TEL INSTRUMENT ELECTRONICS CORP

The Company has built a very solid position in the Mode 5 IFF and TACAN test set market. The Company is successfully extending its dominant market position in Mode 5 test sets in the U.S. defense industry to international partners. 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. Internationally, the Company has been very successful in capturing the lion’s share of the Mode 5 test set business with TIC’s T-47/M5 test set being selected by many international customers including: Canada; the U.K.; Japan; South Korea; and Australia. The Company continues to be in the forefront on Mode 5 research and development and has demonstrated test capability for Mode 5 Level 2B, which provides enhanced secure navigation data to military pilots. The U.S. Army has indicated that they plan to move to this new navigation technology in the next several years. This could entail substantial software upgrade revenues for the thousands of TS-4530A test sets sold to the U.S. Army and U.S.A.F.

Fiscal year 2021 was extremely challenging for the Company. The COVID-19 pandemic materially impacted commercial sales and supply chain disruptions prevented us from shipping product on schedule. This led to substantially reduced revenues and profitability. The Company reported a 26.6% decline in sales to $11,582,520 for the year ended March 31, 2021, as compared to $15,774,943 for the previous year. Commercial sales decreased by 42.6% to $1,723,983 for the year ended March 31, 2021, as compared to $3,004,580 for the year ended March 31, 2020. The commercial airline industry has been devastated by the COVID pandemic and this led to a sharp reduction in commercial test set orders. Avionics government sales decreased by 22.6% to $9,858,537 for the year ended March 31, 2021, as compared to $12,737,362 for the year ended March 31, 2020. This decrease in sales is mainly the result of supply chain disruption due to the pandemic, the slowdown of purchased components significantly disrupted the TIC manufacturing of finished goods. Gross Margin decreased by $2.6 million in fiscal 2021 as compared to 2020 and the gross margin percentage declined by 6 percentage points to 41.3%. This was due to adverse manufacturing variances due to the lower volume and discounted sales prices to Germany and the U.K. to secure future business. Total operating expenses for the year declined by approximately $150,000due primarily to lower bonus amounts. This expense reduction was achieved despite one-time professional fees of $300,000 related to M&A discussions and a GAO government protest that was filed in the fourth quarter. Net income before taxes was $573,030 for fiscal year 2021 as compared to $2,087,210 in fiscal year 2020. The Company’s cash balance on March 31, 2021, was $5.5 million, including the $2 million of restricted cash to support the appeal bond. The Company’s backlog on March 31, 2021, was $7.6 million, which is $3.6 million higher than the year-ago period.

The Company continues to pursue opportunities in the domestic and international market for our Mode 5 test sets with good results. We continue to receive volume orders from South Korea, Australia, Canada, the U.K. and Germany for our Mode 5 test sets. We also are receiving volume orders from the U.S. Government and Lockheed Martin for our AN/USM-708 and 719 (“CRAFT”) Mode 5 test sets. We have also been awarded a large contract from the U.S. military for our T-47NH product and are seeing solid demand for our other non-Mode 5 test sets. 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 military products. After a sharp drop in FY 2021, the Company is also seeing the beginning of a rebound in commercial test set business with orders in the first two months exceeding demand for all of FY2021. Tel Instrument is also working on the next generation of Mode 5 called Mode 5 Level 2B. This could potentially lead to substantial software upgrades in the future for our domestic and international Mode 5 customers. The Navy is also considering a mid-life update of our CRAFT product line which could entail funded engineering starting next fiscal year. This is an important product for the Company, and this should ensure an additional 10 years of product life.

TIC qualified for full loan forgiveness on the initial tranche on December 18, 2020. On January 6, 2021, updated PPP guidance outlining program changes to enhance its effectiveness and accessibility was released on in accordance with the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act. This was available to companies that recorded greater than a 25% sales reduction in any quarter compared to the prior year. The Company qualified for this second round of funding and on March 15, 2021, the company secured a Second Draw PPP loan in the amount of $772,577. A borrower can apply for forgiveness once all loan proceeds for which the borrower is requesting forgiveness have been used. Borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender. The Company plans to file for loan forgiveness of the second tranche of PPP funding during fiscal year ending March 31, 2022.

Contingencies are recorded in the consolidated financial statements when it is probable that a liability will be incurred and the amount of the loss is reasonably estimable, or otherwise disclosed, in accordance with Accounting Standards Codification 450, Contingencies (ASC 450). Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, the Company will, when applicable, adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss or if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made. On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court located in Sedgwick County, Kansas, Case No. 09 CV 1141 (the “Aeroflex Action”), alleging that the Company and its two employees misappropriated Aeroflex’s proprietary technology in connection with the Company winning a substantial contract from the U.S. Army, to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5 (the “Award”). Aeroflex’s petition, seeking injunctive relief and damages, alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with Aeroflex’s business relationship; conspired to harm Aeroflex and tortiously interfered with Aeroflex’s contract. The central basis of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology and confidential information in winning the Award.  In February 2009, subsequent to the Company winning the Award, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the U.S. Army Contracts Attorney and the U.S. Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed on Aeroflex’s proprietary technology in winning the Award and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest.