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: December 31, 2014June 30, 2015

¨ 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 FebruaryAugust 10, 2015 there were 3,256,887 shares outstanding of the registrant’s common stock.
 
 
 
 
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.
14  13
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
19  17
   
Item 4.
Controls and Procedures.
19  17
   
PART II – OTHER INFORMATION
   
Item 1.
Legal Proceedings.
  2018
   
Item 1A.
Risk Factors.
  2018
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
  2018
   
Item 3.
Defaults Upon Senior Securities.
  2018
   
Item 4.
Mine Safety Disclosures.
  2018
   
Item 5.
Other Information.
  2118
   
Item 6.
Exhibits.
  2119
   
Signatures
  2220
 
 
 
 
PART I – FINANCIAL INFORMATION
Item 1.  Financial Statements.
 
TEL-INSTRUMENT ELECTRONICS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS

 
December 31,
2014
  
March 31,
2014
  
June 30,
2015
  
March 31,
2015
 
 (unaudited)    (unaudited)   
ASSETS          
          
Current assets:          
Cash and cash equivalents
 
$
331,991
 
232,118
  
$
178,023
 
185,932
 
Accounts receivable, net
 
614,239
 
2,095,640
  
1,856,985
 
1,625,171
 
Inventories, net
 
4,583,365
 
4,025,391
  
4,523,832
 
4,032,074
 
Prepaid expenses and other current assets
 
463,661
 
263,592
  
328,720
 
281,002
 
Deferred financing costs
 
5,429
 
108,321
  
5,429
 
5,429
 
Deferred income tax asset
  
1,089,538
  
1,089,538
   
1,064,395
  
1,064,395
 
Total current assets
 
7,088,223
 
7,814,600
  
7,957,384
 
7,194,003
 
          
Equipment and leasehold improvements, net
 
310,566
 
450,873
  
234,252
 
270,792
 
Deferred financing costs – long-term
 
10,149
 
48,142
  
7,435
 
8,792
 
Deferred income tax asset – non-current
 
2,484,379
 
2,273,068
  
2,162,405
 
2,377,583
 
Other long-term assets
  
32,317
  
47,670
   
32,317
  
32,317
 
Total assets
  
9,925,634
  
 10,634,353
   
10,393,793
  
 9,883,487
 
          
LIABILITIES & STOCKHOLDERS’ EQUITY
          
          
Current liabilities:
          
Current portion of long-term debt, net of debt discount
 
382,169
 
718,848
  
393,846
 
387,839
 
Capital lease obligations – current portion
 
16,188
 
53,608
  
17,345
 
16,758
 
Accounts payable and accrued liabilities
 
3,728,861
 
3,332,181
  
3,903,312
 
3,577,566
 
Progress billings
 
256,816
 
775,475
 
Deferred revenues – current portion
 
81,388
 
37,452
  
8,167
 
18,609
 
Accrued payroll, vacation pay and payroll taxes
  
527,228
  
444,238
   
676,288
  
594,114
 
Total current liabilities
 
4,992,650
 
5,361,802
  
4,998,958
 
4,594,886
 
          
Subordinated notes payable - related parties
 
250,000
 
250,000
  
250,000
 
250,000
 
Capital lease obligations – long-term
 
8,971
 
21,320
  
-
 
4,561
 
Long-term debt
 
807,859
 
596,526
  
607,927
 
708,604
 
Deferred revenues – long-term
 
133,650
 
133,650
  
133,650
 
133,650
 
Warrant liability
 
423,059
 
354,309
  
451,202
 
518,962
 
Other long-term liabilities
  
45,600
  
56,100
   
26,700
  
33,000
 
Total liabilities
  
6,661,789
  
6,773,707
   
6,468,437
  
6,243,663
 
          
Commitments
          
          
Stockholders' equity:
          
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
 
Common stock, 4,000,000 shares authorized, par value $0.10 per share,
3,256,887 and 3,256,887 shares issued and outstanding, respectively
 
325,686
 
325,686
 
Additional paid-in capital
 
8,042,893
 
7,987,100
  
8,052,634
 
8,046,168
 
Accumulated deficit
  
(5,104,734
)
  
(4,451,590
)
  
(4,452,964
)
  
(4,732,030
)
Total stockholders' equity
  
3,263,845
  
3,860,646
   
3,925,356
  
3,639,824
 
Total liabilities and stockholders' equity
 
$
9,925,634
 
$
10,634,353
  
$
10,393,793
 
$
9,883,487
 
 
See accompanying notes to condensed consolidated financial statements.
 
 
3
 
TEL-INSTRUMENT ELECTRONICS CORP.CORP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 Three Months Ended Nine Months Ended  Three Months Ended 
 
December 31,
2014
 
December 31,
2013
 
December 31,
2014
 
December 31,
2013
  June 30, 2015  June 30, 2014 
              
Net sales
 
$
5,030,097
 
$
4,089,029
 
11,746,847
 
$
11,323,585
  
$
5,845,919
 
$
3,129,076
 
Cost of sales
  
3,484,310
  
2,693,342
  
8,211,499
  
7,465,991
   
4,030,624
  
2,008,859
 
              
Gross margin
 
1,545,787
 
1,395,687
 
3,535,348
 
3,857,594
  
1,815,295
 
1,120,217
 
              
Operating expenses:
              
Selling, general and administrative
 
825,261
 
697,919
 
2,364,488
 
2,022,579
  
865,688
 
879,193
 
Engineering, research and development
  
494,721
  
449,477
  
1,476,343
  
1,378,426
   
492,132
  
483,896
 
Total operating expenses
  
1,319,982
  
1,147,396
  
3,840,831
  
3,401,005
   
1,357,820
  
1,363,089
 
              
Income (loss) from operations
 
225,805
 
248,291
 
(305,483
)
 
456,589
  
457,475
 
(242,872
)
              
Other income (expense):
              
Amortization of debt discount
 
(14,373
)
 
(27,120
)
 
(75,308
)
 
(75,707
)
 
-
 
(30,874
)
Loss on extinguishment of debt
 
(188,102
)
 
-
 
(188,102
)
 
(26,600
)
Amortization of deferred financing costs
 
(13,648
)
 
(27,827
)
 
(67,808
)
 
(81,987
)
 
(1,357
)
 
(27,080
)
Change in fair value of common stock warrants
 
37,330
 
(229,726
)
 
(68,750
)
 
(272,499
)
 
67,760
 
(133,881
)
Interest income
 
-
 
129
 
-
 
163
 
Interest expense
  
(39,137
)
  
(50,828
)
  
(159,004
)
  
(252,295
)
  
(29,634
)
  
(62,480
)
Total other income (expense)
  
(217,930
)
  
(335,372
)
  
(558,972
)
  
(708,925
)
  
36,769
  
(254,315 
)
              
Income (loss) before income taxes
 
7,875
 
(87,081
)
 
(864,455
)
 
(252,336
)
 
494,244
 
(497,187
)
              
Income tax expense (benefit)
  
28,819
  
58,852
  
(211,311
)
  
51,843
 
Income tax provision (benefit)
  
215,178
  
(113,182
)
              
Net loss
 
$
(20,944
)
 
$
(145,933
)
 
$
(653,144
)
 
$
(304,179
)
Net income (loss)
 
$
279,066
 
$
(384,005
)
              
Basic loss per common share
 
$
(0.01
)
 
$
(0.04
)
 
$
(0.20
)
 
$
(0.10
)
Diluted loss per common share
 
$
(0.01
)
 
$
(0.04
)
 
$
(0.20
)
 
$
(0.10
)
Net income (loss) per share:
     
Basic income (loss) per common share
 
$
0.09
 
$
(0.12
)
Diluted income (loss) per common share
 
$
0.02
 
$
(0.12
)
              
Weighted average shares outstanding:
              
Basic
 
3,255,028
 
3,247,387
 
3,253,045
 
3,189,123
  
3,256,887
 
3,251,387
 
Diluted
 
3,255,028
 
3,247,387
 
3,253,045
 
3,189,123
  
3,320,442
 
3,251,387
 
 
See accompanying notes to condensed consolidated financial statements.

 
4
 
TEL-INSTRUMENT ELECTRONICS CORP.CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 Nine months ended Three months ended
 
December 31,
2014
 
December 31,
2013
 June 30, 2015 June 30, 2014
        
Cash flows from operating activities:        
Net loss
 
$
(653,144
)
 
$
(304,179
)
Net income (loss)
 
$
279,066
 
$
(384,005
)
Adjustments to reconcile net loss to net cash
used in operating activities:
          
Deferred income taxes
 
(211,311
)
 
50,503
  
215,178
 
(113,182
)
Depreciation and amortization
 
134,837
 
153,818
  
42,413
 
45,062
 
Provision for inventory obsolescence
 
5,000
 
-
  
5,713
 
5,000
 
Amortization of debt discount
 
75,308
 
75,707
  
-
 
30,874
 
Amortization of deferred financing costs
 
67,808
 
81,987
  
1,357
 
27,080
 
Loss on extinguishment of debt
 
188,102
 
26,600
 
Change in fair value of common stock warrant
 
68,750
 
272,499
  
(67,760
)
 
133,881
 
Non-cash interest associated with conversion of note
 
-
 
21,003
 
Non-cash stock-based compensation
 
29,733
 
48,519
  
6,466
 
12,063
 
          
Changes in assets and liabilities:
          
Decrease (increase) in accounts receivable
 
1,481,401
 
(572,034
)
(Increase) decrease in inventories, net
 
(548,963
)
 
1,731,581
 
(Increase) decrease in accounts receivable
 
(231,814
)
 
1,250,928
 
Increase in inventories
 
(497,471
)
 
(534,136
)
Increase in prepaid expenses & other
 
(184,716
)
 
(28,077
)
 
(47,718
)
 
(316,628
)
Increase (decrease) in accounts payable and other accrued liabilities
 
423,290
 
(2,137,411
)
Increase (decrease) in accrued payroll, vacation pay & withholdings
 
82,990
 
(48,090
)
(Decrease) increase in deferred revenues
 
43,936
 
107,000
 
(Decrease) increase in progress billings
 
(518,659
)
 
795,050
 
Increase (decrease) in accounts payable and other accrued expenses
 
325,746
 
(2,593
)
Increase in accrued payroll, vacation pay & withholdings
 
82,174
 
28,936
 
Decrease in deferred revenues
 
(10,442
)
 
(33,226
)
Decrease in other long-term liabilities
  
(10,500
)
  
-
   
(6,300
)
  
(2,100
)
Net cash provided by operating activities
  
473,862
  
274,476
   
96,608
  
147,954
 
          
Cash flows from investing activities:
          
Purchases of equipment
  
(8,541
)
  
(11,595
)
  
(5,873
)
  
(1,145
)
Net cash used in investing activities
  
(8,541
)
  
(11,595
)
  
(5,873
)
  
(1,145
)
          
Cash flows from financing activities:
          
Proceeds from note payable – related party
 
-
 
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
 
(1,499,392
)
 
(424,245
)
 
(94,670
)
 
(156,069
)
Repayment of capitalized lease obligations
  
(49,769
)
  
(55,956
)
  
(3,974
)
  
(20,400
)
Net cash used in financing activities
  
(365,448
)
  
(356,831
)
  
(98,644
)
  
(176,469
)
          
Net increase (decrease) in cash and cash equivalents
 
99,873
 
(93,950
)
Net decrease in cash and cash equivalents
 
(7,909
)
 
(29,660
)
Cash and cash equivalents at beginning of period
  
232,118
  
310,297
   
185,932
  
232,118
 
Cash and cash equivalents at end of period
 
$
331,991
 
$
216,347
  
$
178,023
 
$
202,458
 
          
Supplemental cash flow information:
          
Taxes paid
 
$
20,500
 
$
 -
  
$
-
 
$
20,500
 
Interest paid
 
$
141,180
 
$
276,546
  
$
17,154
 
$
53,556
 
     
Supplemental non-cash information:
     
Converted accounts payable to equity
  
26,610
  
-
 
Converted debt to equity
 
$
-
 
$
700,000
 
Converted accrued interest to equity
 
$
-
 
$
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 December 31, 2014,June 30, 2015, the results of operations for the three and nine months ended December 31,June 30, 2015 and June 30, 2014, and December 31, 2013, and statements of cash flows for the ninethree months ended December 31, 2014June 30, 2015 and December 31, 2013.June 30, 2014.  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, 20142015 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, 20142015 , as filed with the United States Securities and Exchange Commission (the “SEC”) on June 30, 201425, 2015 (the “Annual Report).

Note 2 – Summary of Significant Accounting Policies

During the ninethree months ended December 31, 2014,June 30, 2015, there have been no material changes in the Company’s significant accounting policies to those previously disclosed in the Annual Report.
 
Note 3 – Accounts Receivable, net

The following table sets forth the components of accounts receivable:

 
December 31,
2014
 
March 31,
2014
  
June 30,
2015
 
March 31,
2015
 
Government
 
$
519,018
 
$
1,982,215
  
$
1,680,023
 
$
1,440,378
 
Commercial
 
122,503
 
140,707
  
201,937
 
209,768
 
Less: Allowance for doubtful accounts
  
(27,282
)
  
(27,282
)
  
(24,975
)
  
(24,975
)
 
$
614,239
 
$
2,095,640
  
$
1,856,985
 
$
1,625,171
 
 
Note 4 – Inventories, net
 
Inventories consist of:
 
 
December 31,
2014
 
March 31,
2014
  
June 30,
2015
 
March 31,
2015
 
          
Purchased parts
 
$
3,360,506
 
$
3,085,070
  
$
3,065,974
 
$
2,746,671
 
Work-in-process
 
1,387,572
 
1,134,714
  
1,658,180
 
1,514,356
 
Finished goods
 
45,287
 
10,607
  
34,678
 
334
 
Less: Inventory reserve
  
(210,000
)
  
(205,000
)
  
(235,000
)
  
(229,287
)
 
$
4,583,365
 
$
4,025,391
  
$
4,523,832
 
$
4,032,074
 
 
Note 5 – LossIncome (Loss) Per Share

Net lossincome (loss) per share has been computed according to FASB ASC 260, “Earnings per Share,” which requires a dual presentation of basic and diluted lossincome (loss) per share (“EPS”). Basic EPS represents net lossincome (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 – LossIncome (Loss) Per Share (continued)

Diluted loss per share for the three and nine months ended 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 
  
December 31,
2014
  
December 31,
2013
 
Basic net loss per share computation:      
Net loss
 
$
(20,944
)
 
$
(145,933
)
Weighted-average common shares outstanding
  
3,255,028
   
3,247,387
 
Basic net loss per share
 
$
(0.01
)
 
$
(0.04
)
Diluted net loss  per share computation:
        
Net loss
 
$
(20,944
)
 
$
(145,933
)
Weighted-average common shares outstanding
  
3,255,028
   
3,247,387
 
Incremental shares attributable to the assumed exercise of outstanding stock options
  
-
   
-
 
Total adjusted weighted-average shares
  
3,255,028
   
3,247,387
 
Diluted net loss per share
 
$
(0.01
)
 
$
(0.04
)
  Three Months Ended  Three Months Ended 
  June 30, 2015  June 30, 2014 
Basic net income (loss) per share computation:      
  Net income(loss)
 
$
279,066
  
$
(384,005
) 
  Weighted-average common shares outstanding
  
3,256,887
   
3,251,387
 
  Basic net  income (loss) per share
 
$
0.09
  
$
(0.12
) 
Diluted net income (loss) per share computation
        
  Net income (loss)
 
$
279,066
  
$
(384,005
) 
  Add: Change in fair value of warrants
  
198,000
   
             -
 
  Diluted income (loss)
  
81,066
   
(384,005
) 
  Weighted-average common shares outstanding
  
3,256,887
   
3,251,387
 
  Incremental shares attributable to the assumed exercise
     of outstanding stock options and warrants
  
63,555
   
-
 
  Total adjusted weighted-average shares
  
3,320,442
   
3,251,387
 
  Diluted net income (loss) per share
 
$
0.02
  
$
(0.12
) 
 
  Nine Months Ended  Nine Months Ended 
  
December 31,
2014
  
December 31,
2013
 
Basic net loss per share computation:      
Net loss
 
$
(653,144
)
 
$
(304,179
)
Weighted-average common shares outstanding
  
3,253,045
   
3,189,123
 
Basic net loss per share
 
$
(0.20
)
 
$
(0.10
)
Diluted net loss  per share computation:
        
Net loss
 
$
(653,144
)
 
$
(304,179
)
Weighted-average common shares outstanding
  
3,253,045
   
3,189,123
 
Incremental shares attributable to the assumed exercise of outstanding stock options
  
-
   
-
 
Total adjusted weighted-average shares
  
3,253,045
   
3,189,123
 
Diluted net loss per share
 
$
(0.20
)
 
$
(0.10
)
The following table summarizes securities that, if exercised, would have an anti-dilutive effect on earnings per share:

For the three and nine months ended 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.
  
June 30,
2015
  
June 30,
2014
 
Stock options
  
99,500
   
93,500
 
Warrants
  
147,336
   
297,336
 
   
246,836
   
390,836
 
 
Note 6 – Long-Term Debt

In September 2010, the Company entered into an agreementTerm Loan with BCA Mezzanine Fund LLP (“BCA”) to lend the Company $2,500,000 in the formBank of a Promissory Note (the “Note”).   This note was paid in full in November 2014 from proceeds from a $1,200,000 term loan from a bank (see Note 7).

Note 7 – Term LoanAmerica

In November 2014, the Company entered into a term loan in the amount of $1,200,000 with Bank of America. The proceeds from the term loan were primarily used to pay off the remaining balance of the loan with BCA Mezzanine Fund, L.P. (“BCA”) in the amount of $1,153,109, including accrued interest of $4,467 (see Note 6).$4,467. 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 assets of the Company. At DecemberJune 30, 2015 and March 31, 2015, the outstanding balances were $983,275 and $1,076,894, respectively.
Automobile Loan

In March 2014, the Company entered into a loan with Ford Credit to purchase a van for the Company in the amount of $23,712. Such note has a term of five (5) years with an annual interest rate of 8.79% with monthly payments of $492.  The outstanding balance was $1,169,449.
balances at June 30, 2015 and March 31, 2015 were $18,497 and $19,549, respectively.
7
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 87 – Segment Information

In accordance with FASB ASC 280, “Disclosures about Segments of an Enterprise and related information,”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.

7
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 – Segment Information (continued)
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. Segment assets include accounts receivable and work-in-process inventory. Asset information, other than accounts receivable and work-in-process inventory, is not reported, since the Company does not produce such information internally.  All long-lived assets are located in the U.S.
 
The table below presents information about reportable segments within the avionics business for the three and nine month periods ending December 31, 2014June 30, 2015 and 2013:2014:
 
Three Months Ended
December 31, 2014
 
Avionics
 Government
 
Avionics
 Commercial
 
Avionics
 Total
 
Corporate
 Items
 Total 
Three Months Ended
June 30, 2015
 
Avionics
 Government
 
Avionics
 Commercial
 
Avionics
 Total
 
Corporate
 Items
 Total 
Net sales
 
$
4,455,399
 
$
574,698
 
$
5,030,097
 
-
 
$
5,030,097
  
$
5,261,319
 
$
584,600
 
$
5,845,919
 
-
 
$
5,845,919
 
Cost of sales
  
3,015,359
  
468,951
  
3,484,310
  
-
  
3,484,310
   
3,561,594
  
469,030
  
4,030,624
  
-
  
4,030,624
 
Gross margin
  
1,440,040
  
105,747
  
1,545,787
  
-
  
1,545,787
   
1,699,725
  
115,570
  
1,815,295
  
-
  
1,815,295
 
                      
Engineering, research, and development
     
494,721
 
-
 
494,721
      
492,132
 
-
 
492,132
 
Selling, general and administrative
     
323,862
 
501,399
 
825,261
      
360,629
 
505,059
 
865,688
 
Amortization of debt discount
     
-
 
14,373
 
14,373
 
Amortization of deferred financing costs
     
-
 
13,648
 
13,648
      
-
 
1,357
 
1,357
 
Loss on extinguishment of debt
     
-
 
188,102
 
188,102
 
Change in fair value of common stock warrants
     
-
 
(37,330
)
 
(37,330
)
     
-
 
(67,760
)
 
(67,760
)
Interest expense, net
        
-
  
39,137
  
39,137
         
-
  
29,634
  
29,634
 
Total expenses
        
818,583
  
719,329
  
1,537,912
         
852,761
  
468,290
  
1,321,051
 
                      
Income (loss) before income taxes
       
$
727,204
 
$
(719,329
)
 
$
7,875
        
$
962,534
 
$
(468,290
)
 
$
494,244
 
 
Three Months Ended
December 31, 2013
 
Avionics
Government
 
Avionics
Commercial
 
Avionics
Total
 
Corporate
Items
 
 
Total
 
Three Months Ended
June 30, 2014
 
Avionics
Government
 
Avionics
Commercial
 
Avionics
Total
 
Corporate
Items
 
 
Total
 
Net sales
 
$
3,797,272
 
291,757
 
4,089,029
 
-
 
4,089,029
  
$
2,520,723
 
$
608,353
 
$
3,129,076
 
-
 
$
3,129,076
 
Cost of sales
  
2,415,427
  
277,915
  
2,693,342
  
-
  
2,693,342
   
1,514,415
  
494,444
  
2,008,859
  
-
  
2,008,859
 
Gross margin
  
1,381,845
  
13,842
  
1,395,687
  
-
  
1,395,687
   
1,006,308
  
113,909
  
1,120,217
  
-
  
1,120,217
 
                      
Engineering, research, and development
     
449,477
   
449,477
      
483,896
 
-
 
483,896
 
Selling, general, and administrative
     
375,255
 
322,664
 
697,919
      
292,383
 
586,810
 
879,193
 
Amortization of debt discount
       
27,120
 
27,120
      
-
 
30,874
 
30,874
 
Amortization of deferred financing costs
       
27,827
 
27,827
      
-
 
27,080
 
27,080
 
Change in fair value of common stock warrants
       
229,726
 
229,726
      
-
 
133,881
 
133,881
 
Interest (income) expense, net
           
50,699
  
50,699
         
-
  
62,480
  
62,480
 
Total expenses
        
824,732
  
658,036
  
1,482,768
         
776,279
  
841,125
  
1,617,404
 
                      
Income (loss) before income taxes
       
$
570,955
 
$
(658,036)
 
$
(87,081
)
       
$
343,938
 
$
(841,125
)
 
$
(497,187
)
 
 
8
 
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 8 – Segment Information (continued)

Nine Months Ended
 December 31, 2014
 
Avionics
 Government
  
Avionics
 Commercial
  
Avionics
 Total
  
Corporate
 Items
  Total 
Net sales
 
$
10,002,850
  
$
1,743,997
  
$
11,746,847
   
-
  
$
11,746,847
 
Cost of sales
  
6,800,031
   
1,411,468
   
8,211,499
   
-
   
8,211,499
 
Gross margin
  
3,202,819
   
332,529
   
3,535,348
   
-
   
3,535,348
 
                     
Engineering, research, and development
          
1,476,343
   
-
   
1,476,343
 
Selling, general and administrative
          
899,579
   
1,464,909
   
2,364,488
 
Amortization of debt discount
          
-
   
75,308
   
75,308
 
Amortization of deferred financing costs
          
-
   
67,808
   
67,808
 
Loss on extinguishment of debt
              
188,102
   
188,102
 
Change in fair value of common stock warrants
          
-
   
68,750
   
68,750
 
Interest expense, net
          
-
   
159,004
   
159,004
 
Total expenses
          
2,375,922
   
2,023,881
   
4,399,803
 
                     
Income (loss) before income taxes
         
$
1,159,426
  
$
(2,023,881
)
 
$
(864,455
)

Nine Months Ended
 December 31, 2013
 
Avionics
 Government
  
Avionics
 Commercial
  
Avionics
 Total
  
Corporate
 Items
  Total 
Net sales
  
10,054,033
   
1,269,552
   
11,323,585
   
-
   
11,323,585
 
Cost of Sales
  
6,497,178
   
968,813
   
7,465,991
   
-
   
7,465,991
 
Gross Margin
  
3,556,855
   
300,739
   
3,857,594
   
-
   
3,857,594
 
                     
Engineering, research, and development
          
1,378,426
       
1,378,426
 
Selling, general and administrative
          
933,033
   
1,089,546
   
2,022,579
 
Amortization of debt discount
              
75,707
   
75,707
 
Amortization of deferred financing costs
              
81,987
   
81,987
 
Loss on extinguishment of debt
              
26,600
   
26,600
 
Change in fair value of common stock warrants
              
272,499
   
272,499
 
Interest expense, net
              
252,132
   
252,132
 
Total expenses
          
2,311,459
   
1,798,471
   
4,109,930
 
                     
Income (loss) before income taxes
         $
1,546,135
  $
(1,798,471
)
 $
(252,336
)

Note 9 – Income Taxes

The Company adopted FASB ASC 740-10, “Accounting“Accounting for Uncertainty in Income 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 December 31, 2014June 30, 2015 and March 31, 20142015 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 109 – 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). 
9
   TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 9 – 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 DecemberJune 30, 20142015 and March 31, 2014.2015.  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 10 – 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.
 
December 31, 2014 Level I Level II Level III Total 
June 30, 2015 Level I Level II Level III Total 
Total Assets
 
$
-
 
$
-
 
$
-
 
$
-
  
$
-
 
$
-
 
$
-
 
$
-
 
                  
Warrant liability
  
-
  
-
  
423,059
  
423,059
   
-
  
-
  
451,202
  
451,202
 
Total Liabilities
 
$
-
 
$
-
 
$
423,059
 
$
423,059
  
$
-
 
$
-
 
$
451,202
 
$
451,202
 

March 31, 2014 Level I Level II Level III Total 
March 31, 2015 Level I Level II Level III Total 
Total Assets
 
$
-
 
$
-
 
$
-
 
$
-
  
$
-
 
$
-
 
$
-
 
$
-
 
                  
Warrant liability
  
-
  
-
  
354,309
  
354,309
   
-
  
-
  
518,962
  
518,962
 
Total Liabilities
 
$
-
 
$
-
 
$
354,309
 
$
354,309
  
$
-
 
$
-
 
$
518,962
 
$
518,962
 
 
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 prior to the quarter ended December 31, 2014 werewas 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, 20142015 through December 31, 2014,June 30, 2015, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to the liability held at December 31, 2014:June 30, 2015:

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
  
68,750
  
-
  
-
  
423,059
   
518,962
  
(67,760
)
  
-
  
-
  
451,202
 
Total Liabilities
 
$
354,309
 
$
68,750
 
$
-
 
$
-
 
$
423,059
  
$
518,962
 
$
(67,760
)
 
$
-
 
$
-
 
$
451,202
 
 
The common stock warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign corporation.  The warrants do not qualify for hedge accounting, and, as such, all changes in the fair value of these warrants are recognized as other income/expense in the statement of operations until such time as the warrants are exercised or expire.  Since these common stock warrants do not trade in an active securities market, the Company recognized a warrant liability and estimated the fair value of these warrants using the Black-Scholes options model using the following assumptions until the payment of the loan in November 2014.
10
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 9 – Fair Value Measurements (continued)

With the payment of the loan in November 2014, the holder has the right, exercisable at 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 (as defined below) 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“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,June 30, 2015, reflect the higher of these two options for each specific warrant.
 
11
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 10 – 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
 
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
 
2015
 
Values at December 31, 2014
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
  
$
6.42
  
$
68,460
   
NA
   
4.45
  
$
68,460
 
 
09-10-2010
   
09-10-2015
   
10,416
  
$
6.70
  
$
6.42
   
NA
   
NA
   
0.45
  
$
7,002*
 
 
07-26-2012
   
09-10-2019
   
50,000
  
$
3.35
  
$
6.42
  
$
30,000
   
153,500
   
4.45
  
$
153,500
 
 
07-26-2012
   
09-10-2019
   
20,000
  
$
3.35
  
$
6.42
  
$
13,200
   
61,400
   
4.45
  
$
61,400
 
 
11-20-2012
   
09-10-2019
   
20,000
  
$
3.56
  
$
6.42
  
$
13,200
   
57,200
   
4.45
  
$
57,200
 
 
02-14-2013
   
09-10-2019
   
20,000
  
$
3.58
  
$
6.42
  
$
13,200
   
55,000
   
4.45
  
$
55,000
 
 
07-12-2013
   
09-10-2019
   
20,000
  
$
3.33
  
$
6.42
  
$
13,200
   
61,800
   
4.45
  
$
61,800
 
 
08-12-2013
   
09-10-2019
   
20,000
  
$
3.69
  
$
6.42
  
$
13,200
   
54,600
   
4.45
  
$
54,600
 
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
 

* Based on Black-Scholes Calculation

Values at June 30, 2015
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
  
$
5.10
  
$
205,380
   
NA
   
4.20
  
$
205,380
 
 
09-10-2010
   
09-10-2015
   
10,416
  
$
6.70
  
$
5.10
   
NA
   
NA
   
0.20
  
$
322*
 
 
07-26-2012
   
09-10-2019
   
50,000
  
$
3.35
  
$
5.10
  
$
75,000
   
84,300
   
4.20
  
$
84,300
 
 
07-26-2012
   
09-10-2019
   
20,000
  
$
3.35
  
$
5.10
  
$
30,000
   
35,000
   
4.20
  
$
35,000
 
 
11-20-2012
   
09-10-2019
   
20,000
  
$
3.56
  
$
5.10
  
$
30,000
   
30,800
   
4.20
  
$
30,800
 
 
02-14-2013
   
09-10-2019
   
20,000
  
$
3.58
  
$
5.10
  
$
30,000
   
28,600
   
4.20
  
$
30,000
 
 
07-12-2013
   
09-10-2019
   
20,000
  
$
3.33
  
$
5.10
  
$
30,000
   
35,400
   
4.20
  
$
35,400
 
 
08-12-2013
   
09-10-2019
   
20,000
  
$
3.69
  
$
5.10
  
$
30,000
   
28,200
   
4.20
  
$
30,000
 

* Based on Black-Scholes Calculation
Note 1110 – Reclassifications

Certain prior year and period amounts have been reclassified to conform to the current period presentation.

 
1211
 
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1211 – 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,Award, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the U.S. Army Contracts Attorney and the U.S. Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed 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 Kansas District Court for further proceedings. The Company has been engaged in discovery and depositions for the last three quarters, which has resulted in substantially higher legal expense. The Amended Fifth Supplemental Modified Scheduling Order has the trial date set for February 29, 2016 and is estimated to last three weeks, but this date may be subject to 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 made an Offer to Settle to the SEC and in September 2014 the SEC accepted such 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 1312 – 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 outlinesthat introduces 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 newfive-step revenue recognition model provides a five-step analysis in determining when and howwhich an entity should recognize 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 companyto which the entity expects to receivebe entitled in exchange for those goods or services. This Accounting Standards Update (“ASU”)ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This standard is effective for annual reporting periodsfiscal years 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.2017, including interim periods within that reporting period. The Company is currently assessingevaluating the new guidance to determine the impact, that adopting this new accounting guidanceif any, it will have on its condensed consolidated financial statements and footnote disclosures.statements.

In August 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-15, "Presentation“Presentation of Financial Statements - Going Concern"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.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory”. This ASU applies to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predicable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, last-out (“LILO”). This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim and annual reporting period. We are currently evaluating the impact of adopting ASU 2015-11 on our consolidated financial statements and related disclosures.

No other recently issued accounting pronouncements had or are expected to have a material impact on the Company’s condensed consolidated financial statements.
 
 
1312
 
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 (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, 2014,2015, filed with the SEC on June 30, 2014,25, 2015, 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

After returning to profitabilityfinishing strong in the fourth quarter of last fiscal year, 2014, we had a slow start to the 2015 fiscal year as a result of program delays and a six week interruption in CRAFT shipments. Thirdfirst quarter revenues forcontinued 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, wetrend. All three major programs are shipping CRAFT at a more consistent rate, including some of the higher priced units, TS-4530A KITS for the U.S. Army are in full production as well as the ITATS program.rate. Our legacy business also continues to be consistent. We are still awaiting approval fromIn August 2015, we received the U.S. ArmyFull Rate Production Release for the TS-4530A SETS but this could take several additional months.

The following provides a brief summaryfrom the U.S. Army. It is expected that volume deliveries of TS-4530A SETS will commence late in the status of our major programs atthird fiscal quarter which ends December 31, 2014:2015. We currently have a backlog of 688 TS-4530A SETS with a contract value of approximately $7.8 million, and we are also actively marketing this test set to both domestic and foreign markets.
During the three months ended June 30, 2015, the Company continued to its growth trend, and continues to pursue new opportunities which we believe will provide a basis for future growth.

·  Revenues increased 87% from the same three month period in the prior year.
·  
CRAFT 708 and 719: The Company currently has approximately $10.3 million of open ordersIncome 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 valueoperations increased 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$457,475 as compared to a loss from operations of $242,872 for the initial U.S. Navy contract,same period in the prior year.
·  Net income was $279,066 as compared to a net loss of $384,005 for the same period in the prior year.
·  In March 2015, the Company received an order for an additional 21 CRAFT test sets from Lockheed Martin in the amount of $775,369 with shipment expected to take place in the second and we believe that it should improve our gross margin as thesethird quarters ending September 30, 2015 and December 31, 2015, respectively. These units beginare to be shipped in volume. Management also believes thatused on the CRAFT program also has significant potential for salesJSF program.
·  Introduction of the TR-36 Navigation/Communication Test Set, representing our first new production introduction into the balancecommercial market in a few years. The TR-36 provides comprehensive ramp testing in an user-friendly, light weight high-precision instrument for rapid functional testing of the U.S. Military, NATO,VOR, LOC/GS, MB, and internationally, as the new Mode 5 IFF systems are installedVHF COMM (AM/FM), ELT and EPIRB avionic equipment all in overseas aircraft platforms. The Joint Strike Fighter (“JSF”) program by itself is expected to generate significant CRAFT orders asa weather proof package with color display. We believe this program continues to ramp up limited rate production.product with our competitive price will compete in this market.
·  Pursuit of Foreign Military Sales (“FMS”) for its major products.
·  Investment in new lightweight design for commercial and military customers that we hope will expand our product line and be very competitive.


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

Overview (continued)

·  Engagement of our new partner, Blue Star Engineering and Electronics Ltd. (“Blue Star”).  Blue Star will handle all the Company’s interests in India, Nepal, Sri Lanka, Maldives and Bangladesh for both General Aviation and Military markets. The market in this region represents a significant opportunity for the Company.
·  
TS-4530A:  The booked backlog on the TS-4530A program (Mode 5 IFF test set) is approximately $17 million. This is comprisedAs developments of 688our major programs are complete, units (“SETS”)engineering efforts have been directed to new product development, 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 SETSwe have a few new products in the April timeframe. TIC continuespipeline, in addition 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.
recently introduced TR-36.

·  
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 continuesContinue 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.
explore opportunities worldwide.

·  
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 in the future. We believe that the revenue increase from the TS-4530A and ITATS shipments will also enhance the Company’s liquidity position.
For the three months ended 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 $305,483 as compared to income from operations of $456,589 for the nine months ended December 31, 2013. 
For the three months ended 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 $864,455 as compared to a loss before income taxes of $252,336 for the nine 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, 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 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.
 
At December 31, 2014,June 30, 2015, the Company’s backlog was approximately $32.6$24.8 million as compared to approximately $36.0 million at December 31, 2013.June 30, 2014.

In November 2014, the Company entered into a loan agreement with a bank for $1,200,000. The proceeds from the loan were 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 yearyears 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 nine months ended December 31, 2014,June 30, 2015, sales increased $941,068 (23.0%) and $423,262 (3.7%$2,716,843 (86.8%) to $5,030,097 and $11,746,847, respectively,$5,845,919 as compared to $4,089,029 and $11,323,585, respectively,$3,129,076 for the three and nine months ended December 31, 2013.June 30, 2014.
 
Avionics government sales increased $658,127 (17.3%$2,740,596 (108.7%) to $4,455,399$5,261,319 for the three months ended December 31, 2014June 30, 2015 as compared to $3,797,272$2,520,723 for the three months ended December 31, 2013.June 30, 2014. This increase is mostly attributed to the increased shipments for the CRAFTTS-4530 KITS and ITATS as well as a modest increase in shipmentsITATS.

Commercial sales were relatively flat, decreasing $23,753 (3.9%) to $584,600 for the TS-4530A program as we increase shipment of the KITS, which was mostly offset by the shipment of SETS in the 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, 2014June 30, 2015 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 nine 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 affected sales for these periods, but has been resolved.  CRAFT shipments resumed in October. These decreases were partially offset by the shipment of the KITS 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 increased $282,941 (97.0%) and $474,445 (37.4%) to $574,698 and $1,743,997, respectively,$608,353 for the three and nine months ended December 31, 2014, as compared to $291,757 and $1,269,552, respectively, for the three and nine months ended December 31, 2013 This increase in sales is primarily attributed to an increase in overhaul and repairs revenues, sales of spare parts as well as the Company being able to reduce its backlog for its commercial products. The economic conditions in the commercial market remain depressed and, therefore, this increase in commercial sales cannot be considered a trend.   June 30, 2014.
 
Gross Margin

Gross margin increased $150,100 (10.8%$695,078 (62.0%) to $1,545,787$1,815,295 for the three months ended December 31, 2014,June 30, 2015 as compared to $1,395,687$1,120,217 for the three months ended December 31, 2013.June 30, 2014. This increase is mostly attributed to the increase in volume and higher pricesof sales, especially 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 KITS 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.ITATS. The gross margin percentage for the three months ended December 31, 2014June 30, 2015 was 30.7%31.1%, as compared to 34.1%35.8% for the three months ended December 31, 2013.June 30, 2014. The decrease in gross margin percentage is mostly attributed to the change in sales mix, mostly due to the increase in sales for the nine months ended December 31, 2014 was 30.1%,TS-4530 and ITATS programs which have lower margins as compared to 34.1% for the nine months ended December 31, 2013.  these programs were competitively bid.

Operating Expenses

Selling, general and administrative expenses increased $127,342 (18.2%) and $341,909 (16.9%decreased $13,505 (1.5%) to $825,261 and $2,364,488, respectively,$865,688 for the three and nine months ended December 31, 2014,June 30, 2015, as compared to $697,919 and $2,022,579, respectively,$879,193 for the three and nine months ended December 31, 2013.June 30, 2014. This increasedecrease was primarily attributed to higherlower litigation expenses and professional fees associated with the deposition phase Aeroflex litigation.offset mostly by higher commissions and accrued bonus compensation.  Legal expenses associated with the Aeroflex litigation were $189,964$70,372 for the three months ended December 31, 2014,June 30, 2015 as compared to $15,493$146,409 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 $45,244 (10.1%) and $97,917 (7.1%$8,236 (1.7%) to $494,721 and $1,476,343, respectively,$492,132 for the three and nine months ended December 31, 2014,June 30, 2015 as compared to $449,477 and $1,378,426, respectively,$483,896 for the three and nine months ended December 31, 2013.June 30, 2014. 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.


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 income from operations of $225,805$457,475 for the three months ended December 31, 2014,June 30, 2015 as compared to $248,291a loss from operations of $242,872 for the three months ended December 31, 2013.  For the nine months ended December 31, 2014, the Company recorded a loss from operations of $305,483 as compared to income from operations of $456,589 for the nine months ended December 31, 2013.June 30, 2014.  

Other Income (Expense), Net

For the three months ended December 31, 2014,June 30, 2015, total other expenseincome was $217,930$36,769 as compared to other expense of $335,372$254,315 for the three months ended December 31, 2013.June 30, 2014. This change is primarily due to the non-cash gain of $67,760 on the change in the valuation of common stock warrants for the three months ended December 31, 2014,June 30, 2015 as compared to a loss of $133,881 in the valuation of common stock warrants in same period in the prior year, which was offset partially byyear. Interest expense declined as a result of the lower interest rate on the new loan and the lower outstanding loan balance. Amortization of deferred financing charges and debt discount were lower as a result of the repayment of the loan with BCA, as these remaining expenses were recorded as a loss on the extinguishment of debt for the three months ended December 31, 2014.  For the nine months ended December 31, 2014, total other expense was $558,972 as compared to other expense of $708,925 for the nine months ended December 31, 2013. This change is primarily due to the lower non-cash loss on the change in the valuation of common stock warrants as compared to the same period last year and lower interest expense partially offset by the loss on the extinguishment of debt for the nine months ended .December 31, 2014.prior fiscal year.

Income (Loss) before Income Taxes

As a result of the above, the Company recorded income before taxes of $7,875$494,244 for the three months ended December 31, 2014,June 30, 2015 as compared to a loss before income taxes of $87,081$497,187 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 $864,455 as compared to a loss before taxes of $252,336 for the nine months ended December 31, 2013.June 30, 2014.

Income Tax Benefit

For the three months ended December 31, 2014,June 30, 2015, the Company recorded an income tax provision of $28,819$215,178 as compared to $58,852an income tax benefit of $113,182 for the three months ended December 31, 2013.June 30, 2014. The Company recorded a provision for income taxes as the Company recorded a profit before taxes becausetaxes. It should be noted that as a result 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 $211,311 as compared to an income tax provision of $51,843 for the nine months ended December 31, 2013.  These amounts represent the statutory federal and state tax rate on the Company’s net operating loss beforecarryforwards, it will not be paying significant taxes this year, and, as such, the provision for taxes represents a reduction of our deferred tax asset and not a liability to pay taxes.

Net LossIncome (Loss)

As a result of the above, the Company recorded net lossesincome of $20,944 and $653,144$279,066 for the three and nine months ended December 31, 2014,June 30, 2015 as compared to a net lossesloss of $145,933 and $304,179$384,005 for the three and nine months ended December 31, 2013.June 30, 2014.

Liquidity and Capital Resources

At December 31, 2014,June 30, 2015, the Company had net working capital of $2,095,573$2,958,426 as compared to $2,452,798$2,599,117 at March 31, 2014.2015. This change is primarily the result of the decreaseincrease in accounts receivable and inventories partially offset by the increase in accounts payable and accrued liabilities offset partially by an increase in inventories and prepaid expenses and decrease in progress billings.expenses.

During the ninethree months ended December 31, 2014,June 30, 2015, the Company’s cash balance increaseddecreased by $99,873$7,909 to $331,991.$178,023.  The Company’s principal sources and uses of funds were as follows:

Cash provided by operating activities. For the ninethree months ended December 31, 2014,June 30, 2015, the Company provided $473,862$96,608 in cash for operations as compared to providing $274,476$147,954 in cash for operations for the ninethree months ended December 31, 2013.June 30, 2014.  This improvementreduction is the result of the reductionincrease in accounts receivable and increase in accounts payable and accrued liabilitiesexpenses offset partiallymostly by the increaseincreased in inventories, reduction in progress billings, and the higher operating loss.income.

Cash used in investing activities.  For the ninethree months ended December 31, 2014,June 30, 2015, the Company used $8,541$5,873 of its cash for investing activities, as compared to $11,595$1,145 for the ninethree months ended December 31, 2013June 30, 2014.
Cash used in financing activities. For the three months ended June 30, 2015, the Company used $98,644 in financing activities as compared to using $176,469 for the three months ended June 30, 2014 as a result of lower purchases of equipment.debt repayments.
 
 
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 nine months ended December 31, 2014, the Company used $365,448 in financing activities as compared to using $356,831 for the nine months ended 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. During the nine months ended 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 a 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 ninethree months ended December 31, 2014.June 30, 2015.

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, 2014,2015, filed with the SEC on June 30, 201425, 2015 (the “Annual Report”).
 
Off-Balance Sheet Arrangements

As of December 31, 2014,June 30, 2015, 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. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 20142015 consolidated financial statements included in our Annual Report.
 
 
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 officerCompany's Chief Executive Officer and principal financial officer, conducted an evaluation ofthe Company's Principal Financial Officer have evaluated the effectiveness of the design and operation of itsCompany's disclosure controls and procedures as(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)Act) as of the end of the period covered by this report (the “Evaluation Date”).Quarterly Report on Form 10-Q. Based upon such evaluation, the evaluation, our principal executive officerChief Executive Officer and principal financial officerPrincipal Financial Officer concluded that, as of the Evaluation Date that ourend of the period covered by this Quarterly Report on Form 10-Q, the Company's disclosure controls and procedures were effective. Disclosure controls are controlsnot effective as required under Rules 13a-15(e) and procedures designed to reasonably ensure that information required to be disclosed in our reports filed15d-15(e) under the Exchange Act such as this report, is recorded, processed, summarized and reported withina result of the time periods specifiedmaterial weakness in the SEC’s rulesCompany’s internal control over financial reporting previously disclosed under Item 9A of the Company’s Annual Report.
The Company is actively engaged in implementing the remediation efforts described in the Company’s Annual Report which are designed to address this material weakness. While progress has been made, additional time is needed to fully implement and forms. Disclosuredemonstrate the effectiveness of the remediation efforts. The Company is committed to designing, implementing and operating effective controls, includeand management continues to regularly assess the progress and sufficiency of the ongoing initiatives and make adjustments as and when necessary.   

Notwithstanding the ineffectiveness of the Company’s disclosure controls and procedures designedas of the end of the period covered by this Quarterly Report on Form 10-Q and the material weakness in our internal control over financial reporting that existed as of that date, management believes that (i) this Quarterly Report on Form 10-Q does not contain any untrue statement of a material fact or omit to reasonably ensure that suchstate a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this Quarterly Report on Form 10-Q and (ii) the unaudited consolidated financial statements, and other financial information, is accumulatedincluded in this Quarterly Report on Form 10-Q fairly present in all material respects in accordance with GAAP our financial condition, results of operations and communicated to our management, including our chief executive officercash flows as of, and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.for, the dates and periods presented.
 
Changes in Internal Control over Financial Reporting
 
The Company includingis taking actions to remediate the material weakness related to its principal executive officer and principal accounting officer, reviewed the Company’s internal control over financial reporting, pursuant to Rule 13(a)-15(e) underas described above. Other than the Exchange Act and concluded thatchanges disclosed above, there waswere no changematerial changes in the Company’sour internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(e) and 15d-15(e) under the Exchange Act that occurred during the Company’s most recently completed fiscal quarterperiod covered by this Quarterly Report on Form 10-Q that hashave materially affected, or isare reasonably likely to materially affect, the Company’sour internal control over financial reporting.reporting.  
Inherent Limitations of Internal Controls
The Company’s management, including the Chief Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
 
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 Company winning Award to the Company,Award, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the U.S. Army Contracts Attorney and the U.S. Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed 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 Kansas District Court for further proceedings. The Company has been in engaged in discovery and depositions for the last three quarters, which has resulted in substantially higher legal expense. The Amended Fifth Supplemental Modified Scheduling Order has the trial date set for February 29, 2016 and is estimated to last three weeks, but this date may be subject to 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 made an Offer to Settle to the SEC and in September 2014 the SEC accepted such 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 1A1A..  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, 2014,2015, filed with the SEC on June 30, 2014.25, 2015.

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 December 31, 2014,June 30, 2015 other than those previously reported in a 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.

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.
 
Item 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

 
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: February 17,August 12, 2015 By: /s/ Jeffrey C. O’Hara 
    Name: Jeffrey C. O’Hara 
    
Title:   Chief Executive Officer
            Principal Executive Officer
 

      
Date: February 17,August 12, 2015 By: /s/ Joseph P. Macaluso 
    Name: Joseph P. Macaluso 
    
Title:   Principal Financial Officer
            Principal Accounting Officer
 
 
 
 
 
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