UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
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, 2014

¨ 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 12, 2014,February 10, 2015 there were 3,251,3873,256,887 shares outstanding of the registrant’s common stock.
 
 
 
 
TEL-TEL-INSTRUMENTINSTRUMENT ELECTRONICS CORP.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
  Page
Item 1.
Financial Statements.
3
  3
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
14
  14
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
19
  18
Item 4.
Controls and Procedures.
19
  18
PART II – OTHER INFORMATION
   
Item 1.
Legal Proceedings.
19  20
   
Item 1A.
Risk Factors.
19  20
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
19  20
   
Item 3.
Defaults Upon Senior Securities.
19  20
   
Item 4.
Mine Safety Disclosures.
19  20
   
Item 5.
Other Information.
20  21
   
Item 6.
Exhibits.
20  21
   
Signatures
21  22
 
 
 
 
PART I – FINANCIAL INFORMATION
Item 1.1.  Financial Statements.
 
TEL-INSTRUMENT ELECTRONICS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS

 
September 30,
2014
  
March 31,
2014
  
December 31,
2014
  
March 31,
2014
 
 (unaudited)    (unaudited)   
ASSETS          
          
Current assets:          
Cash and cash equivalents
 
$
243,146
 
232,118
  
$
331,991
 
232,118
 
Accounts receivable, net
 
542,624
 
2,095,640
  
614,239
 
2,095,640
 
Inventories, net
 
4,544,267
 
4,025,391
  
4,583,365
 
4,025,391
 
Prepaid expenses and other current assets
 
549,930
 
263,592
  
463,661
 
263,592
 
Deferred financing costs
 
102,303
 
108,321
  
5,429
 
108,321
 
Deferred income tax asset
  
1,089,538
  
1,089,538
   
1,089,538
  
1,089,538
 
Total current assets
 
7,071,808
 
7,814,600
  
7,088,223
 
7,814,600
 
          
Equipment and leasehold improvements, net
 
353,583
 
450,873
  
310,566
 
450,873
 
Deferred financing costs – long-term
 
-
 
48,142
  
10,149
 
48,142
 
Deferred income tax asset – non-current
 
2,513,198
 
2,273,068
  
2,484,379
 
2,273,068
 
Other long-term assets
  
47,670
  
47,670
   
32,317
  
47,670
 
Total assets
  
9,986,259
  
 10,634,353
   
9,925,634
  
 10,634,353
 
          
LIABILITIES & STOCKHOLDERS’ EQUITY
          
          
Current liabilities:
          
Current portion of long-term debt, net of debt discount
 
202,759
 
718,848
  
382,169
 
718,848
 
Capital lease obligations – current portion
 
20,895
 
53,608
  
16,188
 
53,608
 
Accounts payable and accrued liabilities
 
3,617,674
 
3,332,181
  
3,728,861
 
3,332,181
 
Progress billings
 
592,156
 
775,475
  
256,816
 
775,475
 
Deferred revenues – current portion
 
36,041
 
37,452
  
81,388
 
37,452
 
Accrued payroll, vacation pay and payroll taxes
  
491,953
  
444,238
   
527,228
  
444,238
 
Total current liabilities
 
4,961,478
 
5,361,802
  
4,992,650
 
5,361,802
 
          
Subordinated notes payable - related parties
 
250,000
 
250,000
  
250,000
 
250,000
 
Capital lease obligations – long-term
 
13,231
 
21,320
  
8,971
 
21,320
 
Long-term debt
 
854,361
 
596,526
  
807,859
 
596,526
 
Deferred revenues – long-term
 
133,650
 
133,650
  
133,650
 
133,650
 
Warrant liability
 
460,389
 
354,309
  
423,059
 
354,309
 
Other long-term liabilities
  
51,900
  
56,100
   
45,600
  
56,100
 
Total liabilities
  
6,725,009
  
6,773,707
   
6,661,789
  
6,773,707
 
          
Commitments
          
          
Stockholders' equity:
          
Common stock, 4,000,000 shares authorized, par value $.10 per share,
3,253,887 and 3,251,387 shares issued and outstanding, respectively
 
325,386
 
325,136
 
Common stock, 4,000,000 shares authorized, par value $.10 per share,
3,256,887 and 3,251,387 shares issued and outstanding, respectively
 
325,686
 
325,136
 
Additional paid-in capital
 
8,019,654
 
7,987,100
  
8,042,893
 
7,987,100
 
Accumulated deficit
  
(5,083,790
)
  
(4,451,590
)
  
(5,104,734
)
  
(4,451,590
)
Total stockholders' equity
  
3,261,250
  
3,860,646
   
3,263,845
  
3,860,646
 
Total liabilities and stockholders' equity
 
$
9,986,259
 
$
10,634,353
  
$
9,925,634
 
$
10,634,353
 
 
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,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30,
2013
  
December 31,
2014
 
December 31,
2013
 
December 31,
2014
 
December 31,
2013
 
                  
Net sales
 
$
3,587,674
 
$
4,034,581
 
6,716,750
 
$
7,234,556
  
$
5,030,097
 
$
4,089,029
 
11,746,847
 
$
11,323,585
 
Cost of sales
  
2,718,330
  
2,758,832
  
4,727,189
  
4,772,649
   
3,484,310
  
2,693,342
  
8,211,499
  
7,465,991
 
                  
Gross margin
 
869,344
 
1,275,749
 
1,989,561
 
2,461,907
  
1,545,787
 
1,395,687
 
3,535,348
 
3,857,594
 
                  
Operating expenses:
                  
Selling, general and administrative
 
660,034
 
671,410
 
1,539,227
 
1,324,660
  
825,261
 
697,919
 
2,364,488
 
2,022,579
 
Engineering, research and development
  
497,726
  
448,572
  
981,622
  
928,949
   
494,721
  
449,477
  
1,476,343
  
1,378,426
 
Total operating expenses
  
1,157,760
  
1,119,982
  
2,520,849
  
2,253,609
   
1,319,982
  
1,147,396
  
3,840,831
  
3,401,005
 
                  
Income (loss) from operations
 
(288,416
)
 
155,767
 
(531,288
)
 
208,298
  
225,805
 
248,291
 
(305,483
)
 
456,589
 
                  
Other income (expense):
                  
Amortization of debt discount
 
(30,061
)
 
(25,600
)
 
(60,935
)
 
(48,587
)
 
(14,373
)
 
(27,120
)
 
(75,308
)
 
(75,707
)
Loss on extinguishment of debt
 
-
 
-
 
-
 
(26,600
)
 
(188,102
)
 
-
 
(188,102
)
 
(26,600
)
Amortization of deferred financing costs
 
(27,080
)
 
(27,080
)
 
(54,160
)
 
(54,160
)
 
(13,648
)
 
(27,827
)
 
(67,808
)
 
(81,987
)
Change in fair value of common stock warrants
 
27,801
 
(67,345
)
 
(106,080
)
 
(42,773
)
 
37,330
 
(229,726
)
 
(68,750
)
 
(272,499
)
Interest income
 
-
 
34
 
-
 
34
  
-
 
129
 
-
 
163
 
Interest expense
  
(57,387
)
  
(97,390
)
  
(119,867
)
  
(201,467
)
  
(39,137
)
  
(50,828
)
  
(159,004
)
  
(252,295
)
Total other income (expense)
  
(86,727
)
  
(217,381
)
  
(341,042
)
  
(373,553
)
  
(217,930
)
  
(335,372
)
  
(558,972
)
  
(708,925
)
                  
Loss before income taxes
 
(375,143
)
 
(61,614
)
 
(872,330
)
 
(165,255
)
Income (loss) before income taxes
 
7,875
 
(87,081
)
 
(864,455
)
 
(252,336
)
                  
Income tax expense (benefit)
  
(126,948
)
  
10,860
  
(240,130
)
  
(7,009
)
  
28,819
  
58,852
  
(211,311
)
  
51,843
 
                  
Net loss
 
$
(248,195
)
 
$
(72,474
)
 
$
(632,200
)
 
$
(158,246
)
 
$
(20,944
)
 
$
(145,933
)
 
$
(653,144
)
 
$
(304,179
)
                  
Basic loss per common share
 
$
(0.08
)
 
$
(0.02
)
 
$
(0.19
)
 
$
(0.05
)
 
$
(0.01
)
 
$
(0.04
)
 
$
(0.20
)
 
$
(0.10
)
Diluted loss per common share
 
$
(0.08
)
 
$
(0.02
)
 
$
(0.19
)
 
$
(0.05
)
 
$
(0.01
)
 
$
(0.04
)
 
$
(0.20
)
 
$
(0.10
)
                  
Weighted average shares outstanding:
                  
Basic
 
3,252,702
 
3,235,250
 
3,252,048
 
3,157,985
  
3,255,028
 
3,247,387
 
3,253,045
 
3,189,123
 
Diluted
 
3,252,702
 
3,235,250
 
3,252,048
 
3,157,985
  
3,255,028
 
3,247,387
 
3,253,045
 
3,189,123
 
 
See accompanying notes to condensed consolidated financial statements.

 
4
 
TEL-INSTRUMENT ELECTRONICS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 Six months ended Nine months ended
 
September 30,
2014
 
September 30,
2013
 
December 31,
2014
 
December 31,
2013
        
Cash flows from operating activities:        
Net loss
 
$
(632,200
)
 
$
(158,246
)
 
$
(653,144
)
 
$
(304,179
)
Adjustments to reconcile net loss to net cash
used in operating activities:
          
Deferred income taxes
 
(240,130
)
 
(7,519
)
 
(211,311
)
 
50,503
 
Depreciation and amortization
 
89,790
 
104,365
  
134,837
 
153,818
 
Provision for inventory obsolescence
 
5,000
 
-
  
5,000
 
-
 
Amortization of debt discount
 
60,935
 
48,587
  
75,308
 
75,707
 
Amortization of deferred financing costs
 
54,160
 
54,160
  
67,808
 
81,987
 
Loss on extinguishment of debt
 
-
 
26,600
  
188,102
 
26,600
 
Change in fair value of common stock warrant
 
106,080
 
42,773
  
68,750
 
272,499
 
Non-cash interest associated with conversion of note
 
-
 
21,003
  
-
 
21,003
 
Non-cash stock-based compensation
 
20,904
 
32,161
  
29,733
 
48,519
 
          
Changes in assets and liabilities:
          
Decrease (increase) in accounts receivable
 
1,553,016
 
(810,779
)
 
1,481,401
 
(572,034
)
(Increase) decrease in inventories, net
 
(509,865
)
 
1,529,141
  
(548,963
)
 
1,731,581
 
Increase in prepaid expenses & other
 
(286,338
)
 
(31,144
)
 
(184,716
)
 
(28,077
)
Increase (decrease) in accounts payable and other accrued liabilities
 
297,393
 
(1,570,723
)
 
423,290
 
(2,137,411
)
Increase (decrease) in accrued payroll, vacation pay & withholdings
 
47,715
 
(66,664
)
 
82,990
 
(48,090
)
(Decrease) increase in deferred revenues
 
(1,411
)
 
4,635
  
43,936
 
107,000
 
(Decrease) increase in progress billings
 
(183,319
)
 
795,050
  
(518,659
)
 
795,050
 
Decrease in other long-term liabilities
  
(4,200
)
  
-
   
(10,500
)
  
-
 
Net cash provided by operating activities
  
377,530
  
13,400
   
473,862
  
274,476
 
          
Cash flows from investing activities:
          
Purchases of equipment
  
(6,511
)
  
(11,226
)
  
(8,541
)
  
(11,595
)
Net cash used in investing activities
  
(6,511
)
  
(11,226
)
  
(8,541
)
  
(11,595
)
          
Cash flows from financing activities:
          
Proceeds from note payable – related party
 
-
 
100,000
  
-
 
100,000
 
Proceeds from the exercise of stock options
 
-
 
23,370
 
Proceeds from term loan
 
1,200,000
 
-
 
Deferred financing costs
 
(16,287
)
 
-
 
Repayment of long-term debt
 
(319,189
)
 
(229,750
)
 
(1,499,392
)
 
(424,245
)
Repayment of capitalized lease obligations
  
(40,802
)
  
(36,970
)
  
(49,769
)
  
(55,956
)
Net cash used in financing activities
  
(359,991
)
  
(166,720
)
  
(365,448
)
  
(356,831
)
          
Net increase (decrease) in cash and cash equivalents
 
11,028
 
(164,546
)
 
99,873
 
(93,950
)
Cash and cash equivalents at beginning of period
  
232,118
  
310,297
   
232,118
  
310,297
 
Cash and cash equivalents at end of period
 
$
243,146
 
$
145,751
  
$
331,991
 
$
216,347
 
          
Supplemental cash flow information:
          
Taxes paid
 
$
20,500
 
$
 -
  
$
20,500
 
$
 -
 
Interest paid
 
$
114,589
 
$
192,837
  
$
141,180
 
$
276,546
 
          
Supplemental non-cash information:
          
Converted accounts payable to equity
  
11,900
  
-
   
26,610
  
-
 
Converted debt to equity
 
$
-
 
$
700,000
  
$
-
 
$
700,000
 
Converted accrued interest to 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 CorpCorp. (the “Company” or “TIC”) as of September 30,December 31, 2014, the results of operations for the three and sixnine months ended September 30,December 31, 2014 and September 30,December 31, 2013, and statements of cash flows for the sixnine months ended September 30,December 31, 2014 and September 30,December 31, 2013. 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, 2014 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, 2014 , as filed with the United States Securities and Exchange Commission (the “SEC”) on June 30, 2014.2014 (the “Annual Report).

Note 2 – Summary of Significant Accounting Policies

During the sixnine months ended September 30,December 31, 2014, 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, 2014, as filed with the SEC on June 30, 2014.Report.
 
Note 3 – Accounts Receivable, net

The following table sets forth the components of accounts receivable:

 
September 30,
2014
 
March 31,
2014
  
December 31,
2014
 
March 31,
2014
 
Government
 
$
422,255
 
$
1,982,215
  
$
519,018
 
$
1,982,215
 
Commercial
 
147,651
 
140,707
  
122,503
 
140,707
 
Less: Allowance for doubtful accounts
  
(27,282
)
  
(27,282
)
  
(27,282
)
  
(27,282
)
 
$
542,624
 
$
2,095,640
  
$
614,239
 
$
2,095,640
 
 
Note 4 – Inventories, net
 
Inventories consist of:
 
 
September 30,
2014
 
March 31,
2014
  
December 31,
2014
 
March 31,
2014
 
          
Purchased parts
 
$
3,375,294
 
$
3,085,070
  
$
3,360,506
 
$
3,085,070
 
Work-in-process
 
1,333,415
 
1,134,714
  
1,387,572
 
1,134,714
 
Finished goods
 
45,558
 
10,607
  
45,287
 
10,607
 
Less: Inventory reserve
  
(210,000
)
  
(205,000
)
  
(210,000
)
  
(205,000
)
 
$
4,544,267
 
$
4,025,391
  
$
4,583,365
 
$
4,025,391
 
 
Note 5 – Loss Per Share

Net loss per share has been computed according to FASB ASC 260, “Earnings per Share,” which requires a dual presentation of basic and diluted loss per share (“EPS”). Basic EPS represents net loss divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS reflects the potential dilution that could occur if securities, including 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.
 
 
6
 
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 5 – Loss Per Share (continued)

Diluted loss per share for the three and sixnine months ended September 30,December 31, 2014 and 2013 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,
2014
 
September 30,
2013
  
December 31,
2014
 
December 31,
2013
 
Basic net loss per share computation:          
Net loss
 
$
(248,195
)
 
$
(72,474
)
 
$
(20,944
)
 
$
(145,933
)
Weighted-average common shares outstanding
 
3,252,702
 
3,235,250
  
3,255,028
 
3,247,387
 
Basic net loss per share
 
$
(0.08
)
 
$
(0.02
)
 
$
(0.01
)
 
$
(0.04
)
Diluted net loss per share computation:
          
Net loss
 
$
(248,195
)
 
$
(72,474
)
 
$
(20,944
)
 
$
(145,933
)
Weighted-average common shares outstanding
 
3,252,702
 
3,235,250
  
3,255,028
 
3,247,387
 
Incremental shares attributable to the assumed exercise of outstanding stock options
 
-
 
-
  
-
 
-
 
Total adjusted weighted-average shares
 
3,252,702
 
3,235,250
  
3,255,028
 
3,247,387
 
Diluted net loss per share
 
$
(0.08
)
 
$
(0.02
)
 
$
(0.01
)
 
$
(0.04
)
 
 Six Months Ended Six Months Ended  Nine Months Ended Nine Months Ended 
 
September 30,
2014
 
September 30,
2013
  
December 31,
2014
 
December 31,
2013
 
Basic net loss per share computation:          
Net loss
 
$
(632,200
)
 
$
(158,246
)
 
$
(653,144
)
 
$
(304,179
)
Weighted-average common shares outstanding
 
3,252,048
 
3,157,985
  
3,253,045
 
3,189,123
 
Basic net loss per share
 
$
(0.19
)
 
$
(0.05
)
 
$
(0.20
)
 
$
(0.10
)
Diluted net loss per share computation:
          
Net loss
 
$
(632,200
)
 
$
(158,246
)
 
$
(653,144
)
 
$
(304,179
)
Weighted-average common shares outstanding
 
3,252,048
 
3,157,985
  
3,253,045
 
3,189,123
 
Incremental shares attributable to the assumed exercise of outstanding stock options
 
-
 
-
  
-
 
-
 
Total adjusted weighted-average shares
 
3,252,048
 
3,157,985
  
3,253,045
 
3,189,123
 
Diluted net loss per share
 
$
(0.19
)
 
$
(0.05
)
 
$
(0.20
)
 
$
(0.10
)

For the three and nine months ended September 30,December 31, 2014 and 2013, all outstanding warrants and options were excluded from the computation of diluted loss per share because their effect would be anti-dilutive.
 
Note 6 – Long-Term Debt

In September 2010, the Company entered into an agreement with BCA Mezzanine Fund LLP (“BCA”) to loanlend the Company $2,500,000 in the form of a Promissory Note (the “Note”).   TheThis note was paid in full in November 2014 from proceeds from a $1,200,000 term loan from a bank (see Note contains a number of affirmative and negative covenants which restrict our operations.  For the quarter ended September 30,7).

Note 7 – Term Loan

In November 2014, the Company was notentered into a term loan in compliancethe amount of $1,200,000 with certain financial covenants relatedBank of America. The proceeds from the term loan were primarily used to maintaining agreed upon financial ratios for fixed charges and debt service. In November 2014,pay off the remaining balance of the loan with BCA in conjunction with the payoffamount of this debt$1,153,109, including accrued interest of $4,467 (see Note 13), the Company received a waiver from BCA on each6). The term loan is for three years, and expires in November 2017. Monthly payments are at $36,551 including interest at 6%. The term loan is collateralized by substantially all of the above mentioned covenants as well as the deferralassets of the monthly payment of principal due fromCompany. At December 31, 2014 the Company on September until the maturity of the Note. outstanding balance was $1,169,449.
 
 
7

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

Note 78 – 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, 2014 and 2013:
 
Three Months Ended
September 30, 2014
 
Avionics
 Government
 
Avionics
 Commercial
 
Avionics
 Total
 
Corporate
 Items
 Total 
Three Months Ended
December 31, 2014
 
Avionics
 Government
 
Avionics
 Commercial
 
Avionics
 Total
 
Corporate
 Items
 Total 
Net sales
 
$
3,026,728
 
$
560,946
 
$
3,587,674
 
-
 
$
3,587,674
  
$
4,455,399
 
$
574,698
 
$
5,030,097
 
-
 
$
5,030,097
 
Cost of sales
  
2,270,257
  
448,073
  
2,718,330
  
-
  
2,718,330
   
3,015,359
  
468,951
  
3,484,310
  
-
  
3,484,310
 
Gross margin
  
756,471
  
112,873
  
869,344
  
-
  
869,344
   
1,440,040
  
105,747
  
1,545,787
  
-
  
1,545,787
 
                      
Engineering, research, and development
     
497,726
 
-
 
497,726
      
494,721
 
-
 
494,721
 
Selling, general and administrative
     
283,434
 
376,600
 
660,034
      
323,862
 
501,399
 
825,261
 
Amortization of debt discount
     
-
 
30,061
 
30,061
      
-
 
14,373
 
14,373
 
Amortization of deferred financing costs
     
-
 
27,080
 
27,080
      
-
 
13,648
 
13,648
 
Loss on extinguishment of debt
     
-
 
188,102
 
188,102
 
Change in fair value of common stock warrants
     
-
 
(27,801
)
 
(27,801
)
     
-
 
(37,330
)
 
(37,330
)
Interest expense, net
        
-
  
57,387
  
57,387
         
-
  
39,137
  
39,137
 
Total expenses
        
781,160
  
463,327
  
1,244,487
         
818,583
  
719,329
  
1,537,912
 
                      
Income (loss) before income taxes
       
$
88,184
 
$
(463,327
)
 
$
(375,143
)
       
$
727,204
 
$
(719,329
)
 
$
7,875
 
 
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
        
27,827
 
27,827
 
Change in fair value of common stock warrants
     
  -
 
67,345
 
67,345
        
229,726
 
229,726
 
Interest (income) expense, net
        
  -
  
97,356
  
97,356
            
50,699
  
50,699
 
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
)
 
 
8

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

Note 78 – Segment Information (continued)

Six Months Ended
September 30, 2014
 
Avionics
 Government
 
Avionics
 Commercial
 
Avionics
 Total
 
Corporate
 Items
 Total 
Nine Months Ended
December 31, 2014
 
Avionics
 Government
 
Avionics
 Commercial
 
Avionics
 Total
 
Corporate
 Items
 Total 
Net sales
 
$
5,547,451
 
$
1,169,299
 
$
6,716,750
 
-
 
$
6,716,750
  
$
10,002,850
 
$
1,743,997
 
$
11,746,847
 
-
 
$
11,746,847
 
Cost of sales
  
3,784,672
  
942,517
  
4,727,189
  
-
  
4,727,189
   
6,800,031
  
1,411,468
  
8,211,499
  
-
  
8,211,499
 
Gross margin
  
1,762,779
  
226,782
  
1,989,561
  
-
  
1,989,561
   
3,202,819
  
332,529
  
3,535,348
  
-
  
3,535,348
 
                      
Engineering, research, and development
     
981,622
 
-
 
981,622
      
1,476,343
 
-
 
1,476,343
 
Selling, general and administrative
     
575,717
 
963,510
 
1,539,227
      
899,579
 
1,464,909
 
2,364,488
 
Amortization of debt discount
     
-
 
60,935
 
60,935
      
-
 
75,308
 
75,308
 
Amortization of deferred financing costs
     
-
 
54,160
 
54,160
      
-
 
67,808
 
67,808
 
Loss on extinguishment of debt
       
188,102
 
188,102
 
Change in fair value of common stock warrants
     
-
 
106,080
 
 
106,080
 
     
-
 
68,750
 
68,750
 
Interest expense, net
        
-
  
119,867
  
119,867
         
-
  
159,004
  
159,004
 
Total expenses
        
1,557,339
  
1,304,552
  
2,861,891
         
2,375,922
  
2,023,881
  
4,399,803
 
                      
Income (loss) before income taxes
       
$
432,222
 
$
(1,304,552
)
 
$
(872,330
)
       
$
1,159,426
 
$
(2,023,881
)
 
$
(864,455
)

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
        
81,987
 
81,987
 
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
            
252,132
  
252,132
 
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
)

Note 89 – Income Taxes

The Company adopted FASB ASC 740-10, “Accounting for Uncertainty in Income Taxes,Taxes”, effective April 1, 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, 2014 and March 31, 2014 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.
 
 
9
 
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 910 – 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). 

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 SeptemberDecember 30, 2014 and March 31, 2014.  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.
 
 
10
 
   TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 910 – Fair Value Measurements (continued)

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
 
September 30, 2014 Level I Level II Level III Total 
December 31, 2014 Level I Level II Level III Total 
Total Assets
 
$
-
 
$
-
 
$
-
 
$
-
  
$
-
 
$
-
 
$
-
 
$
-
 
                  
Warrant liability
  
-
  
-
  
460,389
  
460,389
   
-
  
-
  
423,059
  
423,059
 
Total Liabilities
 
$
-
 
$
-
 
$
460,389
 
$
460,389
  
$
-
 
$
-
 
$
423,059
 
$
423,059
 

March 31, 2014 Level I  Level II  Level III  Total 
Total Assets
 
$
-
  
$
-
  
$
-
  
$
-
 
                 
Warrant liability
  
-
   
-
   
354,309
   
354,309
 
Total Liabilities
 
$
-
  
$
-
  
$
354,309
  
$
354,309
 
 
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 fair value of the warrants isprior to the quarter ended December 31, 2014 were 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, 2014 through September 30,December 31, 2014, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to the liability held at September 30,December 31, 2014:

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
  
354,309
  
106,080
  
-
  
-
  
460,389
   
354,309
  
68,750
  
-
  
-
  
423,059
 
Total Liabilities
 
$
354,309
 
$
106,080
 
$
-
 
$
-
 
$
460,389
  
$
354,309
 
$
68,750
 
$
-
 
$
-
 
$
423,059
 
 
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 recognizesrecognized a warrant liability and estimatesestimated the fair value of these warrants using the Black-Scholes options model using the following assumptions:assumptions until the payment of the loan in November 2014.

ValuesWith the payment of the loan in November 2014, the holder has the right, exercisable 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
 
any time, in writing (the “Warrant Put Notice”, to cause the Company, subject to the terms and conditions hereof, to purchase from the holder all, or any portion, of the warrant for the warrant put repurchase price (the “Repurchase Price”). The Repurchase Price is the greater of 1) Adjusted EBITDA per share as of the date of the Warrant Put Notice, less $0.01, multiplied by the number of warrants or 2) the product of the current market price per share as of the date of the Warrant Put Notice, less the purchase price of the warrant or warrants, multiplied by the number of warrants, if this amount is higher. Adjusted EBITDA means EBITDA, multiplied by 5, plus cash and cash equivalents less unpaid debt divided by the number of shares outstanding on a fully diluted basis. As such, the values of the warrants at December 31, 2014, reflect the higher of these two options for each specific warrant.
 
 
11
 
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 910 – Fair Value Measurements (continued)

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, 2014

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
  
$
4.42
   
43.35
%
  
5.45
   
1.73
%
 
$
123,564
 
 
09-10-2010
   
09-10-2015
   
10,416
  
$
6.70
  
$
4.42
   
43.35
%
  
1.45
   
0.44
%
 
$
2,498
 
 
07-26-2012
   
09-10-2019
   
50,000
  
$
3.35
  
$
4.42
   
43.35
%
  
5.45
   
1.73
%
 
$
77,626
 
 
07-26-2012
   
09-10-2019
   
20,000
  
$
3.35
  
$
4.42
   
43.35
%
  
5.45
   
1.73
%
 
$
31,050
 
 
11-20-2012
   
09-10-2019
   
20,000
  
$
3.56
  
$
4.42
   
43.35
%
  
5.45
   
1.73
%
 
$
29,892
 
 
02-14-2013
   
09-10-2019
   
20,000
  
$
3.58
  
$
4.42
   
43.35
%
  
5.45
   
1.73
%
 
$
29,310
 
 
07-12-2013
   
09-10-2019
   
20,000
  
$
3.33
  
$
4.42
   
43.35
%
  
5.45
   
1.73
%
 
$
31,163
 
 
08-12-2013
   
09-10-2019
   
20,000
  
$
3.69
  
$
4.42
   
43.35
%
  
5.45
   
1.73
%
 
$
29,206
 
 
Values at September 30,December 31, 2014
 
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
  
$
5.34
   
41.86
%
  
4.95
   
1.78
%
 
$
160,990
 
 
09-10-2010
   
09-10-2015
   
10,416
  
$
6.70
  
$
5.34
   
41.86
%
  
0.95
   
0.13
%
 
$
3,199
 
 
07-26-2012
   
09-10-2019
   
50,000
  
$
3.35
  
$
5.34
   
41.86
%
  
4.95
   
1.78
%
 
$
100,668
 
 
07-26-2012
   
09-10-2019
   
20,000
  
$
3.35
  
$
5.34
   
41.86
%
  
4.95
   
1.78
%
 
$
40,267
 
 
11-20-2012
   
09-10-2019
   
20,000
  
$
3.56
  
$
5.34
   
41.86
%
  
4.95
   
1.78
%
 
$
38,818
 
 
02-14-2013
   
09-10-2019
   
20,000
  
$
3.58
  
$
5.34
   
41.86
%
  
4.95
   
1.78
%
 
$
38,085
 
 
07-12-2013
   
09-10-2019
   
20,000
  
$
3.33
  
$
5.34
   
41.86
%
  
4.95
   
1.78
%
 
$
40,409
 
 
08-12-2013
   
09-10-2019
   
20,000
  
$
3.69
  
$
5.34
   
41.86
%
  
4.95
   
1.78
%
 
$
37,953
 
Date of 
Warrant
  
Expiration
Date
  
Number of
Warrants
  
Exercise
Price
  
Fair Market Value
Per Share
  Put Option Value  Market Price Option  
Remaining
Life in Years
  
Warrant
Liability
 
 
09-10-2010
   
09-10-2019
   
136,920
  
$
6.70
  
$
5.34
  
$
138,289
   
NA
   
4.70
  
$
138,289
 
 
09-10-2010
   
09-10-2015
   
10,416
  
$
6.70
  
$
5.34
  
 
NA
   
NA
   
0.70
  
$
3,270*
 
 
07-26-2012
   
09-10-2019
   
50,000
  
$
3.35
  
$
5.34
  
$
20,200
   
39,800
   
4.70
  
$
39,800
 
 
07-26-2012
   
09-10-2019
   
20,000
  
$
3.35
  
$
5.34
  
$
50,500
   
99,500
   
4.70
  
$
99,500
 
 
11-20-2012
   
09-10-2019
   
20,000
  
$
3.56
  
$
5.34
  
$
20,200
   
35,600
   
4.70
  
$
35,600
 
 
02-14-2013
   
09-10-2019
   
20,000
  
$
3.58
  
$
5.34
  
$
20,200
   
33,400
   
4.70
  
$
33,400
 
 
07-12-2013
   
09-10-2019
   
20,000
  
$
3.33
  
$
5.34
  
$
20,200
   
40,200
   
4.70
  
$
40,200
 
 
08-12-2013
   
09-10-2019
   
20,000
  
$
3.69
  
$
5.34
  
$
20,200
   
33,000
   
4.70
  
$
33,000
 
 
The volatility calculation was based* Based on the 57 months for the Company’s common 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.Calculation
 
Note 1011 – Reclassifications

Certain prior year and period amounts have been reclassified to conform to the current period presentation.
12
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1112 – 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 Company winning 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.
12
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 – Litigation (continued)

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 District Court for further proceedings. The Company has been in engaged in discovery and depositions for the last twothree quarters, which has resulted in substantially higher legal expense. The case is currentlyAmended Fifth Supplemental Modified Scheduling Order has the trial date set for trial on May 19, 2015,February 29, 2016 and is estimated to last three weeks, but this date may continuebe subject to slip.postponement. The Company 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.

On October 9, 2013, the SEC notified the Company that it may be in violation of Section 16(a) for failure to accurately and timely file beneficial ownership reports (the “Filings”) for certain officers and directors.  The Company accepted responsibility for filing all such reports on behalf of each officer and director.

The Company apparently made certain coding errors with respect to certain of the Filings, in addition to not filing within two business days of a reportable transaction as reported by an officer or director. Based on the above, the SEC notified the Company that it may be in violation of Section 16(a). Currently, all transactions by the Holdersholders have been disclosed with the SEC and the Company believes that the transactions which required timely Section 16(a) reports did not involve a material amount of equity securities.  Additionally, no sales were made by any officer or director and the violation is related to disclosure only.

The Company has made an Offer to Settle to the SEC and in September 2014 the SEC accepted such Offer.offer. The Company has also revised its procedures for Section 16(a) reports to ensure complete compliance.

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.

Note 1213 – New Accounting Pronouncements

In May 2014, the FASB issued Accounting Standard Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2014-09”). ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. This ASUAccounting Standards Update (“ASU”) is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, the Company will adopt this ASU on April 1, 2017. Companies may use either a full retrospective or modified retrospective approach to adopt this ASU and management is currently evaluating which transition approach to use. The Company is currently assessing the impact that adopting this new accounting guidance will have on its condensed consolidated financial statements and footnote disclosures.

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)ASU 2014-15, "Presentation of Financial Statements - Going Concern", which requires management to evaluate whether conditions or events raise substantial doubt about the entity’s ability to continue as a going concern and, if so, to provide related footnote disclosures. The guidance is effective for annual or interim reporting periods beginning on or after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on the Company’s 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.
 
Note 13 – Subsequent Event

In November 2014, the Company entered into loan agreement with a bank for $1,200,000. The proceeds from the loan will be used to pay off the remaining balance of the loan with BCA Mezzanine Fund, L.P. in the amount of $1,153,109, including accrued interest of $4,467.  The term of the loan is for 3 year and expires in November 2017. Monthly payments are at $36,551 including interest at 6%.
 
13

Item 2.2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This quarterly reportQuarterly 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 (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, 2014, filed with the SEC on June 30, 2014, 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

As previously announced,After returning to profitability in fiscal year 2014, we had a slow start to the Company received full2015 fiscal year as a result of program delays and a six week interruption in CRAFT shipments. Third quarter revenues for the current fiscal year, however, increased to over $5.0 million as compared to $4.1 million for the same quarter in the previous year, an increase of 23%. Currently, we are shipping CRAFT at a more consistent rate, production approvalincluding some of the higher priced units, TS-4530A KITS for the U.S. Army TS-4530A KITS with expected deliveries of about $450k per month, which commencedare in July 2014. Thefull production as well as the ITATS program. Our legacy business also continues to be consistent. We are still awaiting approval from the U.S. Army is still working to secure production approval for the completeTS-4530A SETS, but this could take several additional months. As of September 30, 2014, the Company has open orders for 1,997 kits and 687 sets, totaling $17.7 million.

The Company also began shipping the first U.S. Navy ITATS production units in July 2014. As of September 30, 2014, the Company has open orders for the AN/ARM-206 (ITATS) for 99 units atfollowing provides a contract value of $5.6 million, including additional enhancements. The Company continues to ship the AN/USM-708 CRAFT test sets and should complete the shipment of allbrief summary of the Ship in Place units by August 2014.  In October 2013, the Company received an additional contract for the CRAFT program with a maximum valuestatus of $9.5 million. The order is a not-to-exceed $9.5 million fixed-price, indefinite-delivery/indefinite-quantity (“IDIQ”) contract for the manufactureour major programs at December 31, 2014:

·  
CRAFT 708 and 719: The Company currently has approximately $10.3 million of open orders from the U.S. Navy on the CRAFT program (multi-purpose test set including Mode 5 test capability). The CRAFT test set replaces seven obsolete U.S. Navy test sets that collectively cost approximately $300,000, making the CRAFT test set an excellent value to the government. This unit has been well received by the end users. The Company has 180 CRAFT 708 units on order from the original contract with a remaining value of about $4 million. In late 2013, the U.S. Navy issued a follow-on $9.5 million Indefinite Delivery Indefinite Quantity (“IDIQ”) contract. At this time, the U.S. Navy has issued purchase orders for a total of 247 CRAFT 708 and CRAFT 719 units on this follow-on contract with a value of about $7.5 million. These new orders are at a higher price as compared to the initial U.S. Navy contract, and we believe that it should improve our gross margin as these units begin to be shipped in volume. Management also believes that the CRAFT program also has significant potential for sales into the balance of the U.S. Military, NATO, and internationally, as the new Mode 5 IFF systems are installed in overseas aircraft platforms. The Joint Strike Fighter (“JSF”) program by itself is expected to generate significant CRAFT orders as this program continues to ramp up limited rate production.
14
Item 2.  Management’s Discussion and deliveryAnalysis of communications/navigation radio frequency avionics flight line tester CRAFT AN/USM-708 and/or AN/USM-719. This contract is in supportFinancial Condition and Results 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 we believe our CRAFT unit will be the Mode 5 test set of choice for a number of years. The Company had received delivery orders against this new contract for the additional test sets at a total value of $4.1 million. In October 2014, the Company received an order under this contract for an additional $2.4 million. The Company currently has open orders for the AN/USM-708 and AN/USM-719 for 417 units, totaling $11.1 million, including this new order, and an option to purchase up to $3 million of additional units. During the quarter, the Company had a six week interruption in CRAFT deliveries due to delayed component shipments from vendors, and a technical issue with the U.S. Navy, which has now been resolved, which affected sales for these periods.  CRAFT shipments resumed in October.Operations (continued)
Overview (continued)

·  
TS-4530A:  The booked backlog on the TS-4530A program (Mode 5 IFF test set) is approximately $17 million. This is comprised of 688 complete units (“SETS”) and 1,800 upgrade assemblies (“KITS”). The U.S. Army ordered about 50% of the maximum quantity of SETS, so any additional U.S. Army KIT or SET orders would be at higher commercial prices. The U.S. Army has requested that TIC increase the production of KITS to 150 units per month starting in 2015 to ensure that they do not lose any funding for several KIT delivery orders which expire late in calendar year 2015. The U.S. Army has indicated that it expects to authorize full rate production for the SETS in the April timeframe. TIC continues to actively market the TS-4530A product both domestically and overseas, and has received a limited amount of orders outside the U.S. Army contract.

·  
ITATS: The booked backlog on the ITATS (automated TACAN bench test set) program is 85 units at a value of around $4.5 million. The Company began ITATS production in the second quarter and continues to ramp up production and believes full rate production of five units per month will begin in December 2014. We also continue to market this unit to other domestic and international customers, and have begun to receive higher priced commercial orders for this state-of-the-art TACAN bench test set.

·  
Legacy Products: The Company continues to ship other legacy products including a redesign of our DME-P bench test set which is sold exclusively in Europe. TIC has also received a $600,000 order from the U.S. Army for 35 T-47NH units which is part of a 235 unit IDIQ order received several years ago. The U.S. Army T-47NH order should be shipped in the fiscal quarter ending March 31, 2015.

As such, we anticipate improvement in revenues and profitability forin the remainder of fiscal year 2015.future. We believe that the revenue increase from the  TS-4530A and ITATS shipments will also enhance the Company’s liquidity position.
 
For the sixthree months ended September 30,December 31, 2014, the Company recorded income from operations of $225,805 as compared to $248,291 for the same period in the prior year. Income from operations for the quarter ended December 31, 2014 was negatively impacted by significantly higher legal costs associated with the Aeroflex litigation.  For the nine months ended December 31, 2014, the Company recorded an operating loss of $531,288$305,483 as compared to an operating profitincome from operations of $208,298$456,589 for the sixnine months ended September 30,December 31, 2013. 
For the sixthree months ended September 30,December 31, 2014, the Company recorded income before income taxes of $7,875 as compared to a loss before income taxes of $87,081 for the three months ended December 31, 2013. Excluding amortization of debt and financing costs, loss on extinguishment of debt and the change in fair value of common stock warrants, pre-tax income would be $186,668 for the three months ended December 31, 2014, as compared to $197,592 for the three months ended December 31, 2013.

For the nine months ended December 31, 2014, the Company recorded a loss before income taxes of $872,330$864,455 as compared to a loss before income taxes of $165,255$252,336 for the sixnine months ended September 30,December 31, 2013.
14
Item 2.  Management’s Discussiondebt and Analysisfinancing costs, loss on extinguishment of Financial Conditiondebt and Resultsthe change in fair value of Operations (continued)

Overview (continued)common stock warrants, the before tax loss would be $464,487 for the nine months ended December 31, 2014, as compared to  income before taxes of $204,457 for the nine months ended December 31, 2013.

As a result of the substantial operating losses incurred in fiscal year 2013, the Company was not in compliance with the NYSE-MKT’s (the “Exchange”) continued listing standards. 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. On July 17, 2014, based on the review of publicly available and Section 1009(f) of the NYSE MKT Company Guide, the Exchange has indicated that the Company had resolved the continued listing deficiencies with respect to both Sections 1003(a)(ii) and 1003(4)(iv) of the NYSE MKT Company Guide, since it has reported net income for the fiscal year ended March 31, 2014 and demonstrated that it has remedied its financial impairment. As is the case with all listed issuers on the NYSE-MKT, the Company’s continued listing eligibility will be assessed on an ongoing basis.
 
On October 9, 2013, the SEC notified the Company that it may be in violation of Section 16(a) for failure to accurately and timely file beneficial ownership reports (the “Filings”) for certain officers and directors.  The Company accepted responsibility for filing all such reports on behalf of each officer and director.

The Company apparently made certain coding errors with respect to certain of the Filings, in addition to not filing within two business days of a reportable transaction as reported by an officer or director. Based on the above, the SEC notified the Company that it may be in violation of Section 16(a). Currently, all transactions by the Holders have been disclosed with the SEC and the Company believes that the transactions which required timely Section 16(a) reports did not involve a material amount of equity securities.  Additionally, no sales were made by any officer or director and the violation is related to disclosure only.

The Company has made an Offer to Settle to the SEC and the SEC accepted such Offer. The Company has also revised its procedures for Section 16(a) reports to ensure complete compliance.

At September 30,December 31, 2014, the Company’s backlog was approximately $34.0$32.6 million as compared to approximately $33.1$36.0 million at September 30,December 31, 2013.

In November 2014, the Company entered into a loan agreement with a bank for $1,200,000. The proceeds from the loan will bewere used to pay off the remaining balance of the loan with BCA Mezzanine Fund, L.P. in the amount of $1,153,109, including accrued interest of $4,467.  The term of the loan is for 3 year and expires in November, 2017. Monthly payments are at $36,551 including interest at 6%.

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. However, there can be no assurances that the Company will achieve revenue and profitability goals or will not require additional financing.

15

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, 2014, sales decreased $446,907 (11.1%increased $941,068 (23.0%) and $517,806 (7.2%$423,262 (3.7%) to $3,587,674$5,030,097 and $6,716,750,$11,746,847, respectively, as compared to $4,034,581$4,089,029 and $7,234,556,$11,323,585, respectively, for the three and sixnine months ended September 30,December 31, 2013.
 
Avionics government sales decreased $427,191 (12.4%) and $709,310 (11.35%increased $658,127 (17.3%) to $3,026,728 and $5,547,451$4,455,399 for the three and six months ended September 30,December 31, 2014 respectively, as compared to $3,453,919 and $6,256,761$3,797,272 for the three and six months ended September 30,December 31, 2013. This decreaseincrease is mostly attributed to the lowerincreased shipments for the CRAFT and ITATS as well as a modest increase in shipments for the TS-4530A Sets forprogram as we increase shipment of the KITS, which was mostly offset by the Company has not yet received a full production release, but such release is anticipatedshipment of SETS in the next few months.three months ended December 31, 2013 as we were able to ship against a partial release from the U.S. Army. These increases were offset partially by lower sales of legacy products. Avionics government sales decreased only $51,183 (0.5%) to $10,002,850 for the nine months ended December 31, 2014 as compared to $10,054,033 for the same period in the prior year. In the prior year, the Company was able to ship against a partial release from the U.S. Army. During the quarternine months ended December 31, 2014, the Company had a six week interruption in CRAFT deliveries due to delayed component shipments from vendors and a technical issue with the U.S. Navy, which has been resolved, which affected sales for these periods.periods, but has been resolved.  CRAFT shipments resumed in October. These decreases were partially offset by the shipment of the kitsKITS for the TS-4530A program for which the Company received a full production release from the U.S. Army for kits on June 29, 2014, and the commencement of shipments for the Company’s ITATS program.

Commercial sales decreased $19,721 (3.4%increased $282,941 (97.0%) and $474,445 (37.4%) to $560,946$574,698 and $1,743,997, respectively, for the three and nine months ended September 30,December 31, 2014, as compared to $580,662$291,757 and $1,269,552, respectively, for the three and nine months ended September 30, 2013.   The decrease is primarily attributed to lower sales from the overhaul and repairs business. Commercial sales increased  $191,504 (19.6%) to $1,169,299 for the six months ended September 30, 2014 as compared to $977,795 for the six months ended September 30, 2013.December 31, 2013 This increase in sales is primarily attributed to an increase in overhaul and repairs revenues, sales of spare parts availabilityas well as the Company wasbeing able to reduce its backlog for its commercial products as well as increased sales from the overhaul and repairs business.products. The economic conditions in the commercial market remain depressed and, therefore, this increase in commercial sales cannot be considered a trend.   
 
15
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Gross Margin

Gross margin decreased $406,405 (31.9%increased $150,100 (10.8%) and $472,346 (19.2%) %) to $869,344 and $1,989,561, respectively,$1,545,787 for the three and six months ended September 30,December 31, 2014, as compared to $1,275,749 and $2,461,907, respectively,$1,395,687 for the three and six months ended September 30,December 31, 2013. Gross profit was affectedThis increase mostly attributed to the increase in volume and higher prices for certain products partially offset by higher material variances and labor and overhead variances due in part to additional staffing associated with the startup of the TS-4530A and ITATS programs. Gross margin decreased $322,246 (8.4%) to $3,535,348 for the nine months ended December 31, 2014, as compared to $3,857,594 for the nine months ended December 31, 2013. This decrease mostly attributed to higher material variances and labor and overhead variances due in part to additional staffing associated with the startup of the TS-4530A and ITATS programs partially offset by the slightly higher volume and higher prices for certain products.  The gross margin percentage for the three months ended September 30,December 31, 2014 was 24.2%30.7%, as compared to 31.6%34.1% for the three months ended September 30,December 31, 2013.  The gross margin percentage for the sixnine months ended September 30,December 31, 2014 was 29.6%30.1%, as compared to 34.0%34.1% for the sixnine months ended September 30,December 31, 2013.  

Operating Expenses

Selling, general and administrative expenses decreased $11,376 (1.7%increased $127,342 (18.2%) and $341,909 (16.9%) to $660,034$825,261 and $2,364,488, respectively, for the three and nine months ended September 30,December 31, 2014, as compared to $671,410$697,919 and $2,022,579, respectively, for the three and nine months ended September 30, 2013. This decrease was primarily attributed to lower professional fees. Selling, general and administrative expenses increased $214,567 (16.2%) to $1,539,227 for the six months ended September 30, 2014 as compared to $1,324,660 for the six months ended September 30,December 31, 2013. This increase was primarily attributed to higher professional fees associated with the deposition phase Aeroflex litigation.  Legal expenses associated with the Aeroflex litigation were $189,964 for the three months ended December 31, 2014, as compared to $15,493 for the same period last year. For the nine months ended December 31, 2014, legal expenses associated with the litigation were $382,992 as compared to $139,568 for the same period in the prior year.

Engineering, research and development expenses increased $49,154 (11.0%$45,244 (10.1%) and $52,673 (5.7%$97,917 (7.1%) %) to $497,726$494,721 and $981,622,$1,476,343, respectively, for the three and sixnine months ended September 30,December 31, 2014, as compared to $448,572$449,477 and $928,949,$1,378,426, respectively, for the three and sixnine months ended September 30,December 31, 2013. While the Company has completed development on its major programs, research and development resources have now been focused on new product development, sustaining engineering and enhancements to existing products.

16

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

Income (Loss) From Operations

As a result of the above, the Company recorded an operating lossincome from operations of $288,416$225,805 for the three months ended September 30,December 31, 2014, as compared to operating income of $155,767$248,291 for the three months ended September 30,December 31, 2013.  For the sixnine months ended September 30,December 31, 2014, the Company recorded an operatinga loss from operations of $531,288$305,483 as compared to operating income from operations of $208,298$456,589 for the sixnine months ended September 30,December 31, 2013.  

Other Income (Expense), Net

For the three months ended September 30,December 31, 2014, total other expense was $86,727$217,930 as compared to other expense of $217,381$335,372 for the three months ended September 30,December 31, 2013. This change is primarily due to the non-cash gain on the change in the valuation of common stock warrants for the three months ended September 30,December 31, 2014, as compared to a loss in the valuation of common stock warrants in same period in the prior year, as well as lower interest expense.which was offset partially by the loss on the extinguishment of debt for the three months ended December 31, 2014.  For the sixnine months ended September 30,December 31, 2014, total other expense was $341,042$558,972 as compared to other expense of $373,553$708,925 for the sixnine months ended September 30,December 31, 2013. This change is primarily due to lower interest expense offset partially by the higherlower non-cash loss on the change in the valuation of common stock warrants as compared to the same period last year.year and lower interest expense partially offset by the loss on the extinguishment of debt for the nine months ended .December 31, 2014.

LossIncome (Loss) before Income Taxes

As a result of the above, the Company recorded lossesincome before taxes of $7,875 for the three months ended December 31, 2014, as compared to a loss before income taxes of $375,143 and $872,330$87,081 for the three and six months ended September 30,December 31, 2013. For the nine months ended December 31, 2014, the Company recorded a loss before income taxes of $864,455 as compared to lossesa loss before taxes of $61,614 and $165,255$252,336 for the three and sixnine months ended September 30,December 31, 2013.

Income Tax Benefit

For the three and six months ended September 30,December 31, 2014, the Company recorded an income tax benefitsprovision of $126,948 and $240,130$28,819 as compared to income tax expense of $10,860$58,852 for the three months ended September 30, 2013 andDecember 31, 2013. The Company recorded a provision for income taxes as the Company recorded a profit before taxes because of certain non-cash items that are not deductible for tax purposes. For the nine months ended December 31, 2014, the Company recorded an income tax benefit of $7,009$211,311 as compared to an income tax provision of $51,843 for the sixnine months ended September 30,December 31, 2013.  These amounts represent the statutory federal and state tax rate on the Company’s loss before taxes. 

Net Loss

As a result of the above, the Company recorded net losses of $248,195$20,944 and $632,200$653,144 for the three and sixnine months ended September 30,December 31, 2014, as compared to net losses of $72,474$145,933 and $158,246$304,179 for the three and sixnine months ended September 30,December 31, 2013.
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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Liquidity and Capital Resources

At September 30,December 31, 2014, the Company had net working capital of $2,110,330$2,095,573 as compared to $2,452,798 at March 31, 2014. This change is primarily the result of the decrease in accounts receivable and the increase in accounts payable and accrued liabilities offset partially by an increase in inventories and prepaid expenses.expenses and decrease in progress billings.

During the sixnine months ended September 30,December 31, 2014, the Company’s cash balance increased by $11,028$99,873 to $243,146.$331,991.  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, 2014, the Company provided $377,530$473,862 in cash for operations as compared to providing $13,400$274,476 in cash for operations for the sixnine months ended September 30,December 31, 2013.  This improvement is the result of the reduction in accounts receivable and increase in accounts payable and accrued liabilities offset partially by the increase in inventories, reduction in progress billings, and the higher operating loss and increase in prepaid expenses.loss.

Cash used in investing activities.  For the sixnine months ended September 30,December 31, 2014, the Company used $6,511$8,541 of its cash for investing activities, as compared to $11,226$11,595 for the sixnine months ended September 30,December 31, 2013 as result of lower purchases of equipment.
 
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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued)
Cash used in financing activities. For the sixnine months ended September 30,December 31, 2014, the Company used $359,991$365,448 in financing activities as compared to using $166,720$356,831 for the sixnine months ended September 30,December 31, 2013.  This is the result of lower debt repayments as a result of the debt refinancing offset mostly by lower proceeds from notes payable andpayable. During the increase in repayments of debt. For the sixnine months ended September 30,December 31, 2013, the Company received net proceeds from a related party note payable in the amount of $100,000.

In November 2014, the Company entered into loan agreement with a bank for $1,200,000. The proceeds from the loan will be used to pay off the remaining balance of the loan with BCA Mezzanine Fund, L.P. in the amount of $1,153,109, including accrued interest of $4,467.  The term of the loan is for 3 year and expires in November 2017. Monthly payments are at $36,551 including interest at 6%.

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. However, there can be no assurances that the Company will achieve revenue and profitability or will not require 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, 2014.

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, 2014, filed with the SEC on June 30, 2014.2014 (the “Annual Report”).
 
Off-Balance Sheet Arrangements

As of September 30,December 31, 2014, 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, 2014, as filed with the SEC on June 30, 2014.Report. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2014 consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2014, as filed with the SEC on June 30, 2014.Report.
 
 
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Item 3.3.  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.
 
 
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PART II – OTHER INFORMATION
 
Item 1.1.  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 Company winning 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 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 District Court for further proceedings. The Company has been in engaged in discovery and depositions for the last twothree quarters, which has resulted in substantially higher legal expense. The case is currentlyAmended Fifth Supplemental Modified Scheduling Order has the trial date set for trial on May 19, 2015,February 29, 2016  and is estimated to last three weeks, but this date may continuebe subject to slip.postponement. The Company 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.

On October 9, 2013, the SEC notified the Company that it may be in violation of Section 16(a) for failure to accurately and timely file beneficial ownership reports (the “Filings”) for certain officers and directors.  The Company accepted responsibility for filing all such reports on behalf of each officer and director.

The Company apparently made certain coding errors with respect to certain of the Filings, in addition to, not filing within two business days of a reportable transaction as reported by an officer or director. Based on the above, the SEC notified the Company that it may be in violation of Section 16(a). Currently, all transactions by the Holders have been disclosed with the SEC and the Company believes that the transactions which required timely Section 16(a) reports did not involve a material amount of equity securities.  Additionally, no sales were made by any officer or director and the violation is related to disclosure only.

The Company has made an Offer to Settle to the SEC and in September 2014 the SEC accepted such Offer.offer. The Company has also revised its procedures for Section 16(a) reports to ensure complete compliance.

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.
 
Item 1A.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, 2014, filed with the SEC on June 30, 2014.

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

There were no unregistered sales of the Company’s equity securities during the quarter ended September 30,December 31, 2014, other than those previously reported in a Current Report on Form 8-K.

Item 3.3.  Defaults Upon Senior Securities.

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

Item 4.4.  Mine Safety Disclosures.

Not applicable.
 
 
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Item 5.5.  Other Information.

There is no other information required to be disclosed under this item which was not previously disclosed.
 
Item 6.6.  Exhibits.
 
Exhibit No. Description
10.1
Loan Agreement with Bank of America*
   
31.1 
Certification of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002*
   
31.2 
Certification of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002*
   
32.1 
Certification of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
   
32.2 
Certification of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
   
101.INS XBRL Instance Document*
   
101.SCH Taxonomy Extension Schema Document*
   
101.CAL Taxonomy Extension Calculation Linkbase Document*
   
101.DEF Taxonomy Extension Definition Linkbase Document*
   
101.LAB Taxonomy Extension Label Linkbase Document*
   
101.PRE Taxonomy Extension Presentation Linkbase Document*

* Filed herewith

 
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SIGSIGNATURESNATURES

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 14, 2014February 17, 2015 By: /s/ Jeffrey C. O’Hara 
    Name: Jeffrey C. O’Hara 
    
Title:   Chief Executive Officer
            Principal Executive Officer
 

      
Date: November 14, 2014February 17, 2015 By: /s/ Joseph P. Macaluso 
    Name: Joseph P. Macaluso 
    
Title:   Principal Financial Officer
            Principal Accounting Officer
 
 
 
 
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