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, 2015June 30, 2016

¨ 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 February 10,August 9, 2016 there were 3,256,8873,255,887 shares outstanding of the registrant’s common stock.
 
TEL-INSTRUMENT ELECTRONICS CORP.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
  Page
Item 1.3
   
Item 2.1513
   
Item 3.1917
   
Item 4.1917
   
PART II – OTHER INFORMATION
   
Item 1.2018
   
Item 1A.  2018
   
Item 2.  2018
   
Item 3.  2018
   
Item 4.2018
   
Item 5.2019
   
Item 6.2119
   
2220
 
PART I – FINANCIAL INFORMATION
Item 1.  Financial Statements.
 
TEL-INSTRUMENT ELECTRONICS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS

 
December 31,
2015
  
March 31,
2015
  
June 30,
2016
  
March 31,
2016
 
 (unaudited)    (unaudited)    
ASSETS           
           
Current assets:           
Cash and cash equivalents
 
$
629,053
 
$
185,932
  $412,570  $972,633 
Accounts receivable, net
 
1,027,437
 
1,625,171
   2,265,966   1,454,361 
Inventories, net
 
4,808,364
 
4,032,074
   4,048,284   4,679,032 
Prepaid expenses and other current assets
 
251,417
 
281,002
   763,851   128,071 
Deferred financing costs
 
5,429
 
5,429
 
Deferred income tax asset
  
1,064,395
  
1,064,395
   578,507   578,507 
Total current assets
 
7,786,095
 
7,194,003
   8,069,178   7,812,604 
             
Equipment and leasehold improvements, net
 
193,434
 
270,792
   183,815   193,518 
Deferred financing costs – long-term
 
4,720
 
8,792
 
Deferred income tax asset – non-current
 
1,764,767
 
2,377,583
   1,897,382   2,065,126 
Other long-term assets
  
33,509
  
32,317
   35,515   36,871 
Total assets
  
9,782,525
  
 9,883,487
   10,185,890   10,108,119 
             
LIABILITIES & STOCKHOLDERS’ EQUITY
             
             
Current liabilities:
             
Current portion of long-term debt, net of debt discount
 
411,912
 
387,839
 
Current portion of long-term debt  424,710   418,255 
Warrant liability - current  720,000   - 
Capital lease obligations – current portion
 
8,971
 
16,758
   5,844   10,232 
Accounts payable and accrued liabilities
 
2,339,126
 
3,577,566
   2,066,056   2,401,500 
Federal and state taxes payable  -   53,623 
Deferred revenues – current portion
 
23,275
 
18,609
   498,926   48,766 
Accrued payroll, vacation pay and payroll taxes
  
809,133
  
594,114
   760,691   836,589 
Total current liabilities
 
3,592,417
 
4,594,886
   4,476,227   3,768,965 
             
Subordinated notes payable - related parties
 
45,000
 
250,000
   -   25,000 
Capital lease obligations – long-term
 
-
 
4,561
   18,514   20,524 
Long-term debt
 
411,594
 
708,604
   195,977   304,560 
Deferred revenues – long-term
 
134,385
 
133,650
   203,820   172,703 
Warrant liability
 
1,216,541
 
518,962
 
Warrant liability – long-term  199,000   1,136,203 
Other long-term liabilities
  
14,100
  
33,000
   1,500   7,800 
Total liabilities
  
5,414,037
  
6,243,663
   5,095,038   5,435,755 
             
Commitments
             
             
Stockholders' equity:
             
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
 
Common stock, 4,000,000 shares authorized, par value $0.10 per share,
3,255,887 shares issued and outstanding, respectively
  325,586   325,586 
Additional paid-in capital
 
8,069,714
 
8,046,168
   8,082,834   8,074,655 
Accumulated deficit
  
(4,026,912
)
  
(4,732,030
)
  (3,317,568)  (3,727,877)
Total stockholders' equity
  
4,368,488
  
3,639,824
   5,090,852   4,672,364 
Total liabilities and stockholders' equity
 
$
9,782,525
 
$
9,883,487
  $10,185,890  $10,108,119 
 
See accompanying notes to condensed consolidated financial statements.
 
3
Table of Contents
TEL-INSTRUMENT ELECTRONICS CORP.
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 Three Months Ended Nine Months Ended  Three Months Ended 
 
December 31,
2015
 
December 31,
2014
 
December 31,
2015
 
December 31,
2014
  June 30, 2016  June 30, 2015 
               
Net sales
 
$
5,970,865
 
$
5,030,097
 
18,635,174
 
$
11,746,847
  $5,342,369  $5,845,919 
Cost of sales
  
3,936,108
  
3,484,310
  
12,541,656
  
8,211,499
   3,465,716   4,030,624 
                 
Gross margin
 
2,034,757
 
1,545,787
 
6,093,518
 
3,535,348
   1,876,653   1,815,295 
                 
Operating expenses:
                 
Selling, general and administrative
 
767,923
 
825,261
 
2,517,487
 
2,364,488
   911,744   865,688 
Engineering, research and development
  
541,502
  
494,721
  
1,477,290
  
1,476,343
   584,877   492,132 
Total operating expenses
  
1,309,425
  
1,319,982
  
3,994,777
  
3,840,831
   1,496,621   1,357,820 
                 
Income (loss) from operations
 
725,332
 
225,805
 
2,098,741
 
(305,483
)
Income from operations  380,032   457,475 
                 
Other income (expense):
                 
Amortization of debt discount
 
-
 
(14,373
)
 
-
 
(75,308
)
Loss on extinguishment of debt
 
-
 
(188,102
)
 
-
 
(188,102
)
Amortization of deferred financing costs
 
(1,357
)
 
(13,648
)
 
(4,072
)
 
(67,808
)
  (1,356)  (1,357)
Change in fair value of common stock warrants
 
(246,751
)
 
37,330
 
(697,579
)
 
(68,750
)
  217,203   67,760 
Interest expense
  
(23,687
)
  
(39,137
)
  
(79,156
)
  
(159,004
)
  (17,826)  (29,634)
Total other expense
  
(271,795
)
  
(217,930
)
  
(780,807
)
  
(558,972
)
Total other income (expense)  198,021   36,769 
                 
Income (loss) before income taxes
 
453,537
 
7,875
 
1,317,934
 
(864,455
)
Income before income taxes  578,053   494,244 
                 
Income tax expense (benefit)
  
226,951
  
28,819
  
612,816
  
(211,311
)
Income tax provision  167,744   215,178 
                 
Net income (loss)
 
$
226,586
 
$
(20,944
)
 
$
705,118
 
$
(653,144
)
Net income $410,309  $279,066 
                 
Basic income (loss) per common share
 
$
0.07
 
$
(0.01
)
 
$
0.22
 
$
(0.20
)
Diluted income (loss) per common share
 
$
0.07
 
$
(0.01
)
 
$
0.22
 
$
(0.20
)
Net income per share:        
Basic income per common share $0.13  $0.09 
Diluted income per common share $0.10  $0.02 
                 
Weighted average shares outstanding:
                 
Basic
 
3,256,887
 
3,255,028
 
3,256,887
 
3,253,045
   3,255,887   3,256,887 
Diluted
 
3,261,690
 
3,255,028
 
3,261,955
 
3,253,045
   3,274,829   3,320,442 
 
See accompanying notes to condensed consolidated financial statements.
 
4
Table of Contents
TEL-INSTRUMENT ELECTRONICS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
  Nine Months Ended
  December 31, 2015  December 31, 2014
      
Cash flows from operating activities:     
Net income (loss)
 
$
705,118
  
$
(653,144
)
Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
        
Deferred income taxes
  
612,816
   
(211,311
)
Depreciation and amortization
  
122,399
   
134,837
 
Provision for bad debts
  
1,205
   
-
 
Provision for inventory obsolescence
  
35,713
   
5,000
 
Amortization of debt discount
  
-
   
75,308
 
Amortization of deferred financing costs
  
4,072
   
67,808
 
Loss on extinguishment of debt
  
-
   
188,102
 
Change in fair value of common stock warrant
  
697,579
   
68,750
 
Non-cash stock-based compensation
  
23,546
   
29,733
 
         
Changes in assets and liabilities:
        
Decrease in accounts receivable
  
596,529
   
1,481,401
 
Increase in inventories
  
(812,003
)
  
(548,963
)
Decrease (increase) in prepaid expenses & other assets
  
28,393
   
(184,716
)
(Decrease) increase in accounts payable and other accrued expenses
  
(1,238,440
)
  
423,290
 
Increase in accrued payroll, vacation pay & withholdings
  
215,019
   
82,990
 
Decrease in deferred revenues
  
5,401
   
43,936
 
Decrease in progress billings
  
-
   
(518,659
)
Decrease in other long-term liabilities
  
(18,900
)
  
(10,500
)
Net cash provided by operating activities
  
978,447
   
473,862
 
         
Cash flows from investing activities:
        
Purchases of equipment
  
(45,041
)
  
(8,541
)
Net cash used in investing activities
  
(45,041
)
  
(8,541
)
         
Cash flows from financing activities:
        
Proceeds from bank loan
  
18,000
   
1,200,000
 
Deferred financing costs
  
-
   
(16,287
)
Repayment of notes to related parties
  
(205,000
)
  
-
 
Repayment of long-term debt
  
(290,937
)
  
(1,499,392
)
Repayment of capitalized lease obligations
  
(12,348
)
  
(49,769
)
Net cash used in financing activities
  
(490,285
)
  
(365,448
)
         
Net increase in cash and cash equivalents
  
443,121
   
99,873
 
Cash and cash equivalents at beginning of period
  
185,932
   
232,118
 
Cash and cash equivalents at end of period
 
$
629,053
  
$
331,991
 
         
Supplemental cash flow information:
        
Taxes paid
 
$
-
  
$
20,500
 
Interest paid
 
$
46,793
  
$
141,180
 

Supplemental non-cash information:      
Converted accounts payable to equity
 
$
-
  
$
26,610
 
  Three Months Ended 
  June 30, 2016  June 30, 2015 
       
Cash flows from operating activities:      
Net income $410,309  $279,066 
Adjustments to reconcile net loss to net cash
    used in operating activities:
        
Deferred income taxes  167,744   215,178 
Depreciation and amortization  35,010   42,413 
Provision for inventory obsolescence  15,000   5,713 
Amortization of debt discount  -   - 
Amortization of deferred financing costs  1,356   1,357 
Change in fair value of common stock warrant  (217,203)  (67,760)
Non-cash stock-based compensation  8,179   6,466 
         
Changes in assets and liabilities:        
Increase in accounts receivable  (811,605)  (231,814)
Decrease (increase) in inventories  615,748   (497,471)
Increase in prepaid expenses & other assets  (635,780)  (47,718)
(Decrease) increase in accounts payable and other accrued expenses  (335,444)  325,746 
Decrease in federal and state taxes  (53,623)  - 
(Decrease) increase in accrued payroll, vacation pay & withholdings  (75,898)  82,174 
Increase (decrease) in deferred revenues  481,277   (10,442)
Decrease in other long-term liabilities  (6,300)  (6,300)
Net cash (used in) provided by operating activities  (401,230)  96,608 
         
Cash flows from investing activities:        
Purchases of equipment  (25,307)  (5,873)
Net cash used in investing activities  (25,307)  (5,873)
         
Cash flows from financing activities:        
Repayment of long-term debt  (102,128)  (94,670)
Repayment of subordinated notes - related parties  (25,000)  - 
Repayment of capitalized lease obligations  (6,398)  (3,974)
Net cash used in financing activities  (133,526)  (98,644)
         
Net decrease in cash and cash equivalents  (560,063)  (7,909)
Cash and cash equivalents at beginning of period  972,633   185,932 
Cash and cash equivalents at end of period $412,570  $178,023 
         
Supplemental cash flow information:        
Taxes paid $50,000  $- 
Interest paid $21,504  $17,154 
 
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, 2015,June 30, 2016, the results of operations for the three and nine months ended December 31,June 30, 2016 and June 30, 2015, and December 31, 2014, and statements of cash flows for the ninethree months ended December 31, 2015June 30, 2016 and December 31, 2014.June 30, 2015.  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, 20152016 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, 2015,2016, as filed with the United States Securities and Exchange Commission (the “SEC”) on June 25, 201529, 2016 (the “Annual Report).

Note 2 – Summary of Significant Accounting Policies

During the ninethree months ended December 31, 2015,June 30, 2016, 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,
2015
 
March 31,
2015
  
June 30,
2016
  
March 31,
2016
 
Government
 
$
901,705
 
$
1,440,378
  $2,108,208  $1,343,477 
Commercial
 
151,732
 
209,768
   165,258   118,384 
Less: Allowance for doubtful accounts
  
(26,000
)
  
(24,975
)
  (7,500)  (7,500)
 
$
1,027,437
 
$
1,625,171
  $2,265,966  $1,454,361 
 
Note 4 – Inventories, net
 
Inventories consist of:
 
 
December 31,
2015
 
March 31,
2015
  
June 30,
2016
  
March 31,
2016
 
           
Purchased parts
 
$
3,117,916
 
$
2,746,671
  $2,928,619  $3,420,249 
Work-in-process
 
1,856,431
 
1,514,356
   1,403,123   1,446,293 
Finished goods
 
99,017
 
334
   21,542   102,490 
Less: Inventory reserve
  
(265,000
)
  
(229,287
)
  (305,000)  (290,000)
 
$
4,808,364
 
$
4,032,074
  $4,048,284  $4,679,032 
 
Note 5 – Net Income (Loss) Perper Share

Net income (loss) per share has been computed according to FASB Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC 260,260”), “Earnings per Share,” which requires a dual presentation of basic and diluted income (loss) per share (“EPS”). Basic EPS represents net income (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 – Net Income (Loss) Perper Share (continued)
 
  Three Months Ended  Three Months Ended 
  June 30, 2016  June 30, 2015 
Basic net income per share computation:      
  Net income $410,309  $279,066 
  Weighted-average common shares outstanding  3,255,887   3,256,887 
  Basic net  income per share $0.13  $0.09 
Diluted net income per share computation        
  Net income $410,309  $279,066 
  Add: Change in fair value of warrants  92,100   198,000 
  Diluted income $318,209   81,066 
  Weighted-average common shares outstanding  3,255,887   3,256,887 
  Incremental shares attributable to the assumed exercise of
outstanding stock options and warrants
  18,942   63,555 
  Total adjusted weighted-average shares  3,274,829   3,320,442 
 Diluted net  income per share $0.10  $0.02 
  Three Months Ended  Three Months Ended 
  December 31, 2015  December 31, 2014 
Basic net income (loss) per share computation:      
Net income (loss)
 
$
226,586
  
$
(20,944
) 
Weighted-average common shares outstanding
  
3,256,887
   
3,255,028
 
Basic net  income (loss) per share
 
$
0.07
  
$
(0.01
) 
Diluted net income (loss) per share computation
        
Net income (loss)
 
$
226,586
  
$
(20,944
) 
Add: Change in fair value of warrants
  
-
   
             -
 
Diluted income (loss)
  
226,586
   
(20,944
) 
Weighted-average common shares outstanding
  
3,256,887
   
3,255,028
 
Incremental shares attributable to the assumed
exercise of outstanding stock options and warrants
  
4,803
   
-
 
Total adjusted weighted-average shares
  
3,261,690
   
3,255,028
 
Diluted net income (loss) per share
 
$
0.07
  
$
(0.01
) 
  Nine Months Ended  Nine Months Ended 
  December 31, 2015  December 31, 2014 
Basic net income (loss) per share computation:      
Net income (loss)
 
$
705,118
  
$
(653,144
) 
Weighted-average common shares outstanding
  
3,256,887
   
3,253,045
 
Basic net  income (loss) per share
 
$
0.22
  
$
(0.20
) 
Diluted net income (loss) per share computation
        
Net income (loss)
 
$
705,118
  
$
(653,144
) 
Add: Change in fair value of warrants
  
-
   
             -
 
Diluted income (loss)
  
705,118
   
(653,144
) 
Weighted-average common shares outstanding
  
3,256,887
   
3,253,045
 
Incremental shares attributable to the assumed
exercise of outstanding stock options and warrants
  
5,068
   
-
 
Total adjusted weighted-average shares
  
3,261,955
   
3,253,045
 
Diluted net income (loss) per share
 
$
0.22
  
$
(0.20
) 

The following table summarizes securities that, if exercised, would have an anti-dilutive effect on earnings per share:
 
 
December 31,
2015
 
December 31,
2014
  
June 30,
2016
  
June 30,
2015
 
Stock options
 
80,000
 
85,500
   65,000   99,500 
Warrants
  
  286,920
  
297,336
   186,920   147,336 
  
366,920
  
382,836
   251,920   246,836 
 
7
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 – Long-Term Debt

Term Loans with Bank of America

In November 2014, the Company entered into a term loan in the amount of $1,200,000 with Bank of America. The term loan is for three years, and expiresmatures 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 December 31, 2015June 30, 2016 and March 31, 2015,2016, the outstanding balances were $791,539$593,879 and $1,076,894,$693,407, respectively. At June 30, 2016, $413,880 was classified as current.

In July 2015, the Company entered into a term loan in the amount of $18,000 with Bank of America. The term loan is for three years, and expiresmatures in July 2018. Monthly payments are at $536 including interest at 4.5%. The term loan is collateralized by substantially all of the assets of the Company. At December 31, 2015June 30, 2016 and March 31, 2015,2016, the outstanding balances were $15,646$12,760 and $-0-,$14,211, respectively. At June 30, 2016, $5,974 was classified as current.
 
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% withand monthly payments of $492.  The outstanding balances at December 31, 2015June 30, 2016 and March 31, 20152016 were $16,321$14,048 and $19,549,$15,197, respectively. At June 30, 2016, $4,856 was classified as current.

Note 7 – Deferred Revenues
During the quarter ended June 30, 2016, the Company negotiated a settlement from a customer in the amount of $679,935 for price increase due to delays on a production release. Deferred revenues will be recognized based upon the shipment of units under this contract. During the three months ended June 30, 2016, the Company recognized $214,396 of this amount as revenues. It is expected that the balance of this amount will be recognized in the current fiscal year.
7

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

Note 78 – Segment Information
 
In accordance with FASB ASC 280, “Disclosures about Segments of an Enterprise and related information”, the Company determined it has two reportable segments - avionics government and avionics commercial. There are no inter-segment revenues.
 
The Company is organized primarily on the basis of its avionics products.  The avionics government segment consists primarily of the design, manufacture, and sale of test equipment to the U.S. and foreign governments and militaries either directly or through distributors.  The avionics commercial segment consists of design, manufacture, and sale of test equipment to domestic and foreign airlines, directly or through commercial distributors, and to general aviation repair and maintenance shops. The Company develops and designs test equipment for the avionics industry and as such, the Company’s products and designs cross segments.
 
Management evaluates the performance of its segments and allocates resources to them based on gross margin. The Company’s general and administrative costs and sales and marketing expenses, and engineering costs are not segment specific. As a result, all operating expenses are not managed on a segment basis.  Net interest includes expenses on debt and income earned on cash balances, both maintained at the corporate level. 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, 2015June 30, 2016 and 2014:2015:
 
Three Months Ended
 June 30, 2016
 
Avionics
Government
  
Avionics
Commercial
  
Avionics
Total
  
Corporate
Items
  Total 
Net sales $4,871,620  $470,749  $5,342,369  $-  $5,342,369 
Cost of sales  3,104,918   360,798   3,465,716   -   3,465,716 
Gross margin  1,766,702   109,951   1,876,653   -   1,876,653 
                     
Engineering, research, and development          584,877   -   584,877 
Selling, general and administrative          343,882   567,862   911,744 
Amortization of deferred financing costs          -   1,356   1,356 
Change in fair value of common stock warrants          -   (217,203)  (217,203)
Interest expense, net          -   17,826   17,826 
Total expenses          928,759   369,841   1,298,600 
Income (loss) before income taxes         $947,894  $(369,841) $578,053 

Three Months Ended
 June 30, 2015
 
Avionics
Government
  
Avionics
Commercial
  
Avionics
Total
  
Corporate
Items
  Total 
Net sales $5,261,319  $584,600  $5,845,919   -  $5,845,919 
Cost of sales  3,561,594   469,030   4,030,624   -   4,030,624 
Gross margin  1,699,725   115,570   1,815,295   -   1,815,295 
                     
Engineering, research, and development          492,132   -   492,132 
Selling, general and administrative          360,629   505,059   865,688 
Amortization of deferred financing costs          -   1,357   1,357 
Change in fair value of common stock warrants          -   (67,760)  (67,760)
Interest expense, net          -   29,634   29,634 
Total expenses          852,761   468,290   1,321,051 
                     
Income (loss) before income taxes         $962,534  $(468,290) $494,244 
Three Months Ended
 December 31, 2015
 
Avionics
 Government
  
Avionics
 Commercial
  
Avionics
 Total
  
Corporate
 Items
  Total 
Net sales
 
$
5,658,695
  
$
312,170
  
$
5,970,865
  
$
-
  
$
5,970,865
 
Cost of sales
  
3,709,998
   
226,110
   
3,936,108
   
-
   
3,936,108
 
Gross margin
  
1,948,697
   
86,060
   
2,034,757
   
-
   
2,034,757
 
                     
Engineering, research, and development
          
541,502
   
-
   
541,502
 
Selling, general and administrative
          
203,249
   
564,674
   
767,923
 
Amortization of deferred financing costs
          
-
   
1,357
   
1,357
 
Change in fair value of common stock warrants
          
-
   
246,751
   
246,751
 
Interest expense, net
          
-
   
23,687
   
23,687
 
Total expenses
          
744,751
   
836,469
   
1,581,220
 
Income (loss) before income taxes
         
$
1,290,006
  
$
(836,469
)
 
$
453,537
 
8

TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 7 – Segment Information (continued)

Three Months Ended
 December 31, 2014
 
Avionics
 Government
  
Avionics
 Commercial
  
Avionics
 Total
  
Corporate
 Items
  Total 
Net sales
 
$
4,455,399
  
$
574,698
  
$
5,030,097
   
-
  
$
5,030,097
 
Cost of sales
  
3,015,359
   
468,951
   
3,484,310
   
-
   
3,484,310
 
Gross margin
  
1,440,040
   
105,747
   
1,545,787
   
-
   
1,545,787
 
                     
Engineering, research, and development
          
494,721
   
-
   
494,721
 
Selling, general and administrative
          
323,862
   
501,399
   
825,261
 
Amortization of debt discount
          
-
   
14,373
   
14,373
 
Amortization of deferred financing costs
          
-
   
13,648
   
13,648
 
Loss on extinguishment of debt
          
-
   
188,102
   
188,102
 
Change in fair value of common stock warrants
          
-
   
(37,330
)
  
(37,330
)
Interest expense, net
          
-
   
39,137
   
39,137
 
Total expenses
          
818,583
   
719,329
   
1,537,912
 
Income (loss) before income taxes
         
$
727,204
  
$
(719,329
)
 
$
7,875
 
Nine Months Ended
 December 31, 2015
 
Avionics
 Government
  
Avionics
 Commercial
  
Avionics
 Total
  
Corporate
 Items
  Total 
Net sales
 
$
17,248,766
  
$
1,386,408
  
$
18,635,174
  
$
-
  
$
18,635,174
 
Cost of sales
  
11,506,710
   
1,034,946
   
12,541,656
   
-
   
12,541,656
 
Gross margin
  
5,742,056
   
351,462
   
6,093,518
   
-
   
6,093,518
 
                     
Engineering, research, and development
          
1,477,290
   
-
   
1,477,290
 
Selling, general and administrative
          
908,829
   
1,608,658
   
2,517,487
 
Amortization of deferred financing costs
          
-
   
4,072
   
4,072
 
Change in fair value of common stock warrants
          
-
   
697,579
   
697,579
 
Interest expense, net
          
-
   
79,156
   
79,156
 
Total expenses
          
2,386,119
   
2,389,465
   
4,775,584
 
Income (loss) before income taxes
         
$
3,707,399
  
$
(2,389,465
)
 
$
1,317,934
 
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
)
9
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 – Income Taxes

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

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, 2015June 30, 2016 and March 31, 20152016 condensed consolidated balance sheets.  Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reverse. 

Note 910 – Fair Value Measurements

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

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

The three levels of the fair value hierarchy defined by ASC 820-10 are as follows:
 
·  Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.  Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

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

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

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

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

·  Cost approach — Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). 

9

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

Note 10 – Fair Value Measurements (continued)

The carrying value of the Company’s borrowings is a reasonable estimate of its fair value as borrowings under the Company’s credit facility reflect currently available terms and conditions for similar debt.
10
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 9 – Fair Value Measurements (continued)

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 December 31, 2015June 30, 2016 and March 31, 2015.2016.  As required by ASC 820-10, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
 
December 31, 2015 Level I Level II Level III Total 
June 30, 2016 Level I  Level II  Level III  Total 
Total Assets
 
$
-
 
$
-
 
$
-
 
$
-
  $-  $-  $-  $- 
                         
Warrant liability
  
-
  
-
  
1,216,541
  
1,216,541
   -   -   919,000   919,000 
Total Liabilities
 
$
-
 
$
-
 
$
1,216,541
 
$
1,216,541
  $-  $-  $919,000  $919,000 

March 31, 2015 Level I Level II Level III Total 
March 31, 2016 Level I  Level II  Level III  Total 
Total Assets
 
$
-
 
$
-
 
$
-
 
$
-
  $-  $-  $-  $- 
                         
Warrant liability
  
-
  
-
  
518,962
  
518,962
   -   -   1,136,203   1,136,203 
Total Liabilities
 
$
-
 
$
-
 
$
518,962
 
$
518,962
  $-  $-  $1,136,203  $1,136,203 
 
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 was 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, 20152016 through December 31, 2015,June 30, 2016, 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, 2015:June 30, 2016:

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
 
$
518,962
 
$
697,579
 
$
-
 
$
-
 
$
1,216,541
  $1,136,203  $(217,203) $-  $-  $919,000 
Total Liabilities
 
$
518,962
 
$
697,579
 
$
-
 
$
-
 
$
1,216,541
  $1,136,203  $(217,203) $-  $-  $919,000 
 
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.

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

Note 910 – 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” 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,
During May 2016, BCA Mezzanine Fund LLP (“BCA”) informed the valuesCompany that BCA has elected to exercise its “put option”, thereby requiring the Company to purchase all the warrants held by BCA. Total warrants were to purchase a total of 236,920 shares of the Company’s common stock. The table below shows the warrants held by BCA for which the “put option” has been exercised.
Date of
Warrant
  
Expiration
Date
  
Number of
Warrants
  
Exercise
Price
 
 09-10-2010   09-10-2019   136,920  $6.70 
 07-26-2012   09-10-2019   20,000  $3.35 
 11-20-2012   09-10-2019   20,000  $3.56 
 02-14-2013   09-10-2019   20,000  $3.58 
 07-12-2013   09-10-2019   20,000  $3.33 
08/12/2013   
09-10-2019
   
20,000
  $3.69 

The value of the warrants for the 236,920 shares of the Company’s common stock at December 31, 2015, reflect the highertime of exercise was $720,000 and the Company is expected to pay this amount this calendar year using cash from operations. The warrant liability for these two options for each specific warrant.
Valueswarrants was $720,000 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
 

ValuesJune 30, 2016 as compared to $938,203 at March 31, 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
  
$
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
 
2016.

* Based on Black-Scholes Calculation and expiredUpon payment to BCA, the Company will have remaining warrants with an outside investor to purchase 50,000 shares of the Company’s common stock at an exercise price of $3.35 per share or exercising the “put option” to the Company in September 2015.the same fashion as BCA. The warrant liability of the 50,000 warrants was $199,000 at June 30, 2016 as compared to $198,000 at March 31, 2016.

Values at December 31, 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
  
$
4.85
  
$
580,541
   
NA
   
3.70
  
$
580,541
 
 
07-26-2012
   
09-10-2019
   
50,000
  
$
3.35
  
$
4.85
  
$
212,000
   
75,000
   
3.70
  
$
212,000
 
 
07-26-2012
   
09-10-2019
   
20,000
  
$
3.35
  
$
4.85
  
$
84,800
   
30,000
   
3.70
  
$
84,800
 
 
11-20-2012
   
09-10-2019
   
20,000
  
$
3.56
  
$
4.85
  
$
84,800
   
25,800
   
3.70
  
$
84,800
 
 
02-14-2013
   
09-10-2019
   
20,000
  
$
3.58
  
$
4.85
  
$
84,800
   
23,600
   
3.70
  
$
84,800
 
 
07-12-2013
   
09-10-2019
   
20,000
  
$
3.33
  
$
4.85
  
$
84,800
   
30,400
   
3.70
  
$
84,800
 
 
08-12-2013
   
09-10-2019
   
20,000
  
$
3.69
  
$
4.85
  
$
84,800
   
23,200
   
3.70
  
$
84,800
 
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1011 – Reclassifications

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

Note 1112 – Litigation

Contingencies are recorded in the consolidated financial statements when it is probable that a liability will be incurred and the amount of the loss is reasonably estimable, or otherwise disclosed, in accordance with Accounting Standards Codification 450, Contingencies (“ASC 450”). Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, the Company will, when applicable, adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss or if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.


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

Note 12 – Litigation (continued)
 
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 the Award, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the U.S. Army Contracts Attorney and the U.S. Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed 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.

On May 23, 2016, the Company filed a motion for summary judgment based on Aeroflex’s lack of jurisdictional standing to bring the case. The motion asserts that Aeroflex does not own the intellectual property at issue since it is a bare licensee of Northrop Grumman. Northrop Grumman had declined to join this suit as a plaintiff. As such, it is our contention that Aeroflex lacks standing to sue alone. Also, the motion raises the fact that in December 2011 Aeroflex allowed the license to expire, so that Aeroflex’s claims are either moot or it lacks standing to sue for damages allegedly accruing after the license ended. The Company believes we have a solid legal position and expect that this action will be heard on August 31, 201525, 2016.  The June 2, 2016 Amended Supplemental Modified Scheduling Order has the trial date set for October 24, 2016February 13, 2017 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.

Other than the matters outlined above, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of executive officers of our Company, threatened against or affecting our Company, or our common stock in which an adverse decision could have a material effect.

Note 1213 – New Accounting Pronouncements

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-01 (Accounting Standards Codification (“ASC”) Subtopic 825-10), Financial Instruments- Overall Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU require entities to measure all investments in equity securities at fair value with changes recognized through net income. This requirement does not apply to investments that qualify for the equity method of accounting, to those that result in consolidation of the investee, or for which the entity meets a practicability exception to fair value measurement. Additionally, the amendments eliminate certain disclosure requirements related to financial instruments measured at amortized cost and add disclosures related to the measurement categories of financial assets and financial liabilities. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for only certain portions of the ASU. The Company is in the process of assessing the impact, if any, on its consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17 (ASC Topic 740), Income Taxes Balance Sheet Classification of Deferred Taxes. The amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted by all entities as of the beginning of an interim or annual reporting period. The Company is in the process of assessing the impact, if any, on its consolidated financial statements.

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

Note 12 – New Accounting Pronouncements (continued)

In September 2015, the FASB issued ASU 2015-16 (ASC Topic 805), Business Combinations Simplifying the Accounting for Measurement-Period Adjustments. The amendments in this update require that an acquirer recognize measurement period adjustments in the period in which the adjustments are determined. The income effects of such measurement period adjustments are to be recorded in the same period’s financial statements but calculated as if the accounting had been completed as of the acquisition date. The impact of measurement period adjustments to earnings that relate to prior period financial statements are to be presented separately on the income statement or disclosed by line item. The amendments in this update are for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for public business entities for reporting periods for which financial statements have not yet been issued. The adoption of this new guidance is not expected to have a material impact on the Company’s consolidated financial statements and disclosures.

In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs with Line-of-Credit Arrangements (ASU 2015-15). The previous guidance in ASU 2015-03, as defined below, did not address the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-15 is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted and entities shall apply the guidance retrospectively to all prior year periods presented. The Company is in the process of assessing the effects of the application of the new guidance.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). To simplify presentation of debt issuance costs, ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. ASU 2015-03 is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted and entities shall apply the guidance retrospectively to all prior year periods presented. The Company is in the process of assessing the effects of the application of the new guidance.

In May 2014, the FASB issued ASU 2014-09 that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. In March 2016, the FASB issued ASU 2016-08 which further clarifies the guidance on the principal versus agent considerations within ASU 2014-09. In April 2016, the FASB issued ASU 2016-10 to expand the guidance on identifying performance obligations and licensing within ASU 2014-09. In May 2016, the FASB issued ASU 2016-12 to improve revenue recognition in the areas of collectability, presentation of sales tax and other similar taxes collected from customers, noncash consideration, contract modifications and completed contracts at transition. This standard isupdate also amends the disclosure requirements within ASU 2014-09 for entities that retrospectively apply the guidance. The latest amendments are intended to address implementation issues that were raised by stakeholders and discussed by the Revenue Recognition Transition Resource Group, and provide additional practical expedients. These standards are effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the new guidance to determine the impact, if any, it will have on its consolidated financial statements.

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

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.
 
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 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, 2015, filed with the SEC on June 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

The Company continued to show improved operating results for its fourth consecutive quarter. All three major programs are shipping at a consistent rate. Our military legacy business also continues to be consistent, but commercial sales remain weak. In August 2015, we received the Full Rate Production Release for the TS-4530A SETS from the U.S. Army. The Company shipped 50 TS-4530A SETS through December 31, 2015, but volume deliveries of TS-4530A SETS are not anticipated to commence until the fourth quarter of this fiscal year ending March 31, 2016. The backlog at December 31, 2015 was approximately $15 million as compared to $32.6 million a year ago The Company has built a very solid position in the Mode 5 IFF and TACAN test set market and its existing contracts should result in strong revenues and improved profitability through fiscal year 2017. The revenue increase from the TS-4530A and ITATS shipments have enhanced the Company’s liquidity position, thereby enabling the Company to pursue opportunities worldwide and increase our new product development efforts. Our gross margin percentage is expected to remain well below our historical 50% average for the next year as most of the TS-4530A and ITATS products were both bid competitively at tight margins. Revenues will benefit from the start of TS-4530A SET production but KIT production is expected to be completed by the middle of this calendar year. It is critical that we capture the major share of the large international market which should generate substantial revenues starting in the 2017 fiscal year timeframe. We believe that we are well positioned as our CRAFT and TS-4530A flight-line test sets have been endorsed by the U.S. military and we have already delivered test sets into 18 international markets. The commercial avionics industry is undergoing a great deal of change and we believe our new hand-held products that we are planning to introduce within the next 12 months will generate increased market share at very attractive gross margin levels. We are also working closely with our military customers on new potential market opportunities that will be needed to maintain our sales and profitability growth.

Fiscal year 2016 highlights:

·  Revenues increased 59% for the first nine months of fiscal year 2016 as compared to the same period in the prior year.

·  Income from operations increased to $2.1 million for the first nine months of fiscal year 2016 as compared to a loss from operations of $305,483 for the same period in the prior year.

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 and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management.  Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof.  When used in the Filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements.  Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended March 31, 2016, filed with the SEC on June 29, 2016, 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

Management believes that the Company has built a very solid position in the Mode 5 IFF and TACAN test set market, and its existing contracts as well as the introduction of new products should result in solid revenues and profitability through fiscal year 2017. While our sales declined 8.6% to $5.3 million, our gross margin as a percentage of sales and in actual dollars increased as a result of the higher pricing on CRAFT and the shipment of the TS-4530A SETS which yield a higher gross profit than the TS-4530A Kits.  Gross margin percentage is expected to remain well below our historical 50% average for the current fiscal next year as most of the TS-4530A products and ITATS products were both bid competitively at tight margins. Revenues should benefit from the TS-4530A SET production, but TS-4530A KITS production as well as the ITATS program have, for the most part, been completed as of June 30, 2016. We continue to emphasize the importance of capturing the majority share of the large IFF international market which should generate revenues starting in the 2018 fiscal year timeframe, and we have been working with international partners to ensure that we are well-positioned in this market. We believe that we are well positioned as our CRAFT and TS-4530A flight-line test sets have been endorsed by the U.S. military and we have already delivered test sets into 18 international markets. Tel is starting to see a pick-up in international activity based on the January 1, 2020 deadline for Mode 5 compliance.  The commercial avionics industry is undergoing a great deal of change, and we believe our new hand-held products, that we are planning to introduce by the end of this fiscal year, will generate increased market share at attractive gross margin levels. We are also working closely with our military customers on new potential market opportunities that will be needed to maintain our sales and profitability growth.
In May 2016, BCA Mezzanine Fund LLP (“BCA”) exercised its “put option” wherein BCA is exercising its right to have the Company purchase the warrants for 236,920 shares from BCA (see Note 10 in Notes to Condensed Consolidated Financial Statements). The value of the warrants for the 236,920 shares of the Company’s common stock at the time of exercise was $720,000, and the Company is expected to pay this amount this calendar year using cash from operations. The warrant liability for these warrants was $720,000 at June 30, 2016 as compared to $938,203 at March 31, 2016.


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

Overview (continued)

·
$1.6 million improvement in net working capital to a $4.2 million since March 31, 2015.
Overview (continued)

·  Net income was $705,120 for the nine months ended December 31,On March 21, 2016, as compared to a net loss of $653,144 for the same period. Net income for the first nine months of fiscal year 2016 was negatively impacted by the change in the fair value of the warrants in the amount of $697,579.

·  
The Company received orders for an additional 61 CRAFT test sets from Lockheed Martin in the amount of $2.2 million. These units are to be used on the Joint Strike Fighter program (“JSF”) program. This brings total CRAFT orders for this program to $4.4 million.

·  Introduction of the TR-36 Navigation/Communication Test Set (the ‘TR-36”), representing our first new production introduction into the commercial market for the last 10 years. The TR-36 provides comprehensive ramp testing in a user-friendly, light weight high-precision instrument for rapid functional testing of VOR, LOC/GS, MB, and VHF COMM (AM/FM), ELT and EPIRB avionic equipment all in a weather proof package with color display. We believe this product will be very competitive in this market.
·  Investment in new lightweight, hand held test set design for commercial and military customers that we hope will expand our product line and allow us to compete in this very large radio test set market.

·  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.

·  As developments of our major programs are complete, engineering efforts have been directed to new product development, and we have a few new products in the pipeline, in addition to the recently introduced TR-36.
In November 2014, the Company entered into a loanline of credit agreement with Bank of America, which expires March 31, 2017.  The line provides a bank for $1,200,000.revolving credit facility with borrowing capacity of up to $500,000. There are no covenants or borrowing base calculations associated with his line of credit. Interest on any outstanding balance is payable monthly at an annual interest rate equal to the LIBOR (London Interbank Offered Rates) Daily Floating plus 3.75 percentage points. The proceeds fromCompany’s interest rate was 4.96% at March 31, 2016.   The line is collateralized by substantially all of the loan were used to pay offassets of the Company.  The Company has not made any borrowings against this line of credit. As of June 30, 2016, the remaining balance ofavailability under this line is $500,000.

At June 30, 2016, the loan with BCA Mezzanine Fund L.P. (“BCA”) in the amount of $1,153,109, including accrued interest of $4,467.  The term of the loan is for 3 years and expires in November, 2017. Monthly payments areCompany’s backlog was $10.2 million as compared to $24.8 million at $36,551 including interest at 6%.June 30, 2015.

Based on existing backlog and recurring orders, existing cash, and the credit line from Bank of America, 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.

Results of Operations
 
Sales

For the three months ended December 31, 2015,June 30, 2016, sales increased $940,768 (18.7%decreased $503,550 (8.6%) to $5,970,865$5,342,369 as compared to $5,030,097$5,845,919 for the three months ended December 31, 2014.June 30, 2015.
 
Avionics government sales increased $1,203,296 (27.0%decreased $389,699 (7.4%) to $5,658,695$4,871,620 for the three months ended December 31, 2015June 30, 2016, as compared to $4,455,399$5,261,319 for the three months ended December 31, 2014.June 30, 2015. The increasedecrease in revenues is mostly attributed to the increasedecrease in shipmentsshipment of the AN/USM-708TS-4530A KITS, which contract has now been completed, and lower sales of PDME test set,sets partially offset by the shipment of the TS-4530A SETS and the AN/ARM-206 test set associated with the Company’s three major programs.SETS. Commercial sales decreased $262,528(45.7%$113,851(19.5%) to $312,170$470,749 for the three months ended December 31, 2015June 30, 2016 as compared to $574,698$584,600 for the three months ended December 31, 2014.June 30, 2015. This decrease is attributed to lower sales of the TR-220 as well as lower sales for calibration and repairs and spare parts.TR-220.
 
For the nine months ended December 31, 2015, sales increased $6,888,327 (58.6%) to $18,635,174 as compared to $11,746,847 for the nine months ended December 31, 2014.

Avionics government sales increased $7,245,916 (74.2%) to $17,248,766 for the nine months ended December 31, 2015 as compared to $10,002,850 for the nine months ended December 31, 2014. The increase in revenues is mostly attributed to the increase in shipments of the AN/USM-708 test set, TS-4530A KITS and SETS and the AN/ARM-206 test set associated with the Company’s three major programs. Commercial sales decreased $357,589 (20.5%) to $1,386,408 for the nine months ended December 31, 2015 as compared to $1,743,997 for the nine months ended December 31, 2014. This decrease is attributed to lower sales of the TR-220 as well as lower sales for calibration and repairs and spare parts. 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations (continued)

Gross Margin

Gross margin increased $488,970 (31.6%) and $2,558,170 (72.4%$61,358 (3.4%) to $2,034,757 and $6,093,518, respectively,$1,876,653 for the three and nine months ended December 31, 2015June 30, 2016 as compared to $1,545,787 and $3,535,348, respectively,$1,815,295 for the three and nine months ended DecemberJune 30, 2014.2015. This increase is mostly attributed to the increase in volume ofincreased prices on CRAFT offset partially by lower sales especially for the CRAFT, TS-4530A and ITATS programs. Gross margin was also favorably impacted by the increase in selling prices for the CRAFT program for the new orders.volume. The gross margin percentage for the three months ended DecemberJune 30, 20152016 was 34.1%35.1%, as compared to 30.7%31.1% for the three months ended December 31, 2014. The gross margin percentage for the nine months ended December 31, 2015 was 32.7%, as compared to 30.1% for the nine months ended December 31, 2014.June 30, 2015.
 
Operating Expenses

Selling, general and administrative expenses decreased $57,338 (6.9%increased $46,056 (5.3%) to $767,923$911,744 for the three months ended December 31, 2015,June 30, 2016, as compared to $825,261$865,688 for the three months ended December 31, 2014.June 30, 2015. This decreaseincrease was primarily attributed to a favorable settlement of an accrued liability and slightly lower litigation expenses mostly offset by higher accrued bonus compensation, salaries and related expenses, commissions and consulting fees. Legalthe increase in legal expenses associated with the Aeroflex Wichita, Inc. (“Aeroflex”) litigation partially offset by a decrease in other professional fees. Litigation expenses associated with the Aeroflex action were $150,289$143,714 for the three months ended December 31, 2015June 30, 2016 as compared to $180,755$70,372 for the same period last year.

Selling, general and administrative expenses increased $152,999 (6.5%) to $2,517,487 for the nine months ended December 31, 2015, as compared to $2,364,488 for the nine months ended December 31, 2014.This increase was primarily attributed to higher accrued bonus compensation, commissions, salaries and related expenses and consulting fees offset partially by favorable settlement of an accrued liability, and lower litigation expenses and professional fees. Legal expenses associated with the Aeroflex litigation were $328,441 for the nine months ended December 31, 2015 as compared to $401,279 for the same period last year.

Engineering, research and development expenses increased $46,781 (9.5%$92,745 (18.8%) and $947 to $541,502 and $1,477,290, respectively$584,877 for the three and nine months ended December 31, 2015June 30, 2016, as compared to $494,721 and $1,476,343, respectively,$492,132 for the three and nine months ended December 31, 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.June 30, 2015. The Company continues to invest in new products and introduced a new commercial Nav/Comm test set earlier this calendar year. We are making some modifications toalso upgrading this unit based on customer feedback and already have received orders for this new unit. This is a large and important market segment for the Company, and we are optimistic that this new product will help us regain market share in this segment. We are also taking advantage of our CRAFT and TS-4530A technology to develop smaller hand-held products in the next 12 months, which will broaden our product line for both commercial and military applications. We have added additional personnel to research and development activities to accelerate our time to market.

Income (Loss) Fromfrom Operations

As a result of the above, the Company recorded income from operations of $725,332 and $2,098,741, respectively,$380,032 for the three and nine months ended December 31, 2015,June 30, 2016, as compared to income from operations of $225,805$457,475 for the three months ended December 31, 2014 and a loss from operations of $305,483 for the nine months ended December 31, 2014.  June 30, 2015.  


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

Results of Operations (continued)

Other Income (Expense), Net

For the three months ended December 31, 2015,June 30, 2016, total other expenseincome was $271,795$198,021 as compared to other expenseincome of $217,930$36,769 for the three months ended December 31, 2014.June 30, 2015. This increase in other income is primarily due to the non-cash lossgain of $246,751$217,203 on the change in the valuation of common stock warrants for the three months ended December 31, 2015June 30, 2016 as compared to a gain of $37,330$67,760 in the valuation of common stock warrants in same period in the prior year. Interest expense declined as a result of the lower interest rate on the new loan and the lower outstanding loan balance. Amortizationbalance and repayment of deferred financing chargesloans to CEO and debt discount were lower as a resultthe spouse 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, 2015, total other expense was $780,807 as compared to other expense of $558,972 for the nine months ended December 31, 2014. This change is primarily due to the non-cash loss of $697,579 on the change in the valuation of common stock warrants for the nine months ended December 31, 2015 as compared to a loss of $68,750 in the valuation of common stock warrants in same period in the prior year. 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 nine month ended December 31, 2014.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operationsformer CEO.

Results of Operations (continued)

Income (Loss) before Income Taxes

As a result of the above, the Company recorded income before taxes of $453,537 and $1,317,934, respectively,$578,053 for the three and nine months ended December 31, 2015June 30, 2016, as compared to income before taxes of $7,875$494,244 for the three months ended December 31, 2014 and a loss before income taxes of $864,455 for the nine months ended December 31, 2014.June 30, 2015.

Income Tax Provision/Benefit

For the three and nine months ended December 31, 2015,June 30, 2016, the Company recorded income tax provisions of $226,951 and $612,816, respectively, as compared toan income tax provision of $28,819$167,744, as compared to an income tax provision of $215,178 for the three months ended December 31, 2014 and an income tax benefit of $211,311 for the nine months ended December 31, 2014.June 30, 2015. The Company recorded a provision for income taxes as a result of the Company recording a profit before taxes. It should be noted that as a result of the Company’s net operating loss carryforwards, it will not be paying significant taxes this year, and, as such, the provision for taxes represents a reduction of our deferred tax asset and not a liability to pay taxes.

Net Income (Loss)

As a result of the above, the Company recorded net income of $226,586 and $705,118, respectively,$410,309 for the three and nine months ended December 31, 2015June 30, 2016, as compared to net losses of $20,944 and $653,144$279,066 for the three and nine months ended December 31, 2014.June 30, 2015.

Liquidity and Capital Resources

At December 31, 2015,June 30, 2016, the Company had net working capital of $4,193,678$3,592,951 as compared to $2,599,117$4,043,639 at March 31, 2015.2016. This change is primarily the result of the reclassification of $720,000 of the warrant liability to current assets due to the scheduled payment this calendar year, the increase in deferred revenues and the decrease in cash and inventories offset partially by the increase in accounts receivable and other current assets and the large decrease in accounts payable and accrued liabilities partially offset by the decrease in accounts receivable.liabilities.

During the ninethree months ended December 31, 2015,June 30, 2016, the Company’s cash balance increaseddecreased by $443,121$560,063 to $629,053.$412,570.  The Company’s principal sources and uses of funds were as follows:

Cash provided by operating activities. For the ninethree months ended December 31, 2015,June 30, 2016, the Company provided $978,447used $401,230 in cash for operations as compared to providing $473,862$96,608 in cash for operations for the ninethree months ended December 31, 2014.June 30, 2015.  This increasedecrease in cash from operations is the result of the improvement in income from operations, lower payments of progress billings offset partially by an increase in accounts receivable and other assets, lower operating income and decrease in accounts payable and accrued expenses as well as aoffset partially by the increase in deferred revenues and decrease in the Company’s deferred tax asset.inventories.

Cash used in investing activities.  For the ninethree months ended December 31, 2015,June 30, 2016, the Company used $45,041$25,307 of its cash for investing activities, as compared to $8,541$5,873 for the ninethree months ended December 31, 2014June 30, 2015 as a result of an increasea decrease in the purchase of capital equipment.
 
Cash used in financing activities. For the ninethree months ended December 31, 2015,June 30, 2016, the Company used $490,285$133,526 in financing activities as compared to using $365,448$98,644 for the ninethree months ended December 31, 2014June 30, 2015 primarily as a result of lower capital lease obligations. The Company paidpaying down $205,000the remaining balance of itsthe subordinated notes to related parties. Repayments of long-term debt decreased as a result of the refinancing with Bank of America in November 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 in the amount of $1,153,109, including accrued interest of $4,467.  The term of the loan is for 3 years and expiresmatures in November 2017. Monthly payments are at $36,551 including interest at 6%.


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

On March 21, 2016, the Company entered into a line of credit agreement with Bank of America, which matures on March 31, 2017.  The line provides a revolving credit facility with borrowing capacity of up to $500,000. There are no covenants or borrowing base calculations associated with this line of credit. Interest on any outstanding balance is payable monthly at an annual interest rate equal to the LIBOR (London Interbank Offered Rates) Daily Floating plus 3.75 percentage points. The Company’s interest rate was 4.96% at March 31, 2016.   The line is collateralized by substantially all of the assets of the Company.  The Company has not made any borrowings against this line of credit. As of June 30, 2016, the remaining availability under this line is $500,000.

In May 2016, BCA Mezzanine Fund LLP (“BCA”) exercised its “put option” wherein BCA is exercising its right to have the Company purchase the warrants for 236,920 shares from BCA (see Notes 10 in Notes to Condensed Consolidated Financial Statements). The value of the warrants for the 236,920 shares of the Company’s common stock at the time of exercise was $720,000, and the Company is expected to pay this amount this calendar year. The Company intends to pay this amount from cash from operations. The warrant liability for these warrants was $720,000 at June 30, 2016 as compared to $938,203 at March 31, 2016.

Based on existing backlog and expected production releases,recurring orders, existing cash, and the credit line from Bank of America, 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.

There was no significant impact on the Company’s operations as a result of inflation for the ninethree months ended December 31, 2015.June 30, 2016.

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, 2015,2016, filed with the SEC on June 25, 201529, 2016 (the “Annual Report”).

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

Off-Balance Sheet Arrangements

As of December 31, 2015,June 30, 2016, the Company had no material 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 20152016 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's Chief Executive OfficerCompany, including its principal executive officer and the Company's Principal Financial Officer have evaluatedprincipal financial officer, conducted an evaluation of the effectiveness of the Company'sdesign and operation of its disclosure controls and procedures, (asas defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act)Act of 1934 (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q.report (the “Evaluation Date”). Based upon suchthe evaluation, the Chief Executive Officerour principal executive officer and Principal Financial Officerprincipal financial officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company'sEvaluation Date that our disclosure controls and procedures were not effective aseffective. Disclosure controls are controls and procedures designed to reasonably ensure that information required under Rules 13a-15(e) and 15d-15(e)to be disclosed in our reports filed under the Exchange Act, such as a result ofthis report, is recorded, processed, summarized and reported within the material weaknesstime periods specified in the Company’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 implementSEC’s rules and demonstrate the effectiveness of the remediation efforts. The Company is committed to designing, implementing and operating effectiveforms. Disclosure controls and 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 disclosureinclude controls and procedures designed to reasonably ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as 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 omitappropriate to state 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 condensed consolidated financial statements, and other financial information, included 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 cash flows as of, and for, the dates and periods presented.allow timely decisions regarding required disclosure.
 
Changes in Internal Control over Financial Reporting
 
The Company, is taking actions to remediateincluding its principal executive officer and principal accounting officer, reviewed the material weakness related to itsCompany’s internal control over financial reporting, as described above. Other thanpursuant to Rule 13(a)-15(e) under the changes disclosed above,Exchange Act and concluded that there werewas no material changeschange in ourthe Company’s 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 period covered by this Quarterly Report on Form 10-QCompany’s most recently completed fiscal quarter that havehas materially affected, or areis reasonably likely to materially affect, ourthe Company’s internal control over financial 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 the Award, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the U.S. Army Contracts Attorney and the U.S. Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed 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.

On May 23, 2016, the Company filed a motion for summary judgment based on Aeroflex’s lack of jurisdictional standing to bring the case. The motion asserts that Aeroflex does not own the intellectual property at issue since it is a bare licensee of Northrop Grumman. Northrop Grumman had declined to join this suit as a plaintiff. As such, it is our contention that Aeroflex lacks standing to sue alone. Also, the motion raises the fact that in December 2011 Aeroflex allowed the license to expire, so that Aeroflex’s claims are either moot or it lacks standing to sue for damages allegedly accruing after the license ended. The Company believes we have a solid legal position and expect that this action will be heard August 31, 201525, 2016.  The June 2, 2016 Amended Supplemental Modified Scheduling Order has the trial date set for October 24, 2016February 13, 2017 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.

Other than the matters outlined above, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of executive officers of our Company, threatened against or affecting our Company, or our common stock in which an adverse decision could have a material effect.

Item 1A.  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, 2015,2016, filed with the SEC on June 25, 2015.29, 2016.

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, 2015June 30, 2016 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.
 
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Item 6.  Exhibits.
 
Item 6.  Exhibits.
Exhibit No. 
Description
   
31.1 
   
31.2 
   
32.1 
   
32.2 
   
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 16,August 18, 2016 By: /s/ Jeffrey C. O’Hara 
   Name: Jeffrey C. O’Hara 
   
Title:   Chief Executive Officer
            Principal Executive Officer
 

     
Date: February 16,August 18, 2016 By: /s/ Joseph P. Macaluso 
   Name: Joseph P. Macaluso 
   
Title:   Principal Financial Officer
            Principal Accounting Officer
 
 
 
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