TEL INSTRUMENT ELECTRONICS CORP - Quarter Report: 2023 September (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: September 30, 2023

☐ 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)

New Jersey

22-1441806

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

One Branca Road

East Rutherford, NJ 07073

(Address of principal executive offices)

(201) 933-1600

(Registrant’s telephone number, including area code)

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
N/A		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 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.

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 Exchange Act). Yes ☐ No ☒

As of November 13, 2023, there were 3,255,887 shares outstanding of the registrant’s common stock.

TEL-INSTRUMENT ELECTRONICS CORP.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
		Page
Item 1.	Unaudited Condensed Consolidated Financial Statements.	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	25

Item 4.	Controls and Procedures.	25

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings.	26

Item 1A.	Risk Factors.	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	26

Item 3.	Defaults Upon Senior Securities.	26

Item 4.	Mine Safety Disclosures.	26

Item 5.	Other Information.	26

Item 6.	Exhibits.	27

Signatures		28

PART I – FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements.

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2023			March 31, 2023
	(unaudited)
ASSETS

Current assets:
Cash	$	356,942		$	3,839,398
Accounts receivable, net		941,826			900,881
Inventories, net		4,102,786			3,586,065
Restricted cash to support appeal bond		-			2,011,083
Prepaid expenses and other current assets		233,670			817,625
Total current assets		5,635,224			11,155,052

Equipment and leasehold improvements, net		93,194			85,167
Operating lease right-of-use assets		1,426,491			1,526,551
Deferred tax asset, net		2,720,638			2,627,935
Other long-term assets		35,109			35,109
Total assets	$	9,910,656		$	15,429,814

LIABILITIES & STOCKHOLDERS’ EQUITY

Current liabilities:
Line of credit	$	690,000		$	690,000
Operating lease liabilities – current portion		206,060			202,087
Accounts payable		607,564			322,582
Deferred revenues - current portion		132,345			123,117
Accrued expenses ‐vacation pay, payroll and payroll withholdings		307,757			240,034
Accrued legal damages		-			6,360,698
Accrued expenses - other		186,553			157,896
Total current liabilities		2,130,279			8,096,414

Operating lease liabilities – long-term		1,220,431			1,324,464
Other long term liabilities		49,459			53,416
Deferred revenues – long-term		142,497			173,883

Total liabilities		3,542,666			9,648,177

Commitments and contingencies

Stockholders’ equity:
Preferred stock, 1,000,000 shares authorized, par value $0.10 per share
Preferred stock, 500,000 shares 8% Cumulative Series A Convertible Preferred authorized, issued and outstanding, par value $0.10 per share		3,995,998			3,875,998
Preferred stock, 302,000 shares 8% Cumulative Series B Convertible Preferred authorized, 233,224 and 166,667 issued and outstanding, respectively, par value $0.1 per share		1,648,701			1,207,367
Preferred stock, 166,667 shares 8% Cumulative Series C Convertible Preferred authorized 53,500 and 0 issued and outstanding, Par value $0.10 per share		322,375			-
Common stock, 7,000,000 shares authorized, par value $0.10 per share, 3,255,887 and 3,255,887 shares issued and outstanding, respectively		325,586			325,586
Additional paid-in capital		6,564,040			6,721,535
Accumulated deficit		(6,488,710	)		(6,348,849	)
Total stockholders’ equity		6,367,990			5,781,637
Total liabilities and stockholders’ equity	$	9,910,656		$	15,429,814

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Six Months Ended
	September 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022

Net sales	$	1,565,094		$	2,012,758		$	4,432,024		$	4,266,515
Cost of sales		1,205,610			1,459,286			2,777,990			2,877,858

Gross margin		359,484			553,472			1,654,034			1,388,657

Operating expenses:
Selling, general and administrative		521,070			479,253			1,105,928			1,036,186
Engineering, research, and development		317,715			609,636			607,155			1,131,739
Total operating expenses		838,785			1,088,889			1,713,083			2,167,925

Loss from operations		(479,301	)		(535,417	)		(59,049	)		(779,268	)

Other income (expense):
Interest income		12,320			2,137			51,609			3,123
Interest expense – judgement		(128,290	)		(71,016	)		(198,535	)		(122,936	)
Interest expense – other		(13,133	)		-			(26,587	)		-
Total other net (expense) income		(129,103	)		(68,879	)		(173,513	)		(119,813	)

Loss before income taxes		(608,404	)		(604,296	)		(232,562	)		(899,081	)

Income tax benefit		(173,251	)		(126,928	)		(92,701	)		(188,844	)

Net loss		(435,153	)		(477,368	)		(139,861	)		(710,237	)

Preferred dividends		(82,708	)		(80,000	)		(162,708	)		(160,000	)

Net loss attributable to common shareholders	$	(517,861	)	$	(557,368	)	$	(302,569	)	$	(870,237	)

Basic net loss per common share	$	(0.16	)	$	(0.17	)	$	(0.09	)	$	(0.27	)
Diluted net loss per common share	$	(0.16	)	$	(0.17	)	$	(0.09	)	$	(0.27	)

Weighted average shares outstanding:
Basic		3,255,887			3,255,887			3,255,887			3,255,887
Diluted		3,255,887			3,255,887			3,255,887			3,255,887

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three Months Ended September 30, 2023, and 2022

(Unaudited)

	Series A Convertible Preferred Stock				Series B Convertible Preferred Stock				Series C Convertible Preferred Stock				Common Stock
	# of Shares Issued		Amount		# of Shares Issued		Amount		# of Shares Issued		Amount		# of Shares Issued		Amount		Additional Paid-In Capital			Accumulated Deficit			Total
Balances at July 1, 2023		500,000	$	3,935,998		166,667	$	1,227,367		-		-		3,255,887	$	325,586	$	6,644,804		$	(6,053,557	)	$	6,080,198
8% Dividends on Preferred Stock		-		60,000		-		21,334		-		1,375		-		-		(82,709	)		-			-
Issuance of Series B and Series C Preferred Stock		-		-		66,667		400,000		53,500		321,000		-		-		-			-			721,000
Stock-based compensation		-		-		-		-		-		-		-		-		1,945			-			1,945
Net loss		-		-		-		-		-		-		-		-		-			(435,153	)		(435,153	)
Balances at September 30, 2023		500,000	$	3,995,998		233,334	$	1,648,701		53,500	$	322,375		3,255,887	$	325,586	$	6,564,040		$	(6,488,710	)	$	6,367,990

	Series A Convertible Preferred Stock				Series B Convertible Preferred Stock				Common Stock
	# of Shares Issued		Amount		# of Shares Issued		Amount		# of Shares Issued		Amount		Additional Paid-In Capital			Accumulated Deficit			Total
Balances at July 1, 2022		500,000	$	3,695,998		166,667	$	1,147,367		3,255,887	$	325,586	$	6,944,588		$	(6,193,173	)	$	5,920,366
8% Dividends on Preferred Stock		-		60,000		-		20,000		-		-		(80,000	)		-			-
Stock-based compensation		-		-		-		-		-		-		6,234			-			6,234
Net loss		-		-		-		-		-		-		-			(477,368	)		(477,368	)
Balances at September 30, 2022		500,000	$	3,755,998		166,667	$	1,167,367		3,255,887	$	325,586	$	6,870,822		$	(6,670,541	)	$	5,449,232

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Six Months Ended September 30, 2023, and 2022

(Unaudited)

	Series A Convertible Preferred Stock				Series B Convertible Preferred Stock				Series C Convertible Preferred Stock				Common Stock
	# of Shares Issued		Amount		# of Shares Issued		Amount		# of Shares Issued		Amount		# of Shares Issued		Amount		Additional Paid-In Capital			Accumulated Deficit			Total
Balances at April 1, 2023		500,000	$	3,875,998		166,667	$	1,207,367		-		-		3,255,887	$	325,586	$	6,721,535		$	(6,348,849	)	$	5,781,637
8% Dividends on Preferred Stock		-		120,000		-		41,334		-		1,375		-		-		(162,709	)		-			-
Issuance of Series B and C Convertible Preferred Stock		-		-		66,667		400,000		53,500		321,000		-		-		-			-			721,000
Stock-based compensation		-		-		-		-		-		-		-		-		5,214			-			5,214
Net loss		-		-		-		-		-		-		-		-		-			(139,861	)		(139,861	)
Balances at September 30, 2023		500,000	$	3,995,998		233,334	$	1,648,701		53,500	$	322,375		3,255,887	$	325,586	$	6,564,040		$	(6,488,710	)	$	6,367,990

	Series A Convertible Preferred Stock					Series B Convertible Preferred Stock					Common Stock
	# of Shares Issued		Amount			# of Shares Issued		Amount			# of Shares Issued		Amount		Additional Paid-In Capital			Accumulated Deficit			Total
Balances at April 1, 2022		500,000	$	3,695,998			166,667	$	1,147,367			3,255,887	$	325,586	$	7,018,353		$	(5,960,304	)	$	6,227,000
8% Dividends on Preferred Stock		-		120,000			-		40,000			-		-		(160,000	)		-			-
Dividend Payments		-		(60,000	)		-		(20,000	)		-		-		-			-			(80,000	)
Stock-based compensation		-		-			-		-			-		-		12,469			-			12,469
Net loss		-		-			-		-			-		-		-			(710,237	)		(710,237	)
Balances at September 30, 2022		500,000	$	3,755,998			166,667	$	1,167,367			3,255,887	$	325,586	$	6,870,822		$	(6,670,541	)	$	5,449,232

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended
	September 30, 2023			September 30, 2022
Cash flows from operating activities:
Net loss	$	(139,861	)	$	(710,237	)
Adjustments to reconcile net loss used in operating activities
Deferred income taxes		(92,701	)		(188,844	)
Depreciation and amortization		24,325			30,910
Amortization of right of use assets		100,060			96,239
Recovery of for inventory obsolescence		(5,132	)		(13,068	)
Non-cash stock-based compensation		5,214			12,469
Changes in assets and liabilities:
Increase in accounts receivable		(40,945	)		(386,983	)
Increase in inventories		(511,589	)		(100,682	)
Decrease (increase) in prepaid expenses & other assets		583,951			(89,482	)
Increase in accounts payable		313,639			83,181
Increase (decrease) in accrued payroll, vacation pay and payroll taxes		67,723			(117,190	)
Decrease in deferred revenues		(22,158	)		(64,602	)
Decrease in operating lease liabilities		(100,060	)		(96,239	)
Decrease in other long term liabilities		(3,955	)		-
(Decrease) increase in accrued legal damages		(6,360,698	)		122,936
Net cash used in operating activities		(6,182,187	)		(1,421,592	)

Cash flows from investing activities:
Purchases of equipment		(32,352	)		(11,732	)
Net cash used in investing activities		(32,352	)		(11,732	)

Cash flows from financing activities:
Proceeds from issuance of Preferred Stock		721,000			-
Payment of dividends		-			(80,000	)
Net cash provided (used in) financing activities		721,000			(80,000	)

Net decrease in cash and restricted cash		(5,493,539	)		(1,513,324	)
Cash and restricted cash at beginning of period		5,850,481			6,960,740
Cash and restricted cash at end of period	$	356,942		$	5,447,416

End of period
Cash	$	356,942		$	3,436,366
Restricted cash		-			2,011,050
	$	356,942		$	5,447,416
Beginning of period
Cash	$	3,839,398		$	4,949,690
Restricted cash		2,011,083			2,011,050
	$	5,850,481		$	6,960,740
Supplemental cash flow information:
Taxes paid	$	-			-
Interest paid	$	26,587		$	-

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

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 two decades.

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

Liquidity

On September 30, 2023, the Company had positive net working capital of $3,504,945, as compared to working capital of $3,058,638 at March 31, 2023.

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

On September 30, 2023, the Company had $356,942 of cash on hand.

The Company had a $6.5 million sales backlog on September 30, 2023.

The Company had recorded total damages of $6,559,233 including interest of $1,659,233 as a result of the jury verdict associated with the Aeroflex litigation as well as the Court’s decision on punitive damages. A decision on the case was rendered and released on July 21, 2023, the Kansas Appeals Court rejected each of TIC’s appeal arguments, however there will be no impact on net worth, as these damages had already been fully accrued. TIC paid the full judgement amount of $6,559,233 on September 15, 2023.

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

Moving forward, we believe that our expected cash flows from operations and fulfillment of our $6.5 million open orders will be sufficient to operate in the normal course of business for at least the next 12 months from the issuance date of these unaudited condensed consolidated financial statements.

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

Impact of the COVID-19 Coronavirus

In December 2019, a novel strain of coronavirus, which causes the disease known as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 coronavirus has spread globally. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic and the U.S. government imposed travel restrictions on travel between the United States, Europe, and certain other countries. The impact of this pandemic has been, and will likely continue to be, extensive in many aspects of society, which has resulted, and will likely continue to result, in significant disruptions to the global economy as well as businesses and capital markets around the world.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Business, Organization and Liquidity (continued)

Impact of the COVID-19 Coronavirus (continued)

On September 9, 2021, President Biden announced Executive Order 14042 (“Executive Order”) and related initiatives designed to lead the country out of the COVID-19 pandemic. The Executive Order includes policies that will require employees of contractors that do business with the federal government to be vaccinated. On September 24, 2021, The Safer Federal Workforce Task Force released COVID-19 vaccine guidance for Federal contractors and subcontractors. According to this guidance, covered employees must be fully vaccinated by December 8, 2021, or at the latest, by the first day of performance on a covered contract, absent the need for a disability or religious accommodation. In addition, covered contractors must follow the CDC’s mask and physical distance requirements for covered contractor employees and visitors. The Executive Order and the guidance apply to any prime contractor or subcontractor that is a party to a “contract or contract-like instrument” that includes a clause incorporating the requirements of the Executive Order. The new clause applied on or after October 15, 2021, to only new federal contracts, solicitations, contract extensions and renewals.

On December 7, 2021, the federal court in Georgia issued a preliminary injunction temporarily halting the enforcement of EO 14042 (Ensuring Adequate COVID Safety Protocols for Federal Contractors) for all covered contracts nation-wide. New guidance from OMB also followed suit giving federal agencies input on how to go about non-enforcement provisions until legal challenges have been resolved. The updated guidance will remain applicable despite any change to new or existing court decisions. The new guidance does not impact the Safer Federal Workforce Taskforce Guidance.

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 September 30, 2023, the results of operations, change in stockholders’ equity and statements of cash flow for the six months ended September 30, 2023 and September 30, 2022. 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, 2023 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, 2023, as filed with the United States Securities and Exchange Commission (the “SEC”) on June 15, 2023 (the “Annual Report”).

Inventory Reserve Policy

Inventories are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. Inventories are reviewed for obsolescence and a reserve is recorded for inventory allowances if the estimated net realizable value is less than the recorded value. The Company reviews the carrying cost of inventories by product to determine the adequacy of reserves for obsolescence. In accounting for inventories, the Company must make estimates regarding the estimated realizable value of inventory. If actual conditions are less favorable than those we have projected, we may need to increase our reserves for excess and obsolete inventories. Any increases in our reserves will adversely impact our results of operations. Such reserves are not reduced until the product is sold. If we are able to sell such inventory any related reserves would be reversed in the period of sale. In accordance with industry practice, service parts inventory is included in current assets, although service parts are carried for established requirements during the serviceable lives of the products and, therefore, not all parts are expected to be sold within one year.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2 – Summary of Significant Accounting Policies (continued)

Revenue Recognition

Under Financial Accounting Standards Board (“FASB”) 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 and 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.

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. The ASC 606 defines a five-step process to achieve the core principle and, in doing so, it is possible more judgement and estimates may be required within the revenue recognition process than are currently in use.

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.

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 and ground radios. 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 is 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 considering 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 September 30, 2023.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2 – Summary of Significant Accounting Policies (continued)

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.

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 ranging from 2 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 September 30, 2023, $229,814 is expected to be recognized from remaining performance obligations for extended warranties as compared to $296,400 at March 31, 2023. For the three and six months ended September 30, 2023, the Company recognized revenue of $32,580 and $66,586 respectively from amounts that were included in Deferred Revenue as compared to $23,862 and $47,403, respectively from amounts that were included in Deferred Revenue for the three months and six months ended September 30, 2022.

The following table provides a summary of the changes in deferred revenues for the six months ended September 30, 2023:

Deferred revenues at April 1, 2023	$	296,400
Revenue recognized for the six months ended September 30, 2023		(66,586	)
Deferred revenues at September 30, 2023	$	229,814

Other Deferred Revenues

The Company sometimes receives payments in advance of shipment. These amounts are classified as other deferred revenues. For the periods ended September 30, 2023, and March 31, 2023, the Company has other deferred revenues of $45,028 and $600, 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 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 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.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2 – Summary of Significant Accounting Policies (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.

	For the Three Months Ended September 30, 2023
	Commercial		Government
Sales Distribution
Test Units & Engineering	$	77,125	$	1,108,426
	$	77,125	$	1,108,426

The remainder of our revenues for the three months ended September 30, 2023, are derived from repairs and calibration of $298,382, replacement parts of $41,893, extended warranties of $32,580 and other revenues of $6,688. We do not disaggregate these revenue streams as they are not deemed an important element related to how management operates the business between segments.

	For the Three Months Ended September 30, 2022
	Commercial		Government
Sales Distribution
Test Units and Engineering	$	93,982	$	1,364,876
	$	93,982	$	1,364,876

The remainder of our revenues for the three months ended September 30, 2022, are derived from repairs and calibration of $460,331, replacement parts of $56,749, extended warranties of $28,862 and other revenues of $7,958. We do not disaggregate these revenue streams as they are not deemed an important element related to how management operates the business between segments.

	For the Six Months Ended September 30, 2023
	Commercial		Government
Sales Distribution
Test Units and Engineering	$	486,084	$	3,086,238
	$	486,084	$	3,086,238

The remainder of our revenues for the six months ended September 30, 2023, are derived from repairs and calibration of $640,433, replacement parts of $139,190, extended warranties of $66,585 and other revenues of $13,494. We do not disaggregate these revenue streams as they are not deemed an important element related to how management operates the business between segments.

	For the Six Months Ended September 30, 2022
	Commercial		Government
Sales Distribution
Test Units and Engineering	$	201,932	$	2,969,026
	$	201,932	$	2,969,026

The remainder of our revenues for the six months ended September 30, 2022, are derived from repairs and calibration of $930,365, replacement parts of $85,076, extended warranties of $57,404 and other revenues of $22,712. We do not disaggregate these revenue streams as they are not deemed an important element related to how management operates the business between segments.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2 – Summary of Significant Accounting Policies (continued)

In the following table, revenue is disaggregated by geography.

	For the Three Months Ended September 30, 2023		For the Three Months Ended September 30, 2022
Geography
United States	$	1,352,734	$	1,601,639
International		212,360		411,119
Total	$	1,565,094	$	2,012,758

	For the Six Months Ended September 30, 2023		For the Six Months Ended September 30, 2022
Geography
United States	$	3,616,564	$	3,502,568
International		815,460		763,947
Total	$	4,432,024	$	4,266,515

For the three months ended September 30, 2023, two customers accounted for sales of $412,770 or 26%, and $366,127 or 23%.

For the six months ended September 30, 2023 one customer accounted for sales of $1,446,626, or 33%.

For the three months ended September 30, 2022, one customer accounted for sales of $451,853, or 22%. For the six months ended September 30, 2022, two customers accounted for sales of $1,016,194 and $585,802 or 24%, and 14% respectively.

The Company, in addition to inside sales efforts, utilizes independent sales agents to sell its products to customers. A related party independent sales agent earned $54,636 and $56,236 in commissions for the three and six months ended September 30, 2023, respectively. The sales agent earned $9,000 and $18,000 for sales and marketing assistance for the three and six months ended September 30, 2023. The same related party independent sales agent earned $16,520 and $27,680 in commissions for the three and six months ended September 30, 2022, respectively. The sales agent earned $9,000 and $18,000 for sales and marketing assistance for the three and six months ended September 30, 2022.

Long-Lived Assets

The Company assesses the recoverability of the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future, undiscounted cash flows expected to be generated by an asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. No impairment losses have been recognized for the three and six months ended September 30, 2023 and 2022.

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 is for fiscal years beginning after December 15, 2022 and was adopted by the Company on April 1, 2023. The adoption of this standard did not 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.

Table of Contents

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:

	September 30, 2023			March 31, 2023
Government	$	655,066		$	651,370
Commercial		296,192			255,912
Less: Allowance for doubtful accounts		(9,432	)		(6,401	)
	$	941,826		$	900,881

Note 4 – Inventories, net

Inventories consist of:

	September 30, 2023			March 31, 2023

Purchased parts	$	2,756,698		$	2,602,447
Work-in-process		1,774,939			1,388,679
Finished Goods		26,130			55,052
Less: Inventory reserve		(454,981	)		(460,113	)
	$	4,102,786		$	3,586,065

Note 5 – Restricted Cash to Support Appeal Bond

In January 2018, the Company transferred $2,000,000 to a restricted cash account to secure a letter of credit which was used for collateral for the appeal bond (See Note 14). In September 2023, the restricted cash account funds of $2,011,083 which includes interest earned, were used to make payment towards the final judgment. At September 30, 2023, the restricted cash balance was $0.

Note 6 – Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of:

	September 30, 2023		March 31, 2023

Prepaid expenses	$	186,722	$	148,929
Deferred charges		27,720		24,720
Other receivables		19,228		643,976
	$	233,670	$	817,625

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

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7 – Line of Credit

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

As of September 30, 2023, and March 31, 2023, the outstanding balances were $690,000, respectively. The interest rate on September 30, 2023, was 9.15%.

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

Note 8 – Right of Use Assets and Operating Lease Liability

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

The Company's leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company estimated its incremental borrowing rate based on its credit quality, line of credit agreement and by comparing interest rates available in the market for similar borrowings. The Company used a discount rate of 3.90% for both September 30, 2023 and March 31,2023. The weighted average remaining lease term is 5.92 years.

Right to use assets is summarized below:

	September 30, 2023			March 31, 2023
Right to use asset	$	1,830,857		$	1,830,857
Less: Accumulated amortization		(404,366	)		(304,306	)
Right to use assets, net	$	1,426,491		$	1,526,551

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 September 30, 2023:

Remaining payments in fiscal 2024	$	127,420
2025		254,840
2026		267,767
2027		277,000
2028		277,000
Thereafter		392,417
Total undiscounted future minimum lease payments		1,596,444
Less: Difference between undiscounted lease payments and discounted lease liabilities		(169,953	)
Present value of net minimum lease payments		1,426,491
Less current portion		(206,060	)
Operating lease liabilities – long-term	$	1,220,431

Total rent expense for the three and six months ended September 30, 2023, was $102,923 and $205,734, respectively, as compared to $104,595 and $208,503 for the three and six months ended September 30, 2022, respectively.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 9 – Stockholder’s Equity

Series B 8% Convertible Preferred Stock

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

The shares of Series B Preferred to have a stated value of $6.00 per share (the “Series B Stated Value”) and are convertible into Common Stock at a price of $2.00 per share. The holder of shares of the Series B Preferred shall be entitled to receive dividends out of any assets legally available, to the extent permitted by New Jersey law, at an annual rate equal to 8% of the Series B Stated Value of such shares of Series B Preferred, calculated on the basis of a 360 day year, consisting of twelve 30-day months, and shall accrue from the date of issuance of such shares of Series B Preferred, payable quarterly in cash. Any unpaid dividends shall accrue at the same rate. To the extent not paid on the last day of March, June, September and December of each calendar year, all dividends on any share of Series B Preferred shall accumulate whether or not declared by the Board and shall remain accumulated dividends until paid. As of September 30, 2023, the Company recognized $1,334 for dividends, which have not been paid.

Series C 8% Convertible Preferred Stock

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

The shares of Series C Preferred to have a stated value of $6.00 per share (the “Series C Stated Value”) and are convertible into Common Stock at a price of $2.00 per share. The holder of shares of the Series C Preferred shall be entitled to receive dividends out of any assets legally available, to the extent permitted by New Jersey law, at an annual rate equal to 8% of the Series C Stated Value of such shares of Series C Preferred, calculated on the basis of a 360 day year, consisting of twelve 30-day months, and shall accrue from the date of issuance of such shares of Series c Preferred, payable quarterly in cash. Any unpaid dividends shall accrue at the same rate. To the extent not paid on the last day of March, June, September and December of each calendar year, all dividends on any share of Series C Preferred shall accumulate whether or not declared by the Board and shall remain accumulated dividends until paid. As of September 30, 2023, the Company recognized $1,375 for dividends, which have not been paid.

Note 10 – Stock Options Plans

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

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10 – Stock Options Plans (continued)

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

	Number of Options		Average Exercise Price		Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding options at April 1, 2023		99,000	$	3.13	1.78 years	$	-
Options granted		-	$	-
Options exercised		-	$	-
Options canceled/forfeited		-	$	-

Outstanding options at September 30, 2023		99,000	$	3.13	1.28 years	$	-
Vested Options:
September 30, 2023:		75,600	$	3.17	0.8 years	$	-

Remaining options available for grant were 151,000 as of September 30, 2023.

At September 30, 2023, the unamortized compensation expense for stock options was $12,451. Unamortized compensation expense is expected to be recognized over a weighted-average period of approximately 2.61 years.

For the three months ended September 30, 2023, the Company recorded stock compensation costs of $1,943, as compared to $6,234 for the three months ended September 30, 2022. The Company recorded stock compensation costs of $5,214 as compared to $12,469 for the six months ended September 30, 2022.

Note 11 – Income Taxes

FASB ASC 740-10, “Accounting for Uncertainty in Income Taxes” (“ASC 740-10”) prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company does not have any unrecognized tax benefits.

The tax effect of temporary differences, primarily net operating loss carryforwards, asset reserves and accrued liabilities, gave rise to the Company’s deferred tax asset. Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reverse. The Company had approximately $2.7 million in deferred tax assets at September 30, 2023 and approximately $2.6 million in deferred tax assets at March 31, 2023. The Company recognizes the impact of an uncertain income tax position taken on its income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 12 – Net loss per Share

Net loss per share has been computed according to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC 260”), “Earnings per Share,” which requires a dual presentation of basic and diluted income per share (“EPS”). Basic EPS represents net income (loss) divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS to common stockholders reflects the potential dilution that could occur if securities, including preferred stock and options, were converted into common stock. The dilutive effect of outstanding options is reflected in earnings per share by use of the treasury stock method. The dilutive effect of preferred stock is reflected in earnings per share by use of the if-converted method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amounts of average unrecognized compensation. For the three and six months ended September 30, 2023 and 2022, since the Company has a net loss, the effect of common stock equivalents is anti-dilutive, and as such, common stock equivalents have been excluded from this calculation.

	Three Months Ended			Three Months Ended
	September 30, 2023			September 30, 2022
Basic net loss per share computation:
Net loss	$	(435,153	)	$	(477,368	)
Less: Preferred dividends		(82,708	)		(80,000	)
Net loss attributable to common shareholders		(517,861	)		(557,368	)
Weighted-average common shares outstanding		3,255,887			3,255,887
Basic net loss per share	$	(0.16	)	$	(0.17	)
Diluted net loss per share computation
Net loss attributable to common shareholders	$	(517,861	)	$	(557,368	)
Add: Preferred dividends		-			-
Diluted net loss attributable to common shareholders	$	(517,861	)	$	(557,368	)
Weighted-average common shares outstanding		3,255,887			3,255,887
Incremental shares attributable to the assumed conversion of preferred stock		-			-
Total adjusted weighted-average shares		3,255,887			3,255,887
Diluted net loss per share	$	(0.16	)	$	(0.17	)

	Six Months Ended			Six Months Ended
	September 30, 2023			September 30, 2022
Basic net loss per share computation:
Net loss	$	(139,861	)	$	(710,237	)
Less: Preferred dividends		(162,708	)		(160,000	)
Net loss attributable to common shareholders		(302,569	)		(870,237	)
Weighted-average common shares outstanding		3,255,887			3,255,887
Basic net loss per share	$	(0.09	)	$	(0.27	)
Diluted net loss per share computation
Net loss attributable to common shareholders	$	(302,569	)	$	(870,237	)
Add: Preferred dividends		-			-
Net loss attributable to common shareholders	$	(302,569	)	$	(870,237	)
Weighted-average common shares outstanding		3,255,887			3,255,887
Incremental shares attributable to the assumed conversion of preferred stock		-			-
Total adjusted weighted-average shares		3,255,887			3,255,887
Diluted net loss per share	$	(0.09	)	$	(0.27	)

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 12 – Net loss 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:

	September 30, 2023		September 30, 2022
Convertible preferred stock		2,151,611		1,869,778
Stock options		99,000		111,500
		2,250,611		1,981,278

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

	September 30, 2023		September 30, 2022
Convertible preferred stock		2,151,611		1,869,778
Stock options		99,000		111,500
		2,250,611		1,981,278

Note 13 – Segment Information

In accordance with FASB ASC 280, “Disclosures about Segments of an Enterprise and related information”, the Company determined it has two reportable segments - avionics government and avionics commercial. There are no inter-segment revenues.

The Company is organized primarily on the basis of its avionics products. The avionics government segment consists primarily of the design, manufacture, and sale of test equipment to the U.S. and foreign governments and militaries either directly or through distributors. The avionics commercial segment consists of design, manufacture, and sale of test equipment to domestic and foreign airlines, directly or through commercial distributors, and to general aviation repair and maintenance shops. The Company develops and designs test equipment for the avionics industry and as such, the Company’s products and designs cross segments.

Management evaluates the performance of its segments and allocates resources to them based on gross margin. The Company’s general and administrative costs and sales and marketing expenses, and engineering costs are not segment specific. As a result, all operating expenses are not managed on a segment basis. Net interest includes expenses on debt and income earned on cash balances, both maintained at the corporate level.

The tables below present information about reportable segments within the avionics business for the three and six months ended September 30, 2023, and 2022:

Three Months Ended September 30, 2023	Avionics Government		Avionics Commercial		Avionics Total			Corporate Items			Total
Net sales	$	1,108,425	$	456,669	$	1,565,094		$	-		$	1,565,094
Cost of sales		773,358		432,252		1,205,610			-			1,205,610
Gross margin		335,067		24,417		359,484			-			359,484

Total expenses						512,603			455,285			967,888
Loss before income taxes					$	(153,119	)	$	(455,285	)	$	(608,404	)

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 13 – Segment Information (continued)

Three Months Ended September 30, 2022	Avionics Government		Avionics Commercial		Avionics Total			Corporate Items			Total
Net sales	$	1,364,876	$	647,882	$	2,012,758		$	-		$	2,012,758
Cost of sales		966,980		492,306		1,459,286			-			1,459,286
Gross margin		397,896		155,576		553,472			-			553,472

Total expenses						775,789			381,979			1,157,768
Loss before income taxes					$	(222,317	)	$	(381,979	)	$	(604,296	)

Six Months Ended September 30, 2023	Avionics Government		Avionics Commercial		Avionics Total		Corporate Items			Total
Net sales	$	3,086,237	$	1,345,787	$	4,432,024	$	-		$	4,432,024
Cost of sales		1,759,396		1,018,594		2,777,990		-			2,777,990
Gross margin		1,326,841		327,193		1,654,034		-			1,654,034

Total expenses						991,950		894,646			1,886,596
Income (loss) before income taxes					$	662,084	$	(894,646	)	$	(232,562	)

Six Months Ended September 30, 2022	Avionics Government		Avionics Commercial		Avionics Total			Corporate Items			Total
Net sales	$	2,969,026	$	1,297,489	$	4,266,515		$	-		$	4,266,515
Cost of sales		1,929,216		948,642		2,877,858			-			2,877,858
Gross margin		1,039,810		348,847		1,388,657			-			1,388,657

Total expenses						1,470,742			816,996			2,287,738
Loss before income taxes					$	(82,085	)	$	(816,996	)	$	(899,081	)

Note 14 – Litigation

Currently, we are 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.

The Aeroflex litigation did not result in a favorable outcome for the Company, despite our belief that we committed no wrongdoing. We have paid the $6.6 million judgment in full and there are no outstanding obligations related to the Aeroflex litigation. 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 found that TIC tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees, and that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex. Upon appeal, a decision on the case was rendered and released on July 21, 2023, the Kansas Appeals Court rejected each of TIC’s appeal arguments. TIC paid the full judgement amount of $6,559,233 on September 15, 2023, including interest of $1,659,233.

Table of Contents

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.

The key factors that are not within the Company’s control and that may have a direct bearing on operating results include, but are not limited to, managements’ ability to raise capital in the future, the retention of key employees and changes in the regulation of our industry, as well as the risk factors identified in the Company’s filings.

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.

For purposes of this Quarterly Report, “Tel-Instrument,” “we,” “our,” “us,” or similar references refers to Tel-Instrument Electronics, Inc, unless the context requires otherwise.

Overview

The Company reported net sales of $1,565,094 and $4,432,024 for the three and six months ended September 30, 2023. This compared to net sales of $2,012,758 and $4,266,515 for the same three and six-month period in the prior fiscal year. The decline in sales for the quarter ending September 30, 2023 was caused by supply chain procurement issues and a delay by an outside contractor in porting code for a new display on a large government order. This work has now been completed and the units will ship in the third quarter of fiscal 2024. Long supplier lead lines for certain high demand chips have been unprecedented, preventing the timely production of finished units being shipped to customers. The supply chain situation is gradually improving, and TIC has received sufficient parts to resume normal production operations starting in third quarter of the current fiscal year.

Gross margin for the current quarter was $359,484 (23%) and $1,654,034 (37%) for the six months ended September 30, 2023 as compared to $553,472 (27%) and $1,388,657 (33%) for the same periods in the prior year, respectively. This was primarily attributable to fixed production costs being spread over decreased volumes as production is ramped up with manufacturing components being delivered by our suppliers to coincide with open order deadlines. This is a result of placing supplier orders further out to manage the long delivery dates for the three months ended September 30, 2023. The increase in the six months ended September 30, 2023 as compared to September 30, 2022 is primarily due to revenue from the Navy Craft project which has a high margin.

Net loss was $435,153 and $139,860 for the three and six months ended September 30, 2023, as compared to a loss of $477,368 and 710,237 for the same periods in the prior year, respectively.

Backlog orders on September 30, 2023, were $6.5 million compared to $6.5 million as of March 31, 2023.

Table of Contents

Overview (continued)

The Company continues to pursue opportunities in the domestic and international market for our Mode 5 test sets. The international market has been slow over the last year due in part to the recent strength of the dollar. We are still expecting a large follow-on order from the German government this year. We continue to receive orders from the U.S. Government and the F-35 program for our AN/USM-708 and 719 (“CRAFT”) Mode 5 test sets. Our expectation is that orders and back-log will improve this fiscal year as the SDR-OMNI test set gains traction in the marketplace. We also received a $875,000 contract from the U.S. Army in July 2023 to update the TS-4530A software and add new capabilities. The software work has been completed and we expect to invoice this amount by year-end, although this is contingent upon securing prompt approval from a government certification body.

TIC is also exploring new avenues to broaden its product portfolio including designing a high frequency test set for the Lockheed Martin F-35 program. This contract takes advantage of our expertise in RF technology. This is a completely new market for TIC as it involves high frequency communication signals. TIC has successfully completed the engineering portion of the program and recently provided a quote for production units with a value of $1.5 million. TIC is currently in contract negotiations with the customer. TIC will continue to explore funded engineering programs of this nature as this is high margin business that helps diversify and expand our product portfolio.

The main focus area for the Company is moving into the military avionic and secure communications testing. The key for long-term sustained growth will be to supplement our strong position in military Mode 5 transponder testing with dominant product offerings in the much larger commercial and military communications and navigation test set market. TIC has spent several years and millions of dollars in developing our ground-breaking SDR-OMNI product which is meant to address both the commercial market for transponder and navigation test sets as well as competing in the military secure comm test set market. The SDR/OMNI supports a wide frequency range to accommodate new commercial and military waveforms in an industry leading 4.5-pound package. This is approximately half the weight of competitive test sets. It is also the only new multi-purpose test set which meets the Class 1 military environmental specifications. It utilizes the latest touch screen technology and has the capability to replace all TIC commercial test sets and military flight-line test sets with one handheld product. The Company started initial production deliveries during December 2022 and has sold over $675,000 of SDR/OMNI test sets as of September 30, 2023. There are several companies competing in this market space, but we believe that our SDR/OMNI design will be extremely competitive, particularly for military applications.

As previously disclosed, the Aeroflex litigation (see Note 14 to the Unaudited Condensed Consolidated Financial Statements) did not result in a favorable outcome for the Company, despite our belief that we committed no wrongdoing. We have paid the $6.6 million judgment in full and there are no outstanding obligations related to the Aeroflex litigation. 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 found that TIC tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees, and that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex. Upon appeal, a decision on the case was rendered and released on July 21, 2023. The Kansas Appeals Court rejected each of TIC’s appeal arguments and the judgment required the Company to pay Aeroflex $6.6 million. The loss of the appeal is very disappointing to the Company, however there will be no impact on our net worth, as these damages had already been fully accrued. TIC paid the full judgement amount and has been fully satisfied as of September 15, 2023.

Results of Operations

Sales

Net sales were $1,565,094 and $4,432,024 for the three months and six months ended September 30, 2023, as compared to $2,012,758 and $4,266,515 for the same three and six month periods in the prior fiscal year. The decrease in sales of $447,664 (22.2%) for the quarter ended September 2023 compared to the prior year for the same period was caused by supply chain procurement issues and a delay by an outside contractor in porting code to for a new display on a large government order. This work has now been completed and the units will ship in the quarter of fiscal year 2024. The $165,509 increase for the six months as compared to prior year is due to revenues from the Navy ECP contract offset by other product sales decreases. Long supplier lead lines for certain high demand chips have been unprecedented, preventing the timely production of finished units being shipped to customers. The supply chain situation is gradually improving, and TIC has received sufficient parts to resume normal production operations starting in third quarter of the current fiscal year.

Table of Contents

Gross Margin

For the three months ended September 30, 2023, total gross margin decreased $193,988 (35%) to $359,484 as compared to $553,472 for the three months ended September 30, 2022. For the six ended September 30, 2023, total gross margin increased $265,377 (19%) to $1,654,034 as compared to $1,388,657 for the six months ended September 30, 2022.

The gross margin percentage for the three months ended September 30, 2023, was 23% as compared to 27% for the three months ended September 30, 2022. The margin decline was primarily attributable to fixed production costs being spread over decreased volumes as production is ramped up with manufacturing components being delivered by our suppliers to coincide with open order deadlines.

The six months September 30, 2023, was 37% as compared to 33% for the same period in the prior year. The margin increase is a result of a blend of higher margin revenue including the Navy ECP contract.

Operating Expenses

Selling, general and administrative expenses increased $41,817 (9%) to $521,070 and $69,742 (7%) to $1,105,928 for the three and six months ended September 30, 2023, as compared to $479,253 and $1,036,186, respectively for the three and six months ended September 30, 2022. The three and six months increases of $41,818 and $69,742, respectively are a result of marketing documentation for our new SDR-OMNI test set, the resumption of travel and trade show participation.

Engineering, research, and development expenses decreased $291,921 (48%) to $317,715 and $524,584 (46%) to $607,155 for the three and six months ended September 30, 2023, as compared to $609,636 and $1,131,739 for the three and six months ended September 30, 2022, respectively. Total engineering expense decreased primarily as a result of the Navy ECP Contract non-recurring engineering expenditures (“NRE”) which are reimbursed and reduced engineering costs in the current quarter by $248,941 with the balance of the decrease a result of cost efficiencies.

Income (loss) from Operations

As a result of the above, the Company recorded a loss from operations of $479,301 and $59,049 for the three and six months ended September 30, 2023, as compared to a loss from operations of $535,417 and $779,268 for the three and six months ended September 30, 2022.

Other Expense, Net

For the three and six months ended September 30, 2023, total other net expense was $129,103 and $173,513 as compared to other net expense of $68,879 and $119,813 for the three and six months ended September 30, 2022, this is primarily a result of $198,535 interest related to the judgement for the six months ended September 30, 2023 and bank line of credit increased interest rates.

Loss before Income Taxes

The Company recorded a net loss before taxes of $608,404 and $232,562 for the three and six months ended September 30, 2023, as compared to net loss before taxes of $604,296 and $899,081 for the three and six months ended September 30, 2022.

Income Tax Benefit

For the three and six months ended September 30, 2023, the Company recorded income tax benefits of $173,251 and $92,701, and related increase in its deferred tax asset, as a result of the Company’s net loss respectively, as compared to income tax benefits of $126,928 and $188,844 for the three and six months ended September 30, 2022, respectively.

Net Loss

The Company recorded net loss of $435,153 and $139,861 for the three and six months ended September 30, 2023, as compared to net loss of $477,368 and $710,237 for the three and six months ended September 30, 2022.

Liquidity and Capital Resources

At September 30, 2023, the Company had net working capital of $3,504,945, as compared to $3,058,638 at March 31, 2023. The Company had approximately $357,000 of cash on hand at September 30, 2023 and approximately $5,850,000 at March 31, 2023.

Table of Contents

The Company’s principal sources, and uses of funds were as follows:

Cash used in operating activities. For the six months ended September 30, 2023, $6,182,187 in cash from operations was used as compared to the six months ended September 30, 2022, the Company used $1,421,592. This decrease in cash used from operations is attributable to both operating losses and the settlement of the Aeroflex judgement of $6,559,233.

Cash used in investing activities. For the six months ended September 30, 2023, the Company used $32,352 for purchases of equipment as compared to the six months ended September 30, 2022, the Company used $11,732.

Cash provided by (used in) financing activities. For the six months ended September 30, 2023, the Company provided $721,000 from financing activities as compared to using $80,000 for the six months ended September 30, 2022. This increase is due to proceeds received from issuance of Series B and C Convertible Preferred Stock.

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

A decision on the Aeroflex case was rendered and released on July 21, 2023, the Kansas Appeals Court rejected each of TIC’s appeal arguments. The loss of the appeal is very disappointing to the Company, however there will be no impact on net worth, as these damages have already been fully accrued. TIC paid the full judgement amount and has been fully satisfied as of September 15, 2023.

The Company has recorded total damages of $6,559,233 including interest of $1,659,233, as a result of the jury verdict associated with the Aeroflex litigation as well as the Court’s decision on punitive damages.

Moving forward, we believe that our expected cash flows from increased operations and increased accounts receivable payments will be sufficient to operate in the normal course of business for at least the next 12 months from the issuance date of these unaudited condensed financial statements.

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

These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on For 10-K for the fiscal year ended March 31, 2023, filed with the SEC on June 15, 2023 (the “Annual Report”).

Off-Balance Sheet Arrangements

As of September 30, 2023, 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 2023 consolidated financial statements included in our Annual Report.

Table of Contents

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We are a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this Item. 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 as of the end of the period covered by this Quarterly Report. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act was recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. 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 chief executive officer and chief 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 during the period ended September 30, 2023 or subsequent to the date the Company completed its evaluation that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

As previously disclosed, the Aeroflex litigation (see Note 14 to the Unaudited Condensed Consolidated Financial Statements) did not result in a favorable outcome for the Company, despite our belief that we committed no wrongdoing. We have paid the $6.4 million judgment in full and there are no outstanding obligations related to the Aeroflex litigation. 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 found that TIC tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees, and that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex. Upon appeal, a decision on the case was rendered and released on July 21, 2023. The Kansas Appeals Court rejected each of TIC’s appeal arguments and the judgment required the Company to pay Aeroflex $6.4 million. The loss of the appeal is very disappointing to the Company, however there will be no impact on net worth, as these damages had already been fully accrued.

Item 1A. Risk Factors.

Not applicable because we are a smaller reporting company. Notwithstanding, 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, 2023, filed with the SEC on June 15, 2023.

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

During the three months ended September 30, 2023, other than as previously disclosed in a Current Report on Form 8-K, we did not issue any securities that were not registered under the Securities Act. .

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 during the quarter ending September 30, 2023.

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.

Table of Contents

Item 6. Exhibits.

Exhibit No.		Description

31.1		Certification of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002*

31.2		Certification of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002*

32.1		Certification of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

32.2		Certification of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

101.INS		Inline XBRL Instance Document*

101.SCH		Inline XBRL Taxonomy Extension Schema Document*

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document*

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document*

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document*

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document*

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)*

* Filed herewith

Table of Contents

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.

	TEL-INSTRUMENT ELECTRONICS CORP.


Date: November 14, 2023	By:	/s/ Jeffrey C. O’Hara
	Name:	Jeffrey C. O’Hara
	Title:	Chief Executive Officer (Principal Executive Officer)

Date: November 14, 2023	By:	/s/ Pauline Romeo
	Name:	Pauline Romeo
	Title:	Chief Accounting Officer (Principal Financial and Accounting Officer)