UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
 
 x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30,December 31, 2013

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-31990

TEL-INSTRUMENT ELECTRONICS CORP
(Exact name of registrant as specified in its charter)

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

One Branca Road
East Rutherford, NJ 07073
(Address of principal executive offices)

(201) 933-1600
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes ý   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.  Yes ý   No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer¨ Accelerated filer¨
     
Non-accelerated filer¨ Smaller reporting companyý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨   No ý

As of November 6, 2013,February 10, 2014, there were 3,246,0873,248,387 shares outstanding of the registrant’s common stock.
 
 
 
 
TEL-INSTRUMENT TEL-INSTRUMENT ELECTRONICS CORP

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
  Page
Item 1.
Financial Statements.
 
    3
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
    15
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
 
    2021
Item 4.
Controls and Procedures.
 
    2021
PART II – OTHER INFORMATION
   
Item 1.
Legal Proceedings.
  2122
   
Item 1A.
Risk Factors.
  2122
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
  2122
   
Item 3.
Defaults Upon Senior Securities.
  2122
   
Item 4.
Mine Safety Disclosures.
  2122
   
Item 5.
Other Information.
  2122
   
Item 6.
Exhibits.
  2223
   
Signatures
  2324

 
 
 
PART I – FINANCIAL INFORMATION
 
Item 1.  Financial Statements.
 
TEL-INSTRUMENT ELECTRONICS CORP
CONDENSED CONSOLIDATED BALANCE SHEETS

 
September 30,
2013
  
March 31,
2013
  
December 31,
2013
  
March 31,
2013
 
 (unaudited)    (unaudited)   
ASSETS          
          
Current assets:          
Cash and cash equivalents
 
$
145,751
 
310,297
  
$
216,347
 
310,297
 
Accounts receivable, net
 
1,368,658
 
557,879
  
1,129,913
 
557,879
 
Inventories, net
 
4,712,040
 
6,241,181
  
4,509,600
 
6,241,181
 
Prepaid expenses and other
 
146,996
 
115,852
  
143,929
 
115,852
 
Deferred financing costs
 
108,321
 
108,321
  
113,876
 
108,321
 
Deferred income tax asset
  
1,238,421
  
1,238,421
   
1,239,761
  
1,238,421
 
Total current assets
 
7,720,187
 
8,571,951
  
7,353,426
 
8,571,951
 
          
Equipment and leasehold improvements, net
 
494,819
 
587,958
  
445,735
 
587,958
 
Deferred financing costs – long-term
 
102,303
 
156,463
  
78,921
 
156,463
 
Deferred income tax asset – non-current
 
2,553,709
 
2,546,190
  
2,494,347
 
2,546,190
 
Other assets
  
56,872
  
56,872
   
56,872
  
56,872
 
Total assets
  
10,927,890
  
 11,919,434
   
10,429,301
  
 11,919,434
 
          
LIABILITIES & STOCKHOLDERS’ EQUITY
          
          
Current liabilities:
          
Current portion long-term debt
 
668,469
 
1,229,643
  
641,254
 
1,229,643
 
Capital lease obligations – current portion
 
79,468
 
74,508
  
69,448
 
74,508
 
Accounts payable
 
2,819,192
 
4,272,431
  
2,233,671
 
4,272,431
 
Progress billings
 
795,050
 
-
  
795,050
 
-
 
Deferred revenues – current portion
 
24,140
 
18,460
  
8,155
 
18,460
 
Accrued payroll, vacation pay and payroll taxes
 
375,858
 
442,522
  
394,432
 
442,522
 
Accrued expenses
  
1,370,654
  
1,525,538
   
1,389,487
  
1,525,538
 
Total current liabilities
 
6,132,831
 
7,563,102
  
5,531,497
 
7,563,102
 
          
Subordinated notes payable-related parties
 
250,000
 
250,000
  
250,000
 
250,000
 
Capital lease obligations – long-term
 
34,125
 
76,055
  
25,159
 
76,055
 
Deferred revenues – long-term
 
-
 
1,045
  
118,350
 
1,045
 
Warrant liability
 
282,213
 
198,330
  
511,939
 
198,330
 
Long-term debt, net of debt discount
  
873,450
  
1,134,549
   
743,290
  
1,134,549
 
Total liabilities
  
7,572,619
  
9,223,081
   
7,180,235
  
9,223,081
 
          
Commitments
          
          
Stockholders' equity:
          
Common stock, par value $.10 per share, 3,243,087 and 3,011,739 issued and outstanding
as of September 30, 2013 and March 31, 2013, respectively
 
324,306
 
  301,171
 
Common stock, par value $0.10 per share, 3,248,387 and 3,011,739 issued and outstanding
as of December 31, 2013 and March 31, 2013, respectively
 
324,886
 
  301,171
 
Additional paid-in capital
 
7,902,329
 
7,108,300
  
7,941,477
 
7,108,300
 
Accumulated deficit
  
(4,871,364
)
  
(4,713,118
)
  
(5,017,297
)
  
(4,713,118
)
Total stockholders' equity
  
3,355,271
  
2,696,353
   
3,249,066
  
2,696,353
 
Total liabilities and stockholders' equity
 
$
10,927,890
 
$
11,919,434
  
$
10,429,301
 
$
11,919,434
 
 
See accompanying notes to condensed consolidated financial statements.
 
 
3
 
TEL-INSTRUMENT ELECTRONICS CORP
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 Three Months Ended Six Months Ended  Three Months Ended Nine Months Ended 
 
September 30,
2013
 
September 30,
2012
 
September 30,
2013
 
September 30,
2012
  
December 31,
2013
 
December 31,
2012
 
December 31,
2013
 
December 31,
2012
 
                  
Net sales
 
$
4,034,581
 
$
2,394,950
 
7,234,556
 
$
3,572,238
  
$
4,089,029
 
$
2,350,020
 
11,323,585
 
$
5,922,258
 
Cost of sales
  
2,758,832
  
1,792,527
  
4,772,649
  
2,686,121
   
2,693,342
  
1,896,652
  
7,465,991
  
4,582,773
 
                  
Gross margin
 
1,275,749
 
602,423
 
2,461,907
 
886,117
  
1,395,687
 
453,368
 
3,857,594
 
1,339,485
 
                  
Operating expenses:
                  
Selling, general and administrative
 
671,410
 
686,346
 
1,324,660
 
1,340,234
  
697,919
 
587,146
 
2,022,579
 
1,927,380
 
Engineering, research and development
  
448,572
  
548,800
  
928,949
  
1,127,404
   
449,477
  
481,055
  
1,378,426
  
1,608,459
 
Total operating expenses
  
1,119,982
  
1,235,146
  
2,253,609
  
2,467,638
   
1,147,396
  
1,068,201
  
3,401,005
  
3,535,839
 
                  
Income (loss) from operations
 
155,767
 
(632,723
)
 
208,298
 
(1,581,521
)
 
248,291
 
(614,833
)
 
456,589
 
(2,196,354
)
                  
Other income (expense):
                  
Amortization of debt discount
 
(25,600
)
 
(31,009
)
 
(48,587
)
 
(44,401
)
 
(27,120
)
 
(37,948
)
 
(75,707
)
 
(82,349
)
Loss on extinguishment of debt
 
0
 
0
 
(26,600
)
 
0
  
0
 
-
 
(26,600
)
 
-
 
Amortization of deferred financing costs
 
(27,080
)
 
(56,711
)
 
(54,160
)
 
(83,791
)
 
(27,827
)
 
(68,383
)
 
(81,987
)
 
(152,174
)
Financing costs
 
-
 
(26,477
)
 
-
 
(26,477
)
 
-
 
(21,441
)
 
-
 
(47,918
)
Change in fair value of common stock Warrants
 
(67,345
)
 
(337
)
 
(42,773
)
 
249,057
  
(229,726
)
 
19,710
 
(272,499
)
 
268,767
 
Interest income
 
34
 
13
 
34
 
13
  
129
 
420
 
163
 
433
 
Interest expense
  
(97,390
)
  
(131,032
)
  
(201,467
)
  
(223,500
)
  
(50,828
)
  
(126,490
)
  
(252,295
)
  
(349,990
)
Total other income (expense)
  
(217,381
)
  
(245,553
)
  
(373,553
)
  
(129,099
)
  
(335,372
)
  
(234,132
)
  
(708,925
)
  
(363,231
)
                  
Loss before income taxes
 
(61,614
)
 
(878,276
)
 
(165,255
)
 
(1,710,620
)
 
(87,081
)
 
(848,965
)
 
(252,336
)
 
(2,559,585
)
                  
Income tax expense (benefit)
  
10,860
  
(448,571
)
  
(7,009
)
  
(612,115
)
  
58,852
  
(303,788
)
  
51,843
  
  (915,903
)
                  
Net loss
 
$
(72,474
)
 
$
(429,705
)
 
$
(158,246
)
 
$
(1,098,505
)
 
$
(145,933
)
 
$
(545,177
)
 
$
(304,179
)
 
$
(1,643,682
)
                  
Basic income (loss) per common share
 
$
(0.02
)
 
$
(0.16
)
 
$
(0.05
)
 
$
(0.41
)
 
$
(0.04
)
 
$
(0.19
)
 
$
(0.10
)
 
$
(0.59
)
Diluted income (loss) per common share
 
$
(0.02
)
 
$
(0.16
)
 
$
(0.05
)
 
$
(0.41
)
 
$
(0.04
)
 
$
(0.19
)
 
$
(0.10
)
 
$
(0.59
)
                  
Weighted average shares outstanding:
                  
Basic
 
3,235,250
 
2,717,585
 
3,157,985
 
2,708,335
  
3,247,387
 
2,912,516
 
3,189,123
 
2,776,643
 
Diluted
 
3,235,250
 
2,717,585
 
3,157,985
 
2,708,335
  
3,247,387
 
2,912,516
 
3,189,123
 
2,776,643
 
 
See accompanying notes to condensed consolidated financial statements.
 
 
4
 
TEL-INSTRUMENT ELECTRONICS CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 Three months ended Nine months ended
 
September 30,
2013
 
September 30,
2012
 
December 31,
2013
 
December 31,
2012
        
Cash flows from operating activities:        
Net loss
 
$
(158,246
)
 
$
(1,098,505
)
 
$
(304,179
)
 
$
(1,643,682
)
Adjustments to reconcile net loss to net cash
used in operating activities:
          
Deferred income taxes
 
(7,519
)
 
(616,026
)
 
50,503
 
(919,814
)
Depreciation and amortization
 
104,365
 
106,625
  
153,818
 
160,140
 
Amortization of debt discount
 
48,587
 
44,401
  
75,707
 
82,349
 
Amortization of deferred financing costs
 
54,160
 
83,791
 
Amortization of deferred financing costs, net
 
81,987
 
152,174
 
Loss on extinguishment of debt
 
26,600
 
  -
  
26,600
 
  -
 
Warrants issued in exchange for services
 
-
 
26,477
  
-
 
47,918
 
Change in fair value of common stock warrants
 
42,773
 
(249,057
)
 
272,499
 
(268,767
)
Non-cash interest expense associated with conversion of note
 
21,003
 
-
  
21,003
 
-
 
Non-cash stock-based compensation
 
32,161
 
46,277
  
48,519
 
62,884
 
          
Changes in assets and liabilities:
          
(Increase) decrease in accounts receivable, net
 
(810,779
)
 
834,149
  
(572,034
)
 
1,041,720
 
Decrease in unbilled government receivables
 
-
 
18,127
  
-
 
728,724
 
Decrease (increase) in inventories, net
 
1,529,141
 
(1,540,862
)
 
1,731,581
 
(1,780,056
)
(Increase) decrease in prepaid expenses & other
 
(31,144
) 
 
118,741
  
(28,077
) 
 
126,381
 
(Decrease) increase in accounts payable
 
(1,453,239
)
 
532,296
  
(2,038,760
)
 
1,150,140
 
(Decrease) increase in accrued payroll, vacation pay & withholdings
 
(66,664
)
 
36,732
 
Decrease in accrued payroll, vacation pay & withholdings
 
(48,090
)
 
(70,661
)
Increase (decrease) in deferred revenues
 
4,635
 
(18,021
)
 
107,000
 
(13,125
)
Increase in progress billings
 
795,050
 
405,551
  
795,050
 
-
 
(Decrease) increase in accrued expenses
  
(117,484
) 
  
362,786
   
(98,651
) 
  
(527,446
)
Net cash provided by (used in) operating activities
  
13,400
  
(906,518
)
  
274,476
  
(1,671,121
)
          
Cash flows from investing activities:
          
Purchases of equipment
  
(11,226
) 
  
(45,308
)
  
(11,595
) 
  
(60,816
)
Net cash used in investing activities
  
(11,226
)
  
(45,308
)
  
(11,595
)
  
(60,816
)
          
Cash flows from financing activities:
          
Proceeds from note payable – related party
 
100,000
 
-
  
100,000
 
-
 
Proceeds from the sale of common stock
 
-
 
300,002
  
-
 
1,000,002
 
Proceeds from the issuance of debt
 
-
 
600,000
  
-
 
600,000
 
Expenses associated with the issuance of debt
 
-
 
(111,340
)
 
-
 
(111,340
)
Proceeds from the exercise of stock options
 
-
 
104,430
  
23,370
 
104,430
 
Repayment of long-term debt
 
(229,750
)
 
(127,929
)
 
(424,245
)
 
(127,929
)
Repayment of capitalized lease obligations
  
(36,970
)
  
(30,262
)
  
(55,956
)
  
(47,627
)
Net cash (used in) provided by financing activities
  
(166,720
)
  
734,901
   
(356,831
)
  
1,417,536
 
          
Net decrease in cash and cash equivalents
 
(164,546
)
 
(216,925
)
 
(93,950
)
 
(314,401
)
Cash and cash equivalents at beginning of period
  
310,297
  
413,195
   
310,297
  
413,195
 
Cash and cash equivalents at end of period
 
$
145,751
 
$
196,270
  
$
216,347
 
$
98,794
 
          
Supplemental cash flow information:
          
Taxes paid
 
$
 -
 
$
 -
  
$
 -
 
$
 -
 
Interest paid
 
$
192,837
 
$
181,903
  
$
276,546
 
$
261,413
 
          
Supplemental non-cash information:
          
Conversion of debt to equity
 
$
700,000
 
$
-
  
$
700,000
 
$
-
 
Conversion of accrued interest into equity
 
$
37,400
 
$
  -
  
$
37,400
 
$
  -
 
 
See accompanying notes to condensed consolidated financial statements.
 
 
5
 
TEL-INSTRUMENT ELECTRONICS CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 – Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Tel-Instrument Electronics Corp (the “Company” or “TIC”) as of September 30,December 31, 2013, the results of operations for the three and sixnine months ended September 30,December 31, 2013 and September 30,December 31, 2012, and statements of cash flows for the sixnine months ended September 30,December 31, 2013 and September 30,December 31, 2012.  These results are not necessarily indicative of the results to be expected for the full year.  The financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include disclosures normally made in an Annual Report on Form 10-K.  The March 31, 2013 balance sheet included herein was derived from the audited financial statements included in the Company’s Annual Report on Form 10-K as of that date.  Accordingly, the financial statements included herein should be reviewed in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2013 , as filed with the United States Securities and Exchange Commission (the “SEC”) on July 16, 20132013.

Note 2 – Summary of Significant Accounting Policies

During the sixnine months ended September 30,December 31, 2013, there have been no material changes in the Company’s significant accounting policies to those previously disclosed in the Company’s Annual Report on Form 10-K for the year ended March 31, 2013, as filed with the SEC on July 16, 2013.
 
Note 3 – Accounts Receivable, net

The following table sets forth the components of accounts receivable:

 
September 30,
2013
 
March 31,
2013
  
December 31,
2013
 
March 31,
2013
 
Government
 
$
1,116,472
 
$
423,165
  
$
1,042,639
 
$
423,165
 
Commercial
 
269,468
 
153,654
  
104,556
 
153,654
 
Less: Allowance for doubtful accounts
  
(17,282
)
  
(18,940
)
  
(17,282
)
  
(18,940
)
 
$
  1,368,658
 
$
557,879
  
$
  1,129,913
 
$
557,879
 
 
Note 4 –Inventories,– Inventories, net
 
Inventories consist of:
 
 
September 30,
2013
 
March 31,
2013
  
December 31,
2013
 
March 31,
2013
 
          
Purchased parts
 
$
3,845,654
 
$
4,418,989
  
$
3,624,430
 
$
4,418,989
 
Work-in-process
 
1,020,630
 
1,636,325
  
1,050,622
 
1,636,325
 
Finished goods
 
45,756
 
385,867
  
34,548
 
385,867
 
Less: Inventory reserve
  
(200,000
)
  
(200,000
)
  
(200,000
)
  
(200,000
)
          
 
$
4,712,040
 
$
6,241,181
  
$
4,509,600
 
$
6,241,181
 
 
 
6
 
 TEL-INSTRUMENT ELECTRONICS CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 5 – Loss Per Share

Net (loss) income per share has been computed according to FASB ASC 260, “Earnings per Share,” which requires a dual presentation of basic and diluted earnings (loss) per share (“EPS”). Basic EPS represents net (loss) income divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS reflects the potential dilution that could occur if securities, including warrants and options, were converted into common stock. The dilutive effect of outstanding warrants and options is reflected in earnings per share by use of the treasury stock method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amounts of average unrecognized compensation costs attributed to future services.

Diluted loss per share for the three and sixnine months ended September 30,December 31, 2013 and 2012 does not include common stock equivalents, as these stock equivalents would be anti-dilutive.

 Three Months Ended Three Months Ended  Three Months Ended Three Months Ended��
 
September 30,
2013
 
September 30,
2012
  
December 31,
2013
 
December 31,
2012
 
Basic net loss per share computation:          
Net loss
 
$
(72,474
)
 
$
(429,705
)
 
$
(145,933
)
 
$
(545,177
)
Weighted-average common shares outstanding
 
3,235,250
 
2,717,585
  
3,247,387
 
2,912,516
 
Basic net loss per share
 
$
(0.02
)
 
$
(0.16
)
 
$
(0.04
)
 
$
(0.19
)
Diluted net loss per share computation:
          
Net loss
 
$
(72,474
)
 
$
(429,705
)
 
$
(145,933
)
 
$
(545,177
)
Weighted-average common shares outstanding
 
3,235,250
 
2,717,585
  
3,247,387
 
2,912,516
 
Incremental shares attributable to the assumed exercise of outstanding stock options
 
-
 
-
  
-
 
-
 
Total adjusted weighted-average shares
 
3,235,250
 
2,717,585
  
3,247,387
 
2,912,516
 
Diluted net loss per share
 
$
(0.02
)
 
$
(0.16
)
 
$
(0.04
)
 
$
(0.19
)
 
 Six Months Ended Six Months Ended  Nine Months Ended Nine Months Ended 
 
September 30,
2013
 
September 30,
2012
  
December 31,
2013
 
December 31,
2012
 
Basic net loss per share computation:          
Net loss
 
$
(158,246
)
 
$
(1,098,505
)
 
$
(304,179
)
 
$
(1,643,682
)
Weighted-average common shares outstanding
 
3,157,985
 
2,708,335
  
3,189,123
 
2,776,643
 
Basic net loss per share
 
$
(0.05
)
 
$
(0.41
)
 
$
(0.10
)
 
$
(0.59
)
Diluted net loss per share computation:
          
Net loss
 
$
(158,246
)
 
$
(1,098,505
)
 
$
(304,179
)
 
$
(1,643,682
)
Weighted-average common shares outstanding
 
3,157,985
 
2,708,335
  
3,189,123
 
2,776,643
 
Incremental shares attributable to the assumed exercise of outstanding stock options
 
-
 
-
  
-
 
-
 
Total adjusted weighted-average shares
 
3,157,985
 
2,708,335
  
3,189,123
 
2,776,643
 
Diluted net loss per share
 
$
(0.05
)
 
$
(0.41
)
 
$
(0.10
)
 
$
(0.59
)
 
 
7
 
TEL-INSTRUMENT ELECTRONICS CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 6 – Long-Term Debt

In September 2010, the Company entered into an agreement with BCA Mezzanine Fund LLP (“BCA”) to loan the Company $2,500,000 in the form of a Promissory Note (the “Note”).  The Note contains a number of affirmative and negative covenants which restrict our operations.  For the quarter ended September 30,December 31, 2013, the Company was not in compliance with four covenants related to maintaining agreed upon financial ratios for fixed charges, leverage and debt service as well as a requirement for earnings before interest, taxes, depreciation and amortization (EBITDA). However,On February 13, 2014 the Company received a waiver from BCA on each of the above mentioned covenants.  In consideration for this waiver for non-compliance of the financial covenants, the Company incurred an incremental fee of $10,000.

In consideration for the waiver for non-compliance of the financial covenants at September 30, 2013, on November 12, 2013, the Company incurred an incremental fee of $10,000.

In consideration for the waiver for non-compliance of the financial covenants at June 30, 2013, on August 12, 2013, BCA received warrants to purchase 20,000 shares of the Company’s common stock. The common stock underlying the warrants is exercisable at a price of $3.69 per share and the warrants expire on September 10, 2019. Determining the warrant value to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant.  The fair value of the warrant is calculated using the Black-Scholes valuation model. The value of the warrant will be recorded as a debt discount of $21,587, and will be amortized over the remaining life of the loan.

In consideration for the waiver for non-compliance of the financial covenants at March 31, 2013, on July 12, 2013, BCA received warrants to purchase 20,000 shares of the Company’s common stock. The common stock underlying the warrants is exercisable at a price of $3.33 per share and the warrants expire on September 10, 2019. Determining the warrant value to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant.  The fair value of the warrant is calculated using the Black-Scholes valuation model. The value of the warrant will be recorded as a debt discount of $19,523, and will be amortized over the remaining life of the loan.
 
On July 26, 2012, the Company entered into a securities purchase agreement (the “Securities Purchase“Purchase Agreement”) with a private investor (the “Private Investor”).  Pursuant to the terms of the Purchase Agreement, the Company issued (i) a senior secured promissory note (the “Note”“2012 Note”) in favor of the Private Investor in the aggregate principal amount of $600,000, approximately $489,000 net of expenses, accruing interest at a rate of 14% per annum and (ii) a common stock purchase warrant to purchase 50,000 shares of the Company’s common stock, par value $0.10 per share. The 2012 Note, together with all unpaid interest and principal was due on March 31, 2013.  The common stock underlying the warrant is exercisable at a price of $3.35 per share and the warrant expires on September 10, 2019. In conjunction with the Purchase Agreement the Company entered into an (i) Investor Rights Agreement, (ii) Securities Agreement, (iii) Intercreditor Agreement and (iv) Subordination Agreement. The Company reported the foregoing on its Current Report on Form 8-K filed with the SEC on August 3, 2012.

Effective May 31, 2013, the Private Investor converted the outstanding principal of $600,000, penalty of $25,000 and accrued interest for the month of May 2013 in the amount of $12,400 for a total of $637,400 into 200,000 shares of the Company’s common stock at a price of $3.187 per share. The fair value of these shares at the date of conversion was $3.32 per share. As such, the Company recorded a loss on the extinguishment of debt in the amount of $26,600 and this amount is included in the accompanying statement of operations for the sixnine months ended September 30,December 31, 2013. As further consideration to the Private Investor, the Company agreed that each time the Company issues any new shares of Common Stockits common stock in the next two years (excluding the exercise of existing stock options and warrants currently outstanding), at a price lower than a purchase oriceprice of $3.187 per share, purchase price, the Company will issue additional shares to the Private Investor, for no additional consideration, based on the differential between the $3.187 price and the price paid for the newly issued shares of common stock.
 
Note 7 – Note Payable – Related Party

In June 2013, a related party received a note payable from the Company in exchange for $100,000 which the Company used for working capital needs. On July 24, 2013, the related party converted its note payable in the amount of $100,000 into 31,348 shares of the Company’s common stock at a price of $3.19 per share. The price was approved by the board of directors (the “Board”) of the Company and was the same price as the 200,000 shares issued to the Private Investor upon the conversion of debt on May 31, 2013. The fair value of these shares at the date of conversion was $3.86 per share. As such, in July 2013, the Company recorded additional interest expense of $21,003.
 
 
8
 
TEL-INSTRUMENT ELECTRONICS CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 8 – Segment Information

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

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

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

The table below presents information about reportable segments within the avionics business for the three and sixnine month periods ending September 30,December 31, 2013 and 2012:
 
Three Months Ended
September 30, 2013
 
Avionics
 Government
 
Avionics
 Commercial
 
Avionics
 Total
 
Corporate
 Items
 Total 
Three Months Ended
December 31, 2013
 
Avionics
 Government
 
Avionics
 Commercial
 
Avionics
 Total
 
Corporate
 Items
 Total 
Net sales
 
3,453,919
 
580,662
 
4,034,581
 
-
 
4,034,581
  
3,797,272
 
291,757
 
4,089,029
 
-
 
4,089,029
 
Cost of Sales
  
2,419,505
  
339,327
  
2,758,832
  
-
  
2,758,832
   
2,415,427
  
277,915
  
2,693,342
  
-
  
2,693,342
 
Gross Margin
  
1,034,414
  
241,335
  
1,275,749
  
-
  
1,275,749
   
1,381,845
  
13,842
  
1,395,687
  
-
  
1,395,687
 
                      
Engineering, research, and development
     
448,572
   
448,572
      
449,477
   
449,477
 
Selling, general and administrative
     
293,632
 
377,778
 
671,410
      
375,255
 
322,664
 
697,919
 
Amortization of debt discount
       
25,600
 
25,600
        
27,120
 
27,120
 
Amortization of deferred financing costs
       
27,080
 
27,080
        
27,826
 
27,826
 
Change in fair value of common stock warrants
       
67,345
 
67,345
        
229,726
 
229,726
 
Interest expense, net
           
97,356
  
97,356
            
50,700
  
50,700
 
Total expenses
        
742,204
  
595,159
  
1,337,363
         
824,732
  
658,036
  
1,482,768
 
                      
Income (loss) before income taxes
        
533,545
  
(595,159)
  
(61,614
)
        
570,955
  
(658,036)
  
(87,081
)
 
Three Months Ended
September 30, 2012
 
Avionics
Government
 
Avionics
Commercial
 
Avionics
Total
 
Corporate
Items
 
 
Total
 
Three Months Ended
December 31, 2012
 
Avionics
Government
 
Avionics
Commercial
 
Avionics
Total
 
Corporate
Items
 
 
Total
 
Net sales
 
1,847,545
 
547,405
 
2,394,950
 
-
 
2,394,950
  
1,828,941
 
521,079
 
2,350,020
 
-
 
2,350,020
 
Cost of Sales
  
1,296,733
  
495,794
  
1,792,527
  
-
  
1,792,527
   
1,480,584
  
416,068
  
1,896,652
  
-
  
1,896,652
 
Gross Margin
  
550,812
  
51,611
  
602,423
  
-
  
602,423
   
348,357
  
105,011
  
453,368
  
-
  
453,368
 
                      
Engineering, research, and development
     
548,800
   
548,800
      
481,055
   
481,055
 
Selling, general, and administrative
     
310,147
 
376,199
 
686,346
      
264,627
 
322,519
 
587,146
 
Amortization of debt discount
       
31,009
 
31,009
        
37,948
 
37,948
 
Amortization of deferred financing costs
       
56,711
 
56,711
        
68,384
 
68,384
 
Financing costs
       
26,477
 
26,477
        
21,441
 
21,441
 
Change in fair value of common stock warrants
       
337
 
337
        
(19,710
 )
 
(19,710
)
Interest (income) expense, net
           
131,019
  
131,019
            
126,069
  
126,069
 
Total expenses
        
858,947
  
621,752
  
1,480,699
         
745,682
  
556,651
  
1,302,333
 
                      
Loss before income taxes
        
(256,524
)
  
(621,752
)
  
(878,276
)
        
(292,314
)
  
(556,651
)
  
(848,965
)
 
 
9

TEL-INSTRUMENT ELECTRONICS CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 8 – Segment Information (continued)
 
Six Months Ended
September 30, 2013
 
Avionics
 Government
  
Avionics
 Commercial
  
Avionics
 Total
  
Corporate
 Items
  Total 
Nine Months Ended
December 31 2013
 
Avionics
 Government
 
Avionics
 Commercial
 
Avionics
 Total
 
Corporate
 Items
 Total 
Net sales
  6,256,761   977,795   7,234,556   -   7,234,556  
10,054,033
 
1,269,552
 
11,323,585
 
-
 
11,323,585
 
Cost of Sales
  4,081,751   690,898   4,772,649   -   4,772,649   
6,497,178
  
968,813
  
7,465,991
  
-
  
7,465,991
 
Gross Margin
  2,175,010   286,897   2,461,907   -   2,461,907   
3,556,855
  
300,739
  
3,857,594
  
-
  
3,857,594
 
                               
Engineering, research, and development
          928,949       928,949      
1,378,426
   
1,378,426
 
Selling, general and administrative
          557,777   766,883   1,324,660      
933,033
 
1,089,546
 
2,022,579
 
Amortization of debt discount
              48,587   48,587        
75,707
 
75,707
 
Amortization of deferred financing costs
              54,160   54,160        
81,986
 
81,986
 
Loss on extinguishment of debt
              26,600   26,600        
26,600
 
26,600
 
Change in fair value of common stock warrants
              42,773   42,773        
272,499
 
272,499
 
Interest expense, net
              201,433   201,433            
252,133
  
252,133
 
Total expenses
          1,486,726   1,140,436   2,627,162         
2,311,459
  
1,798,471
  
4,109,930
 
                               
Income (loss) before income taxes
          975,181   (1,140,436)  (165,255)        
1,546,135
  
(1,798,471
)
  
(252,336
)

Six Months Ended
September 30, 2012
 
Avionics
 Government
  
Avionics
 Commercial
  
Avionics
 Total
  
Corporate
 Items
  Total 
Nine Months Ended
December 31, 2012
 
Avionics
 Government
 
Avionics
 Commercial
 
Avionics
 Total
 
Corporate
 Items
 Total 
Net sales
  2,397,509   1,174,729   3,572,238   -   3,572,238  
4,226,451
 
1,695,807
 
5,922,258
 
-
 
5,922,258
 
Cost of Sales
  1,571,288   1,114,833   2,686,121   -   2,686,121   
3,051,873
  
1,530,900
  
4,582,773
  
-
  
4,582,773
 
Gross Margin
  826,221   59,896   886,117   -   886,117   
1,174,578
  
164,907
  
1,339,485
  
-
  
1,339,485
 
                               
Engineering, research, and development
          1,127,404       1,127,404      
1,608,459
 
  -
 
1,608,459
 
Selling, general and administrative
          627,137   713,097   1,340,234      
891,764
 
1,035,616
 
1,927,380
 
Amortization of debt discount
              44,401   44,401        
82,349
 
82,349
 
Amortization of deferred financing costs
              83,791   83,791        
152,175
 
152,175
 
Financing costs
              26,477   26,477        
47,918
 
47,918
 
Change in fair value of common stock warrants
              (249,057)  (249,057)       
(268,767
)
 
(268,767
)
Interest expense, net
              223,487   223,487            
349,556
  
349,556
 
Total expenses
          1,754,541   842,196   2,596,737         
2,500,223
  
1,398,847
  
3,899,070
 
                               
Income (loss) before income taxes
          (868,424)  (842,196)  (1,710,620)        
(1,160,738
)
  
(1,398,847
)
  
(2,559,585
)

 
10
 
TEL-INSTRUMENT ELECTRONICS CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 9 – Income Taxes

The Company adopted FASB ASC 740-10, Accounting for Uncertainty in Income Taxes, effective April 1, 2007.2007 (“ASC 740-10”).  ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions.  The Company does not have any unrecognized tax benefits.

The tax effect of temporary differences, primarily net operating loss carryforwards, asset reserves and accrued liabilities, gave rise to the Company’s deferred tax asset in the accompanying September 30,December 31, 2013 and March 31, 2013 condensed consolidated balance sheets.  Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reverse.

Note 10 – Fair Value Measurements

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

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

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

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

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

·  Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources.  These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
 
The valuation techniques that may be used to measure fair value are as follows:

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

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

·  Cost approach — Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). 
 
 
11
 
   TEL-INSTRUMENT ELECTRONICS CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 10 – Fair Value Measurements (continued)

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 September 30,December 31, 2013 and March 31, 2013.  As required by FASB 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.
 
September 30, 2013 Level I Level II Level III Total 
December 31, 2013 Level I Level II Level III Total 
Total Assets
 
$
-
 
$
-
 
$
-
 
$
-
  
$
-
 
$
-
 
$
-
 
$
-
 
                  
Warrant liability
  
-
  
-
  
282,213
  
282,213
   
-
  
-
  
511,939
  
511,939
 
Total Liabilities
 
$
-
 
$
-
 
$
282,213
 
$
282,213
  
$
-
 
$
-
 
$
511,939
 
$
511,939
 

March 31, 2013 Level I  Level II  Level III  Total 
Total Assets
 
$
-
  
$
-
  
$
-
  
$
-
 
                 
Warrant liability
  
-
   
-
   
198,330
   
198,330
 
Total Liabilities
 
$
-
  
$
-
  
$
198,330
  
$
198,330
 
 
The Company adopted the guidance of ASC 815 (“Derivative“Derivative and Hedging”), which requires that we mark the value of our warrant liability (see Note 6) 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 fair value of the warrants is calculated using the Black-Scholes valuation model.
 
The following table provides a summary of the changes in fair value of our Level 3 financial liabilities from March 31, 2013 through September 30,December 31, 2013, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to the liability held at SeptemberDecember 30, 2013:

Level 3 Reconciliation Beginning at beginning of period 
Gains and losses for the period
(realized and unrealized)
 
Purchases, issuances, sales
and settlements, net
 Transfers in or out of Level 3 Balance at the end of period  Beginning at beginning of period 
Gains and losses for the period
(realized and unrealized)
 
Purchases, issuances, sales
and settlements, net
 Transfers in or out of Level 3 Balance at the end of period 
                      
Warrant liability
  
198,330
  
42,773
  
41,110
 
-
  
282,213
   
198,330
  
272,499
  
41,110
 
-
  
511,939
 
Total Liabilities
 
$
198,330
 
$
42,773
 
$
41,110
 
$
-
 
$
282,213
  
$
198,330
 
$
272,499
 
$
41,110
 
$
-
 
$
511,939
 
 
 
12
 
TEL-INSTRUMENT ELECTRONICS CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 10 – Fair Value Measurements (continued)

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 recognizes a warrant liability and estimates the fair value of these warrants using the Black-Scholes options model using the following assumptions:

Values at Inception
                                                                                                                              
Date of
Warrant
  
Expiration 
Date
  
Number of
Warrants
  
Exercise 
Price
  
Fair Market Value
Per Share
  
Expected
Volatility
  
Remaining 
Life in Years
  
Risk Free 
Interest Rate
  
Warrant 
Liability
 
 
09-10-2010
   
09-10-2019
   
136,920
  
$
6.70
  
$
6.70
   
28.51
%
  
9
   
2.81
%
 
$
267,848
 
 
09-10-2010
   
09-10-2015
   
10,416
  
$
6.70
  
$
6.70
   
28.51
%
  
5
   
1.59
%
 
$
13,808
 
 
07-26-2012
   
09-10-2019
   
50,000
  
$
3.35
  
$
3.90
   
42.04
%
  
7
   
0.94
%
 
$
66,193
 
 
07-26-2012
   
09-10-2019
   
20,000
  
$
3.35
  
$
3.90
   
42.04
%
  
7
   
0.94
%
 
$
26,477
 
 
11-20-2012
   
09-10-2019
   
20,000
  
$
3.56
  
$
3.50
   
42.45
%
  
6.83
   
1.09
%
 
$
21,441
 
 
02-14-2013
   
09-10-2019
   
20,000
  
$
3.58
  
$
3.80
   
41.25
%
  
6.58
   
1.43
%
 
$
23,714
 
 
07-12-2013
   
09-10-2019
   
20,000
  
$
3.33
  
$
3.32
   
40.26
%
  
6.17
   
2.00
%
 
$
19,523
 
 
08-12-2013
   
09-10-2019
   
20,000
  
$
3.69
  
$
3.69
   
40.20
%
  
6.08
   
2.01
%
 
$
21,587
 
 
Values at March 31, 2013

Date of 
Warrant
  
Expiration
Date
  
Number of
Warrants
  
Exercise 
Price
  
Fair Market Value
Per Share
  
Expected
Volatility
 
Remaining
Life in Years
  
Risk Free
Interest Rate
 
Warrant
Liability
 
 
09-10-2010
   
09-10-2019
   
136,920
  
$
6.70
  
$
3.50
   
41.45
%
  
6.45
   
1.24
%
 
$
81,080
 
 
09-10-2010
   
09-10-2015
   
10,416
  
$
6.70
  
$
3.50
   
41.45
%
  
2.45
   
0.25
%
 
$
1,870
 
 
07-26-2012
   
09-10-2019
   
50,000
  
$
3.35
  
$
3.50
   
41.45
%
  
6.33
   
1.24
%
 
$
53,269
 
 
07-26-2012
   
09-10-2019
   
20,000
  
$
3.35
  
$
3.50
   
41.45
%
  
6.33
   
1.24
%
 
$
21,307
 
 
11-20-2012
   
09-10-2019
   
20,000
  
$
3.56
  
$
3.50
   
41.45
%
  
6.50
   
1.24
%
 
$
20,664
 
 
02-14-2013
   
09-10-2019
   
20,000
  
$
3.67
  
$
3.50
   
41.45
%
  
6.45
   
1.24
%
 
$
20,140
 
Values at December 31, 2013
 
Values at September 30, 2013
Date of 
Warrant
  
Expiration
Date
  
Number of
Warrants
  
Exercise
Price
  
Fair Market Value
Per Share
  
Expected
Volatility
  
Remaining
Life in Years
  
Risk Free
Interest Rate
 
Warrant
Liability
 
 
09-10-2010
   
09-10-2019
   
136,920
  
$
6.70
  
$
5.55
   
40.73
%
  
5.70
   
1.75
%
 
$
183,711
 
 
09-10-2010
   
09-10-2015
   
10,416
  
$
6.70
  
$
5.55
   
40.73
%
  
1.70
   
0.38
%
 
$
5,809
 
 
07-26-2012
   
09-10-2019
   
50,000
  
$
3.35
  
$
5.55
   
40.73
%
  
5.70
   
1.75
%
 
$
109,407
 
 
07-26-2012
   
09-10-2019
   
20,000
  
$
3.35
  
$
5.55
   
40.73
%
  
5.70
   
1.75
%
 
$
43,762
 
 
11-20-2012
   
09-10-2019
   
20,000
  
$
3.56
  
$
5.55
   
40.73
%
  
5.70
   
1.75
%
 
$
42,321
 
 
02-14-2013
   
09-10-2019
   
20,000
  
$
3.67
  
$
5.55
   
40.73
%
  
5.70
   
1.75
%
 
$
41,592
 
 
07-1-2013
   
09-10-2019
   
20,000
  
$
3.33
  
$
5.55
   
40.73
%
  
5.70
   
1.75
%
 
$
43,876
 
 
08-12-2013
   
09-10-2019
   
20,000
  
$
3.69
  
$
5.55
   
40.73
%
  
5.70
   
1.75
%
 
$
41,461
 

Date of 
Warrant
  
Expiration
Date
  
Number of
Warrants
  
Exercise
Price
  
Fair Market Value
Per Share
  
Expected
Volatility
  
Remaining
Life in Years
  
Risk Free
Interest Rate
 
Warrant
Liability
 
 
09-10-2010
   
09-10-2019
   
136,920
  
$
6.70
  
$
4.00
   
39.76
%
  
5.95
   
1.39
%
 
$
93,564
 
 
09-10-2010
   
09-10-2015
   
10,416
  
$
6.70
  
$
4.00
   
39.76
%
  
1.95
   
0.33
%
 
$
1,983
 
 
07-26-2012
   
09-10-2019
   
50,000
  
$
3.35
  
$
4.00
   
39.76
%
  
5.95
   
1.39
%
 
$
63,670
 
 
07-26-2012
   
09-10-2019
   
20,000
  
$
3.35
  
$
4.00
   
39.76
%
  
5.95
   
1.39
%
 
$
25,468
 
 
11-20-2012
   
09-10-2019
   
20,000
  
$
3.56
  
$
4.00
   
39.76
%
  
5.95
   
1.39
%
 
$
24,380
 
 
02-14-2013
   
09-10-2019
   
20,000
  
$
3.67
  
$
4.00
   
39.76
%
  
5.95
   
1.39
%
 
$
23,835
 
 
07-1-2013
   
09-10-2019
   
20,000
  
$
3.33
  
$
4.00
   
39.76
%
  
5.95
   
1.39
%
 
$
25,575
 
 
08-12-2013
   
09-10-2019
   
20,000
  
$
3.69
  
$
4.00
   
39.76
%
  
5.95
   
1.39
%
 
$
23,738
 

The volatility calculation was based on the 4548 months for the Company’s stock price prior to the measurement date, utilizing January 1, 2010 as the initial period, as the Company believes that this is the best indicator of future performance, and the source of the risk free interest rate is the US Treasury rate.  The exercise price is per the agreement, the fair market value is the closing price of our stock on the date of measurement, and the expected life is based on management’s current estimate of when the warrants will be exercised.  All inputs to the Black-Scholes options model are evaluated each reporting period.
 
 
13

TEL-INSTRUMENT ELECTRONICS CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 11 – Reclassifications

Certain prior year and period amounts have been reclassified to conform to the current period presentation.
 
Note 12 – Litigation

On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court, 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. Aeroflex’s petition alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with its business relationship; conspired to harm Aeroflex and tortiously interfered with its contract and seeks injunctive relief and damages. 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 Award to the Company, 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 Aeroflex 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 on jurisdiction grounds the Aeroflex Action. Aeroflex appealed this decision. In May 2012, the Kansas Supreme Court reversed the decision and remanded the Aeroflex Action to the District Court for further proceedings. The case is in discovery. Aeroflex has not yet identified to the court's satisfaction the trade secrets that Aeroflex alleges to have been misappropriated. Because of the pending discovery disputes, discoveryDiscovery is still in the early stages and no firm trial date has been set. Tel is optimistic as to the outcome of this litigation. However, the outcome of any litigation is unpredictable and an adverse decision in this matter could have a material adverse effect on our financial condition, results of operations or liquidity.

Note 13 – New Accounting Pronouncements

For the sixnine months ended September 30,December 31, 2013, there have been no significant accounting pronouncements or changes in accounting pronouncements that have become effective that are expected to have a material impact on the Company’s financial position, operations or cash flows.

Note 14 – Subsequent Event

In January 2014, the Company negotiated a $2.14 million contract modification on the ITATS program. The ITATS product (“AN/ARM-206”) is a fully automated TACAN test set for use in U.S. Navy Intermediate Level repair locations. This contract modification entails the sale of certain Intellectual Property (“IP”) to the U.S. Navy plus the sale of ancillary test support equipment and a modest increase in the recurring price to reflect several product enhancements. A portion of the IP sale proceeds will go to the Company’s subcontractor on this program. This contract modification is expected to result in a pre-tax benefit of about $1.2 million over the next two fiscal quarters. The sale of the IP for the ITATS program should have no impact on sales of these units to the U.S. Navy or other customers. Management believes that the sale of the ITATS IP should improve the Company’s balance sheet and liquidity position and help facilitate the commencement of the ITATS full rate production this summer.
 
14
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the SEC contain or may contain forward-looking statements (collectively the “Filings”) 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, 2013, filed with the SEC on July 16, 2013, relating to the Company’s industry, the Company’s operations and results of operations, and any businesses that the Company may acquire.  Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements.  Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
 
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).  These accounting principles require us to make certain estimates, judgments and assumptions.  We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made.  These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented.  Our financial statements would be affected to the extent there are material differences between these estimates and actual results.  In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application.  There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.  The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.
 
Overview

For the sixnine months ended September 30,December 31, 2013, the Company recorded operating income of $456,589 as compared to an operating loss of $2,196,354 for the nine months ended December 31, 2012. For the nine months ended December 31, 2013, the Company recorded a loss before taxes of $252,336 as compared to a loss before taxes of $2,559,585 for the nine months ended December 31, 2012. Excluding the non-cash loss on the change in the valuation of the common stock warrants, the Company has a profit before taxes of $20,163. The Company hopes to continue this positive trend. If the Company is unable to obtain a full rate production release on the TS-4530A program within a reasonable period of time, earnings growth could be delayed.
For the nine months ended December 31, 2013, sales increased $3,662,318 (102.5%$5,401,327 (91.2%) to $7,234,556$11,323,585 as compared to $3,572,238$5,922,258 for the quarternine months ended September 30,December 31, 2012. This increase is mostly attributed to the shipment of units and kits for the TS-4530A program against a partial release from the U.S. Army, resumption of shipments on the CRAFT program as well as shipmentan increase in revenues for a partial release on the TS-4530A program.Company’s legacy products.  The Company is expecting significant revenue and profitability growth for the fiscal year ending March 31, 2014 as it expects to be in production on the CRAFT program for the full year, as well as shipping the $3.3 million limited rate production order it received in July 2013 on the TS-4530 program. The Company has alsohad received $1.3 million in orders for its legacy products, of which it expectsa portion was shipped in the quarter ended December 31, 2013 with the balance to ship duringbe shipped in the second halffourth quarter of  the current fiscal year. The Company has received final AIMS certification for this TS-4530A, but a full production release on this contract will not be provided until the remaining logistics documentation items (e.g., technical manual) are approved by the U.S. Army. The Company has completed the major portion of the documentation and is working closely with the U.S. Army to secure a full production release as it has shipped most of the units and kits required under the initial production release. It is critical that the Company receives this production release to continue the growth and profitability it is starting to achieve.  In the last few months the Company has received additional orders under this contract totaling approximately $4.1 million. The Company currently has $17.7$19.7 million of existing TS-4530A orders on this Indefinite-Delivery-Indefinite Quantity (“IDIQ”) contract program. The Army has the option of purchasing up to an additional $18 million of units under this IDIQ contract. The commencement of TS-4530A volume shipments will augment the Company’s liquidity position as the Company has a substantial amount of the material in house to commence production.
 
15
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Overview (continued)

In October 2013, the Company received an additional contract for the CRAFT program with a maximum value of $9.5 million. The order is a not-to-exceed $9.5 million fixed-price, indefinite-delivery/indefinite-quantity (“IDIQ”) contract for the manufacture and delivery of communications/navigation radio frequency avionics flight line tester CRAFT AN/USM-708 and/or AN/USM-719. This contract is in support of the U.S. Navy, U.S. Marine Corps, U.S. Army and various Foreign Military Sales customers under the Foreign Military Sales program. This follow-on contract further strengthens our position in the industry as the predominant supplier of Mode 5 test equipment. The CRAFT unit has been well received by the end users and we look forward to working with the U.S. Navy on this program, and believe it will be the Mode 5 test set of choice for a number of years. The Company has received three delivery orders against this new contract for the additional test sets at a total value of $4.1 million. The Company currently has $11.2 million of existing orders on the CRAFT program and an option to purchase up to $5.4 million of additional units.
15

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

Overview (continued)

During the first sixnine months of fiscal year 2014, the Private Investor converted the outstanding principal of $600,000, penalty of $25,000 and accrued interest for the month of May 2013 in the amount of $12,400 for a total of $637,400 into 200,000 shares of the Company’s common stock at a price of $3.19 per share.

In June 2013 a related party received a note payable from the Company in exchange for $100,000, which the Company used for working capital needs. On July 24, 2013, the related party converted its note payable in the amount of $100,000 into 31,348 shares of the Company’s common stock at a price of $3.19 per share.

In consideration for the waiver for non-compliance of the financial covenants at March 31, 2013, on July 12, 2013, BCA received warrants to purchase 20,000 shares of the Company’s common stock. The common stock underlying the warrant is exercisable at a price of $3.33 per share and the warrants expire on September 10, 2019.

In consideration for the waiver for non-compliance of the financial covenants at June 30, 2013, on August 12, 2013, BCA received warrants to purchase 20,000 shares of the Company’s common stock. The common stock underlying the warrants is exercisable at a price of $3.69 per share and the warrants expire on September 10, 2019.

In consideration for the waiver for non-compliance of the financial covenants at September 30, 2013, on November 12, 2013, the Company incurred an incremental fee of $10,000.

As a result of the substantial operating losses incurred in the last year, the Company is not currently in compliance with the NYSE-MKT’s (the “Exchange”) continued listing standards. Based on the information provided by the Company on August 15, 2013, the Exchange has determined, based on the information provided and the improved first quarter results that the Company had made a reasonable demonstration of its ability to regain compliance by the end of the revised plan period which is now February 20, 2014.  As such, the Company listing is being continued pursuant to an extension and will continue to be monitored against this plan.
 
The Company also received a letter from the staff of the Exchange that, based on the Company’s financial statements at March 31, 2013, Telthe Company was no longer in compliance with the minimum stockholders’ equity requirement of $4.0 million, and had also reported net losses in three of its last four fiscal years, as set forth in Section 1003(a)(ii) of the NYSE MKT Company Guide. The Company was afforded the opportunity to submit a plan of compliance to the Exchange and based on information provided by the Company, the Exchange notified the Company that it accepted the Company’s plan of compliance and granted an extension until November 7, 2014.
 
The Company is optimistic that it will demonstrate sufficient progress to maintain our NYSE-MKT listing. 
 
In June 2013, the Company received a performance-based payment from the government in the amount of $858,050, which was used to pay old outstanding accounts payable of a significant vendor. The Company made solid progress during the first sixnine months of the current fiscal year in working down outstanding payables to its vendors. Based on existing and expected production releases, the Company believes that it will have adequate liquidity, and backlog to fund operating plans for at least the next twelve months.  Currently, the Company has no material future capital expenditure requirements.

If the Company is unable to obtain a full rate production release on the TS-4530A program within a reasonable period of time and/or our vendors or lenders begin to pursue legal action demanding payments, it would result in a material adverse effect on the Company’s operations and its ability to pay its obligations. As such, the Company may need to pursue additional sources of financing and/or additional progress payments. There can be no assurances that the Company can secure additional financing.

At September 30,December 31, 2013, the Company’s backlog was approximately $33.4$36.0 million not including the $4.1 million in CRAFT orders received in October 2013, as compared to approximately $38.0$36.9 million at September 30,December 31, 2012.
 
 
16
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Results of Operations
 
Sales

For the three and sixnine months ended September 30,December 31, 2013, sales increased $1,639,631 (68.5%$1,739,039 (74.0%) and $3,662,318 (102.5%$5,401,327 (91.2%), respectively, to  $4,034,581$4,089,059 and $7,234,556$11,323,585 for the three and sixnine months ended September 30,December 31, 2013 as compared to $2,394,950$2,350,020 and $3,572,238$5,922,258 for the three and sixnine months ended September 30,December 31, 2012.
 
Avionics Governmentgovernment sales increased $1,606,374 (86.9%$1,968,331 (107.6%) and $3,859,252 (161.0%$5,827,582 (137.9%), respectively, to  $3,453,919$3,797,272 and $6,256,761$10,054,033 for the three and sixnine months ended September 30,December 31, 2013 as compared to $1,847,545$1,828,941 and $2,397,509$4,226,451 for the three and sixnine months ended September 30,December 31, 2012. This increase is mostly attributed to the shipment of units and kits for the TS-4530A program against a partial release from the U.S. Army, resumption of shipments on the CRAFT program which were on temporary hold last year to correct issues discovered in prior deliveries and to incorporate the final AIMS approved software configuration which includes several product enhancements, as well as shipmentan increase in revenues for a partial release on the TS-4530A program.Company’s legacy products.

Commercial sales increased $33,257 (6.1%decreased $229,322 (44.0%) and $426,255 (25.1%), respectively, to $580,662$291,757 and $1,269,552 for the three and nine months ended September 30,December 31, 2013, as compared to $547,405$521,079 and $1,695,807 for the three and nine months ended September 30,December 31, 2012. This increase is mostly due to the timing of the deliveries and is not considered to be a trend.  Commercial sales decreased $196,934 (16.8%) to $977,795 for the six months ended September 30, 2013, as compared to $1,174,729 in the same period in the prior year.   The decrease in sales is primarily attributed to parts availability issues and lower sales from the overhaul and repairs business. The economic conditions in the commercial market remain depressed.   

Gross Margin

Gross margin increased $673,326 (111.8%$942,319 (207.8%) and $1,575,790 (177.8%$2,518,109 (188.0%), respectively to $1,275,749$1,395,687 and $2,461,907$3,857,594 for the three and sixnine months ended September 30,December 31, 2013, as compared to $602,423$453,368 and $886,117$1,339,485 for the three and sixnine months ended September 30,December 31, 2012. Gross profit was favorably impacted by the increase in sales volume as a result of the increase in shipments of units and kits for the TS-4530A program against a partial release from the U.S. Army, resumption of shipments on the CRAFT program which were on temporary hold last year to correct issues discovered in prior deliveries and to incorporate the final AIMS approved software configuration which includes several product enhancements, as well as the shipment of unitsan increase in revenues for the TS-4530A program.Company’s legacy products. The gross margin percentage for the three months ended September 30,December 31, 2013 was 31.6%34.1%, as compared to 25.2%,19.3% for the three months ended September 30,December 31, 2012.  The gross margin percentage for the sixnine months ended September 30,December 31, 2013 was 34.0%34.1%, as compared to 24.8%22.6%, for the sixnine months ended September 30,December 31, 2012.

Operating Expenses

Selling, general and administrative expenses decreased $14,936 (2.2%increased $110,773 (18.9%) and $15,574, (1.2%$95,199, (4.9%), respectively, to $671,410$697,919 and $1,324,660$2,022,579 for the three and sixnine months ended September 30,December 31, 2013, as compared to $686,346$587,146 and $1,340,234$1,927,380 for the three and sixnine months ended September 30,December 31, 2012. For the three months ended September 30,December 31, 2013, the decreaseincrease was primarily attributed mainly to loweran increase in outside commission and personnel costs partially offset by high program management costs. .Forexpenses associated with higher sales of the Company’s legacy products. For the nine months ended September 30,December 31, 2013, lower personnel coststhe increase was mostly offset byattributed to higher professional andoutside commission expenses, increased program management fees and shareholder relation expenses.offset partially with lower personnel costs.

Engineering, research and development expenses decreased $100,228 (18.3%$31,578 (6.6%) and $198,455 (17.6%$230,033 (14.3%), respectively, to $448,572$449,477 and $928,949$1,378,426 for the three and sixnine months ended September 30,December 31, 2013 as compared to $548,800$481,055 and $1,127,404$1,608,459 for the three and sixnine months ended September 30,December 31, 2012, primarily as a result of a decrease in personnel costs as a result of the Company finalizing the engineering efforts on the CRAFT and TS-4530A programs.

Income (Loss) From Operations

As a result of the above, the Company recorded operating income of $248,291 and $456,589, respectively, for the three and nine months ended December 31, 2013, as compared to operating losses of $614,833 and $2,196,354, respectively, for the three and nine months ended December 31, 2012.  

Other Income (Expense), Net

For the three months ended September 30,December 31, 2013, total other expense was $217,381$335,372 as compared to other expense of $245,553$234,132 for the three months ended September 30,December 31, 2012. This change is primarily due to lower interest expense, amortization of debt discount and financing costs offset partially by the higher non-cash loss on the change in the valuation of common stock warrants as compared to the prior period last year.

year offset partially by lower interest expense, amortization of debt discount and financing costs. For the sixthree months ended September 30,December 31, 2013 total other expense was $373,553 as compared to other expense of $129,099 for the six months ended September 30, 2012. This change is primarily due toCompany recorded a loss on the change in the valuation of common stock warrants in the amount of $229,726, primarily as compared toa result of the prior period last year. For the six months ended September 30, 2013, the Company recorded a loss of $42,773higher stock price, as compared to a gain in the valuation of $249,057 forcommon stock warrants in the six months ended September 30, 2012.

Income (Loss) before Income Taxes

As a resultamount of the above, the Company recorded a loss before income taxes of $61,614$19,710 for the three months ended September 30, 2013 as compared to a loss before taxesDecember 31, 2012, an unfavorable change of $878,276 for the three months ended September 30, 2012.  The Company also recorded a loss before income taxes of $165,255 for the six months ended September 30, 2013 as compared to loss before income taxes of $1,710,620 for the six months ended September 30, 2012.  $249,436.
 
 
17
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Results of Operations (continued)
Other Income (Expense), Net (continued)

For the nine months ended December 31, 2013, total other expense was $708,295 as compared to other expense of $363,231 for the nine months ended December 31, 2012. This change is primarily due to the higher non-cash loss on the change in the valuation of common stock warrants as compared to the prior period last year offset partially by lower interest expense, amortization of debt discount and financing costs. For the nine months ended December 31, 2013 the Company recorded a non-cash loss on the change in the valuation of common stock warrants in the amount of $272,499, primarily as a result of the higher stock price, as compared to a gain in the valuation of common stock warrants in the amount of $268,767 for the nine months ended December 31, 2012, an unfavorable change of $541,266.

Income (Loss) before Income Taxes

As a result of the above, the Company recorded a loss before income taxes of $87,081 for the three months ended December 31, 2013, as compared to a loss before taxes of $848,965 for the three months ended December 31, 2012.  The Company also recorded a loss before income taxes of $252,336 for the nine months ended December 31, 2013, as compared to loss before income taxes of $2,559,585 for the nine months ended December 31, 2012.  The Company would have recorded a profit before taxes of $142,645 for the three months ended December 31, 2013, excluding the non-cash loss on the change in the valuation of common stock warrants in the amount of $229,726, and a profit before taxes of $20,163 for the nine months ended December 31, 2013, excluding the non-cash loss on the change in the valuation of common stock warrants in the amount of $272,499.

Income Taxes

For the sixnine months ended September 30,December 31, 2013, the Company recorded ana provision for income tax benefittaxes in the amount of $7,009$51,843 as compared to an income tax benefit of $612,115$915,903 for the sixnine months ended September 30,December 31, 2012.  These amounts represent the statutory federal and state tax rate on the Company’s lossincome (loss) before taxes. For the nine months ended December 31, 2013, the Company recorded a provision for income taxes as the Company recorded a profit before taxes because the non-cash loss on the change in the valuation of common stock warrants is not deductible for tax purposes.

Net Income (Loss)

As a result of the above, the Company recorded a net loss of $72,474$145,933 for the three months ended September 30,December 31, 2013, as compared to a net loss of $429,705$545,177 for the three months ended September 30,December 31, 2012. The Company also recorded a net loss of $158,246$304,179 for the sixnine months ended September 30,December 31, 2013, as compared to a net loss of $1,098,505$1,643,682 for the sixnine months ended September 30, 2012December 31, 2012.

Liquidity and Capital Resources

At September 30,December 31, 2013, the Company had net working capital of $1,587,356$1,821,929 as compared to $1,008,849 at March 31, 2013. This change is primarily the result of the conversion of short-term debt into equity.equity and a reduction in accounts payable offset partially by a decline in inventories.

During the sixnine months ended September 30December 31, 2013, the Company’s cash balance decreased by $164,546$93,950 to $145,751.$216,347.  The Company’s principal sources and uses of funds were as follows:

Cash provided by (used in) operating activities. For the sixnine months ended September 30,December 31, 2013, the Company provided $13,400$274,476 in cash for operations as compared to using $906,518$1,671,121 in cash for operations for the sixnine months ended September 30,December 31, 2012.  This improvement is the result of the improvement in operating income, decrease in inventories and the increase in progress billings partially offset by the decrease in accounts payable and accounts receivable.

Cash used in investing activities.  For the sixnine months ended September 30,December 31, 2013, the Company used $11,226$11,595 of its cash for investing activities, as compared to $45,308$60,816 for the sixnine months ended September 30,December 31, 2012 as result of lower purchases of equipment.
 
Cash (used in) provided by financing activities. For the sixnine months ended September 30,December 31, 2013, the Company used $166,720$356,831 in financing activities as compared to providing $734,901$1,417,536 for the sixnine months ended September 30,December 31, 2012.  For the sixnine months ended September 30,December 31, 2012, the Company received net proceeds from the sale of common stock and proceeds from the issuance of long-term debt in the amount of $788,662$1,488,662 as compared to $100,000 for the sixnine months ended September 30,December 31, 2013. Additionally, the Company repaid debt and capital lease obligations of $266,720$470,201 for the sixnine months ended September 30,December 31, 2013 as compared to $158,191$175,556 for the sixnine months ended September 30,December 31, 2012. The Company also received proceeds from the exercise
18
Item 2.  Management’s Discussion and Analysis of $104,430 for the six months ended September 30, 2012Financial Condition and $-0- for the six months ended September 30, 2013.Results of Operations (continued)

Liquidity and Capital Resources (continued)

During the first sixnine months of the current fiscal year, the Private Investor converted the outstanding principal of $600,000, penalty of $25,000 and accrued interest for the month of May 2013 in the amount of $12,400 for a total of $637,400 into 200,000 shares of common stock at a price of $3.19 per share.

In June 2013, a related party received a note payable from the Company in exchange for $100,000, which the Company used for working capital needs. On July 24, 2013, the related party converted its note payable in the amount of $100,000 into 31,348 shares of the Company’s common stock at a price of $3.19 per share.

In consideration for the waiver for non-compliance of the financial covenants at March 31, 2013, on July 12, 2013, BCA received warrants to purchase 20,000 shares of the Company’s common stock. The common stock underlying the warrant is exercisable at a price of $3.33 per share and the warrants expire on September 10, 2019.

In consideration for the waiver for non-compliance of the financial covenants at June 30, 2013, on August 12, 2013, BCA received warrants to purchase 20,000 shares of the Company’s common stock. The common stock underlying the warrants is exercisable at a price of $3.69 per share and the warrants expire on September 10, 2019.
 
18
the financial covenants at September 30, 2013, on November 12, 2013, the Company incurred an incremental fee of $10,000.
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Liquidity and Capital Resources (continued)

As a result of the substantial operating losses incurred in the last year, the Company is not currently in compliance with the Exchange’s continued listing standards. Based on the information provided by the Company on August 15, 2013, the Exchange has determined, based on the information provided and the improved first quarter results that the Company had made a reasonable demonstration of its ability to regain compliance by the end of the revised plan period which is now February 20, 2014.  As such, the Company listing is being continued pursuant to an extension and will continue to be monitored against this plan.
 
The Company also received a letter from the staff of the Exchange that, based on the Company’s financial statements at March 31, 2013, the Company was no longer in compliance with the minimum stockholders’ equity requirement of $4.0 million, and had also reported net losses in three of its last four fiscal years, as set forth in Section 1003(a)(ii) of the NYSE MKT Company Guide. The Company was afforded the opportunity to submit a plan of compliance to the Exchange and based on information provided by the Company, the Exchange notified the Company that it accepted the Company’s plan of compliance and granted an extension until November 7, 2014.
 
The Company is optimistic that it will demonstrate sufficient progress to maintain our NYSE-MKT listing. 
 
In June 2013, the Company received a performance-based payment from the government in the amount of $858,050, which was used to pay old outstanding accounts payable of a significant vendor. The Company made solid progress during the first sixnine months of the current fiscal year in working down outstanding payables to its vendors.

Based on existing and expected production releases, the Company believes that it will have adequate liquidity, and backlog to fund operating plans for at least the next twelve months.  Currently, the Company has no material future capital expenditure requirements.

If the Company is unable to obtain a full rate production release on the TS-4530A program within a reasonable period of time and/or our vendors or lenders begin to pursue legal action demanding payments, it would result in a material adverse effect on the Company’s operations and its ability to pay its obligations. As such, the Company may need to pursue additional sources of financing and/or additional progress payments. There can be no assurances that the Company can secure additional financing.

There was no significant impact on the Company’s operations as a result of inflation for the sixnine months ended September 30,December 31, 2013.  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, 2013, filed with the SEC on July 16, 2013.
 
19
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Off-Balance Sheet Arrangements

As of September 30,December 31, 2013, the Company had no off-balance sheet arrangements.

Critical Accounting Policies

Our critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended March 31, 2013, as filed with the SEC on July 16, 2013. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2013 consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2013, as filed with the SEC on July 16, 2013.
 
 
1920
 
Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

We do not hold any derivative instruments and do not engage in any hedging activities.
 
Item 4.  Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

The Company, including its principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective. Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include controls and procedures designed to reasonably ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control over Financial Reporting  
 
The Company, including its principal executive officer and principal accounting officer, reviewed the Company’s internal control over financial reporting, pursuant to Rule 13(a)-15(e) under the Exchange Act and concluded that there was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
2021
 
PART II – OTHER INFORMATION
 
Item 1.  Legal Proceedings.

On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court, 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. Aeroflex’s petition alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with its business relationship; conspired to harm Aeroflex and tortiously interfered with its contract and seeks injunctive relief and damages. 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 Award to the Company, 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 Aeroflex 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 on jurisdiction grounds the Aeroflex Action. Aeroflex appealed this decision. In May 2012, the Kansas Supreme Court reversed the decision and remanded the Aeroflex Action to the District Court for further proceedings. The case is in discovery. Aeroflex has not yet identified to the court's satisfaction the trade secrets that Aeroflex alleges to have been misappropriated. Because of the pending discovery disputes, discovery is still in the early stages and no firm trial date has been set. Tel is optimistic as to the outcome of this litigation. However, the outcome of any litigation is unpredictable and an adverse decision in this matter could have a material adverse effect on our financial condition, results of operations or liquidity.

Other than described 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 or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our Common Stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
 
Item 1A.  Risk Factors.

We believe there are no changes that constitute material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2013, filed with the SEC on July 16, 2013.

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

On July 24, 2013, a director of the Company purchased 31,348 sharesThere were no unregistered sales of the Company’s Common Stock atequity securities during the quarter ended December 31, 2013, other than those previously reported in a price of $3.19 per share for a total amount of $100,000 which was used for working capital needs.Current Report on Form 8-K.

Item 3.  Defaults Upon Senior Securities.

There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.Company.

Item 4.  Mine Safety Disclosures.

Not applicable.

Item 5.  Other Information.

There is no other information required to be disclosed under this item which was not previously disclosed.
 
 
2122
 
Item 6.  Exhibits.
 
Exhibit No. Description
   
31.1 
Certification of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002*
   
31.2 
Certification of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002*
   
32.1 
Certification of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
   
32.2 
Certification of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
   
101.INS XBRL Instance Document**
   
101.SCH Taxonomy Extension Schema Document**
   
101.CAL Taxonomy Extension Calculation Linkbase Document**
   
101.DEF Taxonomy Extension Definition Linkbase Document**
   
101.LAB Taxonomy Extension Label Linkbase Document**
   
101.PRE Taxonomy Extension Presentation Linkbase Document**

* Filed herewith

** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934
 
2223
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
   TEL-INSTRUMENT ELECTRONICS CORP.
      
      
Date: November 13, 2013February 14, 2014 By: /s/ Jeffrey C. O’Hara 
    Name: Jeffrey C. O’Hara 
    
Title:  Chief Executive Officer
           Principal Executive Officer
 

      
Date: November 13, 2013February 14, 2014 By: /s/ Joseph P. Macaluso 
    Name: Joseph P. Macaluso 
    
Title:  Principal Financial Officer
           Principal Accounting Officer
 
 

 
2324