

 

  Management's Discussion and Analysis of Financial Condition and Results of Operations

 

21

 

 

 

 

 

 

 

Item 3 

 

  Quantitative and Qualitative Disclosures About Market Risk

 

26

 

 

 

 

 

 

 

Item 4 

 

  Controls and Procedures

 

26

 

 

 

 

 

 

 

Part II.  Other Information 

 

27

 

 

 

 

 

Item 5   Other Information 

 

27

 

 

 

 

 

Item 6 

 

  Exhibits

 

27

 

 

 

 

 

 

 

Signatures 

 

28

 

 

 

2

PART I.   FINANCIAL INFORMATION

 

Item 1.   Financial Statements

 

CONSOLIDATED CONDENSED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

    

(Unaudited)

 

 

 

 

 

January 31, 2020

 

April 30, 2019

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash

 

$

415,000

 

$

58,000

Trade receivables, net

 

 

2,232,000

 

 

2,590,000

Contract assets

 

 

949,000

 

 

1,104,000

Inventories

 

 

3,594,000

 

 

3,054,000

Prepaid expenses

 

 

222,000

 

 

152,000

 

 

 

7,412,000

 

 

6,958,000

 

 

 

 

 

 

 

Land

 

 

265,000

 

 

265,000

Buildings and improvements

 

 

1,586,000

 

 

1,569,000

Equipment

 

 

4,362,000

 

 

4,045,000

 

 

 

6,213,000

 

 

5,879,000

Less accumulated depreciation

 

 

4,294,000

 

 

4,056,000

Property, plant and equipment, net

 

 

1,919,000

 

 

1,823,000

 

 

 

 

 

 

 

Operating right-of-use assets

 

 

2,075,000

 

 

 —

Deferred income taxes

 

 

34,000

 

 

34,000

Other assets

 

 

153,000

 

 

186,000

 

 

 

 

 

 

 

Total Assets

 

$

11,593,000

 

$

9,001,000

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current maturities of long-term debt

 

$

667,000

 

$

1,121,000

Current maturities of operating lease liabilities

 

 

395,000

 

 

 —

Current maturities of finance lease liabilities

 

 

45,000

 

 

 —

Trade accounts payable

 

 

2,210,000

 

 

1,625,000

Accrued liabilities

 

 

535,000

 

 

824,000

Customer deposits

 

 

 —

 

 

24,000

 

 

 

3,852,000

 

 

3,594,000

 

 

 

 

 

 

 

Long-term debt, less current maturities

 

 

795,000

 

 

801,000

Operating lease liabilities, less current maturities

 

 

1,945,000

 

 

 —

 

 

 

2,740,000

 

 

801,000

Stockholders' equity:

 

 

 

 

 

 

Common stock; par value $0.01; 6,000,000 shares authorized; 5,995,750 shares issued and outstanding

 

 

60,000

 

 

60,000

Capital in excess of par value

 

 

12,626,000

 

 

12,545,000

Accumulated deficit

 

 

(7,685,000)

 

 

(7,999,000)

 

 

 

5,001,000

 

 

4,606,000

 

 

 

 

 

 

 

Total Liabilities and Stockholders' Equity

 

$

11,593,000

 

$

9,001,000

 

The accompanying notes are an integral part of these statements.

 

3

 

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

    

January 31, 2020

    

January 31, 2019

    

January 31, 2020

    

January 31, 2019

Net sales

 

$

6,094,000

 

$

4,750,000

 

$

19,232,000

 

$

14,097,000

Cost of goods sold

 

 

4,460,000

 

 

3,680,000

 

 

12,526,000

 

 

9,874,000

Gross profit

 

 

1,634,000

 

 

1,070,000

 

 

6,706,000

 

 

4,223,000

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Engineering

 

 

334,000

 

 

351,000

 

 

1,116,000

 

 

966,000

Selling, general and administrative

 

 

1,834,000

 

 

1,089,000

 

 

5,138,000

 

 

3,590,000

 

 

 

2,168,000

 

 

1,440,000

 

 

6,254,000

 

 

4,556,000

Income (loss) from operations

 

 

(534,000)

 

 

(370,000)

 

 

452,000

 

 

(333,000)

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

27,000

 

 

36,000

 

 

77,000

 

 

84,000

Income (loss) before income tax expense

 

 

(561,000)

 

 

(406,000)

 

 

375,000

 

 

(417,000)

Income tax expense (benefit)

 

 

(125,000)

 

 

 —

 

 

61,000

 

 

 —

Net income (loss)

 

$

(436,000)

 

$

(406,000)

 

$

314,000

 

$

(417,000)

Basic earnings (loss) per share

 

$

(0.08)

 

$

(0.08)

 

$

0.05

 

$

(0.08)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

 

4

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Capital In

 

 

    

Total

 

 

 

 

Common

Excess of

Accumulated

Stockholders' 

 

 

Shares

Stock

Par Value

Deficit

Equity

For The Three Months Ended January 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, October 31, 2018

 

5,995,750

 

$

60,000

 

$

12,491,000

 

$

(8,652,000)

 

$

3,899,000

Stock compensation earned

 

 —

 

 

 —

 

 

27,000

 

 

 —

 

 

27,000

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(406,000)

 

 

(406,000)

Balance, January 31, 2019

 

5,995,750

 

 

60,000

 

 

12,518,000

 

 

(9,058,000)

 

 

3,520,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For The Nine Months Ended January 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, April 30, 2018

 

5,995,750

 

$

60,000

 

$

12,437,000

 

$

(8,743,000)

 

$

3,754,000

Stock compensation earned

 

 —

 

 

 —

 

 

81,000

 

 

 —

 

 

81,000

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(417,000)

 

 

(417,000)

Cumulative effect of adoption of new accounting principle

 

 —

 

 

 —

 

 

 —

 

 

102,000

 

 

102,000

Balance, January 31, 2019

 

5,995,750

 

 

60,000

 

 

12,518,000

 

 

(9,058,000)

 

 

3,520,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For The Three Months Ended January 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, October 31, 2019

 

5,995,750

 

$

60,000

 

$

12,599,000

 

$

(7,249,000)

 

$

5,410,000

Stock compensation earned

 

 —

 

 

 —

 

 

27,000

 

 

 —

 

 

27,000

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(436,000)

 

 

(436,000)

Balance, January 31, 2020

 

5,995,750

 

 

60,000

 

 

12,626,000

 

 

(7,685,000)

 

 

5,001,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For The Nine Months Ended January 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, April 30, 2019

 

5,995,750

 

$

60,000

 

$

12,545,000

 

$

(7,999,000)

 

$

4,606,000

Stock compensation earned

 

 —

 

 

 —

 

 

81,000

 

 

 —

 

 

81,000

Net income

 

 —

 

 

 —

 

 

 —

 

 

314,000

 

 

314,000

Balance, January 31, 2020

 

5,995,750

 

 

60,000

 

 

12,626,000

 

 

(7,685,000)

 

 

5,001,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

5

 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

    

January 31, 2020

    

January 31, 2019

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

314,000

 

$

(417,000)

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

 

 

 

 

 

 

Stock compensation cost amortized

 

 

81,000

 

 

81,000

Depreciation

 

 

273,000

 

 

253,000

Changes in operating assets and liabilities:

 

 

 

 

 

 

Trade receivables

 

 

358,000

 

 

742,000

Contract assets

 

 

155,000

 

 

(901,000)

Inventories

 

 

(540,000)

 

 

(535,000)

Prepaid expenses and other assets

 

 

(37,000)

 

 

116,000

Operating lease right-of-use assets

 

 

192,000

 

 

 —

Trade accounts payable

 

 

585,000

 

 

412,000

Accrued liabilities

 

 

(83,000)

 

 

(147,000)

Current and long-term operating lease liabilities

 

 

(133,000)

 

 

 —

Customer deposits

 

 

(24,000)

 

 

(194,000)

Net cash provided by (used in) operating activities

 

 

1,141,000

 

 

(590,000)

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures

 

 

(370,000)

 

 

(108,000)

Proceeds from disposal of equipment

 

 

1,000

 

 

 —

Net cash used in investing activities

 

 

(369,000)

 

 

(108,000)

Cash flows from financing activities:

 

 

 

 

 

 

Principal payments on long-term debt

 

 

(23,000)

 

 

(1,671,000)

Principal payments under capital and financing lease obligations

 

 

(53,000)

 

 

(53,000)

Payments on line of credit

 

 

(11,636,000)

 

 

(1,258,000)

Proceeds from line of credit

 

 

11,297,000

 

 

2,286,000

Proceeds from long-term debt

 

 

 —

 

 

859,000

Net cash provided by (used in) financing activities

 

 

(415,000)

 

 

163,000

Net increase (decrease) in cash

 

 

357,000

 

 

(535,000)

Cash, beginning of period

 

 

58,000

 

 

575,000

Cash, end of period

 

$

415,000

 

$

40,000

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

77,000

 

$

81,000

Capital leases reclassified from long-term debt to finance lease liabilities

 

 

98,000

 

 

 —

Deferred rent reclassified from accrued liabilities to operating right-of-use assets

 

 

206,000

 

 

 —

 

The accompanying notes are an integral part of these statements.

 

 

6

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

NOTE 1 — BASIS OF PRESENTATION

 

The consolidated condensed balance sheet as of April 30,  2019, which has been derived from the audited financial statements of Torotel, Inc. ("Torotel" or the “Company”), is accompanied by the unaudited interim consolidated condensed financial statements, which reflect the normal recurring adjustments that in the opinion of management are necessary to present fairly Torotel’s consolidated financial position at January 31,  2020, and the consolidated results of operations and cash flows for the three and nine months ended January 31,  2020, and 2019, respectively. 

 

The unaudited interim consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC").  Certain information and note disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although management believes the disclosures made are adequate to make the information not misleading. The financial statements contained herein should be read in conjunction with Torotel’s consolidated financial statements and related notes filed on Torotel's Form 10-K for the year ended April 30, 2019 as filed with the SEC on July 23, 2019.

 

Accounting Pronouncements Recently Adopted

 

The Company adopted the guidance of ASU No. 2016-02, Leases, (“ASC 842”) as of May 1, 2019 using the modified retrospective transition approach with the cumulative effect recognized at the date of initial application. The comparative information in the prior year has not been adjusted and continues to be reported under ASC 840, Leases, which was the accounting standard in effect for that period. ASC 842 requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations and presentation of cash flows. See Note 5Leases for the required disclosures of the nature, amount, timing, and uncertainty of cash flows arising from leases.

 

 

 

 

NOTE 2 — NATURE OF OPERATIONS

 

Torotel conducts business through its wholly owned subsidiary, Torotel Products, Inc. (“Torotel Products”). Torotel Products specializes in the custom design and manufacture of a wide variety of precision magnetic components, consisting of transformers, inductors, reactors, chokes, toroidal coils, high voltage transformers, dry-type transformers and electro-mechanical assemblies, for use in commercial, industrial and military electronics.

 

 

NOTE 3—INVENTORIES

 

The following table summarizes the components of inventories:

 

 

 

 

 

 

 

 

 

 

 

 

    

 

January 31, 2020

    

 

April 30, 2019

Raw materials

 

$

2,420,000

 

$

1,723,000

Work in process

 

 

1,009,000

 

 

1,052,000

Finished goods

 

 

165,000

 

 

279,000

 

 

$

3,594,000

 

$

3,054,000

 

 

 

 

7

NOTE 4—REVENUE

 

We determine revenue recognition through the following steps:

 

 

 

1)

Identification of the contract, or contracts, with a customer

A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

2)

Identification of the performance obligations in the contract

Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the goods or services are separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, the Company must apply judgment to determine whether promised goods or services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised goods or services are accounted for as a combined performance obligation.

3)

Determination of the transaction price

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of the Company's contracts as of January 31, 2020 contained a significant financing component. Determining the transaction price requires significant judgment, which is discussed by revenue category in further detail below.

4)

Allocation of the transaction price to the performance obligations in the contract

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct goods or services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone 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.

 

 

 

 

8

5)

Recognition of revenue when, or as, we satisfy a performance obligation

The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer.

 

Performance Obligations Satisfied Over Time

 

We recognize revenue on agreements for the sale of customized goods for use in commercial aerospace and military electronics on an over time basis.

 

Commercial Aerospace and Defense Parts

 

Performance obligations under long-term agreements are considered to be under contract at the time that authorization to ship has been obtained from the customer, except for one long-term agreement which provides a contract for two specific parts if the ship date is within 21 days.  Performance obligations under standalone purchase orders are considered to be under contract at the time that the purchase order is received. Parts manufactured for customers in our aerospace and defense product revenue stream must be built to certain specifications that are then qualified by the customer. Due to the proprietary nature of our custom-built products designed for a specific use by our aerospace and defense customers, control is considered to be with the customer as the products are finalized and placed into finished goods.  Goods within this revenue stream do not provide simultaneous receipt and benefit to the customer.  The goods are controlled by our customers once the finished parts are created.  The customers prevent any alternative use of the asset and an enforceable right to payment does exist.  We provide for potential losses on any of these agreements when it is probable that we will incur the loss.

 

Our billing terms for these over-time contracts vary, but are generally based on ship date.  Control is transferred as products are completed and closed to finished goods.

 

Product fees and engineering and design services

 

For product fees along with engineering and design services, transfer of control is determined by the revenue stream of the associated product. Percentage-of-completion revenue recognition is utilized when revenue recognized exceeds the amount billed to the customer for any project-related services, utilizing labor as the input method.

 

Performance Obligations Satisfied at a Point in Time

 

We recognize revenue on agreements for the sale of customized goods for use in the industrial and commercial market on point in time basis.

 

Industrial and Commercial Parts

 

Performance obligations under long-term agreements are considered to be under contract at the time that authorization to ship has been obtained from the customer. Performance obligations under standalone purchase orders are considered to be under contract at the time that the purchase order is received. For our commercial customers, control of the underlying product design is retained by Torotel, therefore the products are considered in our control until the moment of shipment.  Also, upon shipment the customers have an obligation to pay for the asset and we have an enforceable right to payment.  We provide for potential losses on any of these agreements when it is probable that we will incur the loss.

 

Our billing terms for these point in time sales are generally based on ship date.  Control is transferred as products are shipped to the customers.

9

 

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.  Shipping and handling costs do not have a material impact to the financial statements.  No impairment losses were recognized in the nine months ending January 31, 2020 and 2019, relating to receivables or contract assets arising from contracts with customers.

 

Disaggregation of Revenue

The following tables summarize revenue from contracts with customers for the three and nine months ended January 31, 2020 and 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

January 31, 2020

    

January 31, 2019

 

January 31, 2020

    

January 31, 2019

Markets

 

 

 

 

 

 

 

 

 

 

 

Commercial Aerospace

$

2,277,000

 

$

1,998,000

 

$

7,436,000

 

$

6,741,000

Defense

 

3,595,000

 

 

2,517,000

 

 

11,292,000

 

 

6,641,000

Industrial

 

222,000

 

 

235,000

 

 

504,000

 

 

715,000

Total consolidated net sales

$

6,094,000

 

$

4,750,000

 

$

19,232,000

 

$

14,097,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

January 31, 2020

    

January 31, 2019

 

January 31, 2020

    

January 31, 2019

Product Line

 

 

 

 

 

 

 

 

 

 

 

Magnetic components

$

3,230,000

 

$

2,440,000

 

$

10,394,000

 

$

6,983,000

Potted coil assembly

 

1,299,000

 

 

1,321,000

 

 

4,226,000

 

 

4,186,000

Electro-mechanical assemblies

 

1,565,000

 

 

972,000

 

 

4,612,000

 

 

2,631,000

Large transformers

 

 —

 

 

17,000

 

 

 —

 

 

297,000

Total consolidated net sales

$

6,094,000

 

$

4,750,000

 

$

19,232,000

 

$

14,097,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

January 31, 2020

    

January 31, 2019

 

January 31, 2020

    

January 31, 2019

Geography

 

 

 

 

 

 

 

 

 

 

 

Domestic

$

5,945,000

 

$

4,205,000

 

$

18,629,000

 

$

12,860,000

Foreign

 

149,000

 

 

545,000

 

 

603,000

 

 

1,237,000

Total consolidated net sales

$

6,094,000

 

$

4,750,000

 

$

19,232,000

 

$

14,097,000

 

 

 

 

 

 

 

 

 

 

 

 

10

 

Contract balances

 

All contract asset balances relate to customer contracts entered into during the fiscal year ending April 30, 2020.  We have no contract liabilities other than customer deposits which represent prepaid consideration for contracts with customers.  There have been no significant adjustments to contract asset balances related to contract modifications.  We have certain customers totaling revenue of $5,056,000 with variable payment terms related to discounts in the amount of $43,000 in the fiscal year ending April 30, 2020.

 

Remaining performance obligations

 

As of January  31, 2020, the aggregate amount of the contracted revenues allocated to our unsatisfied (or partially unsatisfied) performance obligations was $4,156,000. The balance of unsatisfied performance obligations excludes contracts with original maturities of one year or less.  We expect to recognize revenue as we satisfy our remaining performance obligations.  Total remaining performance obligations to be recognized in the fiscal year ending April 30, 2020 is expected to be $1,651,000.  Total remaining performance obligations to be recognized in the fiscal year ending April 30, 2021 is expected to be $2,505,000.

 

 

NOTE 5—LEASES

 

The Company adopted ASC 842 on May 1, 2019 using the modified retrospective transition method; and therefore, the comparative information has not been adjusted for the three and nine months ended January 31, 2019 or as of April 30, 2019. Upon transition to the new standard, the Company elected the package of practical expedients, which permitted the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs.

 

The Company leases buildings and equipment under operating and finance leases. The majority of the Company’s operations are conducted in premises occupied under lease agreements with initial base terms ranging from 5 to 15 years, with certain leases containing options to extend the leases for up to an additional 10 years. The Company typically does not believe that exercise of the renewal options is reasonably assured at the inception of the lease agreements and, therefore, considers the initial base term as the lease term. Lease terms vary but generally the leases provide for fixed and escalating rentals or contingent escalating rentals based on the Consumer Price Index.

 

Operating lease ROU assets and lease liabilities were recognized at commencement date based on the present value of minimum lease payments over the remaining lease term. The minimum lease payments include base rent  payments. The Company’s leases have remaining lease terms of approximately 1 year to 8 years, which may include the option to extend the lease when it is reasonably certain the Company will exercise that option. The present value of the lease payments is calculated using the incremental borrowing rate for operating leases, which was determined using a portfolio approach based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. Operating lease expense is recognized on a straight-line basis over the lease term.

 

The Company’s lease agreements do not contain any material residual value guarantees. The Company elected the practical expedient to not separate lease and non-lease components and also elected the short-term practical expedient for all leases that qualify. As a result, the Company will not recognize ROU assets or liabilities for short-term leases that qualify for the short-term practical expedient, but instead will recognize the lease payments as lease cost on a straight-line basis over the lease term.

 

11

As a result of adopting ASC 842, the Company’s consolidated balance sheet includes additional operating ROU lease assets and total operating lease liabilities of $2,075,000 and $2,340,000, respectively, at January 31, 2020. The initial measurement occurring on May 1, 2019, resulted in operating lease ROU assets of $2,267,000, finance lease ROU assets of $98,000, current operating lease liabilities of $380,000, current finance lease liabilities of $73,000, noncurrent operating lease liabilities of $2,093,000, and noncurrent finance lease liabilities of $25,000. The difference of $206,000 between the ROU assets and the lease liabilities results from a reclassification of deferred rent to the operating lease ROU asset of $206,000.

 

The following table provides the operating and finance ROU assets and lease liabilities:

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Classification

    

 

January 31, 2020

Assets

 

 

 

 

 

 

Operating lease right-of-use assets

 

 

Operating right-of-use assets

 

$

2,075,000

Finance lease right-of-use assets

 

 

Property, plant and equipment, net

 

 

45,000

Total leased assets

 

 

 

 

$

2,120,000

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Current

 

 

 

 

 

 

Operating lease liabilities

 

 

Current maturities of operating lease liabilities

 

$

395,000

Finance lease liabilities

 

 

Current maturities of finance lease liabilities

 

 

45,000

Noncurrent

 

 

 

 

 

 

Operating lease liabilities

 

 

Operating lease liabilities, less current maturities

 

 

1,945,000

Total lease liabilities

 

 

 

 

$

2,385,000

 

 

 

 

 

 

 

 

The components of lease expense were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

 

January 31, 2020

 

 

January 31, 2020

 

 

 

 

 

 

 

 

 

 

Operating lease expense

 

 

 

 

$

155,000

 

$

408,000

Finance lease expense

 

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

 

 

 

 

11,000

 

 

34,000

Interest on lease liabilities

 

 

 

 

 

1,000

 

 

5,000

Total finance lease expense

 

 

 

 

 

12,000

 

 

39,000

Total lease expense

 

 

 

 

$

167,000

 

$

447,000

 

 

 

 

 

 

 

 

 

 

 

The supplemental components of cash flows were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

January 31, 2020

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

Operating cash flows from operating leases

 

 

 

 

$

349,000

Financing cash flows from finance leases

 

 

 

 

 

53,000

Total cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

$

402,000

12

 

 

 

 

 

 

 

The following table represents the weighted-average remaining lease term and discount rate as of January 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

January 31, 2020

 

 

 

Weighted Average

 

 

Weighted Average

 

 

 

Remaining

 

 

Discount

Lease Term and Discount Rate

 

 

Lease Term (years)

 

 

Rate

Operating leases

 

 

6.82

 

 

4.52%

Finance leases

 

 

0.67

 

 

5.43%

 

 

 

 

 

 

 

 

Future minimum lease payments on the amended operating lease and future minimum finance lease payments as of January 31, 2020 are as follows:

 

 

 

 

 

 

 

Finance Lease

Operating Lease

Fiscal Years Ending April 30,

Payments

Payments

2020

$

18,000

$

122,000

2021

 

27,000

 

436,000

2022

 

 —

 

448,000

2023

 

 —

 

452,000

2024

 

 —

 

452,000

2025

 

 —

 

456,000

2026

 

 —

 

467,000

2027

 

 —

 

350,000

 

$

45,000

$

3,183,000

 

 

NOTE 6—FINANCING AGREEMENTS

 

On October 19, 2018, Torotel entered into three new business loan agreements (the “financing agreements”) with Cornerstone Bank (the “Bank”).  The financing agreements provide for an asset-backed revolving line of credit, a guidance line of credit, and a real estate term loan.  On October 19, 2019, Torotel renewed the asset-backed revolving line of credit.  A summary of the notes issued under the financing agreements is provided below:

 

 

 

 

 

 

 

 

 

 

 

 

January 31, 2020

 

 

April 30, 2019

5.50% asset-based revolving line of credit with a maturity date of October 19, 2020

 

$

636,000

 

$

975,000

6.25% guidance line of credit with a maturity date of October 19, 2019

 

 

 -

 

 

54,000

5.35% mortgage note payable in monthly installments of $5,573, including interest, with final payment of $690,829 due October 19, 2023

 

 

778,000

 

 

795,000

5.50% equipment term loan note payable in monthly installments of $1,034, including interest, with final payment of $1,034 due on May 13, 2024

 

 

48,000

 

 

 -

Capital lease obligations (see Note 5)

 

 

 -

 

 

98,000

Total long-term debt

 

 

1,462,000

 

 

1,922,000

Less current installments

 

 

667,000

 

 

1,121,000

Long-term debt, excluding current installments

 

$

795,000

 

$

801,000

 

The asset-based revolving line of credit is intended to be used for working capital purposes and has a capacity of $1,500,000.  The asset-based revolving line of credit is renewable annually upon mutual agreement of Torotel and the Bank. The Company intends to renew the asset-based revolving line of credit.  The associated interest rate is equal to the greater of the floating Cornerstone Bank Corporate Base Rate (5.50%  as of January 31, 2020)  or a floor of 5.0%.  Monthly repayments of interest only are required under the asset-based revolving line of credit promissory note with the principal due at maturity.  The borrowing base of the revolving line of credit is limited to 80% of eligible accounts receivable, plus

13

50% of eligible inventory, plus 80% of eligible equipment.  This asset-based revolving line of credit is cross collateralized and cross defaulted with all other financing agreements of Torotel with the Bank.  Pursuant to a Commercial Security Agreement dated October 19, 2018, between Torotel and the Bank (the “Commercial Security Agreement”), which was entered into in connection with the financing agreements, the asset-based revolving line of credit is secured by a first lien on all business assets of Torotel. Under the revolving line of credit, if the aggregate principal amount of the outstanding advances exceeds the applicable borrowing base, Torotel must pay the Bank an amount equal to the difference between the outstanding principal balance of the revolving line of credit and the borrowing base.

 

The real estate term loan is in the principal amount of $815,000 and contains a 5-year term with a 20-year amortization period, with the balance at maturity on October 19, 2023.  The associated interest rate is fixed at 5.35%.  Monthly repayments of approximately $5,573, consisting of both interest and principal, are required.  The final payment of approximately $690,829 is due on the maturity date.  This real estate term loan is cross collateralized and cross defaulted with the other financing agreements.  The real estate term loan is secured by a first lien priority real estate mortgage on the property located at 620 North Lindenwood Drive in Olathe, Kansas pursuant to the Commercial Security Agreement.

 

The equipment note was a guidance line of credit to be used for equipment purchases and had a capacity of $250,000.  On May 13, 2019, Torotel converted the guidance line of credit relating to the equipment note into an equipment term loan.  The equipment term loan is in the principal amount of $54,000 and contains a 5-year term with a 5-year amortization period, with the balance at maturity on May 13, 2024.  The associated interest rate is fixed at 5.50%.  Monthly repayments of approximately $1,034, consisting of both interest and principal, are required.  This final payment of approximately $1,034 is due on the maturity date.  This equipment term loan is cross collateralized and cross defaulted with the other financing agreements of Torotel and is secured by a purchase money security interest in the assets purchased as well as a first lien on all business assets of Torotel.

 

The financing agreements contain customary representations, warranties, and covenants of Torotel for the benefit of the Bank, as well as customary default provisions.  Other than the borrowing base limitations under the asset-based revolving line of credit, none of the financing agreements requires Torotel to comply with any financial covenants.  Prepayments are allowed without penalty under all of the financing agreements.

 

 

Irrevocable Standby Letter of Credit

 

Under the terms of a lease amendment for its manufacturing facility located in Olathe, Kansas, Torotel provided the landlord an irrevocable standby letter of credit in the original amount of $300,000 as additional security. On January 1, 2020, the letter of credit was reduced from $300,000 to $225,000.  The balance under the letter of credit will automatically reduce in accordance with the below schedule if not drawn upon:

 

 

 

 

 

 

Date of Reduction

 

Amount of Reduction

 

Balance of Letter of Credit

January 1, 2021

$

75,000

$

150,000

January 1, 2022

 

75,000

 

75,000

January 1, 2023

 

75,000

 

 -

 

 

 

NOTE 7—INCOME TAXES

 

The Company incurred an income tax benefit of $125,000 during the three months ended January 31, 2020 and incurred income tax expense of $61,000 during the nine months ended January 31, 2020, with an effective tax rate of 22.3% and 16.3%, respectively, compared to no income tax expense or benefit being incurred during the three and nine months ended January 31, 2019.    

 

As of January 31,  2020, the federal tax returns for the fiscal years ended 2017 through 2019 are open to audit until the statute of limitations closes for the years in which our net operating losses are utilized. We would recognize interest and penalties accrued on unrecognized tax benefits as well as interest received from favorable tax settlements

14

within income tax expense. As of January 31, 2020, we recorded no accrued interest or penalties related to uncertain tax positions. We expect no significant change in the amount of unrecognized tax benefit, accrued interest or penalties within the next twelve months.

 

NOTE 8—RESTRICTED STOCK AGREEMENTS

 

Restricted Stock Agreements, and stock awards thereunder, are authorized by the Compensation and Nominating Committee (the "Committee") and the Board of Directors of Torotel (the "Board"). The terms of the Restricted Stock Agreements afford the grantees all of the rights of a stockholder with respect to the award shares, including the right to vote such shares and to receive dividends and other distributions payable with respect to such shares since the date of award. Under the terms of each agreement, the non-vested shares are restricted as to disposition and subject to forfeiture under certain circumstances. The Restricted Stock Agreements further provide, subject to certain conditions, that if prior to all of the restricted shares having vested, we undergo a change in control, then all of the restricted shares will vest and no longer be subject to restrictions under the Restricted Stock Agreements. The restricted shares are treated as non-vested stock; accordingly, the fair value of the restricted stock at the date of award is offset against capital in excess of par value in the accompanying consolidated balance sheets under stockholders' equity.

 

Restricted Stock Grants

 

 On September 21, 2016, we entered into Restricted Stock Agreements (“2016 Agreements”) with three key employees for the grant of an aggregate total of 730,000 restricted shares of the Company's common stock (the “Shares”).  The Shares were granted, and the 2016 Agreements were entered into, pursuant to the Company’s Stock Award Plan (the “Plan”).  The award of the Shares was authorized by both the Committee and the Board as a whole on September 19, 2016.   Except for the number of shares granted to each recipient, the terms of each of the 2016 Agreements are identical.

 

The Shares were granted subject to restrictions that prohibit them from being sold, assigned, pledged or otherwise disposed of until the restrictions lapse.  The restrictions will lapse on the fifth anniversary of the date of grant if during the five year restriction period, (1) the Company's cumulative annual growth in revenue is at least 10%, and (2) the average economic value added as a percentage of revenue is at least 2%. The economic value added, which attempts to capture the true economic profit, will be calculated as the operating profit less the cost of capital with adjustments made for taxes. The restrictions will also lapse, if prior to the fifth anniversary of the date of grant, (1) the grantee's employment with the Company is terminated by reason of disability, (2) the grantee dies, or (3) the Committee, in its sole discretion, terminates the restrictions.  If the restrictions on the Shares have not lapsed by the fifth anniversary of the date of grant, the Shares will be forfeited to the Company.

 

Stock Compensation Costs and Restricted Stock Activity

 

Total stock compensation cost was $81,000 for each of the nine months ended January 31,  2020 and 2019.  

 

Restricted stock activity for each nine month period through January 31 is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

2019

 

    

Restricted

    

Weighted

    

Restricted

    

Weighted

 

 

Shares 

 

Average 

 

Shares 

 

Average 

 

 

Under 

 

Grant 

 

Under 

 

Grant 

 

 

Option

 

Price

 

Option

 

Price

Outstanding at May 1

    

730,000

    

$

0.740

    

730,000

    

$

0.740

Granted

 

 —

 

 

 —

 

 —

 

 

 —

Forfeited

 

 —

 

 

 —

 

 —

 

 

 —

Outstanding at January 31

 

730,000

 

$

0.740

 

730,000

 

$

0.740

 

 

15

NOTE 9—STOCKHOLDERS' EQUITY

 

The shares of common stock outstanding as of each nine month period ended as of January 31 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

    

2020

 

2019

Balance, May 1

 

5,995,750

 

5,995,750

Shares released from treasury for restricted stock grants

 

 —

 

 —

Newly issued shares for restricted stock grants

 

 —

 

 —

Shares reverted to treasury for restricted stock forfeitures

 

 —

 

 —

Balance, January 31

 

5,995,750

 

5,995,750

 

 

NOTE 10—EARNINGS PER SHARE

 

Basic and diluted earnings per share are computed using the two-class method. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Per share amounts are computed by dividing net income attributable to common shareholders by the weighted average shares outstanding during each period.

 

The basic earnings (loss) per common share were computed as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

    

January 31, 2020

    

January 31, 2019

    

January 31, 2020

    

January 31, 2019

Net income (loss)

 

$

(436,000)

 

$

(406,000)

 

$

314,000

 

$

(417,000)

Amounts allocated to participating securities (nonvested restricted shares)

 

 

 —

 

 

 —

 

 

(38,000)

 

 

 —

Net income (loss) attributable to common shareholders

 

$

(436,000)

 

$

(406,000)

 

$

276,000

 

$

(417,000)

Basic weighted average common shares

 

 

5,265,750

 

 

5,265,750

 

 

5,265,750

 

 

5,265,750

Earnings (loss) per share attributable to common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

(0.08)

 

$

(0.08)

 

$

0.05

 

$

(0.08)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASC 260, Earnings per Share, provides that unvested share-based payment awards that contain non-forfeitable rights to dividends are considered to be participating securities and must be considered in the computation of earnings per share pursuant to the two-class method.  Diluted earnings per share is not presented as we do not have any shares considered incremental and dilutive.

 

 

 

NOTE 11—CONTRACT ASSETS

 

For each of our contracts, the timing of revenue recognition, customer billings, and cash collections results in a net contract asset or liability at the end of each reporting period. Contract assets consist of unbilled receivables typically resulting from revenue recognition under contracts when either control has passed to the customer but the product has not yet shipped or the percentage-of-completion of revenue recognition is utilized when revenue recognized exceeds the amount billed to the customer for any project-related services, utilizing labor as the input method.

 

 

 

 

 

 

 

 

 

 

 

    

January 31, 2020

    

April 30, 2019