TEL INSTRUMENT ELECTRONICS CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

By SDR News On Jun 18, 2022

You should read the following discussion and analysis of our financial condition
and results of our operations together with our financial statements and the
notes thereto appearing elsewhere in this Annual Report. This discussion
contains forward-looking statements reflecting our current expectations, whose
actual outcomes involve risks and uncertainties. Actual results and the timing
of events may differ materially from those stated in or implied by these
forward-looking statements due to a number of factors, including those discussed
in the section relating to Forward-Looking Statements below and elsewhere in
this Annual Report. Please see the notes to our Financial Statements for
information about our Critical Accounting Policies and Recently Issued
Accounting Pronouncements.




Forward Looking Statements

A number of the statements made by the Company in this report may be regarded as
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1965.

Forward-looking statements include, among others, statements concerning the
Company’s outlook, pricing trends and forces within the industry, the completion
dates of projects, expected sales growth, cost reduction strategies and their
results, long-term goals of the Company and other statements of expectations,
beliefs, future plans and strategies, anticipated events or trends and similar
expressions concerning matters that are not historical facts.

All predictions as to future results contain a measure of uncertainty and
accordingly, actual results could differ materially. Among the factors that
could cause a difference are changes in the general economy; changes in demand
for the Company’s products or in the costs and availability of its raw
materials; the actions of competitors; the success of our customers,
technological change; changes in employee relations; government regulations;
litigation, including its inherent uncertainty; difficulties in plant operations
and materials transportation; environmental matters; and other unforeseen
circumstances, including the current COVID-19 pandemic. A number of these
factors are discussed in the Company’s filings with the SEC.



General

Management’s discussion and analysis of results of operations and financial
condition is intended to assist the reader in the understanding and assessment
of significant changes and trends related to the results of operations and
financial position of the Company . This discussion and analysis should be read
in conjunction with the consolidated financial statements and accompanying
financial notes, and with the Critical Accounting Policies noted below. The
Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise
noted, all references in this document to a particular year shall mean the
Company’s fiscal year ending on March 31.



Overview

Fiscal year 2022 operations continued to be affected by the ongoing outbreak of
COVID-19 and its variants. While the business is still strong, the Company has
been impacted by the pandemic in its commercial business and delays in orders
from some of its military customers. The pandemic has also impacted its supply
chain and labor force with disruptions to both the delivery of critical
inventory components and personnel shortages due to COVID quarantines, which
have hampered our ability to ship units under normal lead times. Although the
Company has been negatively impacted by the pandemic, there was an increase in
sales during fiscal 2022.

The Company reported net income of $1,309,738 and net sales of $12,932,790 for
the fiscal year ended March 31, 2022. This compared to net income of $600,057
and net sales of $11,582,520 in the prior fiscal year. Net income for the
current and prior fiscal years each included $722,577 gains on forgiveness of
PPP loans. Excluding the $722,577 gain on PPP forgiveness, net income (loss) for
the years ended March 31, 2022, and 2021 were $587,161 and $(122,520),
respectively. The Company reported a 11.7% increase in sales to $12,932,790 for
the year ended March 31, 2022, as compared to $11,582,520 for the previous year.
Commercial sales increased by 49% to $2,568,959 for the year ended March 31,
2022, as compared to $1,723,983 for the year ended March 31, 2021. The
commercial airline industry was devastated by the COVID pandemic during prior
fiscal year, and has been on a steady recovery. Avionics government sales
increased by 5.1% to $10,363,831 for the year ended March 31, 2022, as compared
to $9,858,537 for the year ended March 31, 2021. This increase in government
sales is the gradual return of government workers to their jobs post shutdowns
from the COVID pandemic issues. Gross margin increased by $982,841 in fiscal
2022 as compared to 2021 and the gross margin percentage improved by 3.3
percentage points to 44.6%. The improvement to gross margin was primarily due to
a decrease in manufacturing variances due to lower volume and a decrease of
discounts being granted. Total operating expenses for the year increased by
$121,488, primarily due to engineering, research, and development expenses from
increased engineering activities primarily with the SDR-OMNI hand-held product
line final development plans to begin production in the summer of 2022 and the
restart of the Lockheed Martin MADL program. The Lockheed Martin MADL test set
project was offset by reimbursed engineering costs of approximately $120,000.
Net income before taxes was $1,483,293 for fiscal year 2022 as compared to
$573,030 in fiscal year 2021. The Company’s cash balance on March 31, 2022, was
$7 million, including the $2 million of restricted cash to support the appeal
bond. The Company’s backlog on March 31, 2022, was $3.5 million.

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Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations (continued)



Overview (continued)

The Company continues to pursue 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. Our expectation is
that we will continueprofitable operations in fiscal year 2023, but the timing
of these new orders is largely out of our hands. After a sharp drop in FY 2021,
the Company is also seeing the beginning of a rebound in commercial test set
business. 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
in the process of awarding a contract for the ECP upgrade of all of its test
sets to remove parts obsolesce. This should entail funded engineering starting
in the 2023 fiscal year. This is an important product for the Company, and this
should ensure an additional 10 years of product life.

The Company is also actively looking at expanding out of its current core
avionics market area. TIC is working with Lockheed Martin (LMCO) on a new MADL
test set. TIC was awarded this contract after winning a $956,000 competitive
solicitation. MADL is a secure communications radio for the F-35. This operates
in a much higher frequency range than our other test sets. TIC has finished the
design and is getting ready to commence environmental qualification testing.
This should generate ongoing recurring revenues for the Company and will
position TIC for further engineering work with LMCO.

The main focus area for the Company is moving into the secure communications
testing with our new DSR/OMNI test set. 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 4.5-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. he U.S. military will need to upgrade thousands of existing
communication and navigation test sets over the next several years to address
the new frequency and waveform requirements for military radios and we believe
the SDR/OMNI is well positioned to capture a large portion of this business.

The Aeroflex litigation (see Note 19 to the consolidated financial statements)
did not result in a favorable outcome for the Company, despite our belief that
we committed no wrongdoing.

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 number 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 6).

As reflected in the accompanying consolidated balance sheet as of March 31,
2022, the Company has recorded estimated damages to date of $6.1 million,
including interest, as a result of a jury verdict associated with the Aeroflex
litigation. The Company has filed for an appeal (see Notes 6 and 19). As of
March 31, 2022, the Company has cash balances of $7 million, including $2
million of restricted cash as well as $690,000 of borrowing capacity. We expect
to continue to have sufficient cash and borrowing capacity to fully cover the
Aeroflex damages amount.

The Company is very optimistic about the prospects of its appeal for a judgment
as a matter of law. The Company was hoping for a decision from the court this
calendar year, but this timing will likely be delayed due to the three month
COVID-19 related shutdown of the Kansas court system. As such, the appeal
process is expected to take at least another six months to a year to complete
unless a settlement can be reached. The Company has the ability to settle this
case at its sole discretion by withdrawing the appeal and paying the judgment
plus interest amount.

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Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations (continued)



Overview (continued)

On March 21, 2016, the Company entered into a line of credit agreement with Bank
of America. The line is collateralized by substantially all of the assets of the
Company. The line provided a revolving credit facility with borrowing capacity
of up to $1,000,000. There were no covenants or borrowing base calculations
associated with this line of credit. On August 29, 2018, the Company entered a
Loan Modification Agreement (the “Agreement”) with the bank to extend the
Agreement until May 31, 2019, which included a debt service ratio “covenant”. In
June 2019, Bank of America agreed to extend the Company’s line of credit until
March 31, 2020, including monthly principal payments of $10,000, and eliminating
the covenant for the debt service ratio. In March 2020, the Company extended its
line of credit until January 31, 2021, then extended to March 31, 2021, and then
subsequently to July 31, 2022. The new agreement includes availability up to
$690,000. Monthly payments will be interest only. As of March 31, 2022, the line
of credit draw remains at zero, with $690,000 available (see Note 10 to the
consolidated financial statements). On March 31, 2022, the Company’s backlog of
orders was approximately $3.5 million as compared to $7.6 million on March 31,
2021. 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.

The Company believes it has sufficient cash on hand and expected cash flow from
operations for the next twelve months due to the increase in business and the
opportunities that exist for the next few years.

Results of Operations 2022 Compared to 2021



Sales

For the year ended March 31, 2022, sales increased $1,350,270 (11.7%) to
$12,932,790 as compared to $11,582,520 for the year ended March 31, 2021.
Commercial sales increased $844,976 (49%) to $2,568,959 for the year ended March
31, 2022, as compared to $1,723,983 for the year ended March 31, 2021. The
commercial airline industry which was devastated by the COVID pandemic the prior
fiscal year, has been showing signs of a recovery. Avionics government sales
increased $505,294 (5.1%) to $10,363,831 for the year ended March 31, 2022, as
compared to $9,858,537 for the year ended March 31, 2021. This increase in
government sales is the gradual return of government workers to their jobs post
shutdowns from the COVID pandemic issues.



Gross Margin

Gross margin increased $982,841 (20.6%) to $5,765,340 for the year ended March
31, 2022, as compared to $4,782,499 for the year ended March 31, 2021, primarily
as a result of a decrease in manufacturing variances due to lower volume and a
decrease of discounts being granted. The gross margin percentage for the year
ended March 31, 2022, was 44.6%, as compared to 41.3% for the year ended March
31, 2021.




Operating Expenses

Selling, general and administrative expenses, along with litigation expense,
decreased $133,139 (5.5%) to $2,280,055 for the year ended March 31, 2022, as
compared to $2,413,194 for the year ended March 31, 2021. This decrease is
primarily attributed to one-time legal fees from prior fiscal year ended March
31, 2021.

Engineering, research, and development expenses increased $252,725 (11.0%) to
$2,548,626 for the year ended March 31, 2022, as compared to $2,295,901 for the
year ended March 31, 2021. The increase is primarily due to increase in
engineering staff to support the development of the Company’s SDR/OMNI hand-held
product line final development plans to begin production summer 2022 and the
restart of Lockheed Martin MADL test set projects, which was offset by
reimbursed engineering costs of approximately $120,000.



Income from Operations

As a result of the above, the Company recorded income from operations in the
amount of $936,659 for the fiscal year ended March 31, 2022, as compared to
income from operations of $73,404 for the year ended March 31, 2021.



Other Income

For the year ended March 31, 2022, total other income was $548,532 as compared
to $499,626 for the year ended March 31, 2021. This was primarily the result of
lower interest for the line of credit.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations (continued)




Income before Income Taxes

As a result of the above, the Company recorded income before taxes of $1,485,191
for the year ended March 31, 2022, as compared to income before taxes of
$573,030 for the fiscal year ended March 31, 2021.



Income Taxes

For the year ended March 31, 2022, the Company reported $175,453 tax provision
as compared to a tax benefit of $27,027 in the prior fiscal year. The
forgiveness of the PPP loan in both comparative fiscal year ends are not a
taxable event.

The differences between income taxes expected at the U.S. federal statutory
income tax rate of 21 percent and the reported income tax expense are due to the
recognition of non-taxable PPP funds of $722,577 as other income during fiscal
year ended March 31, 2022. Taxable income was $762,614 for the year ended March
31, 2022, and a tax benefit resulted from the net loss $(149,547) for the year
ended March 31, 2021. The forgiven PPP loans were non-taxable.



Net Income

As a result of the above, the Company recorded net income of $1,309,738 for the
year ended March 31, 2022, as compared to net income of $600,057 for the year
ended March 31, 2021.

Liquidity and Capital Resources

On March 31, 2022, the Company had positive working capital of $3,671,667, as
compared to working capital of $3,159,731 on March 31, 2021. The Company has
approximately $7.0 million of cash on hand at year-end including $2 million of
restricted cash supporting the appeal bond.

On March 31, 2021, Bank of America further extended the maturity date of our
line of credit from March 31, 2021, to June 30, 2021, to allow time for a full
underwriting for the annual renewal period. The line of credit was subsequently
renewed for $690,000 until July 30, 2022.

As discussed in Note 19 of the consolidated financial statements, the Company
has recorded total damages of $6,097,273 including accrued interest, as a result
of the jury verdict associated with the Aeroflex litigation as well as the
Court’s decision on punitive damages. The Company has recorded accrued interest
of $1,197,273 as of March 31, 2022.

The Company is very optimistic about the prospects of its appeal for a judgment
as a matter of law. The Company was hoping for a decision from the court this
calendar year, but this timing has been delayed due to the COVID-19 related
shutdown of the Kansas court system. As such, the appeal process is expected to
take at least another six to twelve months to complete. The Company has the
ability to settle this case at its sole discretion by withdrawing the appeal and
paying the judgment plus interest amount.

On March 27, 2020, former President Trump signed the Coronavirus Aid, Relief and
Economic Security (the “CARES Act”), which, among other things, outlines the
provisions of the Paycheck Protection Program (the “PPP”). The Company
determined that it met the criteria to be eligible to obtain a loan under the
PPP because, among other reasons, in light of the COVID-19 outbreak and the
uncertainty of economic conditions related thereto, the loan was considered
necessary to support the Company’s ongoing operations and retain all its
employees. In addition, former President Trump signed into law the Paycheck
Protection Program and Health Care Enhancement Act on April 24, 2020, which
increased funding provided by the CARES Act. On May 4, 2020, the Company issued
a promissory note (the “Note”) to Bank of America in the principal aggregate
amount of $722,577 (the “PPP Loan”) pursuant to the Paycheck Protection Program
(“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES
Act”). The amount was deposited in our bank on May 4, 2020. On June 5, 2020, the
Paycheck Protection Program Flexibility Act was signed into law and extended the
program until December 31, 2020. 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 $722,577. TIC qualified for full loan forgiveness on September 17,
2021.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations (continued)

Liquidity and Capital Resources (continued)

On August 24, 2021, TIC, and the New Jersey Economic Development Authority
(NJEDA) signed a small business emergency assistance grant agreement in the
amount of $20,000. We received these funds into our bank account on August 30,
2021, from NJEDA.

Based on the foregoing, we believe that our expected cash flows from operations,
line of credit in place and current cash balances will be sufficient to operate
in the normal course of business for next 12 months from the issuance date of
these financial statements, including any payments for settlement of the
Aeroflex litigation.

The Company continues to monitor the impact of the COVID-19 outbreak on its
supply chain, manufacturing and distribution operations, customers, and
employees, as well as the U.S. economy in general. The uncertainties associated
with the COVID-19 outbreak include potential adverse effects on the overall
economy, the Company’s supply chain, transportation services, employees, and
customers. The COVID-19 outbreak could adversely affect the Company’s revenues,
earnings, liquidity, and cash flows and may require significant actions in
response, including expense reductions. Conditions surrounding COVID-19 change
rapidly, and additional impacts of which the Company is not currently aware may
arise. Based on past performance and current expectations, the Company believes
that its anticipated cash flow from operations will be sufficient to fund the
Company’s requirements for working capital, capital expenditures and debt
service for at least the next 12 months.

During the year ended March 31, 2022, the Company’s cash balance increased by
$1,464,415 to $6,960,740, including restricted cash to support the appeal bond.
The Company’s principal sources, and uses of funds were as follows:

Cash provided (used in) operating activities. For the year ended March 31, 2022,
the Company provided $1,800,483 in cash for operations as compared to used
$255,616 in cash for operations for the year ended March 31, 2021. This increase
in cash provided by operations is primarily attributed to the increase in sales
as the economy slowly recovers from the global pandemic related issues and the
retainment of cash allocated for inventory replenishment that was halted during
the fiscal year ended March 31, 2022, due to severe supply chain issues and
prolonged delivery lead times.

Cash (used in) investing activities. For the year ended March 31, 2022, the
Company used a net $16,068 of its cash for investing activities, as compared to
$67,902 used for investing activities for the year ended March 31, 2021.

Cash (used in) provided by financing activities. For the year ended March 31,
2022, the Company used $320,000 in cash for financing activities to pay
preferred dividends as compared to providing $685,104 in cash by financing
activities for the year ended March 31, 2021. This predominantly was a result of
the two PPP loans the company received in fiscal year ended March 31, 2021,
totaling $1,445,154 and the $680,000 repayment of the line of credit.

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 year ended March 31, 2022.

Critical Accounting Policies

In preparing the consolidated financial statements and accounting for the
underlying transactions and balances, the Company applies its accounting
policies as disclosed in Note 2 of our Notes to Consolidated Financial
Statements. The Company’s accounting policies that require a higher degree of
judgment and complexity used in the preparation of these consolidated financial
statements include:

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

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

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations (continued)

Critical Accounting Policies (continued)

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

If the contract contains a single performance obligation, the entire transaction
price is allocated to the single performance obligation. Contracts that contain
multiple performance obligations require an allocation of the transaction price
based on the estimated relative standalone selling prices of the promised
products or services underlying each performance obligation. The Company
determines stand-alone selling prices based on the price at which the
performance obligation is sold separately. If the stand-alone selling price is
not observable through past transactions, the Company estimates the standalone
selling price considering available information such as market conditions and
internally approved pricing guidelines related to the performance obligations.

When determining the transaction price of a contract, an adjustment is made if
payment from the customer occurs either significantly before or significantly
after performance, resulting in a significant financing component. Applying the
practical expedient in paragraph 606-10-32-18, the Company does not assess
whether a significant financing component exists if the period between when the
Company performs its obligations under the contract and when the customer pays
is one year or less. None of the Company’s contracts contained a significant
financing component as of March 31, 2022.



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 March 31,
2022, approximately $386,907 is expected to be recognized from remaining
performance obligations for extended warranties as compared to $408,219 on March
31, 2021. For the year ended March 31, 2022, the Company recognized revenue of
$75,791 from amounts that were included in Deferred Revenue as compared to
$86,588 for the year ended March 31, 2021.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

Critical Accounting Policies (continued)

The following table provides a summary of the changes in deferred revenues
related to extended warranties for the year ended March 31, 2022:

Deferred revenues related to extended warranties on April 1, 2021 $ 408,219
Additional extended warranties

                                          54,479
Revenue recognized for the year ended March 31, 2022                   (75,791 )

Deferred revenues related to extended warranties on March 31, 2022 $ 386,907




Other Deferred Revenues

The Company sometimes receives payments in advance of shipment. These amounts
are classified as other deferred revenues. For the year ended March 31, 2022,
the Company has other deferred revenues of $21,999 and $74,920 for period ending
March 31, 2021.

Repair and Calibration Services

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



Other

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

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

All sales are denominated in U.S. dollars. The Company excludes from revenues
all taxes assessed by a governmental authority that are imposed on the sale of
its products and collected from customers. Company within 30 days of the related
sales order fulfillment. Accordingly, management has determined that no change
in accounting for costs to obtain a contract

will be required for the Company to conform to ASC 606.



Disaggregation of revenue

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



                          For the Year Ended
                            March 31, 2022
                      Commercial       Government
Sales Distribution
Test Units           $    409,594     $ 10,307,842
                     $    409,594     $ 10,307,842




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Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

Critical Accounting Policies (continued)

The remainder of our revenues for the year ended March 31, 2022, are derived
from repairs and calibration of $1,853,665 replacement parts of $229,058,
extended warranties of $75,791 and other miscellaneous. income of $56,840.



                          For the Year Ended
                            March 31, 2021
                      Commercial      Government

Sales Distribution
Test Units           $    325,195     $ 9,858,537
                     $    325,195     $ 9,858,537

The remainder of our revenues for the year ended March 31, 2021, are derived
from repairs and calibration of $1,169,399 replacement parts of $142,801 and
extended warranties of $86,588.

In the following table, revenue is disaggregated by geography.



                  For the Year         For the Year
                     Ended                Ended
                 March 31, 2022       March 31, 2021
Geography
United States   $      8,175,301     $      5,511,516
International          4,757,489            6,071,004
Total           $     12,932,790     $     11,582,520

Inventory reserves – inventory reserves or write-downs are estimated for excess,
slow-moving and obsolete inventory as well as inventory whose carrying value is
in excess of net realizable value. These estimates are based on current
assessments about future demands, market conditions and related management
initiatives. If market conditions and actual demands are less favorable than
those projected by management, additional inventory write-downs may be required.
While such write-downs have historically been within our expectation and the
provision established, the Company cannot guarantee that it will continue to
receive positive results.

Warranty reserves – warranty reserves are based upon historical rates and
specific items that are identifiable and can be estimated at time of sale. While
warranty costs have historically been within the Company’s expectations and the
provisions established, future warranty costs could be in excess of the
Company’s warranty reserves. A significant increase in these costs could
adversely affect the Company’s operating results for the period and the periods
these additional costs materialize. Warranty reserves are adjusted from time to
time when actual warranty claim experience differs from estimates. For the year
ended March 31, 2022, warranty costs were $38,236 as compared to $64,092 for the
year ended March 31, 2021, and are included in Cost of Sales in the accompanying
consolidated statement of operations. See Note 7 for warranty reserves.

Accounts receivable – the Company performs ongoing credit evaluations of its
customers and adjusts credit limits based on customer payment and current credit
worthiness, as determined by review of their current credit information. The
Company continuously monitors credits and payments from its customers and
maintains provision for estimated credit losses based on its historical
experience and any specific customer issues that have been identified. While
such credit losses have historically been within our expectation and the
provision established, the Company cannot guarantee that it will continue to
receive positive results. For the years ended March 31, 2022, and 2021
approximately 26% and 38%, respectively, of the Company’s sales were to the U.S.
Government.

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Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

Critical Accounting Policies (continued)

Income taxes – deferred tax assets arise from a variety of sources, the most
significant being a) tax losses that can be carried forward to be utilized
against profits in future years; b) expenses recognized in the books but
disallowed in the tax return until the associated cash flow occurs; and c)
valuation changes of assets which need to be tax effected for book purposes but
are deductible only when the valuation change is realized. Deferred tax assets
and liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using enacted tax rates
and laws that are expected to be in effect when such differences are expected to
reverse. The measurement of deferred tax assets is reduced, if necessary, by a
valuation allowance for any tax benefit which is not more likely than not to be
realized. In assessing the need for a valuation allowance, future taxable income
is estimated, considering the realization of tax loss carryforwards. Valuation
allowances related to deferred tax assets can also be affected by changes to tax
laws, changes to statutory tax rates and future taxable income levels. In the
event it was determined that the Company would not be able to realize all or a
portion of its deferred tax assets in the future, the Company would reduce such
amounts through a charge to income in the period in which that determination is
made. Conversely, if it were determined that it would be able to realize the
deferred tax assets in the future in excess of the net carrying amounts, TIC
would decrease the recorded valuation allowance through an increase to income in
the period in which that determination is made. In its evaluation of a valuation
allowance, the Company considers existing contracts and backlog, and the
probability that options under these contract awards will be exercised as well
as sales of existing products. The Company prepares profit projections based on
the revenue and expenses forecast to determine that such revenues will produce
sufficient taxable income to realize the deferred tax assets. The Company
determined they will be able to realize the majority of its deferred tax assets
as a result of its current projections on March 31, 2022.

Off Balance Sheet Arrangements

The Company is not party to any off-balance sheet arrangements that may affect
its financial position or its results of operations.

New Accounting Pronouncements

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

Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

Critical Accounting Policies (continued)

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