PART I – FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements.

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

December 31,
2017

March 31,
2017

(unaudited)
ASSETS

Current assets:
Cash and cash equivalents $ 263,983 $ 287,873
Accounts receivable, net 1,660,757 1,556,382
Inventories, net 4,309,324 4,208,179
Restricted cash to support appeal bond 2,000,000 -
Prepaid expenses and other current assets 107,450 188,578
Total current assets 8,341,514 6,241,012

Equipment and leasehold improvements, net 197,602 161,427
Other long-term assets 35,109 33,509
Total assets 8,574,225 6,435,948

LIABILITIES & STOCKHOLDERS’ DEFICIT

Current liabilities:
Current portion of long-term debt 3,696 291,991
Line of credit 1,000,000 200,000
Capital lease obligations – current portion 6,718 6,268
Accounts payable and accrued liabilities 2,431,763 2,072,955
Federal and state taxes payable - 4,105
Deferred revenues – current portion 54,671 123,720
Accrued legal damages 4,930,523 2,800,000
Accrued payroll, vacation pay and payroll taxes 396,207 527,413
Total current liabilities 8,823,578 6,026,452

Capital lease obligations – long-term 8,664 13,760
Long-term debt - 2,124
Deferred revenues – long-term 353,280 352,973
Warrant liability - 95,000
Total liabilities 9,185,522 6,490,309

Commitments

Mezzanine Equity:
Preferred stock, 1,000,000 shares authorized, par value $0.10 per share,
500,000 shares 8% Cumulative Series A Convertible Preferred issued and outstanding
2,990,667 -
Total mezzanine equity 2,990,667 -

Stockholders’ (deficit):
Common stock, 4,000,000 shares authorized, par value $0.10 per share,
3,255,887 shares issued and outstanding, respectively
325,586 325,586
Paid-in capital in excess of par value, common stock 8,099,882 8,107,369
Accumulated deficit (12,027,432 ) (8,487,316 )
Total stockholders’ deficit (3,601,964 ) (54,361 )
Total liabilities, mezzanine equity and stockholders’ deficit $ 8,574,225 $ 6,435,948

	September 30, 2019			March 31, 2019
	(unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	2,246,595		$	585,856
Accounts receivable, net		1,301,894			2,196,099
Inventories, net		3,075,398			2,932,632
Restricted cash to support appeal bond		2,006,534			2,004,871
Prepaid expenses and other current assets		295,817			275,230
Total current assets		8,926,238			7,994,688

Equipment and leasehold improvements, net		257,131			236,370
Operating lease right-of-use assets		409,218			-
Deferred tax asset, net		63,500			63,500
Other long-term assets		35,109			35,109
Total assets	$	9,691,196		$	8,329,667

LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT)

Current liabilities:
Line of credit	$	730,000		$	800,000
Finance lease obligations – current portion		3,202			6,885
Operating lease liabilities – current portion		208,201			-
Accounts payable and accrued liabilities		1,092,228			1,493,793
Deferred revenues – current portion		448,257			97,122
Accrued legal damages		5,483,191			5,312,085
Warrant liability		116,500			43,500
Accrued payroll, vacation pay and payroll taxes		466,217			394,296
Total current liabilities		8,547,796			8,147,681

Operating lease liabilities – long-term		201,017			-
Deferred revenues – long-term		219,939			264,669
Total liabilities		8,968,752			8,412,350

Commitments and contingencies

Stockholders’ equity (deficit):
Preferred stock, 1,000,000 shares authorized, par value $0.10 per share
Preferred stock, 500,000 shares 8% Cumulative Series A Convertible Preferred issued and outstanding, par value $0.10 per share		3,395,998			3,275,998
Preferred stock, 166,667 shares 8% Cumulative Series B Convertible Preferred issued and outstanding, par value $0.10 per share		1,047,367			1,007,367
Common stock, 7,000,000 shares authorized, par value $0.10 per share, 3,255,887 shares issued and outstanding, respectively		325,586			325,586
Paid-in capital in excess of par value, common stock		7,766,072			7,914,955
Accumulated deficit		(11,812,579	)		(12,606,589	)
Total stockholders’ equity (deficit)		722,444			(82,683	)
Total liabilities and stockholders’ equity (deficit)	$	9,691,196		$	8,329,667

See accompanying notes to unaudited condensed consolidated financial statements.

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TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended Nine Months Ended

December 31,
2017

December 31,
2016

December 31,
2017

December 31,
2016

Net sales $ 2,625,793 $ 4,236,519 7,955,035 $ 14,654,917
Cost of sales 1,689,113 2,602,268 5,377,195 9,318,425

Gross margin 936,680 1,634,251 2,577,840 5,336,492

Operating expenses:
Selling, general and administrative 548,391 582,880 1,881,072 2,042,922
Litigation expenses 134,765 282,490 560,610 609,330
Legal damages 30,523 - 2,130,523 -
Engineering, research and development 546,691 615,007 1,691,631 1,783,655
Total operating expenses 1,260,370 1,480,377 6,263,836 4,435,907

(Loss) income from operations (323,690 ) 153,874 (3,685,996 ) 900,585

Other income (expense):
Proceeds from life insurance - - 92,678 -
Amortization of deferred financing costs (649 ) (1,359 ) (3,363 ) (4,072 )
Change in fair value of common stock warrants 5,000 37,000 95,000 288,203
Interest expense (14,097 ) (11,620 ) (38,435 ) (46,953 )
Total other income (expense) (9,746 ) 24,021 145,880 237,178

(Loss) income before income taxes (333,436 ) 177,895 (3,540,116 ) 1,137,763

Income tax expense - 36,382 - 313,886

Net (loss) income (333,436 ) 141,513 (3,540,116 ) 823,877

Preferred stock dividends (30,667 ) - (30,667 ) -

Net (loss) income attributable to common shareholders $ (364,103 ) $ 141,513 $ (3,570,783 ) $ 823,877

Basic (loss) income per common share $ (0.11 ) $ 0.04 $ (1.10 ) $ 0.25
Diluted (loss) income per common share $ (0.11 ) $ 0.03 $ (1.10 ) $ 0.23

Weighted average shares outstanding:
Basic 3,255,887 3,255,887 3,255,887 3,255,887
Diluted 3,255,887 3,265,135 3,255,887 3,266,532

	Three Months Ended						Six Months Ended
	September 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018

Net sales	$	3,912,168		$	2,222,941		$	7,218,630		$	4,037,155
Cost of sales		2,038,535			1,223,728			3,763,393			2,556,629

Gross margin		1,873,633			999,213			3,455,237			1,480,526

Operating expenses:
Selling, general and administrative		625,163			555,411			1,237,634			1,121,936
Litigation expenses		91,553			35,848			102,060			75,119
Engineering, research and development		525,739			503,380			1,050,842			1,020,703
Total operating expenses		1,242,455			1,094,639			2,390,536			2,217,758

Income (loss) from operations		631,178			(95,426	)		1,064,701			(737,232	)

Other income (expense):
Interest income		1,018			1,009			2,018			2,007
Change in fair value of common stock warrants		5,500			-			(73,000	)		-
Interest expense – judgement		(90,596	)		(72,003	)		(171,106	)		(143,223	)
Interest expense		(10,866	)		(24,990	)		(28,603	)		(59,035	)
Total other expense, net		(94,944	)		(95,984	)		(270,691	)		(200,251	)

Income (loss) before income taxes		536,234			(191,410	)		794,010			(937,483	)

Income tax expense		-			-			-			-

Net income (loss)	$	536,234		$	(191,410	)	$	794,010		$	(937,483	)

Preferred dividends		80,000			60,000			160,000			120,000

Net income (loss) attributable to common shareholders	$	456,234		$	(251,410	)	$	634,010		$	(1,057,483	)

Basic income (loss) per common share	$	0.14		$	(0.08	)	$	0.19		$	(0.32	)
Diluted income (loss) per common share	$	0.11		$	(0.08	)	$	0.16		$	(0.32	)

Weighted average shares outstanding:
Basic		3,255,887			3,255,887			3,255,887			3,255,887
Diluted		4,945,665			3,255,887			4,945,665			3,255,887

See accompanying notes to unaudited condensed consolidated financial statements.

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TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

For the Three Months Ended September 30, 2019 and 2018

(Unaudited)

	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, 2019		500,000	$	3,335,998		166,667	$	1,027,367		3,255,887	$	325,586	$	7,840,796		$	(12,348,813	)	$	180,934
8% Dividends on Preferred Stock		-		60,000		-		20,000		-		-		(80,000	)		-			-
Stock-based compensation		-		-		-		-		-		-		5,276						5,276
Net income		-		-		-		-		-		-		-			536,234			536,234
Balances at September 30, 2019		500,000	$	3,395,998		166,667	$	1,047,367		3,255,887	$	325,586	$	7,766,072		$	(11,812,579	)	$	722,444

	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, 2018		500,000	$	3,095,998		-	$	-		3,255,887	$	325,586	$	7,994,733		$	(13,555,700	)	$	(2,139,383	)
8% Dividends on Preferred Stock		-		60,000		-		-		-		-		(60,000	)		-			-
Proceeds from short-swing profits from an investor, net		-		-		-		-		-		-		156,175			-			156,175
Stock-based compensation		-		-		-		-		-		-		5,419						5,419
Net loss		-		-		-		-		-		-		-			(191,410	)		(191,410	)
Balances at September 30, 2018		500,000	$	3,155,998		-	$	-		3,255,887	$	325,586	$	8,096,327		$	(13,747,110	)	$	(2,169,199	)

See accompanying notes to unaudited condensed consolidated financial statements.

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TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

For the Six Months Ended September 30, 2019 and 2018

(Unaudited)

	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, 2019		500,000	$	3,275,998		166,667	$	1,007,367		3,255,887	$	325,586	$	7,914,955		$	(12,606,589	)	$	(82,683	)
8% Dividends on Preferred Stock		-		120,000		-		40,000		-		-		(160,000	)		-			-
Stock-based compensation		-		-		-		-		-		-		11,117						11,117
Net income		-		-		-		-		-		-		-			794,010			794,010
Balances at September 30, 2019		500,000	$	3,395,998		166,667	$	1,047,367		3,255,887	$	325,586	$	7,766,072		$	(11,812,579	)	$	722,444

	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, 2018		500,000	$	3,035,998		-	$	-		3,255,887	$	325,586	$	8,046,975		$	(12,809,627	)	$	(1,401,068	)
8% Dividends on Preferred Stock		-		120,000		-		-		-		-		(120,000	)		-			-
Proceeds from short-swing profits from an investor, net		-		-		-		-		-		-		156,175			-			156,175
Stock-based compensation		-		-		-		-		-		-		13,177						13,177
Net loss		-		-		-		-		-		-		-			(937,483	)		(937,483	)
Balances at September 30, 2018		500,000	$	3,155,998		-	$	-		3,255,887	$	325,586	$	8,096,327		$	(13,747,110	)	$	(2,169,199	)

See accompanying notes to unaudited condensed consolidated financial statements.

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TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Nine Months Ended
December 31, 2017 December 31, 2016

Cash flows from operating activities:
Net (loss) income $ (3,540,116 ) $ 823,877
Adjustments to reconcile net (loss) income to net cash
used in operating activities:

Deferred income taxes - 317,509
Depreciation and amortization 53,221 95,209
Provision for inventory obsolescence 50,000 20,000
Amortization of deferred financing costs 3,363 4,072
Change in fair value of common stock warrant (95,000 ) (288,203 )
Non-cash stock-based compensation 23,180 24,536

Changes in assets and liabilities:
Decrease (increase) in accounts receivable (104,375 ) 396,430
(Increase) decrease in inventories (151,145 ) 185,145
Decrease (increase) in prepaid expenses & other assets 76,165 (28,774 )
Increase (decrease) in accounts payable and other accrued expenses 358,808 (299,359 )
Decrease in federal and state taxes (4,105 ) (53,623 )
Decrease in accrued payroll, vacation pay & withholdings (131,206 ) (224,072 )
(Decrease) increase in deferred revenues (68,742 ) 338,792
Increase in accrued legal damages 2,130,523 -
Restricted cash for appeal bond (2,000,000 )
Decrease in other long-term liabilities - (7,800 )
Net cash (used in) provided by operating activities (3,399,429 ) 1,303,739

Cash flows from investing activities:
Purchases of equipment (89,396 ) (37,070 )
Net cash used in investing activities (89,396 ) (37,070 )

Cash flows from financing activities:
Proceeds from line of credit 800,000 -
Proceeds from issuance of preferred stock, net of expenses 2,960,000 -
Payment of warrant liability - (720,000 )
Repayment of long-term debt (290,419 ) (322,894 )
Repayment of subordinated notes - related parties - (25,000 )
Repayment of capitalized lease obligations (4,646 ) (9,254 )
Net cash provided by (used in) financing activities 3,464,935 (1,077,148 )

Net decrease in cash and cash equivalents (23,890 ) 189,521
Cash and cash equivalents at beginning of period 287,873 972,633
Cash and cash equivalents at end of period $ 263,983 $ 1,162,154

Supplemental cash flow information:
Taxes paid $ 5,000 $ 87,374
Interest paid $ 50,374 $ 107,768

	Six Months Ended
	September 30, 2019			September 30, 2018

Cash flows from operating activities:
Net income (loss)	$	794,010		$	(937,483	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		41,125			37,846
Amortization of right of use assets		99,663			-
Provision for inventory obsolescence		27,000			45,000
Change in fair value of common stock warrant		73,000			-
Non-cash stock-based compensation		11,117			13,177

Changes in assets and liabilities:
Decrease in accounts receivable		894,205			325,496
(Increase) decrease in inventories		(168,116	)		462,770
(Increase) decrease in prepaid expenses & other assets		(20,587	)		16,911
Decrease in accounts payable and other accrued expenses		(401,565	)		(225,114	)
Increase (decrease) in accrued payroll, vacation pay and payroll taxes		71,921			(84,275	)
Increase in deferred revenues		306,405			242,963
Decrease in operating lease liabilities		(99,663	)		-
Increase in accrued legal damages		171,106			84,654
Net cash provided by (used in) operating activities		1,799,621			(18,055	)

Cash flows from investing activities:
Purchases of equipment		(63,536	)		-
Net cash used in investing activities		(63,536	)		-

Cash flows from financing activities:
Repayment of long-term debt		-			(2,124	)
Repayment of line of credit		(70,000	)		(160,000	)
Proceeds from short-swing profits from an investor		-			156,175
Repayment of finance lease obligations		(3,683	)		(3,358	)
Net cash used in financing activities		(73,683	)		(9,307	)

Net increase (decrease) in cash, cash equivalents and restricted cash		1,662,402			(27,362	)
Cash, cash equivalents and restricted cash at beginning of period		2,590,727			2,308,678
Cash, cash equivalents and restricted cash at end of period	$	4,253,129		$	2,281,316

End of period
Cash and cash equivalents	$	2,246,595		$	278,443
Restricted cash		2,006,534			2,002,873
	$	4,253,129		$	2,281,316
Beginning of period
Cash and cash equivalents	$	585,856		$	307,812
Restricted cash		2,004,871			2,000,866
	$	2,590,727		$	2,308,678

Supplemental cash flow information:
Taxes paid	$	-		$	-
Interest paid	$	28,165		$	28,278

Supplemental disclosure of non-cash financing activities:

Upon adoption of ASC 842, Leases, on April 1, 2019 the Company recorded $508,551 of right-use assets and related operating leases liabilities.

See accompanying notes to unaudited condensed consolidated financial statements.

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – 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. (the “Company” or “TIC” or “Tel”) as of ~~December 31, 2017,~~September 30, 2019, the results of operations and changes in stockholders’ equity (deficit) for the three and ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 and ~~December 31, 2016,~~September 30, 2018, and statements of cash flows for the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 and ~~December 31, 2016.~~September 30, 2018. These results are not necessarily indicative of the results to be expected for the full year. The unaudited condensed 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, ~~2017~~2019 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 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, ~~2017,~~2019, as filed with the United States Securities and Exchange Commission (the “SEC”) on July ~~14, 2017~~1, 2019 (the “Annual ~~Report)~~Report”).

Note 2 -– Liquidity and Going Concern

The Aeroflex litigation (see Note 13 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. These unaudited condensed consolidated financial statements have been prepared in conformity with ~~GAAP,~~generally accepted accounting principles (“GAAP”), which contemplates continuation of the Company as a going concern. As ~~discussed~~reflected in ~~Note 15 to~~ the ~~Notes to the Condensed Consolidated Financial Statements,~~accompanying unaudited condensed consolidated balance sheet at September 30, 2019, the Company has recorded ~~total~~estimated damages to date of ~~$4,930,523~~approximately $5.5 million, including interest, as a result of ~~the~~a jury verdict associated with the Aeroflex litigation. The Company has filed for an appeal (see Note 13). In June 2019, Bank of America agreed to extend the Company’s line of credit until March 31, 2020 (see Note 8). While the Company’s operations and profitability have significantly improved, and the Company believes it has sufficient cash and financing in place to fund its plans for the next twelve months, exclusive of any determination that may result from the Aeroflex litigation, due in part to recent large orders it has received that has returned the Company to profitability. The Company may not have sufficient resources to satisfy the judgment if we are not successful in our appeal. We have no commitment from any party to provide additional working capital and there is no assurance that any funding will be available as ~~well~~required, or if available, that its terms will be favorable or acceptable to the Company. This factor raises substantial doubt about the Company’s ability to continue as a going concern within one year of the ~~Court’s decision on punitive damages.~~ date that the financial statements are issued.

The jury found no misappropriation of Aeroflex trade secrets, but it did ~~rule~~find 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, which brings the total Tel damages awarded in this case to approximately $4.9 million.~~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. ~~A hearing on this motion is expected within the next 30 days~~The Court heard these motions and ~~a final decision is expected within the next two to three months.~~such motions were denied. The ~~Judge could deny our motions, reduce the amount of damages or even order a new trial. Once a final decision has been rendered, the~~ Company has ~~30 days to file an~~filed for the appeal. The Company has posted a ~~$2,000,000~~$2 million bond ~~to prevent Aeroflex from enforcement actions until a final decision has been rendered by~~for the ~~Court.~~appeal. This $2 million bond amount ~~would~~will remain in place during the appeal process (See Note 5)13).

The Company is optimistic about the prospects of its appeal for either a judgment as a matter of law or a new trial. The appeal process is expected to take at least another year to complete. However, the Company cannot predict the timing or the outcome of the appeal.

The Company believes it has ~~excellent grounds~~sufficient cash and financing in place to ~~appeal this verdict.~~ fund its plans for the next twelve months, exclusive of any determination that may result from the Aeroflex litigation.

The ~~appeal process would be expected to take several years to complete.~~

~~The~~unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The ability of the Company to continue as a going concern is dependent upon its ability to achieve profitable operations and/or raise additional capital to support the appeal process or pay any final damages amount. In November 2017, the Company signed a subscription agreement in which the Company received $3 million for Series A Convertible Preferred Stock (See Note 14 to the Notes to the Condensed Financial Statements). These funds were used to finance an appeal and provide funds for operations. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 – Summary of Significant Accounting Policies

~~During~~

Revenue Recognition

In May 2014, the ~~nine~~FASB issued ASU 2014-09, Revenue from Contracts with Customers: Topic 606 which supersedes nearly all existing revenue recognition guidance under GAAP. 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 ASU 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. The ASU was effective for the Company in the first quarter of the fiscal year ended March 31, 2019 using either of two methods: (1) retrospective application to each prior reporting period presented with the option to elect certain practical expedients or (2) retrospective application with the cumulative effect of initially applying the ASU recognized at the date of the initial application and providing certain disclosures. The Company adopted Topic 606 pursuant to the method (2) and we determined that any cumulative effect for the initial application did not require an adjustment to retained earnings at April 1, 2018.

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. 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 September 30, 2019.

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 – Summary of Significant Accounting Policies (continued)

Revenue Recognition (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 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 September 30, 2019, approximately $308,708 is expected to be recognized from remaining performance obligations for extended warranties. For the three and six months ended ~~December~~September 30, 2019, the Company recognized revenue of $21,166 and $40,657, respectively, from amounts that were included in Deferred Revenue as compared to $10,687 and $19,620 for the three and six months ended September 30, 2018.

Other Deferred Revenues

For the periods ended September 30, 2019 and March 31, ~~2017, there have been~~2019, the Company has other deferred revenues of $359,488 and $11,926, 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, as it is at this time that the work is completed.

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.

Other

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.

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 ~~material changes~~change in accounting for costs to obtain a contract will be required for the Company to conform with ASC 606.

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 – Summary of Significant Accounting Policies (continued)

Revenue Recognition (continued)

Disaggregation of revenue

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

	For the Three Months Ended September 30, 2019
	Commercial		Government
Sales Distribution
Test Units	$	182,987	$	3,140,454
	$	182,987	$	3,140,454

The remainder of our revenues for the three months ended September 30, 2019 are derived from repairs and calibration of $449,900, replacement parts of $117,661 and extended warranties of $21,166. 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, 2018
	Commercial		Government
Sales Distribution
Test Units	$	280,056	$	1,284,099
	$	280,056	$	1,284,099

The remainder of our revenues for the three months ended September 30, 2018 are derived from repairs and calibration of $566,958, replacement parts of $81,141 and extended warranties of $10,687. 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, 2019
	Commercial		Government
Sales Distribution
Test Units	$	478,910	$	5,644,594
	$	478,910	$	5,644,594

The remainder of our revenues for the six months ended September 30, 2019 are derived from repairs and calibration of $872,756, replacement parts of $181,713 and extended warranties of $40,657. 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, 2018
	Commercial		Government
Sales Distribution
Test Units	$	612,431	$	2,376,681
	$	612,431	$	2,376,681

The remainder of our revenues for the six months ended September 30, 2018 are derived from repairs and calibration of $899,657, replacement parts of $128,766 and extended warranties of $19,620. We do not disaggregate these revenue streams as they are not deemed an important element related to how management operates the business between segments.

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 – Summary of Significant Accounting Policies (continued)

Revenue Recognition (continued)

Disaggregation of revenue (continued)

In the following table, revenue is disaggregated by geography.

	For the Three Months Ended September 30, 2019		For the Three Months Ended September 30, 2018
Geography

United States	$	2,420,423	$	1,879,079
International		1,491,745		343,862
Total	$	3,912,168	$	2,222,941

	For the Six Months Ended September 30, 2019		For the Six Months Ended September 30, 2018
Geography

United States	$	5,332,890	$	3,261,767
International		1,885,740		775,388
Total	$	7,218,630	$	4,037,155

Recently Adopted Authoritative Pronouncements

In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the ~~Company’s significant accounting policies~~income statement. The new standard was effective on April 1, 2019. A modified retrospective transition approach is required, applying the new standard to ~~those previously disclosed~~all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the ~~Annual Report.~~financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. The Company adopted the new standard on April 1, 2019 and uses the effective date as the date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before April 1, 2019. The new standard provides a number of optional practical expedients in transition. The Company elects the ‘package of practical expedients’, which permits the Company not to reassess under the new standard prior conclusions about lease identification, lease classification and initial direct costs.

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Recently Adopted Authoritative Pronouncements (continued)

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the circumstances present. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities, and, if applicable, long-term lease liabilities. Lease liabilities and the corresponding right-of-use assets are recorded based on the present values of lease payments over the lease terms. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the appropriate incremental borrowing rates, which are the rates that would be incurred to borrow on a collateralized basis, over similar terms, amounts equal to the lease payments in a similar economic environment. The Company used 6.25%. ASU 2016-02 did not have an impact on our unaudited condensed consolidated statements of income for the six month period ended September 30, 2019, but had a significant impact on our unaudited consolidated condensed balance sheet as of September 30, 2019. As of September 30, 2019, the Company recognized additional operating lease liabilities of $409,218 with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.

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

Note 4 – Accounts Receivable, net

The following table sets forth the components of accounts receivable:

December 31, 2017 March 31, 2017
Government $ 1,461,090 $ 1,392,482
Commercial 207,167 171,400
Less: Allowance for doubtful accounts (7,500 ) (7,500 )
$ 1,660,757 $ 1,556,382

	September 30, 2019			March 31, 2019
Government	$	1,072,508		$	1,951,729
Commercial		236,886			251,870
Less: Allowance for doubtful accounts		(7,500	)		(7,500	)
	$	1,301,894		$	2,196,099

Note 5 – Restricted Cash to support appeal bond

~~The~~

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 ~~Notes 14 and 15)~~Note 13).

Note 6 – Inventories, net

Inventories consist of:

	September 30, 2019			March 31, 2019

Purchased parts	$	2,525,184		$	2,709,235
Work-in-process		1,042,431			721,397
Finished goods		32,783			-
Less: Inventory reserve		(525,000	)		(498,000	)
	$	3,075,398		$	2,932,632

613

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~Note 6 – Inventories, net~~

~~Inventories consist of:~~

December 31, 2017 March 31, 2017

Purchased parts $ 3,839,370 $ 3,197,378
Work-in-process 817,543 1,272,235
Finished goods 32,411 68,566
Less: Inventory reserve (380,000 ) (330,000 )
$ 4,309,324 $ 4,208,179

Note 7 – Net Income (Loss) per Share

Net income (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 (loss) 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 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 costs attributed to future services.

Three Months Ended Three Months Ended
December 31, 2017 December 31, 2016
Basic net (loss) income per share computation:
  Net (loss) income $ (364,103 ) $ 141,513
  Weighted-average common shares outstanding 3,255,887 3,255,887
  Basic net (loss) income per share $ (0.11 ) $ 0.04
Diluted net (loss) income per share computation
  Net (loss) income $ (364,103 ) $ 141,513
  Add: Change in fair value of warrants - 37,000
  Diluted (loss) income $ (364,103 ) 104,513
  Weighted-average common shares outstanding 3,255,887 3,255,887
  Incremental shares attributable to the assumed exercise of
outstanding stock options and warrants
- 9,248
  Total adjusted weighted-average shares 3,255,887 3,265,135
Diluted net (loss) income per share $ (0.11 ) $ 0.03

	Three Months Ended			Three Months Ended
	September 30, 2019			September 30, 2018
Basic net income (loss) per share computation:
Net income (loss)	$	536,234		$	(191,410	)
Preferred dividends		(80,000	)		(60,000	)
Net income (loss) attributable to common shareholders		456,234			(251,410	)
Weighted-average common shares outstanding		3,255,887			3,255,887
Basic net income (loss) per share	$	0.14		$	(0.08	)
Diluted net income (loss) per share computation
Net income (loss) attributable to common shareholders	$	456,234		$	(251,410	)
Add: Preferred dividends		80,000			-
Diluted income (loss) attributable to common shareholders	$	536,234		$	(251,410	)
Weighted-average common shares outstanding		3,255,887			3,255,887
Incremental shares attributable to the assumed conversion of preferred stock, and exercise of outstanding stock options and warrants		1,689,778			-
Total adjusted weighted-average shares		4,945,665			3,255,887
Diluted net income (loss) per share	$	0.11		$	(0.08	)

	Six Months Ended			Six Months Ended
	September 30, 2019			September 30, 2018
Basic net income (loss) per share computation:
Net income (loss)	$	794,010		$	(937,483	)
Preferred dividends		(160,000	)		(120,000	)
Net income (loss) attributable to common shareholders		634,010			(1,057,483	)
Weighted-average common shares outstanding		3,255,887			3,255,887
Basic net income (loss) per share	$	0.19		$	(0.32	)
Diluted net income (loss) per share computation
Net income (loss) attributable to common shareholders	$	634,010		$	(1,057,483	)
Add: Preferred dividends		160,000			-
Diluted income (loss) attributable to common shareholders	$	794,010		$	(1,057,483	)
Weighted-average common shares outstanding		3,255,887			3,255,887
Incremental shares attributable to the assumed conversion of preferred stock, and exercise of outstanding stock options and warrants		1,689,778			-
Total adjusted weighted-average shares		4,945,665			3,255,887
Diluted net income (loss) per share	$	0.16		$	(0.32	)

714

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7 – Net Income (Loss) per Share (continued)

Nine Months Ended Nine Months Ended
December 31, 2017 December 31, 2016
Basic net (loss) income per share computation:
  Net (loss) income $ (3,570,783 ) $ 823,877
  Weighted-average common shares outstanding 3,255,887 3,255,887
  Basic net(loss)income per share $ (1.10 ) $ 0.25
Diluted net (loss) income per share computation
  Net (loss) income $ (3,570,783 ) $ 823,877
  Change in fair value of warrants - 70,000
  Diluted (loss) income $ (3,570,783 ) 753,877
  Weighted-average common shares outstanding 3,255,887 3,255,887
  Incremental shares attributable to the assumed exercise of
outstanding stock options and warrants
- 10,645
  Total adjusted weighted-average shares 3,255,887 3,266,532
Diluted net (loss) income per share $ (1.10 ) $ 0.23

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

December 31, 2017 December 31, 2016
Convertible preferred stock 1,000,000 -
Stock options 75,000 71,000
Warrants 50,000 -
1,125,000 71,000

	September 30, 2019		September 30, 2018
Convertible preferred stock		-		1,070,222
Stock options		118,500		42,500
Warrants		50,000		50,000
		168,500		1,162,722

Note 8 – ~~Long-Term Debt~~

~~Term Loans with Bank of America~~

~~In November 2014, the Company entered into a term loan in the amount of $1,200,000 with Bank of America. The term loan~~ ~~was~~ ~~for three years, and matured in November 2017. Monthly payments were $36,551 including interest at 6%. The term loan~~ ~~was~~ collateralized by substantially all of the assets of the Company. This loan was fully repaid in November 2017. At December 31, 2017 and March 31, 2017, the outstanding balances were $-0- and $285,810, respectively.

In July 2015, the Company entered into a term loan in the amount of $18,000 with Bank of America. The term loan is for three years, and matures in July 2018. Monthly payments are at $536 including interest at 4.5%. The term loan is collateralized by substantially all of the assets of the Company. At December 31, 2017 and March 31, 2017, the outstanding balances were $3,696 and $8,305, respectively. At December 31, 2017, $3,696 was classified as current.

~~Note 9 -~~ Line of Credit

On March 21, 2016, the Company entered into a line of credit agreement with Bank of America, which expired March 31, 2017. In March 2017, the ~~line of credit was renewed and the expiration date~~Company extended until March 31, 2018. The ~~new~~ line ~~provides~~provided a revolving credit facility with borrowing capacity of up to ~~$1,000,000~~. $1,000,000. There ~~are~~were no covenants or borrowing base calculations associated with this line of credit. ~~Interest on any outstanding balances is payable monthly at an annual interest rate equal~~On August 29, 2018, the Company entered a Loan Modification Agreement (the “Agreement”) with the bank. The Company had been working with the bank and had paid $100,000 to the ~~LIBOR (London Interbank Offered Rates) Daily Floating plus 3.75 percentage points. The Company’s interest rate was 5.319%~~bank to lower the outstanding balance to $900,000 at ~~December 31, 2017. The line is collateralized by substantially all~~the signing of the Agreement. The Agreement had the following provisions:

1)	The Company to make an additional principal payment of $50,000 by October 1, 2018. (The Company made this payment.)

2)	Borrowing base calculation tied to accounts receivable and inventories.

3)	The Agreement expired May 31, 2019.

4)	Interest on any outstanding balances was payable monthly at an annual interest rate equal to the LIBOR (London Interbank Offered Rates) Daily Floating plus 3.75 percentage points.

5)	The line was collateralized by substantially all of the assets of the Company.

6)	The Company will make principal payments of $5,000 per month from September 30, 2018 through November 30, 2018 and principal payments of $10,000 per month from December 31, 2018 to May 31, 2019.

7)	Beginning with the fiscal year ended March 31, 2019, the Company must maintain a debt service coverage ratio.

During the ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2019 the Company ~~borrowed $800,000 from~~repaid $70,000 against this line of credit. As of ~~December 31, 2017~~September 30, 2019 and March 31, ~~2017,~~2019, the outstanding balances were ~~$1,000,000~~$730,000 and ~~$200,000,~~$800,000, respectively. As of ~~December 31, 2017~~September 30, 2019 the remaining availability under this line is $-0-.

During June 2019, Bank of America agreed to extend the Company’s line of credit until March 31, 2020. The new Loan Modification Agreement (the “Amended Loan Modification Agreement”) with the bank contains the following provisions:

1)	The Company to make an additional principal payment of $10,000 at closing.
2)	Borrowing base calculation tied to accounts receivable.
3)	The Amended Loan Modification Agreement expires March 31, 2020.
4)	Interest on any outstanding balances is payable monthly at an annual interest rate equal to the LIBOR (London Interbank Offered Rates) Daily Floating plus 3.75 percentage points. The Company’s interest rate was 5.77% at September 30, 2019.
5)	The line is collateralized by substantially all of the assets of the Company.
6)	The Company will make principal payments of $10,000 per month until March 31, 2020.
7)	The covenant for the debt service ratio is deleted.

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note ~~10 – Deferred Revenues~~

In June 2016, the Company negotiated a settlement with a customer in the amount of $679,935 for price increases due to delays on a production release. Deferred revenues are recognized based upon the shipment of units under this contract. During the nine months ended December 31, 2017, the Company recognized the remaining balance of $73,302 as compared to $470,288 for the nine months ended December 30, 2016. As of December 31, 2017, the remaining deferred revenues related to the above-mentioned settlement was $-0- as compared to $73,302 at March 31, 2017.

~~During the nine months ended December 31, 2017, the Company recognized revenues in the amount of $70,000 that pertained to fiscal year 2017 shipments and that were not recorded in fiscal year 2017.~~

~~Note 11~~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 ~~table~~tables below ~~presents~~present information about reportable segments within the avionics business for the three and ~~nine~~six month periods ending ~~December 31, 2017~~September 30, 2019 and ~~2016:~~

Three Months Ended
December 31, 2017

Avionics
Government

Avionics
Commercial

Avionics
Total

Corporate
Items
Total
Net sales $ 1,825,744 $ 800,049 $ 2,625,793 $ - $ 2,625,793
Cost of sales 1,013,481 675,632 1,689,113 - 1,689,113
Gross margin 812,263 124,417 936,680 - 936,680

Engineering, research, and development 546,691 - 546,691
Selling, general and administrative 225,610 322,781 548,391
Litigation costs 134,765 134,765
Legal damages 30,523 30,523
Amortization of deferred financing costs - 649 649
Change in fair value of common stock warrants - (5,000 ) (5,000 )
Proceeds from life insurance - -
Interest expense, net - 14,097 14,097
Total expenses 772,301 497,815 1,270,116
Income (loss) before income taxes $ 164,379 $ (497,815 ) $ (333,436 )

2018:

Three Months Ended September 30, 2019	Avionics Government		Avionics Commercial		Avionics Total		Corporate Items			Total
Net sales	$	3,140,454	$	771,714	$	3,912,168	$	-		$	3,912,168
Cost of sales		1,626,089		412,446		2,038,535		-			2,038,535
Gross margin		1,514,365		359,268		1,873,633		-			1,873,633

Engineering, research, and development						525,739		-			525,739
Selling, general and administrative						278,026		347,137			625,163
Litigation costs								91,553			91,553
Change in fair value of common stock warrants								(5,500	)		(5,500	)
Interest income						-		(1,018	)		(1,018	)
Interest expense - judgment								90,596			90,596
Interest expense						-		10,866			10,866
Total expenses						803,765		533,634			1,337,399
Income (loss) before income taxes					$	1,069,868	$	(533,634	)	$	536,234

Three Months Ended September 30, 2018	Avionics Government		Avionics Commercial		Avionics Total		Corporate Items			Total
Net sales	$	1,284,099	$	938,842	$	2,222,941	$	-		$	2,222,941
Cost of sales		714,590		509,138		1,223,728		-			1,223,728
Gross margin		569,509		429,704		999,213		-			999,213

Engineering, research, and development						503,380		-			503,380
Selling, general and administrative						194,179		361,232			555,411
Litigation costs								35,848			35,848
Interest income						-		(1,009	)		(1,009	)
Interest expense - judgment								72,003			72,003
Interest expense						-		24,990			24,990
Total expenses						697,559		493,064			1,190,623
Income (loss) before income taxes					$	301,654	$	(493,064	)	$	(191,410	)

916

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 119 – Segment Information (continued)

Three Months Ended
December 31, 2016

Avionics
Government

Avionics
Commercial

Avionics
Total

Corporate
Items
Total
Net sales $ 3,771,384 $ 465,135 $ 4,236,519 $ - $ 4,236,519
Cost of sales 2,297,157 305,111 2,602,268 - 2,602,268
Gross margin 1,474,227 160,024 1,634,251 - 1,634,251

Engineering, research, and development 615,007 - 615,007
Selling, general and administrative 256,599 326,281 582,880
Litigation costs 282,490 282,490
Amortization of deferred financing costs - 1,359 1,359
Change in fair value of common stock warrants - (37,000 ) (37,000 )
Interest expense, net - 11,620 11,620
Total expenses 871,606 584,750 1,456,356
Income (loss) before income taxes $ 762,645 $ (584,750 ) $ 177,895

Nine Months Ended
December 31, 2017

Avionics
Government

Avionics
Commercial

Avionics
Total

Corporate
Items
Total
Net sales $ 5,826,763 $ 2,128,272 $ 7,955,035 $ - $ 7,955,035
Cost of sales 3,489,223 1,887,972 5,377,195 - 5,377,195
Gross margin 2,337,540 240,300 2,577,840 - 2,577,840

Engineering, research, and development 1,691,631 - 1,691,631
Selling, general and administrative 861,795 1,019,277 1,881,072
Litigation costs 560,610 560,610
Legal damages 2,130,523 2,130,523
Amortization of deferred financing costs - 3,363 3,363
Change in fair value of common stock warrants - (95,000 ) (95,000 )
Proceeds from life insurance (92,678 ) (92,678 )
Interest expense, net - 38,435 38,435
Total expenses 2,553,426 3,564,530 6,117,956
Income (loss) before income taxes $ 24,414 $ (3,564,530 ) $ (3,540,116 )

Nine Months Ended
December 31, 2016

Avionics
Government

Avionics
Commercial

Avionics
Total

Corporate
Items
Total
Net sales $ 12,981,768 $ 1,673,149 $ 14,654,917 $ - $ 14,654,917
Cost of sales 8,067,636 1,250,789 9,318,425 - 9,318,425
Gross margin 4,914,132 422,360 5,336,492 - 5,336,492

Engineering, research, and development 1,783,655 - 1,783,655
Selling, general and administrative 946,589 1,096,333 2,042,922
Litigation costs 609,330 609,330
Amortization of deferred financing costs - 4,072 4,072
Change in fair value of common stock warrants - (288,203 ) (288,203 )
Interest expense, net - 46,953 46,953
Total expenses 2,730,244 1,468,485 4,198,729
Income (loss) before income taxes $ 2,606,248 $ (1,468,485 ) $ 1,137,763

~~TEL-INSTRUMENT ELECTRONICS CORP.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Six Months Ended September 30, 2019	Avionics Government		Avionics Commercial		Avionics Total		Corporate Items			Total
Net sales	$	5,644,594	$	1,574,036	$	7,218,630	$	-		$	7,218,630
Cost of sales		2,868,656		894,737		3,763,393		-			3,763,393
Gross margin		2,775,938		679,299		3,455,237		-			3,455,237

Engineering, research, and development						1,050,842		-			1,050,842
Selling, general and administrative						512,604		725,030			1,237,634
Litigation costs								102,060			102,060
Change in fair value of common stock warrants								73,000			73,000
Interest income						-		(2,018	)		(2,018	)
Interest expense - judgment								171,106			171,106
Interest expense						-		28,603			28,603
Total expenses						1,563,446		1,097,781			2,661,227
Income (loss) before income taxes					$	1,891,791	$	(1,097,781	)	$	794,010

Six Months Ended September 30, 2018	Avionics Government		Avionics Commercial		Avionics Total		Corporate Items			Total
Net sales	$	2,376,681	$	1,660,474	$	4,037,155	$	-		$	4,037,155
Cost of sales		1,475,844		1,080,785		2,556,629		-			2,556,629
Gross margin		900,837		579,689		1,480,526		-			1,480,526

Engineering, research, and development						1,020,703		-			1,020,703
Selling, general and administrative						411,307		710,629			1,121,936
Litigation costs								75,119			75,119
Interest income						-		(2,007	)		(2,007	)
Interest expense – judgment								143,223			143,223
Interest expense						-		59,035			59,035
Total expenses						1,432,010		985,999			2,418,009
Income (loss) before income taxes					$	48,516	$	(985,999	)	$	(937,483	)

Note 1210 – 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 has ~~provided a 100% valuation allowance against its deferred tax asset at December 31, 2017 and March 31, 2017.~~

On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted into law and the new legislation contains several key tax provisions that affected us, including a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the tax law changesapproximately $3.1 million in ~~the period of enactment, such as re-measuring our U.S.~~ deferred tax assets, and ~~liabilities as well as reassessing~~we have provided a valuation allowance that offsets the ~~net realizability~~majority of ~~our~~the asset. 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~~assets. Due to the adverse judgment and ~~liabilities.~~the resulting losses the past few years, management has established a valuation allowance against this deferred tax asset. This valuation allowance could be reversed when the Company returns to profitability, and can demonstrate that it will be able to utilize the deferred tax asset. The ~~Tax Act had~~valuation will be re-evaluated as the Company continues to be profitable and will be utilizing a certain portion of its deferred tax asset. Currently, the Company is utilizing existing fully-reserved NOL’s to offset taxable income, thereby resulting in no ~~impact on the accompanying financial statements.~~income tax provision.

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1311 – Fair Value Measurements

FASB ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements.

As defined in ASC 820-10, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observation of those inputs. ASC 820-10 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

The three levels of the fair value hierarchy defined by ASC 820-10 are as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

-	Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

~~TEL-INSTRUMENT ELECTRONICS CORP.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Note 13 – Fair Value Measurements (continued)~~

The valuation techniques that may be used to measure fair value are as follows:

· ●	Market approach — Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

· ●	Income approach — Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method.

· ●	Cost approach — Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).

The carrying value of the Company’s borrowings is a reasonable estimate of its fair value as borrowings under the Company’s credit facility reflect currently available terms and conditions for similar debt.

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of ~~December 31, 2017~~September 30, 2019 and March 31, ~~2017.~~2019. As required by ASC 820-10, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 11 – Fair Value Measurements (continued)

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

~~December 31, 2017~~

~~Level I~~

~~Level II~~

~~Level III~~

~~Total~~

~~Total Assets~~

~~Warrant liability~~

~~Total Liabilities~~

March 31, 2017 Level I Level II Level III Total
Total Assets $ - $ - $ - $ -

Warrant liability - - 95,000 95,000
Total Liabilities $ - $ - $ 95,000 $ 95,000

September 30, 2019	Level I		Level II		Level III		Total
Total Assets	$	-	$	-	$	-	$	-

Warrant liability	$	-	$	-	$	116,500	$	116,500
Total Liabilities	$	-	$	-	$	116,500	$	116,500

March 31, 2019	Level I		Level II		Level III		Total
Total Assets	$	-	$	-	$	-	$	-

Warrant liability	$	-	$	-	$	43,500	$	43,500
Total Liabilities	$	-	$	-	$	43,500	$	43,500

The Company adopted the guidance of ASC 815 “Derivative and Hedging”, which requires that we mark the value of our warrant liability to market and recognize the change in valuation in our statement of operations each reporting period. Determining the warrant liability to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant.

The following table provides a summary of the changes in fair value of our Level 3 financial liabilities from March 31, ~~2017~~2019 through ~~December 31, 2017,~~September 30, 2019, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to the liability held at ~~December 31, 2017:~~

Level 3 Reconciliation
Balance at
beginning of period

(Gains) and losses
for the period
(realized and unrealized)

Purchases, issuances,
sales and
settlements, net

Transfers in or
out of Level 3

Balance at the
end of period

Warrant liability $ 95,000 $ (95,000 ) $ - $ - $ -
Total Liabilities $ 95,000 $ (95,000 ) $ - $ - $ -

September 30, 2019:

Level 3 Reconciliation

Balance at

beginning of period

(Gains) and losses

for the period

(realized and unrealized)

Purchases, issuances,

sales and

settlements, net

Transfers in or

out of Level 3

Balance at the

end of period

Warrant liability

43,500

73,000

116,500

Total Liabilities

43,500

73,000

116,500

The Company has remaining warrants with an outside investor to purchase 50,000 shares of the Company’s common stock at an exercise price of $3.35 per share or exercising the “put option” to the Company. The warrant liability of the 50,000 warrants was ~~$-0-~~$116,500 at ~~December 31, 2017~~September 30, 2019 as compared to ~~$95,000~~$43,500 at March 31, ~~2017.~~

2019. These warrants must be converted at a purchase price of $3.35 per share or the cash put option must be exercised by September 10, 2019.

The holder has the right, exercisable at any time, in writing (the “Warrant Put Notice”, to cause the Company, subject to the terms and conditions herein, to purchase from the holder all, or any portion, of the warrant for the warrant put repurchase price (the “Repurchase Price”). The Repurchase Price is the greater of 1) Adjusted EBITDA (as defined below) per share as of the date of the Warrant Put Notice, less $0.01, multiplied by the number of warrants or 2) the product of the current market price per share as of the date of the Warrant Put Notice, less the purchase price of the warrant or warrants, multiplied by the number of warrants, if this amount is higher. “Adjusted EBITDA” means EBITDA, multiplied by 5, plus cash and cash equivalents less unpaid debt divided by the number of shares outstanding on a fully diluted basis. As such, the values of the warrants at September 30, 2019 reflect the higher of these two options for each specific warrant.

On September 3, 2019, the holder of the warrant informed the Company that it has elected to exercise its “put option”, thereby requiring the Company to purchase the warrants held by holder. Total warrants were to purchase a total of 50,000 shares of the Company’s common stock.

The value of the warrants for the 50,000 shares of the Company’s common stock at the time of exercise was $116,500, and the Company paid this amount using cash from operations in October 2019, thereby extinguishing the warrant liability.

1219

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1412 – ~~Series A 8% Convertible Preferred Stock~~Operating Lease Liability

~~On November 14, 2017,~~

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 ~~entered into definitive subscription agreements with~~uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an ~~accredited investor, pursuant to which the investor purchased an aggregate of 500,000 shares~~estimate of the ~~Company’s Series A Preferred Stock (the “Series A Preferred”) for~~interest rate the Company would incur at lease commencement to borrow an ~~aggregate~~amount equal to the lease payments on a collateralized basis over the term of ~~$3 million.~~a lease. The Company ~~intends~~used incremental borrowing rates as of April 1, 2019 for operating leases that commenced prior to ~~use such proceeds~~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 September 30, 2019.

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, 2019:

Remaining payments 2020	$	113,940
2021		227,880
2022		93,381
Total undiscounted future minimum lease payments		435,201
Less: Difference between undiscounted lease payments and discounted lease liabilities		(25,983	)
Present value of net minimum lease payments		409,218
Less current portion		(208,201	)
Operating lease liabilities – long-term	$	201,017

Total rent expense for the ~~payment of any Court judgment and/or settlement~~three and six months ended September 30, 2019 was $171,618 and $83,824 for the three and six months ended September 30, 2019 as compared to $180,927 and $94,229 for the three and six months ended September 30, 2018.

Disclosures related to ~~the Aeroflex Wichita, Inc. litigation, working capital purposes, and for payment~~periods prior to adoption of fees and expenses associated with this transaction. The Closing occurred following the satisfaction of customary closing conditions. The securities issued pursuant to the Subscription Agreements were not registered under the Securities Act of 1933, as amended (the “Securities Act”), but qualified for exemption under Section 4(a)(2) of the Securities Act. The securities were exempt from registration under Section 4(a)(2) of the Securities Act because the issuance of such securities by the Company did not involve a “public offering,” as defined in Section 4(a)(2) of the Securities Act, due to the insubstantial number of persons involved in the transaction, size of the offering, manner of the offering and number of securities offered. ASU 2016-02

The Company ~~did not undertake an offering~~adopted ASU 2016-02 using a modified retrospective adoption method at April 1, 2019 as noted in ~~which it sold a high number of securities~~Note 3 “Recently Adopted Authoritative Pronouncements”. As required, the following disclosure is provided for periods prior to ~~a high number of investors. In addition, these shareholders had the necessary investment intent~~adoption. Minimum operating lease commitments as required by Section 4(a)(2) of the Securities Act since they agreed to, and received, share certificates bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(a)(2) of the Securities Act.

The shares of Series A Preferred have a stated value of $6.00 per share (the “Series A Stated Value”) and are convertible into Common Stock at a price of $3.00 per share. The holders of shares of the Series A 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 A Stated Value of such shares of Series A 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 A 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~~31, 2019 that have initial or remaining lease terms in excess of ~~each calendar~~one year all dividends on any share of Series A Preferred shall accumulate whether or not declared by the Board and shall remain accumulated dividends until paid. As of December 31, 2017, the Company accrued $30,667 for dividends within mezzanine equity on the accompanying Balance Sheet. Since there were not sufficient authorized shares to allow for full conversion of the preferred stock into common stock at December 31, 2017, preferred stock was classifiedare as mezzanine equity. At the January 2018 annual meeting approval was obtained for the additional authorized shares. As such, future financial statements will have preferred stock classified as permanent stockholders’ equity.

The Holders will vote together with the holders of the Company’s Common Stock on an as-converted basis on each matter submitted to a vote of holders of Common Stock (whether at a meeting of shareholders or by written consent). Effective beginning on the third anniversary of the Original Issue Date, and upon 30 days’ written notice to the Holders of Series A Preferred, the Company may, in its sole discretion, redeem the Series A Preferred at the aggregate Series A Stated Value plus any accrued and accumulated but unpaid dividends.

follows:

Years Ended March 31,	Amount
2020	$	327,434
2021		312,431
2022		128,610
	$	768,475

Note 1513 – 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”)~~(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~~Table 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

Contents

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1513 – Litigation (continued)

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.

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.

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. 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 it did rule 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 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. A hearing on this motion is expected within the next 30 days and a final decision is expected within the next two to three months. The Judge could deny our motions, reduce the amount of damages or even order a new trial. Once a final decision has been rendered, the Company has 30 days to file an appeal. The Company has posted a $2,000,000 bond to prevent Aeroflex from enforcement actions until a final decision has been rendered by the Court. This $2 million bond amount would remain in place during the appeal process (See Note 5). The Company believes it has excellent grounds to appeal this verdict. The appeal process would be expected to take several years to complete.

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.

~~TEL-INSTRUMENT ELECTRONICS CORP.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Note 16 – New Accounting Pronouncements~~

In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments should be applied prospectively to an award modified on or after the adoption date. For public business entities, this update is effective for financial statements issued for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted. We are evaluating whether this ASU will have a material impact on our consolidated financial statements.

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09 (“Improvements to Employee Share-Based Payment Accounting”) which simplifies several aspects of accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard was effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. The Company adopted this standard and it did not have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 (“Leases”), which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. The new standard is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. The adoption of this ASU will increase assets and liabilities for operating leases. The Company is evaluating the impact that the adoption of this standard will have on the Company’s consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, which is an update to Topic 740, “Income Taxes”. This update requires that all deferred tax assets and liabilities be classified as non-current. The Company adopted this update, which is reflected in the accompanying balance sheets. The adoption of this update did not have any impact on the Company’s results of operations.

In August 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements - Going Concern to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern. The guidance requires management to assess whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. When management identifies such conditions or events, a footnote disclosure is required to disclose their nature, as well as management’s plans to alleviate the substantial doubt to continue as a going concern. The standard became effective for our fiscal year end 2017.

In May 2014, the FASB issued ASU 2014-09 that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. In March 2016, the FASB issued ASU 2016-08 which further clarifies the guidance on the principal versus agent considerations within ASU 2014-09. In April 2016, the FASB issued ASU 2016-10 to expand the guidance on identifying performance obligations and licensing within ASU 2014-09. In May 2016, the FASB issued ASU 2016-12 to improve revenue recognition in the areas of collectability, presentation of sales tax and other similar taxes collected from customers, noncash consideration, contract modifications and completed contracts at transition. This update also amends the disclosure requirements within ASU 2014-09 for entities that retrospectively apply the guidance. The latest amendments are intended to address implementation issues that were raised by stakeholders and discussed by the Revenue Recognition Transition Resource Group, and provide additional practical expedients. These standards are effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company is assessing their implementation process and the potential impact on its existing revenue accounting policies and newly required financial statement disclosures. The Company has not yet determined the impact from the adoption of the new standard on either its financial position or results of operations.

~~TEL-INSTRUMENT ELECTRONICS CORP.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Note 16 – New Accounting Pronouncements (continued)~~

ASU 2016-18, Restricted Cash, updates Topic 230, Statement of Cash Flows, to require that a statement of cash flows explain the change during the period in restricted cash or restricted cash equivalents, in addition to changes in cash and cash equivalents. That is, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Consequently, transfers between cash and restricted cash will not be presented as a separate line item in the operating, investing or financing sections of the cash flow statement. The ASU includes examples of the revised presentation guidance, and additional presentation and disclosure requirements apply. The ASU is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied retrospectively to each period presented. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.

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

~~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 “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 identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended March 31, 2017, filed with the SEC on July 14, 2017, relating to the Company’s industry, the Company’s operations and results of operations, and any businesses that the Company may acquire. 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 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 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 Aeroflex litigation (see Note 15) has been hugely disappointing and has strained our finances even with the preferred stock offering. If the Judge does not change the result or vacate the damage award based on our latest motions, we will appeal this decision. 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. A hearing on this motion is expected within the next 30 days and a final decision is expected within the next two to three months. The Judge could deny our motions, reduce the amount of damages or even order a new trial. Once a final decision has been rendered, the Company has 30 days to file an appeal. The Company has posted a $2,000,000 bond to prevent Aeroflex from enforcement actions until a final decision has been rendered by the Court. This $2 million bond amount would remain in place during the appeal process (See Note 5). The Company believes it has excellent grounds to appeal this verdict. The appeal process would be expected to take several years to complete. We ~~believe that we~~ ~~will have approximately~~ 2-3 years to generate sufficient cash or secure additional financing to support the repayment of the remaining $2.9 million not covered by the $2 million appeal bond, if we do not prevail with the appeal.

The Company continues to pursue international opportunities with its “Drive to Mode 5” marketing campaign. All allied countries have a “drop dead” date of January 1, 2020 for implementing Mode 5 capability; as a result, we believe that this international Mode 5 business will remain strong for at least the next three years. 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 new T-47/M5 Mode 5 IFF test set will be a cost-effective upgrade option for our large installed base of Mode 4 test sets and we have seen substantial interest and orders for this test set from a number of countries. In addition to international Mode 4 business, we also believe that we will receive some sizable orders from the U.S. Department of Defense (the “DOD”) for additional TS-4530A test sets this calendar year. We believe that this will help drive revenues and profitability growth.

We have intensified our marketing efforts and increased our investment in research and development. We continue to emphasize the importance of capturing the majority share of the large IFF international market which we believe could generate substantial revenues starting later this fiscal year, and we have been working with international partners to ensure that we are well-positioned in this market. The new T-47M5 Mode 5 IFF test set will be a cost-effective upgrade option for our large installed base of Mode 4 test sets and we began shipment of this test set in the quarter ended December 31, 2017. Our business development team met with several European and Far Eastern customers with the intention of securing volume Mode 5 orders which should commence later this calendar year. We are currently pursuing opportunities in Australia and New Zealand and other areas in the Middle East and Far East.

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

~~Overview (continued)~~

The Company believes its real long-term growth potential is in our new line of modular hand-held test sets. We expect that these hand-held test sets will provide us with the opportunity to expand from our relatively narrow avionics test market niche and enter the much larger secure communications radio test market. We are actively working to identify and secure partners to enter this growth market and we believe that our new hardware platform provides unmatched capabilities in a market leading form factor. Production prototypes of this new test set were available for view at the January 17, 2018 Annual Meeting. 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.

The commercial avionics industry is undergoing a great deal of regulatory change including the requirement that all aircraft be equipped with ADS-B transponders as well as the introduction of new UAT navigation for the general aviation market. We believe that our new hand-held products, which we are planning to introduce in the near term, will generate increased market share at attractive gross margin levels. The Company is also targeting the extremely large commercial and military radio test set market which is many times the size of our traditional avionics test market. We are also working closely with our military customers on new potential market opportunities that will be needed to maintain our sales and profitability growth.

~~We continue to evaluate other attractive potential market opportunities.~~

On November 14, 2017 the Company completed a $3 million issuance of its Series A Preferred Stock with an existing investor. This preferred stock includes an 8% dividend rate and is convertible into shares of our common stock at a price of $3.00 per share. The proceeds from this transaction are to be used to finance the appeal and for working capital purposes.

On March 21, 2016, the Company entered into a line of credit agreement with Bank of America, which expired March 31, 2017. In March 2017, the line of credit was renewed and the expiration date extended until March 31, 2018. ~~The Company plans to renew this line of credit, but there is no assurance that the line will be renewed or that the terms will be the same.~~ ~~The line provides a revolving credit facility with borrowing capacity of up to $1,000,000~~. There are no covenants or borrowing base calculations associated with this line of credit. Interest on any outstanding balances is payable monthly at an annual interest rate equal to the LIBOR (London Interbank Offered Rates) Daily Floating plus 3.75 percentage points. The Company’s interest rate was 5.319% at December 31, 2017. The line is collateralized by substantially all of the assets of the Company. During the nine months ended December 31, 2017, the Company borrowed $800,000 from this line of credit. As of December 31, 2017 and March 31, 2017, the outstanding balances were $1,000,000 and $200,000, respectively. As of December 31, 2017 the remaining availability under this line is $-0-.

On July 27, 2017, the Company received a letter from the staff of the NYSE American (the “Exchange”) stating that, based on Tel’s financial statements at March 31, 2017, Tel is not in compliance with Section 1003(a)(i) of the NYSE American Company Guide, which requires that a company’s stockholders’ equity be $2.0 million or more if it has reported net losses in two of its last three fiscal years (the “Stockholders’ Equity Requirement”). As of March 31, 2017, the Company had a stockholders’ deficit of $54,361, which resulted from litigation costs, the accrual of $2.8 million in damages, as well as the recording of a valuation allowance against the Company’s deferred tax asset of $3.5 million, which resulted in the Company recording a net loss of $4.8 million for the fiscal year ended March 31, 2017, thus bringing the Company below the Stockholders’ Equity Requirement.

The Company submitted is plan to the Exchange, a plan advising of the actions the Company has taken or will take to regain compliance with the Stockholders’ Equity Requirement by January 29, 2019. In October 2017, the Exchange accepted the Company’s plan. The Company continues to provide updates to the Exchange.

Tel’s stock will continue to be listed on the NYSE American while Tel works to regain compliance with the Stockholders’ Equity Requirement. The Company’s common stock will continue to trade under the symbol “TIK”. The Company’s receipt of such notification from the Exchange does not affect the Company’s business, operations or reporting requirements with the U.S. Securities and Exchange Commission.

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

~~Results of Operations~~

~~Sales~~

For the three months ended December 31, 2017, total net sales decreased $1,610,726 (38.0%) to $2,625,793, as compared to $4,236,519 for the three months ended December 31, 2016. Avionics government sales decreased $1,945,640 (51.6%) to $1,825,744 for the three months ended December 31, 2017, as compared to $3,771,384 for the three months ended December 31, 2016. The decrease in sales is mostly attributed to the decrease in shipment of the U.S. Army TS-4530A Kits and Sets, and the CRAFT units associated with the U.S. Navy programs, which contracts have now been completed and the T-47N, partially offset by the increase in sales associated with the initial shipments of the T-47/M5. Commercial sales increased $334.914 (72.0%) to $800,049 for the three months ended December 31, 2017 as compared to $465,135 for the three months ended December 31, 2016. This increase is attributed to the increased sales from our repair business as well as increased shipments of the TR-220 to a major U.S. airline.

For the nine months ended December 31, 2017, total net sales decreased $6,699,882 (45.7%) to $7,955,035, as compared to $14,654,917 for the nine months ended December 31, 2016. Avionics government sales decreased $7,155,005 (55.1%) to $5,826,763 for the nine months ended December 31, 2017, as compared to $12,981,768 for the nine months ended December 31, 2016. The decrease in sales is mostly attributed to the decrease in shipment of the U.S. Army TS-4530A Kits and Sets, and the CRAFT and ITATS units associated with the U.S. Navy programs, which contracts have now been completed. Commercial sales increased $455,123 (27.2%) to $2,128,272 for the nine months ended December 31, 2017 as compared to $1,673,149 for the nine months ended December 31, 2016. This increase is attributed to the increased sales of the TR-220 and the increase in sales from our repair business.

~~Gross Margin~~

For the three and nine months ended December 31, 2017, total gross margin decreased $697,571 (42.7%) and $2,758.652 (51.7%) to $936,680 and $2,577,840, respectively, as compared to $1,634,251 and $5,336,492 for the three and nine months ended December 31, 2016, respectively, primarily as a result of the lower volume as well as labor and overhead variances as a result of the lower volume. The gross margin percentage for the three months ended December 31, 2017 was 35.7%, as compared to 38.6% for the three months ended December 31, 2016. The gross margin percentage for the nine months ended December 31, 2017 was 32.4%, as compared to 36.4% for the nine months ended December 31, 2016.

~~Operating Expenses~~

Selling, general and administrative expenses decreased $34,489 (5.9%) and $161,850 (7.9%) to $548,391 and $1,881,072, respectively, for the three and nine months ended December 31, 2017, as compared to $582,880 and $2,042,922 for the three months ended December 31, 2016, respectively. These decreases were primarily attributed to lower salaries and related expenses and lower accrued profit sharing expenses offset partially by higher commission fees, shareholder communication expenses and consulting fees.

Litigation expenses decreased $147,725 and $48,720 to $134,765 and $560,610, respectively, for the three and nine months ended December 31, 2017 as compared to $282,490 and $609,330 for the three and nine months ended December 31, 2016. The litigation expenses in the quarter ended December 31, 2017 related to the legal expenses for the additional court motions and securing the appeal bond.

The Company recorded $30,323 and $2,130,523 in additional legal damages for the three and nine months ended December 31, 2017 as a result of the Court’s decision regarding punitive damages. The additional expenses for the quarter related to the accrued interest on the assessed damages.

Engineering, research and development expenses decreased $68,316 (11.1%) and $92,024 (5.2%) to $546,691 and $1,691,631, respectively, for the three and nine months ended December 31, 2017 as compared to $615,007 and $1,783,655 for the three and nine months ended December 31, 2016. The Company continues to invest in new products by taking advantage of our CRAFT and TS-4530A technology to develop smaller hand-held products, which will broaden our product line for both commercial and military applications. The Company has completed its development of the T-47/M5 Mode 5 test set, which began initial shipments in the quarter ended December 31, 2017, and which we believe will compete effectively in the international market.

~~(Loss) Income from Operations~~

As a result of the above, the Company recorded losses from operations of $323,690 and $3,685,996 for the three and nine months ended December 31, 2017, as compared to income from operations of $153,874 and $900,585 for the three and nine months ended December 31, 2016.

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

~~Other Income (Expense), Net~~

For the three months ended December 31, 2017, total other expense was $9,746, as compared to other income of $24,021 for the three months December 31, 2016. This decrease in other income is primarily due to the loss on the change in the valuation of common stock warrants as compared to a gain in the same period last year.

For the nine months ended December 31, 2017, total other income was $145,880, as compared to other income of $237,178 for the nine months December 31, 2016. This decrease in other income is primarily due to the lower gain on the change in the valuation of common stock warrants as compared to a gain in the same period last year offset partially by proceeds from a life insurance policy.

~~(Loss) Income before Income Taxes~~

As a result of the above, the Company recorded a loss before taxes of $333,436 and $3,540,116 for the three and nine months ended December 31, 2016, as compared to income before taxes of $177,895 and $1,137,763 for the three and nine months ended December 31, 2016.

~~Income Tax Provision/Benefit~~

For the three and nine months ended December 31, 2017, the Company recorded no income tax benefit as such amount was offset by a valuation allowance. For the three and nine months ended December 31, 2016, the Company reported provisions for income tax in the amounts of $36,382 and $313,886, respectively.

~~Net (Loss) Income~~

As a result of the above, the Company recorded net losses of $333,436 and $3,540,116 for the three and nine months ended December 31, 2017, as compared to net income of $141,513 and $823,877 for the three and nine months ended December 31, 2016.

~~Liquidity and Capital Resources~~

At December 31, 2017, the Company had net negative working capital of $512,731 as compared to positive working capital of $214,560 at March 31, 2017. This change is primarily the result of the additional legal damages offset partially by the cash received from the issuance of preferred stock which was used to obtain a letter of credit to secure the appeal bond and additional amounts drawn from the line of credit.

These condensed consolidated financial statements have been prepared in conformity with GAAP, which contemplates continuation of the Company as a going concern. As discussed in Note 15 to the Notes to the Condensed Consolidated Financial Statements, the Company has recorded total damages of $4,930,523 as a result of the jury verdict associated with the Aeroflex litigation as well as the Court’s decision on punitive damages. The jury found no misappropriation of Aeroflex trade secrets but it did rule that the Company tortiously interfered with a prospective business opportunity and awarded damages. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex. The Court conducted further hearings on the Company’s post-trial motions which sought to reduce the damages award of $2.8 million, as well as the punitive damages claim. The Court denied the Company’s motions and awarded Aeroflex an additional $2.1 million of punitive damages, which brings the total Tel damages awarded in this case to approximately $4.9 million. 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. A hearing on this motion is expected within the next 30 days and a final decision is expected within the next two to three months. The Judge could deny our motions, reduce the amount of damages or even order a new trial. Once a final decision has been rendered, the Company has 30 days to file an appeal. The Company has posted a $2,000,000 bond to prevent Aeroflex from enforcement actions until a final decision has been rendered by the Court. This $2 million bond amount would remain in place during the appeal process (See Note 5). The Company believes it has excellent grounds to appeal this verdict. The appeal process would be expected to take several years to complete.

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

~~The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business.~~ The ability of the Company to continue as a going concern is dependent upon its ability to achieve profitable operations and/or raise additional capital to support the appeal process or pay any final damages amount. In November 2017, the Company signed a subscription agreement in which the Company received $3 million for Series A Convertible Preferred Stock (See Note 14 to the Notes to the Condensed Financial Statements). These funds were used to finance an appeal and provide funds for operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

~~During the nine months ended December 31, 2017, the Company’s cash balance decreased by $23,890 to $263,983. The Company’s principal sources and uses of funds were as follows:~~

~~Cash used in operating activities.~~ For the nine months ended December 31, 2017, the Company used $3,399,429 in cash for operations as compared to providing $1,303,739 in cash from operations for the nine months ended December 31, 2016. This increase in cash used for operations is the result of using $2,000,000 to obtain a letter of credit to secure the appeal bond, lower operating income, increase in accounts receivable and inventories offset partially by the increase in accounts payable and accrued expenses and accrued legal damages.

~~Cash used in investing activities~~. For the nine months ended December 31, 2017, the Company used $89,396 of its cash for investment activities, as compared to $37,070 for the nine months ended December 31, 2016 as a result of an increase in the purchase of capital equipment.

~~Cash provided by (used in) financing activities.~~ For the nine months ended December 31, 2017, the Company provided $3,464,935 in cash from financing activities as compared to using $1,077,148 for the nine months ended December 31, 2016 primarily as a result of the proceeds from issuance of preferred stock and amounts from the line of credit. The nine months ended December 31, 2016 included a $720,000 payment of a warrant liability that did not occur this year.

~~In November 2014, the Company entered into a term loan in the amount of $1,200,000 with Bank of America. The term loan~~ ~~was~~ ~~for three years, and matures in November 2017. Monthly payments are at $36,551 including interest at 6%. The term loan~~ ~~was~~ collateralized by substantially all of the assets of the Company. This loan was fully repaid in November 2017. At December 31, 2017 and March 31, 2017, the outstanding balances were $-0- and $285,810, respectively.

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

~~Liquidity and Capital Resources (continued)~~

The Aeroflex litigation (see Note 15) has been hugely disappointing and has strained our finances even with the closing of our preferred stock offering. If the Judge does not change the result or vacate the damage award based on our latest motions, we will appeal this decision. 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. A hearing on this motion is expected within the next 30 days and a final decision is expected within the next two to three months. The Judge could deny our motions, reduce the amount of damages or even order a new trial. Once a final decision has been rendered, the Company has 30 days to file an appeal. The Company has posted a $2,000,000 bond to prevent Aeroflex from enforcement actions until a final decision has been rendered by the Court. This $2 million bond amount would remain in place during the appeal process (See Note 5). The Company believes it has excellent grounds to appeal this verdict. The appeal process would be expected to take several years to complete. We will have approximately 3 years to generate sufficient cash or secure additional financing to support the repayment of the remaining $2.9 million not covered by the $2 million appeal bond, if we do not prevail with the appeal.

In November 2017, the Company signed a subscription agreement in which the Company received $3 million for Series A Convertible Preferred Stock (See Note 14 to the Notes to the Condensed Financial Statements). These funds will be used to finance an appeal and provide funds for operations.

~~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, 2017.~~

These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2017, filed with the SEC on July 14, 2017 (the “Annual Report”).

~~Off-Balance Sheet Arrangements~~

~~As of December 31, 2017, the Company had no material 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 2017 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 accounting 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.

~~PART II – OTHER INFORMATION~~

~~Item 1. Legal Proceedings.~~

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.

The case then entered an extended discovery period in the District Court.

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% and 6.5% July 1, 2018 through June 30, 2019. The current rate beginning July 1, 2019 is 7.0%. Interest on the $4,900,000 judgment started to accrue on November 22, 2017, the date the judgment was entered.

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 13 – Litigation (continued)

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 optimistic about the prospects of its appeal for either a judgment as a matter of law or a new trial. However, the appeal process is expected to take at least another year to complete. However, the Company cannot predict the timing or the outcome of the appeal.

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 our Company, threatened against or affecting our Company, or our common stock in which an adverse decision could have a material effect.

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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.

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 a profit of $794,010 for the six months ended September 30, 2019 and sales of $7,218,630 as compared to a net loss of $937,483 and sales of $4,037,155 for the same six month period in the prior fiscal year. This is the fourth consecutive quarter of profitability for the Company. This turnaround is the result of the increased shipments of our CRAFT products, especially for Lockheed Martin for the Joint Strike Fighter (“JSF”) program, increased international business for 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 and the TS-4530A. As previously reported, the Company has received a $4.3 million order for Mode 5 test sets from the U.S. military. In August 2018, we also reported that the German government had notified our U.K. distributor of its intent to award a multi-year, multi-million dollar contract. In February 2019, the Company received an initial purchase order totaling $520,000 from its European Distributor, Muirhead Avionics (“Muirhead”) for Mode 5 test sets from the contract awarded by the German military. This is a seven-year procurement contract with anticipated orders for the 2019 calendar year of approximately $3.5 million in total. In July 2019, the Company shipped $450,000 of Mode 5 test sets to the German government. In August 2019, we received a follow-on order from the German government for approximately $1.5 million.

These units for Lockheed Martin will be used 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 orders from Lockheed Martin for the AN/USM-708 units, for the JSF Program, totaling over $5 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.

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, as evidenced by the above-mentioned pending order from Germany, but no guarantees can be made about these opportunities. We received and shipped our Mode 5 test sets to Japan, and have subsequently received an additional order from Japan for approximately $616,000 to be delivered over the next few years. As noted above, our U.K. distributor and the Company have been successful in securing a major contract from the German military. Many other countries have expressed significant interest in our Mode 5 test sets.

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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 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 new T-47/M5 Mode 5 IFF test set is expected to be a cost-effective upgrade option for our large installed base of Mode 4 test sets and we have seen substantial interest and orders for this test set from a number of countries. All allied countries have a drop-dead date of July 1, 2020, which was extended from January 1, 2020, for Mode 5 capability so we expect this international business will begin to accelerate this year and it should remain strong for at least the next three years, based on our current projections. Our expectation is that we will continue to improve both our revenues and gross margins, but the timing of these new orders is largely out of our hands. Nonetheless, we are encouraged by the increasing activity we are seeing for both our commercial and military products.

The commercial avionics industry is undergoing a great deal of change and we believe our new lightweight, hand-held product (the “SDR/OMNI”) that we are planning to introduce in the near term will generate increased market share at very attractive gross margin levels. The technology for the hand-held product will provide a platform for future products. 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.

This new technology could 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 in an industry leading 4-pound package. 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. The initial product will be a commercial avionics air traffic control test set which adds ADS-B UAT test capability for the large general aviation test market that is subject to the January 1, 2020 requirement for ADS-B out capability. This will compete with the Aeroflex IFR 6000 test set and will replace the TIC TR-220 product. This release is targeted at the civil aviation market that is subject to the January 1, 2020 requirement for ADS-B out capability. Future next software releases will incorporate Nav/Comm test functions which can be purchased as APP’s (applications) by our customers. We continue to evaluate other attractive potential market opportunities.

As a result of the potential new military applications for our new 4.5 pound SDR/OMNI hand-held test set, we are currently evaluating a hardware CPU change to further improve high speed processing capabilities. This change will likely move the initial product introduction for the commercial avionics market into the spring of the next calendar year, but will better position the Company for high dollar military contracts which will be critical to our long-term growth in revenues and profitability. The goal of this new test set is to expand out of our relatively narrow avionics test market niche and enter the much larger secure communications radio test market.

In June 2019, Bank of America agreed to extend the Company’s line of credit until March 31, 2020 (see Note 8). The Company believes it has sufficient cash and financing in place to fund its plans for the next twelve months, exclusive of any determination that may result from the Aeroflex litigation, due in part to recent large orders it has received that has returned the Company to profitability. We have no commitment from any party to provide additional working capital and there is no assurance that any funding will be available as required, or if available, that its terms will be favorable or acceptable to the Company. This factor raises doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued.

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

Overview (continued)

The jury found no misappropriation of Aeroflex trade secrets but it did rule that the Company tortiously interfered with a prospective business opportunity and awarded damages. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex. The Court conducted further hearings on the Company’s post-trial motions which sought to reduce the damages award of $2.8 million, as well as the punitive damages claim. The Court denied the Company’s motions and awarded Aeroflex an additional $2.1 million of punitive damages. The Company has filed motions in January 2018 for the Court to reconsider the amount of damages on the grounds that they are duplicative and not legally supportable. ~~A hearing on this motion is expected within the next 30 days~~The Court heard these motions and ~~a final decision is expected within the next two to three months.~~such motions were denied. The ~~Judge could deny our motions, reduce the amount of damages or even order a new trial. Once a final decision has been rendered, the~~ Company has ~~30 days to file an~~filed for the appeal. The Company has posted a ~~$2,000,000~~$2 million bond ~~to prevent Aeroflex from enforcement actions until a final decision has been rendered by~~for the ~~Court.~~appeal. This $2 million bond amount ~~would~~will remain in place during the appeal process (See Note 5)13). The Company believes it has ~~excellent~~solid grounds to appeal this verdict, and believes it has submitted strong legal arguments to vacate the decision. The appeal process is expected to take at least another year to complete. However, the Company cannot predict the timing or the outcome of the appeal.

The Company’s common stock is now quoted on the OTCQB marketplace of the OTC markets with the symbol “TIKK”. Companies on the OTBQB must meet minimum reporting standards, pass a bid test, and must undergo annual verification.

1)	The Company to make an additional principal payment of $10,000 at closing.

2)	Borrowing base calculation tied to accounts receivable.

3)	The Amended Loan Modification Agreement expires March 31, 2020.

4)	Interest on any outstanding balances is payable monthly at an annual interest rate equal to the LIBOR (London Interbank Offered Rates) Daily Floating plus 3.75 percentage points. The Company’s interest rate was 5.77% at September 30, 2019.

5)	The line is collateralized by substantially all of the assets of the Company.

6)	The Company will make principal payments of $10,000 per month until March 31, 2020.
7)	The covenant for the debt service ratio is deleted.

At September 30, 2019, the Company’s backlog of orders was approximately $6.0 million as compared to $1.4 million at September 30, 2018. 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. With the pending Mode 5 deadline at July 1, 2020, the Company expects the backlog and sales to increase over the next year.

Results of Operations

Sales

For the three months and six months ended September 30, 2019, net sales increased $1,689,227 (76.0%) and $3,181,475 (78.8%) to $3,912,168 and $7,218,630, respectively, as compared to $2,222,941 and $4,037,155 for the three and six months ended September 30, 2018, respectively. Avionics government sales increased $1,856,355 (144.6%) and $3,267,913 (137.5%) to $3,140,454 and $5,644,594 for the three and six months ended September 30, 2019, respectively, as compared to $1,284,099 and $2,376,681 for the three and six months ended September 30, 2018, respectively. The increase in sales is mostly attributed to the increase 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, as well as increased sales of our T-47/M5 Dual Crypto test set, mostly to the international market. Commercial sales decreased $167,128 (17.8%) and $86,438 (5.2%) to $771,714 and $1,574,036 for the three and six months ended September 30, 2019, respectively, as compared to $938,842 and $1,660,474 for the three and six months ended September 30, 2018, respectively. This decrease is attributed to the decrease in sales our TR-220 test and a slight decline in sales from our repair business. The commercial business is steady and changes are mainly the result of the timing of orders and parts availability.

Sales are expected to continue to increase primarily as a result penetration of the international market, and, in the future, increased commercial sales when we introduce our new lightweight, hand-held product (the “SDR/OMNI”) that we are planning to introduce in the spring of 2020.

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

Results of Operations

Gross Margin

For the three and six months ended September 30, 2019, total gross margin increased $874,420 (87.5%) and $1,974,711 (133.4%) to $1,873,633 and $3,455,237, respectively, as compared to $999,213 and $1,480,526 for the three and six months ended September 30, 2018, respectively, primarily as a result of the increase in volume as well as the reduction in manufacturing overhead and an increase in manufacturing efficiencies. The gross margin percentage for the three months ended September 30, 2019 was 47.9% as compared to 45.0% for the three months ended September 30, 2018. The gross margin percentage for the six months ended September 30, 2019 was 47.9% as compared to 36.7% for the six months ended September 30, 2018. The higher gross margin percentage is attributable to an improved product mix as well as the reduction in manufacturing overhead as well as manufacturing efficiencies.

Operating Expenses

Selling, general and administrative expenses increased $69,752 (12.6%) and $115,698 (10.3%) to $625,163 and $1,237,634 for the three and six months ended September 30, 2019, respectively, as compared to $555,411 and $1,121,936 for the three and six months ended September 30, 2018, respectively. This increase is primarily attributed to the increase in accrued profit sharing expense and outside commissions offset partially by lower professional fees.

Litigation costs increased $55,705 and $26,941 to $91,553 and $102,060 for the three and six months ended September 30, 2019 as compared to $35,848 and $75,119 for the three and six months ended September 30, 2018. This increase is related to response to the plaintiff’s cross-appeal (see Notes 5 and 13 to Notes to the unaudited condensed consolidated financial statements).

Engineering, research and development expenses increased $22,359 (4.4%) and $30,139 (3.0%) to $525,739 and $1,050,842 for the three and six months ended September 30, 2019 as compared to $503,380 and $1,020,703 for the three and six months ended September 30, 2018. The Company continues to invest in the development of the Company’s hand-held product line utilizing CRAFT and TS-4530A technology, the enhanced remote client, and the incorporation of other product enhancements in existing designs.

Income (Loss) from Operations

As a result of the above, the Company recorded income from operations of $631,178 and $1,064,701 for the three and six months ended September 30, 2019 as compared to losses from operations of $95,426 and $737,232 for the three and six months ended September 30, 2018.

Other Income (Expense), Net

For the three months ended September 30, 2019, total other expense was $94,944, as compared to other expense of $95,984 for the three months ended September 30, 2018 primarily the result of the gain on the change in fair value of the common stock warrants and lower interest for the line of credit and the letter of credit offset mostly by higher interest related to the judgement. For the six months ended September 30, 2019, total other expense was $270,691, as compared to other expense of $200,251 for the six months ended September 30, 2018 primarily the result of the loss on the change in fair value of the common stock warrants and higher interest related to the judgement offset partially by lower interest for the line of credit and the letter of credit.

Income (Loss) before Income Taxes

As a result of the above, the Company recorded income before taxes of $536,234 and $794,010 for the three and six months ended September 30, 2019 as compared to losses before taxes of $191,410 and $937,483 for the three and six months ended September 30, 2018.

Income Taxes

For the three and six months ended September 30, 2019 and September 30, 2018, the Company recorded no income tax benefit as such amounts were offset by a valuation allowance. Currently, the Company is utilizing existing fully-reserved NOL’s to offset taxable income, thereby resulting in no income tax provision.

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

Net Income (Loss)

As a result of the above, the Company recorded net income of $536,234 and $794,010 for the three and six months ended September 30, 2019 as compared to net losses of $191,410 and $937,483 for the three and six months ended September 30, 2018.

Liquidity and Capital Resources

At September 30, 2019, the Company had net working capital of $378,442 as compared to negative working capital of $152,993 at March 31, 2019. This change is primarily the result of the increase in cash and decrease in accounts payable and accrued expenses offset partially by the decrease in accounts receivable and increase in deferred revenues and operating lease liabilities.

These unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, which contemplates continuation of the Company as a going concern. As reflected in the accompanying balance sheet for the period ended September 30, 2019, the Company has recorded estimated damages to date of $5.5 million, including interest, as a result of a jury verdict associated with the Aeroflex litigation. The Company has filed for an appeal (see Note 13 to the unaudited condensed consolidated financial statements). In June 2019, Bank of America agreed to extend the Company’s line of credit until March 31, 2020 (see Note 8). While the Company’s operations and profitability have significantly improved, and the Company believes it has sufficient cash and financing in place to fund its plans for the next twelve months, exclusive of any determination that may result from the Aeroflex litigation, due in part to recent large orders it has received that has returned the Company to profitability, the Company may not have sufficient resources to satisfy the judgment if we are not successful in our appeal. We have no commitment from any party to provide additional working capital and there is no assurance that any funding will be available as required, or if available, that its terms will be favorable or acceptable to the Company. This factor raises doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued.

The Aeroflex litigation 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 did find 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 13). The Company believes it has solid grounds to appeal this verdict. The appeal process ~~would be~~is expected to take ~~several years~~at least another year to complete. However, the Company cannot predict the timing or the outcome of the appeal.

The unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

During the six months ended September 30, 2019, the Company’s cash balance (including the $2 million in restricted cash for the appeal) increased by $1,662,402 to $4,253,419. The Company’s principal sources and uses of funds were as follows:

Cash provided operating activities. For the six months ended September 30, 2019, the Company provided $1,799,621 in cash for operations as compared to using $18,055 in cash for operations for the six months ended September 30, 2018. This increase in cash used for operations is attributed to the improvement in operating income and the decrease in accounts receivable partially offset by an increase in inventories and a decrease in accounts payable and accrued expenses.

Cash used in investing activities. For the six months ended September 30, 2019, the Company used $63,536 of its cash for investment activities, as compared to $-0- for the six months ended September 30, 2018 as a result of an increase in the purchase of capital equipment.

Cash used in financing activities. For the six months ended September 30, 2019, the Company used $73,683 in financing activities as compared to using $9,307 for the six months ended September 30, 2018. For the six months ended September 30, 2019, the Company received proceeds from short-swing profits from an investor, which did not occur in the current fiscal year which was partially offset by lower repayments of the line of credit.

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

Liquidity and Capital Resources (continued)

1)	The Company to make an additional principal payment of $10,000 at closing.

2)	Borrowing base calculation tied to accounts receivable.

3)	The Amended Loan Modification Agreement expires March 31, 2020.

4)	Interest on any outstanding balances is payable monthly at an annual interest rate equal to the LIBOR (London Interbank Offered Rates) Daily Floating plus 3.75 percentage points. The Company’s interest rate was 5.77% at September 30,, 2019.

5)	The line is collateralized by substantially all of the assets of the Company.

6)	The Company will make principal payments of $10,000 per month until March 31, 2020.
7)	The covenant for the debt service ratio is deleted.

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 six months ended September 30, 2019.

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, 2019, filed with the SEC on July 1, 2019 (the “Annual Report”).

Off-Balance Sheet Arrangements

As of September 30, 2019, 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 2019 consolidated financial statements included in our Annual Report.

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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

(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.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

The Aeroflex litigation (see Note 13 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 it did find 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 13). The Company believes it has solid grounds to appeal this verdict, and believes it has submitted strong legal arguments to vacate the decision. The appeal process is expected to take at least one year to complete. However, the Company cannot predict the timing or the outcome of the appeal.

~~PART II – OTHER INFORMATION~~

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, ~~2017,~~2019, filed with the SEC on July ~~14, 2017.~~

1, 2019.

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, 2017 other than those previously reported in a Current Report on Form 8-K filed with the Securities and Exchange Commission on November 16, 2017, regarding the issuance of Series A Preferred Stock.

September 30, 2019.

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.

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Item 6. Exhibits.

Exhibit No.		Description

~~3.1~~ 31.1		~~Certificate of Amendment to Certificate of Incorporation (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on November 16, 2017.)~~

~~10.1~~		~~Form of Subscription Agreement (incorporated to the Company’s Current Report on Form 8-K filed with the SEC on November 16, 2017.)~~

~~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		XBRL Instance Document*

101.SCH		Taxonomy Extension Schema Document*

101.CAL		Taxonomy Extension Calculation Linkbase Document*

101.DEF		Taxonomy Extension Definition Linkbase Document*

101.LAB		Taxonomy Extension Label Linkbase Document*

101.PRE		Taxonomy Extension Presentation Linkbase Document*

* Filed herewith

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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: ~~February 14, 2018~~November 13, 2019	By:	/s/ Jeffrey C. O’Hara
		Name: Jeffrey C. O’Hara
		Title: Chief Executive Officer Principal Executive Officer


Date: ~~February 14, 2018~~November 13, 2019	By:	/s/ Joseph P. Macaluso
		Name: Joseph P. Macaluso
		Title: Principal Financial Officer Principal Accounting Officer

New Jersey	22-1441806
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐ ~~(Do not check if a smaller reporting company)~~ ☒	Smaller reporting company	☒
		Emerging growth company	☐

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.	1623

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	2329

Item 4.	Controls and Procedures.	2329

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings.	30

Item 1.1A.	~~Legal Proceedings.~~Risk Factors.	2430

~~Item 1A.~~	~~Risk Factors.~~	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	2530

Item 3.	Defaults Upon Senior Securities.	2530

Item 4.	Mine Safety Disclosures.	2530

Item 5.	Other Information.	2530

Item 6.	Exhibits.	2631

Signatures		2732

	December 31, 2017			March 31, 2017
	(unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	263,983		$	287,873
Accounts receivable, net		1,660,757			1,556,382
Inventories, net		4,309,324			4,208,179
Restricted cash to support appeal bond		2,000,000			-
Prepaid expenses and other current assets		107,450			188,578
Total current assets		8,341,514			6,241,012

Equipment and leasehold improvements, net		197,602			161,427
Other long-term assets		35,109			33,509
Total assets		8,574,225			6,435,948

LIABILITIES & STOCKHOLDERS’ DEFICIT

Current liabilities:
Current portion of long-term debt		3,696			291,991
Line of credit		1,000,000			200,000
Capital lease obligations – current portion		6,718			6,268
Accounts payable and accrued liabilities		2,431,763			2,072,955
Federal and state taxes payable		-			4,105
Deferred revenues – current portion		54,671			123,720
Accrued legal damages		4,930,523			2,800,000
Accrued payroll, vacation pay and payroll taxes		396,207			527,413
Total current liabilities		8,823,578			6,026,452

Capital lease obligations – long-term		8,664			13,760
Long-term debt		-			2,124
Deferred revenues – long-term		353,280			352,973
Warrant liability		-			95,000
Total liabilities		9,185,522			6,490,309

Commitments

Mezzanine Equity:
Preferred stock, 1,000,000 shares authorized, par value $0.10 per share, 500,000 shares 8% Cumulative Series A Convertible Preferred issued and outstanding		2,990,667			-
Total mezzanine equity		2,990,667			-

Stockholders’ (deficit):
Common stock, 4,000,000 shares authorized, par value $0.10 per share, 3,255,887 shares issued and outstanding, respectively		325,586			325,586
Paid-in capital in excess of par value, common stock		8,099,882			8,107,369
Accumulated deficit		(12,027,432	)		(8,487,316	)
Total stockholders’ deficit		(3,601,964	)		(54,361	)
Total liabilities, mezzanine equity and stockholders’ deficit	$	8,574,225		$	6,435,948

	Three Months Ended						Nine Months Ended
	December 31, 2017			December 31, 2016			December 31, 2017			December 31, 2016

Net sales	$	2,625,793		$	4,236,519			7,955,035		$	14,654,917
Cost of sales		1,689,113			2,602,268			5,377,195			9,318,425

Gross margin		936,680			1,634,251			2,577,840			5,336,492

Operating expenses:
Selling, general and administrative		548,391			582,880			1,881,072			2,042,922
Litigation expenses		134,765			282,490			560,610			609,330
Legal damages		30,523			-			2,130,523			-
Engineering, research and development		546,691			615,007			1,691,631			1,783,655
Total operating expenses		1,260,370			1,480,377			6,263,836			4,435,907

(Loss) income from operations		(323,690	)		153,874			(3,685,996	)		900,585

Other income (expense):
Proceeds from life insurance		-			-			92,678			-
Amortization of deferred financing costs		(649	)		(1,359	)		(3,363	)		(4,072	)
Change in fair value of common stock warrants		5,000			37,000			95,000			288,203
Interest expense		(14,097	)		(11,620	)		(38,435	)		(46,953	)
Total other income (expense)		(9,746	)		24,021			145,880			237,178

(Loss) income before income taxes		(333,436	)		177,895			(3,540,116	)		1,137,763

Income tax expense		-			36,382			-			313,886

Net (loss) income		(333,436	)		141,513			(3,540,116	)		823,877

Preferred stock dividends		(30,667	)		-			(30,667	)		-

Net (loss) income attributable to common shareholders	$	(364,103	)	$	141,513		$	(3,570,783	)	$	823,877

Basic (loss) income per common share	$	(0.11	)	$	0.04		$	(1.10	)	$	0.25
Diluted (loss) income per common share	$	(0.11	)	$	0.03		$	(1.10	)	$	0.23

Weighted average shares outstanding:
Basic		3,255,887			3,255,887			3,255,887			3,255,887
Diluted		3,255,887			3,265,135			3,255,887			3,266,532

	Nine Months Ended
	December 31, 2017			December 31, 2016

Cash flows from operating activities:
Net (loss) income	$	(3,540,116	)	$	823,877
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Deferred income taxes		-			317,509
Depreciation and amortization		53,221			95,209
Provision for inventory obsolescence		50,000			20,000
Amortization of deferred financing costs		3,363			4,072
Change in fair value of common stock warrant		(95,000	)		(288,203	)
Non-cash stock-based compensation		23,180			24,536

Changes in assets and liabilities:
Decrease (increase) in accounts receivable		(104,375	)		396,430
(Increase) decrease in inventories		(151,145	)		185,145
Decrease (increase) in prepaid expenses & other assets		76,165			(28,774	)
Increase (decrease) in accounts payable and other accrued expenses		358,808			(299,359	)
Decrease in federal and state taxes		(4,105	)		(53,623	)
Decrease in accrued payroll, vacation pay & withholdings		(131,206	)		(224,072	)
(Decrease) increase in deferred revenues		(68,742	)		338,792
Increase in accrued legal damages		2,130,523			-
Restricted cash for appeal bond		(2,000,000	)
Decrease in other long-term liabilities		-			(7,800	)
Net cash (used in) provided by operating activities		(3,399,429	)		1,303,739

Cash flows from investing activities:
Purchases of equipment		(89,396	)		(37,070	)
Net cash used in investing activities		(89,396	)		(37,070	)

Cash flows from financing activities:
Proceeds from line of credit		800,000			-
Proceeds from issuance of preferred stock, net of expenses		2,960,000			-
Payment of warrant liability		-			(720,000	)
Repayment of long-term debt		(290,419	)		(322,894	)
Repayment of subordinated notes - related parties		-			(25,000	)
Repayment of capitalized lease obligations		(4,646	)		(9,254	)
Net cash provided by (used in) financing activities		3,464,935			(1,077,148	)

Net decrease in cash and cash equivalents		(23,890	)		189,521
Cash and cash equivalents at beginning of period		287,873			972,633
Cash and cash equivalents at end of period	$	263,983		$	1,162,154

Supplemental cash flow information:
Taxes paid	$	5,000		$	87,374
Interest paid	$	50,374		$	107,768

	December 31, 2017			March 31, 2017
Government	$	1,461,090		$	1,392,482
Commercial		207,167			171,400
Less: Allowance for doubtful accounts		(7,500	)		(7,500	)
	$	1,660,757		$	1,556,382

Three Months Ended December 31, 2017	Avionics Government		Avionics Commercial		Avionics Total		Corporate Items			Total
Net sales	$	1,825,744	$	800,049	$	2,625,793	$	-		$	2,625,793
Cost of sales		1,013,481		675,632		1,689,113		-			1,689,113
Gross margin		812,263		124,417		936,680		-			936,680

Engineering, research, and development						546,691		-			546,691
Selling, general and administrative						225,610		322,781			548,391
Litigation costs								134,765			134,765
Legal damages								30,523			30,523
Amortization of deferred financing costs						-		649			649
Change in fair value of common stock warrants						-		(5,000	)		(5,000	)
Proceeds from life insurance								-			-
Interest expense, net						-		14,097			14,097
Total expenses						772,301		497,815			1,270,116
Income (loss) before income taxes					$	164,379	$	(497,815	)	$	(333,436	)

Three Months Ended December 31, 2016	Avionics Government		Avionics Commercial		Avionics Total		Corporate Items			Total
Net sales	$	3,771,384	$	465,135	$	4,236,519	$	-		$	4,236,519
Cost of sales		2,297,157		305,111		2,602,268		-			2,602,268
Gross margin		1,474,227		160,024		1,634,251		-			1,634,251

Engineering, research, and development						615,007		-			615,007
Selling, general and administrative						256,599		326,281			582,880
Litigation costs								282,490			282,490
Amortization of deferred financing costs						-		1,359			1,359
Change in fair value of common stock warrants						-		(37,000	)		(37,000	)
Interest expense, net						-		11,620			11,620
Total expenses						871,606		584,750			1,456,356
Income (loss) before income taxes					$	762,645	$	(584,750	)	$	177,895

Nine Months Ended December 31, 2017	Avionics Government		Avionics Commercial		Avionics Total		Corporate Items			Total
Net sales	$	5,826,763	$	2,128,272	$	7,955,035	$	-		$	7,955,035
Cost of sales		3,489,223		1,887,972		5,377,195		-			5,377,195
Gross margin		2,337,540		240,300		2,577,840		-			2,577,840

Engineering, research, and development						1,691,631		-			1,691,631
Selling, general and administrative						861,795		1,019,277			1,881,072
Litigation costs								560,610			560,610
Legal damages								2,130,523			2,130,523
Amortization of deferred financing costs						-		3,363			3,363
Change in fair value of common stock warrants						-		(95,000	)		(95,000	)
Proceeds from life insurance								(92,678	)		(92,678	)
Interest expense, net						-		38,435			38,435
Total expenses						2,553,426		3,564,530			6,117,956
Income (loss) before income taxes					$	24,414	$	(3,564,530	)	$	(3,540,116	)

Nine Months Ended December 31, 2016	Avionics Government		Avionics Commercial		Avionics Total		Corporate Items			Total
Net sales	$	12,981,768	$	1,673,149	$	14,654,917	$	-		$	14,654,917
Cost of sales		8,067,636		1,250,789		9,318,425		-			9,318,425
Gross margin		4,914,132		422,360		5,336,492		-			5,336,492

Engineering, research, and development						1,783,655		-			1,783,655
Selling, general and administrative						946,589		1,096,333			2,042,922
Litigation costs								609,330			609,330
Amortization of deferred financing costs						-		4,072			4,072
Change in fair value of common stock warrants						-		(288,203	)		(288,203	)
Interest expense, net						-		46,953			46,953
Total expenses						2,730,244		1,468,485			4,198,729
Income (loss) before income taxes					$	2,606,248	$	(1,468,485	)	$	1,137,763

March 31, 2017	Level I		Level II		Level III		Total
Total Assets	$	-	$	-	$	-	$	-

Warrant liability		-		-		95,000		95,000
Total Liabilities	$	-	$	-	$	95,000	$	95,000

Level 3 Reconciliation	Balance at beginning of period		(Gains) and losses for the period (realized and unrealized)			Purchases, issuances, sales and settlements, net		Transfers in or out of Level 3		Balance at the end of period
Warrant liability	$	95,000	$	(95,000	)	$	-	$	-	$	-
Total Liabilities	$	95,000	$	(95,000	)	$	-	$	-	$	-