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.

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:

 

 

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

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 SeptemberJune 30, 20162017 and March 31, 2016.2017.  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.

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.

 

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 common stock warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign corporation.  The warrants do not qualify for hedge accounting, and, as such, all changes in the fair value of these warrants are recognized as other income/expense in the statement of operations until such time as the warrants are exercised or expire.  Since these common stock warrants do not trade in an active securities market, the Company recognized a warrant liability and estimated the fair value of these warrants using the Black-Scholes options model using the following assumptions until the payment of the loan in November 2014.

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, (the “Award”), to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5.5 (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 itsAeroflex’s business relationship; conspired to harm Aeroflex and tortiously interfered with its contract and seeks injunctive relief and damages.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 Aeroflexon 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 hadhas declined to join this suit as a plaintiff. As such, it is our contention that Aeroflex lacks standing to sue alone. Also, the motion raises the fact that in December 2011 Aeroflex allowed the license to expire, so that Aeroflex’s claims are either moot or itAeroflex lacks standing to sue for damages allegedly accruingalleged to have accrued after the license ended.ended in 2015 2011. The Kansas court has rejected thismotion for summary judgment motionwas denied.

The Aeroflex trial on remand in the Kansas District Court began in March 2017. After a six-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. The court has not yet issued a written opinion detailing its reasoning. On January 4, 2017,entered final judgment on the verdict.

Following the verdict, the Company filed a summarymotion for judgment as a matter of law, which is pending. 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 meritsstatute 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 issues in dispute. Thisnon-disclosure agreements and the award against the Company for interfering with those agreements. Alternatively, the motion asserts there is scheduledinsufficient evidence supporting the lost profit award on that claim. While we believe that this motion has merit, there is no assurance that the judge will reduce the jury awards.

During July 2017, the Court heard the Company’s motion for judgment as well as conducting a hearing as to be heard on February 9, 2017. The current Scheduling Order has the trial date set for February 27, 2017 and is estimatedamount of a punitive damages award. Kansas statutes limit punitive damages to last three weeks.a maximum of $5 million. The Company is optimistic ascurrently awaiting the court’s decision.

Aeroflex has submitted a motion to the Court requesting that the judge award punitive damages at the maximum $5 million amount. In Kansas, punitive damages are awarded to “punish the wrongdoer for his malicious, vindictive or willful and wanton invasion of another’s rights, with the ultimate purpose being to restrain and deter others from the commission of similar wrongdoings.” Importantly, Kansas courts have ruled that the purpose of punitive damages “is to sting, not to kill”. The Court will also take into consideration the Company’s financial condition in setting the amount of punitive damages. The Company does not believe that punitive damages, in any amount are appropriate. Regardless, the Company will vigorously defend against an award.

In summary, until the Court rules on the pending matters the final judgment on the verdict is speculative. At this stage, the Company has recorded a $2.8 million liability but this could materially change based on the judge’s ruling. Punitive damages can also range between $-0- and $5 million.  Depending on the outcome of these hearings, both sides have the ability to appeal the decision or the judge could vacate the jury decision and schedule a new trial. If the judge enters a final damages award, both sides have approximately 30 days to file an appeal or request a new trial. If the Company files the appeal on its own, it will be required to post a bond in the equal to the lesser of: (1) the final damages award; or (2) $1 million plus 25% of the amount of the verdict in excess of $1 million, which would currently total $1.45 million.

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.

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 is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. The Company does not believe that the adoption of this standard will 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”. TheThis update will requirerequires that all deferred tax assets and liabilities be classified as non-current. The Company adopted this update in the current year, which is effective for fiscal years, andreflected in the interim periods within those years, beginning after December 15, 2016. ASU 2015-17 will have a material impact on the Company’saccompanying balance sheet, as thesheets. The deferred tax reportedrecorded as a current asset will be reported as a non-current asset oncefor the update is effective, resulting in a decrease to the Company’s current ratio. As of Decemberyear ended March 31, 2016 the Company reported $578,507was reclassified as Deferred Tax – Non-Current. The adoption of deferred tax as a current asset. It willthis update did not have any material impact on the Company’s results of operations.

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 currently evaluating the new guidance to determine the impact, if any, it will have on its consolidated financial statements.

No other recently issued accounting pronouncements had or are expected to have a material impact on the Company’s condensed consolidated financial 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, 2016,2017, filed with the SEC on June 29, 2016,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.

The Company believes it has built a solid position in the Mode 5 IFF and TACAN test set market, and these products should be very competitive in both the domestic and overseas markets. WeWhile the major contracts have been completed, 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. 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 in the 2017/2018later this fiscal year, timeframe, 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 have seen substantial interest instarted receiving international orders for this new test set from a number of countries.set. Our business development team met with several European customers in January 2017, relating to possiblewith the intention of securing volume Mode 5 orders thatwhich could be issued starting in the summer of 2017.commence later this calendar year. All allied countiescountries have a drop dead date of January 1, 2020 for Mode 5 capability; as a result, we believe that this international Mode 5 business towill remain strong for at least the next three years.

We believe the real long-term growth potential for the Company is in our new line of modular hand-held test sets. This provides 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 are actively working to line up partners to enter this growth market and we believe that our new hardware platform provides unmatched capabilities in a market leading form factor. Prototypes of this new test set were demonstrated at the January 18, 2017 Annual Meeting. The Company is also evaluating upcoming U.S. Navy requirements, and expects at least one large competitive solicitation will be issued in the next 12 months for a product in our technical area of expertise. 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 transpondertransponders as well as the introduction of new UAT navigation for the general aviation market. We believe that our new hand-held products, that we are planning to introduce byin the end of this fiscal year,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.

 

On March 21, 2016, the Company entered into a line of credit agreement with Bank of America, which expiresexpired March 31, 2017. In March 2017, the line of credit was renewed and the expiration date extended until March 31, 2018.  The new line provides a revolving credit facility with borrowing capacity of up to $500,000. $1,000,000. There are no covenants or borrowing base calculations associated with histhis line of credit. Interest on any outstanding balancebalances 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 4.96%4.974% at December 31, 2016.June 30, 2017.   The line is collateralized by substantially all of the assets of the Company.  TheDuring the three months ended June 30, 2017, the Company has not made any borrowings againstborrowed $200,000 from this line of credit. As of DecemberJune 30, 2017 and March 31, 2016,2017, the outstanding balances were $400,000 and $200,000, respectively.  As of June 30, 2017 the remaining availability under this line is $500,000.$600,000. During the July 2017, the Company borrowed $200,000 from this line of credit.

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. The Company is currently negotiatingawaiting the court’s decision

Aeroflex has submitted a motion to the Court requesting that the judge award punitive damages at the maximum $5 million amount. In Kansas, punitive damages are awarded to “punish the wrongdoer for his malicious, vindictive or willful and wanton invasion of another’s rights, with the ultimate purpose being to restrain and deter others from the commission of similar wrongdoings.” Importantly, Kansas courts have ruled that the purpose of punitive damages “is to sting, not to kill”. The Court will also take into consideration the Company’s financial condition in setting the amount of punitive damages. The Company does not believe that punitive damages, in any amount are appropriate. Regardless, the Company will vigorously defend against an extension for this line of credit.award.

In May 2016, BCA exercised its “put option” wherein BCAsummary, until the Court rules on the pending matters the final judgment on the verdict is exercising its right tospeculative. At this stage, the Company has recorded a $2.8 million liability but this could materially change based on the judge’s ruling. Punitive damages can also range between $-0- and $5 million.  Depending on the outcome of these hearings, both sides have the Company purchaseability to appeal the warrants for 236,920 shares from BCA. The value ofdecision or the warrants forjudge could vacate the 236,920 shares ofjury decision and schedule a new trial. If the Company’s common stock at the time of exercise was $720,000. The Company paid this off in full from cash from operations in August 2016.

Based on existing backlogThe Company has been profitable from an operational standpoint for the last several years and recurring orders, existingshould be able to obtain sufficient cash andproceeds capital to support the credit line from Bank of America,planned appeal assuming the Company believes that it willfinal judgment amount remains at or below the current $2.8 million accrual. Financing discussions have adequate liquidity and backlog to fund operating plans for at least the next twelve months.  Currently,been taking place with various parties, but the Company has no material future capital expenditure requirements. However,commitment from any party to provide additional funding at this time. Moreover, there canis no assurance that sufficient funding will be no assurancesavailable, or if available, that its terms will be favorable to the Company will achieve revenue and profitability goals or will not require additional financing.Company. 

Engineering, research and development expenses increased $73,505 (13.6%) and $306,365 (20.7%$30,396 (5.2%) to $615,007 and $1,783,655, respectively,$615,273 for the three and nine months ended December 31, 2016,June 30, 2017 as compared to $541,502 and $1,477,290, respectively,$584,877 for the three and nine months ended December 31, 2015.June 30, 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. WeThe Company is also introduced a new commercial Nav/Commdeveloping its T-47M5 Mode 5 test set, earlier this calendar year. This is a large and important market segment forwhich we believe will compete effectively in the Company, and we are optimistic that this new product will help us regain market share in this segment.international market. We have added additional personnel to research and development activities to accelerate our time to market.

As a result of the above, the Company recorded incomea loss from operations of $153,874 and $900,585, respectively,$462,781 for the three and nine months ended December 31, 2016,June 30, 2017, as compared to income from operations of $725,332 and $2,098,741, respectively,$380,032 for the three and nine months ended December 31, 2015.June 30, 2016.  

For the three and nine months ended December 31, 2016,June 30, 2017, total other income was $24,021 and $237,178, respectively,$176,690, as compared to other expenseincome of $271,795 and $780,807$198,021 for the three and nine months December 31, 2015.June 30, 2016. This increasedecrease in other income is primarily due to the lower gain of on the change in the valuation of common stock warrants as compared to a significantly higher loss on the change in valuation of common stock warrants for the same periods in the prior fiscal year.period last year offset partially by proceeds from life insurance.

As a result of the above, the Company recorded incomea loss before taxes of $177,895 and $1,137,763, respectively, for the three and nine months ended December 30, 2016,$286,091, as compared to income before taxes of $453,537 and $1,317,934, respectively,$578,053 for the three and nine months ended December 31, 2015.June 30, 2016.  

For the three and nine months ended December 31,June 30, 2017, the Company recorded no income tax benefit as such amount was offset by a valuation allowance. For the three months ended June 30, 2016, the Company recorded anreported a provision for income tax provisionsin the amount of $36,382 and $313,886, respectively, as compared to an income tax provisions of $226,951 and $612,816, respectively, for the three and nine months ended December 31, 2015.  It should be noted that as a result of the Company’s net operating loss carryforwards, it will not be paying significant taxes this year, and, as such, the provision for taxes represents a reduction of our deferred tax asset and not a liability to pay taxes.$167,744.

As a result of the above, the Company recorded a net incomeloss of $141,513 and $823,877, respectively,$286,091 for the three and nine months ended December 31, 2016,June 30, 2017, as compared to net income of $226,586 and $705,118, respectively,$410,309 for the three and nine months ended December 31, 2015.  June 30, 2016.  

Cash provided byused in operating activities. For the ninethree months ended December 31, 2016,June 30, 2017, the Company generated $1,303,739used $122,720 in cash for operations as compared to generating $978,447using $401,230 in cash for operations for the ninethree months ended December 31, 2015.June 30, 2016.  This increasedecrease in cash fromused for operations is the result of the increase in accounts receivable and other assets offset partially by lower operating income, deferred revenues and the decrease inventories and lower change in accounts payable and accrued liabilities offset partially by lower account receivable, lower operating income and decrease in accrued payroll, vacation pay and payroll withholdings.inventories.

Cash used in investing activities.  For the ninethree months ended December 31, 2016,June 30, 2017, the Company used $37,070$21,506 of its cash for investment activities, as compared to $45,041$25,307 for the ninethree months ended December 31, 2015June 30, 2016 as a result of a decrease in the purchase of capital equipment.

Cash used inprovided by (used in) financing activities. For ninethree months ended December 31, 2016,June 30, 2017, the Company used $1,077,148provided $91,157 in cash from financing activities as compared to using $490,285$133,526 for the ninethree months ended December 31, 2015June 30, 2016 primarily as a result of paying the warrant liabilityproceeds from the line of $720,000 and $322,894 of bank debt.credit.

In November 2014, the Company entered into a term loan in the amount of $1,200,000 with Bank of America. The term loan is for three years, and matures in November 2017. Monthly payments are at $36,551 including interest at 6%. The term loan is collateralized by substantially all of the assets of the CompanyCompany. At December 31, 2016June 30, 2017 and March 31, 2016,2017, the outstanding balances were $390,113$179,999 and $693,407,$285,810, respectively. At December 31, 2016, $390,113June 30, 2017, $179,999 was classified as current.

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, 2016June 30, 2017 and March 31, 2016,2017, the outstanding balances were $9,808$6,786 and $14,211,$8,305, respectively. At December 31, 2016, $6,112June 30, 2017, $6,252 was classified as current.

On March 21, 2016, the Company entered into a line of credit agreement with Bank of America, which matures onexpired March 31, 2017. In March 2017, the line of credit was renewed and the expiration date extended until March 31, 2018.  The new line provides a revolving credit facility with borrowing capacity of up to $500,000. $1,000,000. There are no covenants or borrowing base calculations associated with this line of credit. Interest on any outstanding balancebalances 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 4.96%4.974% at December 31, 2016.June 30, 2017.   The line is collateralized by substantially all of the assets of the Company.  TheDuring the three months ended June 30, 2017, the Company has not made any borrowings againstborrowed $200,000 from this line of credit. As of DecemberJune 30, 2017 and March 31, 2016,2017, the outstanding balances were $400,000 and $200,000, respectively.  As of June 30, 2017 the remaining availability under this line is $500,000. The$600,000. During July 2017, the Company is currently negotiating an extension forborrowed $200,000 from this line of credit.

In May 2016, BCA exercised its “put option” wherein BCAUntil the Court rules on the pending matters, the final judgment on the verdict is exercising its right tospeculative. At this stage, the Company has recorded a $2.8 million liability but this could materially change based on the judge’s ruling. Punitive damages can also range between $-0- and $5 million.  Depending on the outcome of these hearings, both sides have the ability to appeal the decision or the judge could vacate the jury decision and schedule a new trial. If the judge enters a final damages award, both sides have approximately 30 days to file an appeal or request a new trial. If the Company purchasefiles the warrants for 236,920 shares from BCA (see Notes 10appeal on its own, it will be required to post a bond in Notesthe equal to Condensed Consolidated Financial Statements). The valuethe lesser of: (1) the final damages award; or (2) $1 million plus 25% of the warrantsamount of the verdict in excess of $1 million, which would currently total $1.45 million.

The Company has been profitable from an operational standpoint for the 236,920 shares oflast several years and should be able to obtain sufficient cash proceeds capital to support the Company’s common stockplanned appeal assuming the final judgment amount remains at or below the time of exercise was $720,000. Thecurrent $2.8 million accrual. Financing discussions have been taking place with various parties, but the Company paidhas no commitment from any party to provide additional funding at this amount from cash from operations in August 2016.time. Moreover, there is no assurance that sufficient funding will be available, or if available, that its terms will be favorable to the Company. 

There was no significant impact on the Company’s operations as a result of inflation for the ninethree months ended December 31, 2016.June 30, 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, 2016,2017, filed with the SEC on June 29, 2016July 14, 2017 (the “Annual Report”).

As of December 31, 2016,June 30, 2017, the Company had no material off-balance sheet arrangements.

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 20162017 consolidated financial statements included in our Annual Report.

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

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.

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.

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, (the “Award”), to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5.5 (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 itsAeroflex’s business relationship; conspired to harm Aeroflex and tortiously interfered with its contract and seeks injunctive relief and damages.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 Aeroflexon 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 hadhas declined to join this suit as a plaintiff. As such, it is our contention that Aeroflex lacks standing to sue alone. Also, the motion raises the fact that in December 2011 Aeroflex allowed the license to expire, so that Aeroflex’s claims are either moot or itAeroflex lacks standing to sue for damages allegedly accruingalleged to have accrued after the license ended.ended in December 2011. The Kansas court has rejected thismotion for summary judgment motionwas denied.

The Aeroflex trial on remand in the Kansas District Court began in March 2017. After a six-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. The court has not yet issued a written opinion detailing its reasoning. On January 4, 2017,entered final judgment on the verdict.

Following the verdict, the Company filed a summarymotion for judgment as a matter of law, which is pending. 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 meritsstatute 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 issues in dispute. Thisnon-disclosure agreements and the award against the Company for interfering with those agreements. Alternatively, the motion asserts there is scheduledinsufficient evidence supporting the lost profit award on that claim. While we believe that this motion has merit, there is no assurance that the judge will reduce the jury awards.

During July, 2017, the Court heard the Company’s motion for judgment as well as conducting a hearing as to be heard on February 9, 2017. The current Scheduling Order has the trial date set for February 27, 2017 and is estimatedamount of a punitive damages award. Kansas statutes limit punitive damages to last three weeks.a maximum of $5 million. The Company is optimistic ascurrently awaiting the court’s decision

Aeroflex has submitted a motion to the Court requesting that the judge award punitive damages at the maximum $5 million amount. In Kansas, punitive damages are awarded to “punish the wrongdoer for his malicious, vindictive or willful and wanton invasion of another’s rights, with the ultimate purpose being to restrain and deter others from the commission of similar wrongdoings.” Importantly, Kansas courts have ruled that the purpose of punitive damages “is to sting, not to kill”. The Court will also take into consideration the Company’s financial condition in setting the amount of punitive damages. The Company does not believe that punitive damages, in any amount are appropriate. Regardless, the Company will vigorously defend against an award.

In summary, until the Court rules on the pending matters the final judgment on the verdict is speculative. At this stage, the Company has recorded a $2.8 million liability but this could materially change based on the judge’s ruling. Punitive damages can also range between $-0- and $5 million.  Depending on the outcome of these hearings, both sides have the ability to appeal the decision or the judge could vacate the jury decision and schedule a new trial. If the judge enters a final damages award, both sides have approximately 30 days to file an appeal or request a new trial. If the Company files the appeal on its own, it will be required to post a bond in the equal to the lesser of: (1) the final damages award; or (2) $1 million plus 25% of the amount of the verdict in excess of $1 million, which would currently total $1.45 million.

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.

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, 2016,2017, filed with the SEC on June 29, 2016.July 14, 2017.

There were no unregistered sales of the Company’s equity securities during the quarter ended December 31, 2016June 30, 2017 other than those previously reported in a Current Report on Form 8-K.

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.

Not applicable.  

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

 

* Filed herewith