TEL INSTRUMENT ELECTRONICS CORP - Quarter Report: 2020 December (Form 10-Q)

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: December 31, 2020

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

Commission File Number: 001-31990

TEL-INSTRUMENT ELECTRONICS CORP.

(Exact name of registrant as specified in its charter)

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

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 past 12 months, 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, 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.

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 Exchange Act).  Yes ☐   No ☒

As of February 12, 2021, there were 3,255,887 shares outstanding of the registrant’s common stock. 

TEL-INSTRUMENT ELECTRONICS CORP.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1.  Unaudited Condensed Consolidated Financial Statements.

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to unaudited condensed consolidated financial statements.

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three Months Ended December 31, 2020 and 2019

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Nine Months Ended December 31, 2020 and 2019

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Supplemental disclosure of non-cash financing activities: 

See accompanying notes to unaudited condensed consolidated financial statements.

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 few years.

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

The Company’s operations have been affected by the recent and ongoing outbreak of the coronavirus disease 2019 (COVID-19) which in March 2020, was declared a pandemic by the World Health Organization. While the business is still strong, we have been impacted by the pandemic in our commercial business and delays in orders from some of our military customers. The pandemic has also impacted our supply chain and our labor force with disruptions to both the delivery of critical inventory components and personal shortages due to COVID quarantines. Our international business remains strong mainly due to our Mode 5 test sets, including our T-47/M5, which has received AIMS (Air Traffic Control Radar Beacon System, Identification Friend or Foe, Mark XII/Mark XIIA, Systems) approval, our CRAFT products, especially for Lockheed Martin for the Joint Strike Fighter (“JSF”) program, and the T-4530i and the TS-4530A. The ultimate disruption which may be caused by the outbreak is uncertain; however, it may result in a material adverse impact on the Company’s financial position, operations and cash flows. Possible areas that may be affected include, but are not limited to, disruption to the Company’s customers and revenue, labor workforce, inability of customers to pay outstanding accounts receivable due and owing to the Company as they limit or shut down their businesses,  customers seeking relief or  extended payment plans relating to accounts receivable due and owing to the Company, unavailability of products and supplies used in operations, and the decline in value of assets held by the Company, including property and equipment.

Moving forward, we believe that our expected cash flows from operations and current cash balances at December 31, 2020, which amounted to approximately $5.0 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 financial statements, including any payments for settlement of the litigation (see Note 12).

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Tel-Instrument Electronics Corp. as of December 31, 2020, the results of operations and changes in stockholders’ equity for the three and nine months ended December 31, 2020 and December 31, 2019, and statements of cash flows for the nine months ended December 31, 2020 and December 31, 2019.  These results are not necessarily indicative of the results to be expected for the full year.  The unaudited condensed consolidated financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include disclosures normally made in an Annual Report on Form 10-K.  The March 31, 2020 balance sheet included herein was derived from the audited financial statements included in the Company’s Annual Report on Form 10-K as of that date.  Accordingly, the unaudited condensed consolidated financial statements included herein should be reviewed in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020, as filed with the United States Securities and Exchange Commission (the “SEC”) on June 29, 2020 (the “Annual Report”).

Revenue Recognition

The Company accounts for revenue recognition in accordance with ASC 606. The core principle of Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASC 606 defines a five-step process to achieve the core principal and, in doing so, it is possible more judgement and estimates may be required within the revenue recognition process than are currently in use. 

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2 – Summary of Significant Accounting Policies (continued)

Revenue Recognition (continued)

The Company generates revenue from designing, manufacturing and selling avionic tests and measurement solutions for the global commercial air transport, general aviation, and government/military aerospace and defense markets. The Company also offers calibration and repair services for a wide range of airborne navigation and communication equipment. 

Under ASU 2014-09 Topic 606, Revenue from Contacts with Customers (“ASC 606”), the Company recognizes revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration which is expected to be received in exchange for those goods or services. The Company recognizes revenue following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Nature of goods and services

The following is a description of the products and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each.

Test Units/Sets

The Company develops and manufactures unit sets to test navigation and communication equipment, such as ramp testers and bench testers for equipment installed in aircraft. The Company recognizes revenue when the customer obtains control of the Company’s product based on the contractual shipping terms of the contract, which is usually at the time of shipment. Revenue on products are presented gross because the Company is primarily responsible for fulfilling the promise to provide the product, is responsible to ensure that the product is produced in accordance with the related supply agreement, and bears the risk of loss while the inventory is in-transit. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products to the customer.

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines stand-alone selling prices based on the price at which the performance obligation is sold separately. If the stand-alone 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.

When determining the transaction price of a contract, an adjustment is made if payment from the customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component as of December 31, 2020.

Replacement Parts

The Company offers replacement parts for test equipment, ramp testers, and bench testers. Similar to the sale of test units, the control of the product transfers at a point of time and therefore, revenue is recognized at the point in time when the obligation to the customer has been fulfilled.

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2 – Summary of Significant Accounting Policies (continued)

Revenue Recognition (continued)

Extended Warranties

The extended warranties sold by the Company provide a level of assurance beyond the coverage for defects that existed at the time of a sale or against certain types of covered damage with coverage terms generally ranging from 5 to 7 years. Amounts received for warranties are recorded as deferred revenue and recognized as revenue ratably over the respective term of the agreements. As of December 31, 2020, $367,718 is expected to be recognized from remaining performance obligations for extended warranties as compared to $413,554 at March 31, 2020. For the three and nine months ended December 31, 2020, the Company recognized revenue of $22,140 and $66,420, respectively, from amounts that were included in Deferred Revenue as compared to $22,431 and $63,171, respectively, from amounts that were included in Deferred Revenue for the three and nine months ended December 31, 2019.

The following table provides a summary of the changes in deferred revenues for the nine months ended December 31, 2020:

Other Deferred Revenues

The Company sometimes receives payments in advance of shipment. These amounts are classified as other deferred revenues. For the periods ended December 31, 2020 and March 31, 2020, the Company has other deferred revenues of $49,604 and $58,746, respectively.

Repair and Calibration Services

The Company offers repair and calibration services for units that are returned for annual calibrations and/or for repairs after the warranty period has expired. The Company repairs and calibrates a wide range of airborne navigation and communication equipment. Revenue is recognized at the time the repaired or calibrated unit is shipped back to the customer, as it is at this time that the work is completed.

Other

The majority of the Company’s revenues are from contracts with the U.S. government, airlines, aircraft manufacturers, such as Boeing and Lockheed Martin, domestic distributors, international distributors for sales to military and commercial customers, and other commercial customers. The contracts with the U.S. government typically are subject to the Federal Acquisition Regulation (“FAR”) which provides guidance on the types of costs that are allowable in establishing prices for goods and services provided under U.S. government contracts.

Payment terms and conditions vary by contract, although terms generally include a requirement of payment within a range from 30 to 60 days, or in certain cases, up-front deposits. In circumstances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that the Company's contracts generally do not include a significant financing component. Payments received prior to the delivery of units or services performed are recorded as deferred revenues. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from sales. The Company applied the practical expedient to account for shipping and handling activities as fulfillment cost rather than as a separate performance obligation. Shipping and handling costs charged to customers are classified as sales, and the shipping and handling costs incurred are included in cost of sales. 

All sales are denominated in U.S. dollars.

The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers.

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2 – Summary of Significant Accounting Policies (continued)

Revenue Recognition (continued)

Other (continued)

The Company chose to apply the available practical expedient as commission eligible sales orders are fulfilled within less than one year and commissions are generally paid by the Company within 30 days of the related sales order fulfillment. Accordingly, management has determined that no change in accounting for costs to obtain a contract will be required for the Company to conform to ASC 606.

Disaggregation of revenue

In the following tables, revenue is disaggregated by revenue category.

The remainder of our revenues for the three months ended December 31, 2020 are derived from repairs and calibration of $273,388, replacement parts of $59,026, extended warranties of $22,140 and other revenues of $1,335. We do not disaggregate these revenue streams as they are not deemed an important element related to how management operates the business between segments.

The remainder of our revenues for the three months ended December 31, 2019 are derived from repairs and calibration of $368,722, replacement parts of $151,065 and extended warranties of $22,514. We do not disaggregate these revenue streams as they are not deemed an important element related to how management operates the business between segments.

The remainder of our revenues for the nine months ended December 31, 2020 are derived from repairs and calibration of $762,828, replacement parts of $82,796, extended warranties of $66,420 and other revenues of $58,087. We do not disaggregate these revenue streams as they are not deemed an important element related to how management operates the business between segments.

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2 – Summary of Significant Accounting Policies (continued)

Revenue Recognition (continued)

Disaggregation of revenue (continued)

The remainder of our revenues for the nine months ended December 31, 2019 are derived from repairs and calibration of $1,265,978, replacement parts of $309,135 and extended warranties of $63,171. We do not disaggregate these revenue streams as they are not deemed an important element related to how management operates the business between segments.

In the following table, revenue is disaggregated by geography.

For the three and nine months ended December 31, 2020, Muirhead Avionics, the Company’s distributor for Western Europe accounted for sales of $681,293 and $3,234,035, respectively, as compared to $1,406,243 and $2,080,527for the three and nine months ended December 31, 2019. One government customer (Lockheed Martin) represented 17% of sales for the three months ended December 31, 2020.

New Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments -Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements.  The amendment in this update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses on instruments within its scope, including trade receivables. This update is intended to provide financial statement users with more decision-useful information about the expected credit losses. The effective date of the new standard has been deferred to April 1, 2023. We do not expect the adoption of this standard to have a significant impact on our financial position and results of operations.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes - simplifying the accounting for income taxes (Topic 740), which is meant to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes.  The amendment also improves consistent application and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.  This ASU is effective April 1, 2021, and we do not expect the adoption of this standard to have a significant impact on our financial position and results of operations.

No other recently issued accounting pronouncements had or are expected to have a material impact on the Company’s unaudited condensed consolidated financial statements.

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 – Accounts Receivable, net

The following table sets forth the components of accounts receivable:

Note 4 – 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 12).

Note 5 – Inventories, net

Inventories consist of:

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 6 – Net Income per Share

Net income 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 divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS reflects the potential dilution that could occur if securities, including preferred stock, warrants and options, were converted into common stock. The dilutive effect of outstanding warrants and 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.

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 6 – Net Income per Share (continued)

The following table summarizes securities that, if exercised, would have an anti-dilutive effect on earnings per share for the three months ended:

The following table summarizes securities that, if exercised, would have an anti-dilutive effect on earnings per share for the nine months ended:

Note 7 – Line of Credit

In March 2020, Bank of America extended the line of credit to January 31, 2021. The new agreement includes a line of credit up to $690,000. Monthly payments are interest only. The line is collateralized by substantially all of the assets of the Company. 

In December 2020, the Company paid the balance of the line of credit in the amount of $680,000. As of December 31, 2020 and March 31, 2020, the outstanding balances were $-0- and $680,000, respectively.  As of December 31, 2020 the remaining availability under this line is $690,000.

The bank has extended the expiration of the line of credit to March 31, 2021 to allow time to complete the underwriting of the renewal.

Note 8 – SBA PPP Loan

On March 27, 2020, former President Trump signed the Coronavirus Aid, Relief and Economic Security (the “CARES Act”), which, among other things, outlines the provisions of the Paycheck Protection Program (the “PPP”). The Company determined that it met the criteria to be eligible to obtain a loan under the PPP because, among other reasons, in light of the COVID-19 outbreak and the uncertainty of economic conditions related thereto, the loan was considered necessary to support the Company’s ongoing operations and retain all its employees. In addition, former President Trump signed into law the Paycheck Protection Program and Health Care Enhancement Act on April 24, 2020, which increased funding provided by the CARES Act. On May 4, 2020 the Company issued a promissory note (the “Note”) to Bank of America in the principal aggregate amount of $722,577 (the “PPP Loan”) pursuant to the PPP under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The funds were deposited into the Company’s bank account on May 4, 2020. On June 5, 2020 the Paycheck Protection Program Flexibility Act was signed into law and extended the program until December 31, 2020.

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loan granted under the program. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. The PPP Loan had a two-year term and bears interest at a rate of 1% per annum. Monthly principal and interest payments are deferred for nine months after the date of disbursement. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. Based on the June 5, 2020 Paycheck Protection Program Flexibility Act, certain changes will need to be made to the original Note, based on the new law.

The Company submitted its application for 100% loan forgiveness in October 2020.

In December 2020 the loan was 100% forgiven by the SBA. As a result, the Company recorded a gain on the forgiveness of the loan in the amount of $722,577.

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 9 – 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 ending December 31, 2020 and 2019:

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 9 – Segment Information (continued)

Note 10 – 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, 2020. Future profitability in this competitive industry depends on continually obtaining and fulfilling new profitable sales agreements and modifying products.  The inability to obtain new profitable contracts or the failure of the Company’s engineering development efforts could reduce estimates of future profitability, which could affect the Company’s ability to realize the deferred tax assets.

The recognized deferred tax asset is based upon the expected utilization of its benefit from future taxable income. The Company has federal net operating loss (“NOL”) carryforwards of approximately $3.6 million. These carryforward losses are available to offset future taxable income, and begin to expire in the year 2027.

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 11 – Operating Lease Liability

The Company leases its facility in East Rutherford, NJ with monthly payments of $18,467 which expires in August 2021 and includes a renewal option for an additional five years. The Company also has an operating lease for office equipment with monthly payments of $523 which expires in May 2021.

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 used incremental borrowing rates as of April 1, 2019 for operating leases that commenced prior to that date. 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 6.25% at December 31, 2020.

The following table reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under non-cancelable operating leases with terms of more than one year to the total lease liabilities recognized on the unaudited condensed consolidated balance sheet as of December 31, 2020:

Total rent expense for the three and nine months ended December 31, 2020 was $90,920 and $272,725, respectively, as compared to $97,664 and $269,282 for the three and nine months ended December 31, 2019, respectively.

Note 12 – Litigation

Contingencies are recorded in the unaudited condensed consolidated financial statements when it is probable that a liability will be incurred and the amount of the loss is reasonably estimable, or otherwise disclosed, in accordance with Accounting Standards Codification 450, Contingencies (ASC 450). Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, the Company will, when applicable, adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss or if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.

On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court located in Sedgwick County, Kansas, Case No. 09 CV 1141 (the “Aeroflex Action”), alleging that the Company and its two employees misappropriated Aeroflex’s proprietary technology in connection with the Company winning a substantial contract from the U.S. Army, to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5 (the “Award”). Aeroflex’s petition, seeking injunctive relief and damages, alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with Aeroflex’s business relationship; conspired to harm Aeroflex and tortiously interfered with Aeroflex’s contract. The central basis of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology and confidential information in winning the Award.  In February 2009, subsequent to the Company winning the Award, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the U.S. Army Contracts Attorney and the U.S. Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed on Aeroflex’s proprietary technology in winning the Award, and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest.

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 12 – Litigation (continued)

In December 2009, the Kansas District Court dismissed the Aeroflex Action on jurisdiction grounds. Aeroflex appealed this decision. In May 2012, the Kansas Supreme Court reversed the decision and remanded the Aeroflex Action to the Kansas District Court for further proceedings. The case then entered an extended discovery period in the District Court.

On May 23, 2016, the Company filed a motion for summary judgment based on Aeroflex’s lack of jurisdictional standing to bring the case. The motion asserts that Aeroflex does not own the intellectual property at issue since it is a bare licensee of Northrop Grumman. Northrop Grumman has declined to join this suit as plaintiff. The motion asserted Aeroflex lacks standing to sue alone. Also, the motion raises the fact that Aeroflex allowed the license to expire, Aeroflex’s claims are either moot or Aeroflex lacks standing to sue for damages alleged to have accrued after the license ended in 2011. The motion for summary judgment was denied.

The Aeroflex trial on remand in the Kansas District Court began in March 2017. After a nine-week trial, the jury rendered its verdict. The jury found no misappropriation of Aeroflex trade secrets but found that the Company tortiously interfered with a prospective business opportunity and awarded damages of $1.3 million for lost profits. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees and awarded damages of $1.5 million for lost profits, resulting in total damages against the Company of $2.8 million. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex and awarded damages against these two individuals totaling $525,000. The jury also decided that punitive damages should be allowed against the Company.

Following the verdict, the Company filed a motion for judgment as a matter of law. In the motion, the Company renewed its motion for judgment on Aeroflex’s tortious interference with prospective business opportunity claim arguing that such claim is barred by the statute of limitations. Alternatively, the motion asserts there is insufficient evidence supporting the lost profit award on that claim.  Additionally, the motion for judgment addresses inconsistency between the awards against the former Aeroflex employees for breach of the non-disclosure agreements and the award against the Company for interfering with those agreements. Alternatively, the motion asserts there is insufficient evidence supporting the lost profit award on that claim.

During July 2017, the Court heard the Company’s motion for judgment as well as conducting a hearing as to the amount of a punitive damages award. Kansas statutes limit punitive damages to a maximum of $5 million.

Aeroflex submitted a motion to the Court requesting that the judge award punitive damages at the maximum $5 million amount. In October 2017, the Court denied the Company’s motions and awarded Aeroflex an additional $2.1 million of punitive damages, which brings the total Tel damages awarded in this case to approximately $4.9 million.

The Journal Entry of Judgment including judgment against the Company in the amount of $1.3 million for tortious interference with prospective business advantage, of $1.5 million for tortious interference with existing contracts, and $2.1 million in punitive damages was entered on November 22, 2017. Pursuant to K.S.A. 16-204(d) “any judgment rendered by a court of this state on or after July 1, 1986, shall bear interest on and after the day on which judgment is rendered at the rate provided by subsection (e). The Kansas Secretary of State publishes the rate amount. The amount published for July 1, 2017 through June 30, 2018 is 5.75%, 6.5% July 1, 2018 through June 30, 2019, 7.0% July 1, 2019 through June 30, 2020, and 4.25% July 1, 2020 through June 30, 2021. Interest on the $4,900,000 judgment started to accrue on November 22, 2017, the date the judgment was entered. As of December 31, 2020, the outstanding amount of the judgement and accrued interest is $5,837,673.

The Company filed post-trial motions to avoid damage duplication and inconsistency, and to secure judgment as a matter of law or a new trial. The trial court denied those motions. The Company appealed the verdict and the post-trial rulings to the Court of Appeals of the State of Kansas, Case No. 18-119,563. The Company posted a $2 million supersedeas bond. The Plaintiff filed a cross-appeal. The appeal and cross-appeal are fully briefed. The appellate court has not set a date to hear the appeal.

The Company is very optimistic about the prospects of its appeal for a judgment as a matter of law. The Company was hoping for a decision from the court this calendar year but this timing will likely be delayed due to the ongoing COVID-19 related shutdown of the Kansas court system. As such, the appeal process is expected to take at least another year to complete.

The Company has the ability to settle this case at its sole discretion by withdrawing the appeal and paying the judgment plus interest amount.

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 12 – Litigation (continued)

Other than the matters outlined above, the Company is currently not involved in any litigation that we believe could have a material adverse effect on the Company’s financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of executive officers of the Company, threatened against or affecting the Company, or its common stock in which an adverse decision could have a material effect.

Note 13 – Subsequent Event

Effective February 8, 2021, Tel-Instrument Electronics Corp. hired Pauline Romeo to serve as the Company’s Principal Accounting Officer.

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

Forward Looking Statements

This Quarterly Report on Form 10-Q and other reports filed by the Company from time to time with the SEC (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 income of $499,633 and $833,361 and net sales of $2,672,742 and $8,948,575 for the three and nine months ended December 31, 2020, respectively, as compared to net income of $907,577 and $1,701,587 and net sales of $4,733,135 and $11,951,765 for the same three and nine month periods in the prior fiscal year, respectively. Profitability for the three and nine months ended December 31, 2020 was positively impacted by the forgiveness of the PPP Loan (defined below) in the amount of $722,577. While we believe the business is still strong, we have been impacted by the COVID-19 pandemic in our commercial business and delays in orders from some of our military customers. The quarter ended December 31, 2020 was also impacted by delays from our supply chain which resulted in lower shipments for the quarter. Our international business remains strong mainly due to our Mode 5 test sets, including our T-47/M5, which has received AIMS (Air Traffic Control Radar Beacon System, Identification Friend or Foe, Mark XII/Mark XIIA, Systems) approval, our CRAFT products, and the T-4530i and the TS-4530A. Our international sales have increased over 200% to $5,106,312 for the nine months ended December 31, 2020 as compared to the same period last year. We have received large orders for our Mode 5 test sets from Germany, the United Kingdom, Australia, Japan, South Korea, Poland, Canada and orders from 12 other countries. We believe the Mode 5 market will remain strong for the next couple of years. The Company is also the dominant supplier for Mode 5 test sets to the U.S. Military. In January 2021 the Company received two large orders totaling over $2 million for its legacy and CRAFT products.

The Company continues to pursue opportunities in the international market for our Mode 5 test sets with good success. We continue to emphasize the importance of capturing the majority share of the large Identification Friend or Foe (“IFF”) international market. The Company is also in discussions with other major international customers that have evaluated our Mode 5 test sets and we are excited about the opportunities overseas.

The Company also sells it Mode 5 test sets to Lockheed Martin for the Joint Strike Fighter (“JSF”) program, and we believe this program will generate significant CRAFT orders as this program ramps up limited rate production. The Company had already received and shipped orders from Lockheed Martin for the AN/USM-708 units, for the JSF Program, totaling over $6 million. Sikorsky has also indicated that it will be ordering CRAFT test sets for its new helicopters. The Company also received orders from other customers for this product.

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

Overview (continued)

The Company has built a solid position in the Mode 5 IFF flight line test equipment market, and we believe our products are very competitive in the overseas markets. We believe that we are well-positioned as our CRAFT and TS-4530A flight-line test sets have been endorsed by the U.S. military and we have already delivered test sets into 18 international markets.

The Company had been awarded a $956,000 contract from Lockheed Martin to support the F-35 Joint Strike Fighter. This is a competitively bid development contract to design a “go-no-go” test set for the F-35 advanced communication systems. The system will involve much higher frequency levels than what TIC has worked with in the past and is a testament to our engineering team who came up with a winning design concept. The contract includes eight engineering qualification test sets with an initial option for 50 production test sets upon the completion of the development program. This development program has been going extremely well and TIC had been preparing for the Critical Design Review (“CDR”) in mid-February until we were notified last week by Lockheed Martin that the program has been put on hold due to cash issues. It is our hope that this funding issue will be resolved in the near future and we still plan to complete the development and testing work this calendar year. If the program is not turned back on in the near-term, TIC has the ability to submit an invoice for all engineering work performed on the contract.

The Company also received a $722,577 government loan from the Payroll Protection Program in May 2020 (the “PPP Loan”). The PPP Loan has allowed us to continue development work on the SDR/OMNI test set despite the uncertain outlook for commercial aviation market. In December 2020, the full amount of the PPP Loan was forgiven by the SBA.

We continue to be excited about our new lightweight, hand-held product (the “SDR/OMNI”) that we are planning to introduce this year. This new SDR/OMNI technology should provide us with the opportunity to expand out of our relatively narrow avionics test market niche and enter the much larger secure communications radio test market. We believe that our new hardware platform provides unmatched capabilities in a market leading form factor. The world’s first “All-in-One” Avionics Test Set utilizes true software-designed radio technology that enables it to test all common avionics functions in one 4.5-pound test set. The SDR/OMNI has very wide frequency to accommodate new commercial and military waveforms. This is half the weight of competitive test sets. 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. With the significant disruption in the commercial avionics market caused by the COVID pandemic, the Company has shifted its engineering focus to the military communications test set market which will be the initial product release. This is a much larger market than our traditional avionics market and the SDR/OMNI is ideally situated to gain market share in this segment. We are also continuing work on the ill be a commercial avionics air traffic control test set but the introduction of this test set will be delayed until later this year.

We are also working closely with our other military customers on new potential market opportunities that will be needed to maintain our sales and profitability growth. We are in discussions with an existing customer on a new test set that should generate significant revenues and profitability starting in the next fiscal year.

The Aeroflex litigation (see Note 12 to the Unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report) did not result in a favorable outcome for the Company, despite our belief that we committed no wrong-doing.

The jury found no misappropriation of Aeroflex trade secrets but it found 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 amount 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 has filed for the appeal. The Company has posted a $2 million bond for the appeal. This $2 million bond amount will remain in place during the appeal process (See Note 12 to the Unaudited Condensed Consolidated Financial Statements). The Company believes it has solid grounds to appeal this verdict and believes it has submitted strong legal arguments to vacate the decision. However, the Company cannot predict the timing or the outcome of the appeal. The Company is very optimistic about the prospects of its appeal for a judgment as a matter of law. The Company was hoping for a decision from the court this calendar year, but this timing will likely be delayed due to the three month COVID-19 related shutdown of the Kansas court system. As such, the appeal process is expected to take at least another year to complete.

The Company has the ability to settle this case at its sole discretion by withdrawing the appeal and paying the judgment plus interest amount.

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

Overview (continued)

We believe that our expected cash flows from operations, based on our open orders, current projections, and current cash balances, which amounted to approximately $5.0 million, including the $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 financial statements, including any required payments for settlement of the litigation (see liquidity section below).

In December 2020, the Company paid the balance of the line of credit in the amount of $680,000. As of December 31, 2020 and March 31, 2020, the outstanding balances were $-0- and $680,000, respectively.  As of December 31, 2020 the remaining availability under this line is $690,000. The bank has extended the expiration of the line of credit to March 31, 2021 to allow time to complete the underwriting of the renewal.

At December 31, 2020, the Company’s backlog of orders was approximately $5.7 million as compared to $4.2 million at December 31, 2019. Historically, the Company obtains orders which are required to be filled in less than 12 months, and therefore, these anticipated orders are not reflected in the backlog. In January 2021, the Company received two major contracts for our legacy test sets totaling over $2 million.

Results of Operations

Sales

For the three and nine months ended December 31, 2020, net sales decreased $2,060,393 (43.5%) and $3,003,190 (25.1%) to $2,672,742 and $8,948,575, respectively, as compared to $4,733,135, and $11,951,765 for the three and nine months ended December 31, 2019, respectively.

Avionics government sales decreased $1,707,098 (43.6%) to $2,212,507 for the three months ended December 31, 2020 as compared to $3,919,605 for the three ended December 31, 2019. The decline in sales is primarily attributed to the decrease in international sales. International sales declined $1,358,132 (51%) to $1,304,644 for the three months ended December 31, 2020 as compared to $2,662,796 for the three months ended December 31, 2019, primarily as a result of the decrease in the sales of the T-4530i for which the Company shipped a large order to the German military last year during the three months ended December 31, 2019.

Avionics government sales decreased $1,812,263 (18.9%) to $7,751,936 for the nine months ended December 31, 2020 as compared to $9,564,199 for the nine months ended December 31, 2019. This decrease in sales is primarily attributed to the decrease in shipment of our AN/USM-708 test set to Lockheed for the F-35 program, AN/USM-719 and TS-4530A Mode 5 test sets to the U.S. Government, and shipments to the German military of our T-4530i offset partially by increased sales of our T-47/M5 Dual Crypto test set.

Commercial sales decreased $353,295 (43.4%) and $1,190,927 (49.9%) to $460,335 and $1,196,639 for the three and nine months ended December 31, 2020 as compared to $813,530 and $2,387,566 for the three and nine months ended December 31, 2019. Our commercial business has been seriously impacted by the COVID-19 pandemic. The unprecedented and rapid spread of COVID-19 and the related travel restrictions and social distancing measures implemented throughout the world have significantly reduced demand for air travel and test set support equipment. 

Gross Margin

For the three and nine months ended December 31, 2020, total gross margin decreased $1,201,393 (54.3%) and $1,785,196 (31.5%) to $1,011,089 and $3,882,523 as compared to $2,212,482 and $5,667,719 for the three and nine months ended December 31, 2019 primarily as a result of the decrease in volume and lower net prices as a result of competition internationally. The gross margin percentage for the three months ended December 31, 2020 was 37.8% as compared to 46.7% for the three months ended December 31, 2019. The gross margin percentage for the nine months ended December 31, 2020 was 43.4% as compared to 47.4% for the three months ended December 31, 2019.

Operating Expenses

Selling, general and administrative expenses increased $131,302 (21.5%) and $19,728 (1.1%) to $740,896 and $1,866,756 for the three and nine months ended December 31, 2020 as compared to $609,394 and $1,847,028 for the three and nine months ended December 31, 2019. The increase is primarily attributed to the one time increase in professional fees partially offset by lower profit sharing and consulting fees.

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

Results of Operations (continued)

Operating Expenses (continued)

Litigation costs decreased $14,832 and $108,682 to $1,998 and $10,208 for the three and nine months ended December 31, 2020 as compared to $16,830 and $118,890 for the three and nine months ended December 31, 2019. This decrease reflects decreased activity related to the litigation (see Notes 4 and 12 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. Our attorneys estimate that it will take at least a year from now for this appeal to work its way through the Kansas court system. The pandemic has affected the judicial system and its efforts to resolve open actions have therefor been delayed.

Engineering, research and development expenses decreased $88,085 (15.2%) to $492,432 for the three months ended December 31, 2020 as compared to $580,517 for the three months ended December 31, 2019. While total engineering expense has increased as a result of our increased engineering activities, including the development of a “go-no-go” test set for the F-35 advanced communication systems under a funded program from Lockheed Martin.  The decrease in total engineering expenditures is related to more time being spent on revenue producing contracts by the engineering department in this period.

Engineering, research and development expenses increased $47,581 (2.9%) to $1,678,940 for the nine months ended December 31, 2020 as compared to $1,631,359 for the nine months ended December 31, 2019. Total engineering expense has increased as a result of our increased engineering activities, including the development of a “go-no-go” test set for the F-35 advanced communication systems under a funded program from Lockheed Martin. The increase in overall engineering expense was offset partially by  more time being spent on revenue producing contracts by the engineering department in this period.

The Company continues to invest heavily in the development of the Company’s SDR/OMNI hand-held product line utilizing CRAFT and TS-4531A technology, the T-4530i, and the incorporation of other product enhancements in existing designs.

Income from Operations

As a result of the above, the Company recorded a loss from operation of $224,037 for the three months ended December 31, 2020 as compared to income from operations of $1,005,741 for the three months ended December 2019. For the nine months ended December 31 2020 the Company recorded income from operations of $326,619 as compared to $2,070,442 for the nine months ended December 31, 2019.

Other Income (Expense), Net

For the three months ended December 31, 2020, total other income was $664,406 as compared to other expense of $98,164 for the three months ended December 31, 2019 primarily the result of the forgiveness of the PPP loan by the SBA. For the nine months ended December 31, 2020, total other income was $536,191 as compared to other expense of $368,855 for the nine months ended December 31, 2019 primarily the result of the of the forgiveness of the PPP loan by the SBA and the change in the fair value of the common stock warrants and the lower interest expense related to the judgement as a result of the lower interest rate.

Income before Income Taxes

As a result of the above, the Company recorded income before taxes of $440,369 and $862,810 for the three and nine months ended December 31, 2020 as compared to income before taxes of $907,577 and $1,701,587 for the three and nine months ended December 31, 2019.

Income Taxes

For the three months ended December 31, 2020, the Company recorded an income tax benefit of $59,264, as a result of the Company’s taxable loss for the quarter as the forgiveness of the PPP loan is not a taxable event, as compared to $-0- for the three months ended December 31, 2019. For the nine months ended December 31, 2020, the Company recorded income tax expense of $29,449 as compared to $-0- for the three months ended December 31, 2019. For the three and nine months ended December 31, 2019, the Company recorded no income tax benefit as such amounts were offset by a valuation allowance.

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

Net Income

As a result of the above, the Company recorded net income of $499,633 and $833,361 for the three and nine months ended December 31, 2020 as compared to net income of $907,577 and $1,701,587 for the three and months ended December 31, 2019. 

Liquidity and Capital Resources

At December 31, 2020, the Company had net working capital of $2,764,368 including accrued legal damages related to the Aeroflex litigation of $5,837,673, as compared to working capital of $1,776,176 at March 31, 2020. This change is primarily the result of the and lower accounts payable and payment of the line of credit as well as cash received from the PPP loan, which was forgiven by the SBA.

During the nine months ended December 31, 2020, the Company’s cash balance (including the $2 million in restricted cash for the appeal) decreased by $181,958 to $4,952,781.  The Company’s principal sources and uses of funds were as follows:

Cash (used in) provided by operating activities. For the nine months ended December 31, 2020, the Company used $159,346 in cash for operations as compared to providing $1,397,374 in cash from operations for the nine months ended December 31, 2019.  This increase in cash used for operations is mostly attributed to the lower operating income.

Cash used in investing activities.  For the nine months ended December 31, 2020, the Company used $65,140 of its cash for investment activities, as compared to $102,341 for the nine months ended December 31, 2019, as a result of a decrease in the purchase of capital equipment.

Cash provided by (used in) financing activities. For the nine months ended December 31, 2020, the Company provided $42,528 in cash from financing activities as compared to using $211,450 for the nine months ended December 31, 2019. This increase is the due to the proceeds received from the SBA PPP Loan program offset mostly by the payment of the line of credit. During the nine months ended December 2019 the Company also paid the warrant liability in the amount of $116,500.

In March 2020, Bank of America extended the line of credit to January 31, 2021. The new agreement includes a line of credit up to $690,000. Monthly payments are interest only. The line is collateralized by substantially all of the assets of the Company. 

In December 2020, the Company paid the balance of the line of credit in the amount of $680,000. As of December 31, 2020 and March 31, 2020, the outstanding balances were $-0- and $680,000, respectively.  As of December 31, 2020 the remaining availability under this line is $690,000.

The bank has extended the expiration of the line of credit to March 31, 2021 to allow time to complete the underwriting of the renewal.

On March 27, 2020, former President Trump signed the Coronavirus Aid, Relief and Economic Security (the “CARES Act”), which, among other things, outlines the provisions of the Paycheck Protection Program (the “PPP”). The Company determined that it met the criteria to be eligible to obtain a loan under the PPP because, among other reasons, in light of the COVID-19 outbreak and the uncertainty of economic conditions related thereto, the loan was considered necessary to support the Company’s ongoing operations and retain all its employees. In addition, former President Trump signed into law the Paycheck Protection Program and Health Care Enhancement Act on April 24, 2020, which increased funding provided by the CARES Act. On May 4, 2020 the Company issued a promissory note (the “Note”) to Bank of America in the principal aggregate amount of $722,577 (the “PPP Loan”) pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The amount was deposited in our bank on May 4, 2020. On June 5, 2020 the Paycheck Protection Program Flexibility Act was signed into law and extended the program until December 31, 2020.

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loan granted under the program. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. The PPP Loan had a two-year term and bears interest at a rate of 1% per annum. Monthly principal and interest payments are deferred for nine months after the date of disbursement. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. Based on the June 5, 2020 Paycheck Protection Program Flexibility Act, certain changes will need to be made to the original Note, based on the new law. The Company submitted its application for 100% loan forgiveness in October 2020. The loan has allowed us to continue development work on the SDR/OMNI test set despite the uncertain outlook for commercial aviation market. In December 2020 the loan was 100% forgiven by the SBA.

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

Liquidity and Capital Resources

Moving forward, we believe that our expected cash flows from operations and current cash balances, which amounted to approximately $5.0 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 financial statements, including any payments for settlement of the litigation.

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

There was no significant impact on the Company’s operations as a result of inflation for the nine months ended December 31, 2020.

These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020, filed with the SEC on June 29, 2020 (the “Annual Report”).

Off-Balance Sheet Arrangements

As of December 31, 2020, 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 2020 consolidated financial statements included in our Annual Report.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

We do not hold any derivative instruments and do not engage in any hedging activities.

Item 4.  Controls and Procedures.

(a)          Evaluation of Disclosure Controls and Procedures

The Company, including its principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective. Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include controls and procedures designed to reasonably ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b)          Changes in Internal Control over Financial Reporting

The Company, including its principal executive officer and principal financial officer, reviewed the Company’s internal control over financial reporting, pursuant to Rule 13(a)-15(e) under the Exchange Act and concluded that there was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Effective February 8, 2021, Tel-Instrument Electronics Corp. hired Pauline Romeo to serve as the Company’s Principal Accounting Officer.

PART II – OTHER INFORMATION

Item 1.  Legal Proceedings.

The Aeroflex litigation (see Note 12 to the Unaudited Condensed Consolidated Financial Statements ) did not result in a favorable outcome for the Company, despite our belief that we committed no wrong-doing.

The jury found no misappropriation of Aeroflex trade secrets but found 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 amount 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 has filed for the appeal. The Company has posted a $2 million bond for the appeal. This $2 million bond amount will remain in place during the appeal process (See Note 4).

As reflected in the accompanying unaudited condensed consolidated balance sheet as of December 31, 2020, the Company has recorded estimated damages to date of $5.8 million, including interest, as a result of a jury verdict associated with the Aeroflex litigation. The Company has filed for an appeal (see Notes 4 and 12). As of December 31, 2020, the Company has cash balances of $5.0 million, including $2 million of restricted cash as well as $2.0 million in accounts receivable. We expect to continue to have sufficient cash to fully cover the Aeroflex damages amount.

The Company is very optimistic about the prospects of its appeal for a judgment as a matter of law. The Company was hoping for a decision from the court this calendar year but this timing will likely be delayed due to the three-month COVID-19 related shutdown of the Kansas court system. 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.

Other than the matters outlined above, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of executive officers of our Company, threatened against or affecting our Company, or our common stock in which an adverse decision could have a material effect.

Item 1A.  Risk Factors.

We believe there are no changes that constitute material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020, filed with the SEC on June 29, 2020.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.

There were no unregistered sales of the Company’s equity securities during the quarter ended December 31, 2020.

Item 3.   Defaults upon Senior Securities.

There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.

Item 4.   Mine Safety Disclosures.

Not applicable.  

Item 5.  Other Information.

There is no other information required to be disclosed under this item which was not previously disclosed.

Item 6.  Exhibits.

* Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.