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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 

 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2011

Commission File No. 33-18978

TEL-INSTRUMENT ELECTRONICS CORP
(Exact name of Registrant as specified in its charter)
 
 
New Jersey
22-1441806
 
 
(State of incorporation)
(IRS Employer Identification Number)  
       
       
 
728 Garden Street Carlstadt, New  Jersey
07072
 
 
(Address of principal executive offices)
(Zip Code)
 
       
 
Registrant's telephone number, including area code:   (201) 933-1600
 
 
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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x
 
 
(Do not check if a smaller reporting company)
 
 
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 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 x     No o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Act).  Yes o   No x
 
Indicate the number of shares outstanding of the issuer's common stock, as of the latest practical date:   2,648,215 shares of Common stock, $.10 par value as of August 17, 2011.
 
 
 
TEL-INSTRUMENT ELECTRONICS CORPORATION
TABLE OF CONTENTS

   
PAGE
     
Part I – Financial Information
 
     
Item 1.
3
 
   
 
3
 
4
 
5
 
6
     
Item 2.
15
     
Item 4.
21
     
Part II – Other Information
 
     
Item 1.
22
     
Item 2.
22
     
Item 6.
22
     
23

 
Item 1.            Financial Statements
 
 
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
June 30, 2011
   
March 31, 2011
 
   
(unaudited)
       
ASSETS
           
             
Current assets:
           
   Cash and cash equivalents
  $ 715,323       123,955  
Accounts receivable, net
    1,714,744       2,585,619  
Unbilled government receivables
    1,466,623       1,466,623  
Inventories, net
    2,520,492       2,970,378  
Prepaid expenses and other
    101,241       70,970  
Deferred debt expense
    108,321       108,321  
Deferred income tax asset
    1,105,802       1,131,175  
Total current assets
    7,732,546       8,457,041  
                 
Equipment and leasehold improvements, net
    300,813       330,694  
Deferred debt expenses – long-term
    346,025       373,105  
Deferred income tax asset – non-current
    1,461,664       1,461,664  
Other assets
    52,886       35,235  
Total assets
  $ 9,893,934     $ 10,657,739  
                 
LIABILITIES & STOCKHOLDERS’ EQUITY
               
                 
Current liabilities:
               
Current portion long-term debt
    367,859       282,798  
Capital lease obligations
    7,353       15,685  
Accounts payable
    730,260       1,598,679  
Progress billings
    -       424,202  
Deferred revenues – current portion
    18,450       28,382  
Accrued payroll, vacation pay and payroll taxes
    444,357       445,738  
Accrued expenses
    1,451,387       1,287,034  
Total current liabilities
    3,019,666       4,082,518  
                 
  Subordinated notes payable-related parties, net of debt discount
    250,000       250,000  
  Deferred revenues
    12,037       15,381  
  Warranty Liability
    534,723       366,137  
  Long-term debt, net of debt discount
    1,907,449       1,979,114  
Total liabilities
    5,723,875       6,693,150  
                 
Commitments
               
                 
Stockholders' equity:
               
   Common stock, par value $.10 per share, 2,648,215 and
          2,646,215 issued and outstanding as of June 30,
          2011 and March 31, 2011, respectively
      264,821         264,621  
   Additional paid-in capital
    5,740,952       5,711,531  
   Accumulated deficit
    (1,835,714 )     (2,011,563 )
Total stockholders' equity
    4,170,059       3,964,589  
Total liabilities and stockholders' equity
  $ 9,893,934     $ 10,657,739  
 
See accompanying notes to condensed consolidated financial statements.
 
 
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
   
Three Months Ended
 
   
June 30, 2011
   
June 30, 2010
 
             
Net sales
  $ 3,990,211     $ 2,455,280  
Cost of sales
    2,128,580       1,372,900  
                 
Gross margin
    1,861,631       1,082,380  
                 
Operating expenses:
               
  Selling, general and administrative
    798,822       758,044  
  Engineering, research and development
    849,038       757,346  
Total operating expenses
    1,647,860       1,515,390  
                 
Income (loss) from operations
    213,771       (433,010 )
                 
Other income (expense):
               
  Amortization of debt discount
    (13,395 )     (5,769 )
  Amortization of debt expense
    (27,080 )     -  
  Change in fair value of common stock warrants
    (168,586 )     -  
  Gain on sale of capital asset
    -       3,600  
  Proceeds from life insurance policy
    300,029       -  
  Interest income
    93       47  
  Interest expense
    (102,694 )     (23,505 )
                 
Income (loss) before income taxes
    202,138       (458,637 )
                 
Income tax provision (benefit)
    26,289       (183,225 )
                 
Net Income (loss)
  $ 175,849     $ (275,412 )
                 
Net Income (loss) per share:
               
   Basic income (loss) per common share
  $ 0.07     $ (0.11 )
   Diluted income (loss) per common share
  $ 0.06     $ (0.11 )
                 
Weighted average shares outstanding:
               
   Basic
    2,647,138       2,615,625  
   Diluted
    2,731,749       2,615,625  
 
See accompanying notes to condensed consolidated financial statements.
 
 
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Three Months ended
 
   
June 30, 2011June 30, 2010
 
       
Cash flows from operating activities:
           
Net income (loss)
  $ 175,849     $ (275,412 )
Adjustments to reconcile net loss to net
    cash used in operating activities:
               
       Deferred income taxes
    25,373       (185,940 )
       Depreciation and amortization
    56,961       42,310  
       Provision for inventory obsolescence
    10,000       -  
       Gain on sale of asset
    -       (3,600 )
       Amortization of debt discount
    13,396       5,769  
       Increase in cash surrender value of life insurance
    2,011       -  
       Gain on proceeds from life insurance policy
    (300,029 )     -  
       Change in fair value of common stock warrant
    168,586       -  
       Non-cash stock-based compensation
    24,231       23,665  
                 
Changes in assets and liabilities:
               
    Decrease in accounts receivable
    870,875       96,358  
    Decrease (increase) in inventories
    439,886       (119,697 )
    Increase in prepaid expenses & other
    (3,569 )     (2,789 )
    Increase in other assets
    (32,316 )     (20,278 )
    Decrease in accounts payable
    (868,419 )     (12,501 )
   (Decrease) increase in accrued payroll, vacation pay and payroll taxes
    (1,381 )      65,486  
    Decrease in deferred revenues
    (13,276 )     (22,378 )
   (Decrease) increase in progress billings
    (424,202 )     450,694  
    Increase (decrease) in accrued expenses
    164,353       (133,095 )
Net cash provided by (used in) operating activities
    308,329       (91,408 )
                 
Cash flows from investing activities:
               
    Proceeds from the sale of capital asset
    -       3,600  
    Purchases of equipment
     -       (86,801 )
Net cash used in investing activities
     -       (83,201 )
                 
Cash flows from financing activities:
               
    Proceeds from the exercise of stock options
    5,390       6,075  
    Repayment of capitalized lease obligations
    (8,332 )     -  
    Proceeds from borrowings from line of credit
    -       150,000  
    Proceeds from life insurance policy
    285,981       -  
Net cash provided by financing activities
    283,039       156,075  
                 
Net increase (decrease) in cash and cash equivalents
    591,368       (18,534 )
Cash and cash equivalents at beginning of period
    123,955       173,048  
Cash and cash equivalents at end of period
  $ 715,323     $ 154,514  
                 
Taxes paid
  $  -     $  -  
Interest paid
  $  87,192     $  9,269  
 
See accompanying notes to condensed consolidated financial statements.
 
 
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. as of June 30, 2011, the results of operations for the three months ended June 30, 2011 and June 30, 2010, and statements of cash flows for the three months ended June 30, 2011 and June 30, 2010.  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, 2011 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, 2011.

Note 2                     Revenue Recognition – Percentage-of-Completion – ITATS (“Intermediate Level TACAN Test Set”) (AN/ARM-206)

Due to the unique nature of the ITATS program, wherein a significant portion of this contract will not be delivered for over a year, revenues under this contract are recognized on a percentage-of-completion basis, which recognizes sales and profit as they are earned, rather than at the time of shipment. Revenues and profits are estimated using the cost-to-cost method of accounting where revenues are recognized and profits recorded based upon the ratio of costs incurred to estimate of total costs at completion. The ratio of costs incurred to date to the estimate of total costs at completion is applied to the contract value to determine the revenues and profits. When adjustments in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized by recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods. The Company also receives progress billings on this program, which is a funding mechanism by the government to assist contractors on long-term contracts prior to delivery. In July 2011, the Company secured a $599k contract modification from the U.S. Navy to incorporate product enhancements to the ITATS AN/ARM-206 TACAN test set resulting from Navy technical evaluation testing. These changes, and the required product verification testing, are expected to take an estimated nine to 12 months to complete. This additional funding will not have a material bottom line impact as most of the engineering work for this contract will be sub-contracted to DRS Sustainment Systems located in St. Louis. Production deliveries of the 102 ITATS units are now expected to begin in the middle of the next calendar year.  (See Critical Accounting Policies – Revenue Recognition). These progress payments are applied to Unbilled Government Receivables resulting from revenues recognized under percentage-of-completion accounting.

Note 3                     Accounts Receivable, net

The following table sets forth the components of accounts receivable:
 
   
June 30, 2011
   
March 31, 2011
 
Government
  $ 1,281,152     $ 2,344,438  
Commercial
    470,262       277,851  
Less: Allowance for doubtful accounts
    (36,670 )     (36,670 )
    $ 1,714,744     $ 2,585,619  
 
 
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 4                     Inventories, net

Inventories consist of:
 
   
June 30, 2011
   
March 31, 2011
 
             
Purchased parts
  $ 1,693,513     $ 2,119,957  
Work-in-process
    1,224,968       1,184,812  
Finished goods
    57,011       110,609  
Less: Inventory reserve
    (455,000 )     (445,000 )
                 
    $ 2,520,492     $ 2,970,378  

Note 5                      Earnings (Loss) Per Share

Financial Accounting Standards Board (“FASB”) ASC 260 requires presentation of basic earnings per share ("basic EPS") and diluted earnings per share ("diluted EPS").

The Company’s basic income (loss) per common share is based on net income (loss) for the relevant period, divided by the weighted average number of common shares outstanding during the period.  Diluted income (loss) per common share is based on net income (loss), divided by the weighted average number of common shares outstanding during the period, including common share equivalents, such as outstanding stock options. Diluted loss per share for the period ended June 30, 2010 does not include common stock equivalents, as these stock equivalents would be anti-dilutive.

   
Three Months Ended
   
Three Months Ended
 
   
June 30, 2011
   
June 30, 2010
 
Basic net loss per share computation:
           
   Net Income (loss) attributable to common stockholders
  $ $175,849     $ (275,412 )
   Weighted-average common shares outstanding
    2,647,138       2,615,625  
   Basic net income (loss) per share attributable to common stockholders
  $ 0.07     $ (0.11 )
Diluted net loss per share computation
               
   Net Income (loss) attributable to common stockholders
  $ $175,849     $ (275,412 )
   Weighted-average common shares outstanding
    2,647,138       2,615,625  
   Incremental shares attributable to the assumed exercise of outstanding stock options
    84,611       -  
   Total adjusted weighted-average shares
    2,731,749       2,615,625  
   Diluted net income (loss) per share attributable to common stockholders
  $ 0.06     $ (0.11 )
 
 
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 6                      Long-Term Debt

In September 2010 the Company entered into an agreement with BCA Mezzanine Fund LLP (“BCA”) to loan the Company $2.5 million in the form of a Promissory Note (“the “Note”). The Company incurred expenses of $541,604 in connection with this loan, including legal fees, investment banking fees and other transaction fees. These expenses are included as deferred debt expense in the accompanying balance sheet, and these expenses will be amortized over the term of the loan. The features of the note are as follows:

The features of the note are as follows:
 
 
1.
The Note has a term of five (5) years with an annual interest rate of 14% on the outstanding principal amount. Payments for the first year are interest only and amount to $28,762 monthly and after the first year the Company will make monthly payments of approximately $69,000 for the remaining term of the loan.
2.
The Company issued BCA a nine-year warrant for 136,090 shares, based upon 4.5% of the fully –diluted outstanding shares of the Company’s common stock at $6.70 per share, the average closing price over the three days preceding the loan closing on the NYSE-Amex Exchange. In the event of specific major corporate events or the maturity of the five-year loan, BCA can require the Company to purchase the warrant and warrant shares at the higher of the then Exchange market price less the share exercise price, in the case of the warrant, or five times operating income per share. In connection with the warrant issued in conjunction with this debt, the Company recorded a debt discount (see above) and warrant liability, which is being marked to fair value at the end of each period (see Note 10 to Notes to the Condensed Consolidated Financial Statements). The debt discount is to be amortized over the life of the loan
3.
Loan provisions also contain customary representations and warranties.
4.
BCA has a lien on all of the Company’s assets. In February 2011, BCA agreed to release part of its lien on Company assets to the U.S. Government to allow for progress billings up to $1,000,000.
5.
The Company may prepay a portion of the principal amount provided that (i) any such prepayment shall be applied in the inverse order of the maturity of the principal amount of the Note, (ii) the Company shall pay to BCA an additional amount equal to (A) 3% of the outstanding principal amount being prepaid if such prepayment is made during the first loan year, and (B) 2% of the outstanding principal amount then being prepaid if such prepayment is being made during the second loan year. Each payment must be not less than $25,000 or multiples of $25,000 in excess thereof.
6.
Upon the occurrence of a Change of Control or within five (5) Business Days of an O’Hara Life Insurance Realization Event, the Company shall, in each case at the election of BCA, prepay by wire transfer the entire outstanding principal amount of the Note in accordance with the redemption prices (the “Mandatory Redemption Prices”) set forth below (expressed as a percentage of the outstanding principal amount being prepaid and shall pay 103% in the first loan year, 102% in the second loan year, and 100% thereafter), together with (x) Interest, if any, accrued and unpaid on the outstanding principal amount of the Note so prepaid through the date of such prepayment, (y) all reasonable out-of-pocket costs and expenses (including reasonable fees, charges and disbursements of counsel), if any, associated with such prepayment, and (z) all other costs, expenses and indemnities then payable under this Agreement (such amounts, collectively the “Mandatory Redemption Payment”). If a Change of Control or O’Hara Life Insurance Realization Event shall occur during any Loan Year set forth below, the Mandatory Redemption Price shall be determined based upon the percentage indicated above for such Loan Year multiplied by the principal amount which is being prepaid. At the election of BCA, all or any portion of the Mandatory Redemption Payment may be paid in the form of Marketable Securities in lieu of cash and to the extent available and to the extent not restricted by any SBIC Regulations. In the event BCA makes the election contemplated by the immediately preceding sentence, the Issuer shall issue to Purchaser that number of shares having an aggregate Current Market Price as of such issuance date equal to that portion of the Mandatory Redemption Payment subject to such election.
7.
The senior notes contain a number of affirmative and negative covenants which could restrict our operations. We were in compliance with all of our covenants as of June 30, 2011.
8.
The Company and BCA have amended certain provisions to ease some restrictions.
 
 
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 7                     Stock Options

The Company adopted the FASB ASC 718, utilizing the modified prospective method. FASB ASC 718 requires the measurement of stock-based compensation based on the fair value of the award on the date of grant. Under the modified prospective method, the provisions of ASC 718 apply to all awards granted after the date of adoption. The Company recognizes compensation cost on awards on a straight-line basis over the vesting period, typically four years. As a result of adopting ASC 718, operations was charged $24,231 and $23,665 for three months ended June 30, 2011 and 2010, respectively. The Company estimates the fair value of each option using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield of 0.0%, risk-free interest rate of 1.98% to 2.31%, volatility at 40.74% to 40.76% of the Company’s stock, and an expected life of 5 years for options granted for the three months ended June 30, 2010. The Company did not grant any stock options for the three months ended June 30, 2011.  The Company estimates forfeiture rate based on historical data. Based on an analysis of historical information, the Company has applied a forfeiture rate of 8%.

Note 8                      Segment Information

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

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

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

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

Note 8                      Segment Information (continued)

The table below presents information about reportable segments within the avionics business for the periods ending June 30, 2011 and 2010:

   
Avionics
   
Avionics
   
Avionics
   
Corporate
       
Three Months Ended June 30, 2011
 
Gov’t
   
Comm’l.
   
Total
   
Items
    Total  
Net sales
    3,145,592       844,619       3,990,211       -       3,990,211  
Cost of Sales
    1,674,813       453,767       2,128,580       -       2,128,580  
                                         
Gross Margin
    1,470,779       390,852       1,861,631       -       1,861,631  
                                         
Engineering, research, and   development
                    849,038               849,038  
Selling, general, and admin.
                    361,816       437,006       798,822  
Amortization of debt discount
                    -       13,395       13,395  
Amortization of debt expense
                    -       27,080       27,080  
Change in fair value of   common stock warrants
                    -       168,586       168,586  
Proceeds from life insurance
                    -       (300,029 )     (300,029 )
Interest (income) expense, net
                    -       102,601       102,601  
Total expenses
                    1,210,854       448,639       1,659,493  
                                         
Income (loss) before income   taxes
                  $ 650,777     $ (448,639 )   $ 202,138  
 
 
                               
   
Avionics
   
Avionics
   
Avionics
   
Corporate
       
Three Months Ended June 30, 2010  
Gov’t
   
Comm’l.
   
Total
   
Items
   
Total
 
Net sales
    1,848,473     $ 606,807     $ 2,455,280     $ -     $ 2,455,280  
Cost of Sales
    940,672       432,228       1,372,900       -       1,372,900  
                                         
Gross Margin
    907,801       174,579       1,082,380       -       1,082,380  
                                         
Engineering, research, and development
                    757,346       -       757,346  
Selling, general, and admin.
                    348,095       409,949       758,044  
Gain on sale of asset
                            (3,600 )     (3,600 )
Interest (income) expense,net
                            29,227       29,227  
Total expenses
                    1,105,441       435,576       1,541,017  
                                         
Income (loss) before income   taxes
                  $ (23,061 )   $ (435,576 )   $ (458,637 )
 

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

Note 9                      Income Taxes

The Company adopted FASB ASC 740-10, Accounting for Uncertainty in Income Taxes, effective April 1, 2007. 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 June 30, 2011 and March 31, 2011 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. (See Critical Accounting Policies)

Note 10           Fair Value Measurements

FASB ASC 820-10, Fair Value Measurements and Disclosures 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 observability 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.
 
 
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 10           Fair Value Measurements (continued)
 
The valuation techniques that may be used to measure fair value are as follows:
 
Market approach — Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities
 
Income approach — Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method
 
Cost approach — Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost)
 
The carrying value of the Company’s borrowings is a reasonable estimate of its fair value as borrowings under the Company’s credit facility reflect currently available terms and conditions for similar debt.
 
The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of June 30, 2011 and March 31, 2011. As required by FASB ASC 820-10, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

June 30, 2011
 
Level I
   
Level II
   
Level III
   
Total
 
Total Assets
  $ -     $ -     $ -     $ -  
                                 
Warrant liability
    -       -       534,723       534,723  
Total Liabilities
  $ -     $ -     $ 534,723     $ 534,723  

March 31, 2011
 
Level I
   
Level II
   
Level III
   
Total
 
Total Assets
  $ -     $ -     $ --     $ -  
                                 
Warrant liability
    -       -       366,137       366,137  
Total Liabilities
  $ -     $ -     $ 366,137     $ 366,137  
 
 
 
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 10           Fair Value Measurements (continued

The Company adopted the guidance of ASC 815, which requires that we mark the value of our warrant liability (see Note 6) to market and recognize the change in valuation in our statement of operations each reporting period. Determining the warrant liability to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant. The fair value of the warrant is calculated using the Black-Scholes valuation model.
 
The common stock warrant was not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign corporation. The warrants do not qualify for hedge accounting, and, as such, all changes in the fair value of these warrants are recognized as other income/expense in the statement of operations until such time as the warrants are exercised or expire. Since these common stock warrants do not trade in an active securities market, the Company recognizes a warrant liability and estimates the fair value of these warrants using the Black-Scholes options model using the following assumptions:

   
At Inception
   
March 31, 2011
   
June 30, 2011
 
                   
Risk free interest rate
    2.81 %     3.47 %     3.18 %
Expected life in years
    9       8.45       8.2  
Expected volatility
    28.51 %     29.11 %     39.74 %
Fair market value per share
  $ 6.70     $ 7.63     $ 9.00  
Exercise price
  $ 6.70     $ 6.70     $ 6.70  
Warrant Liability
  $ 281,656     $ 366,137     $ 534,723  
 
The volatility calculation was based on the 18 months for the Company’s stock price prior to the measurement date, utilizing January 1, 2010 as the initial period, as the Company believes that this is the best indicator of future performance, and the source of the risk free interest rate is the US Treasury rate related to 10 year notes. The exercise price is per the agreement, the fair market value is the closing price of our stock on the date of measurement, and the expected life is based on management’s current estimate of when the warrants will be exercised. All inputs to the Black-Scholes options model are evaluated each reporting period.
 
 
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

 
Note 11           Reclassifications
 
Certain prior year and period amounts have been reclassified to conform to the current period presentation.
 

Note 12           Litigation
 
On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court, Sedgwick County, Kansas, Case No. 09 CV 1141 (the “Aeroflex Action”), alleging that the Company and its two employees misappropriated Aeroflex’s proprietary technology in connection with the Company winning a substantial contract from the U.S. Army (the “Award”), to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5. Aeroflex’s petition alleges that in connection with the award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortuously interfered with its business relationship; conspired to harm Aeroflex and tortuously interfered with its contract and seeks injunctive relief and damages. The crux of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology in winning the Award.
 
In February 2009, subsequent to the Award to the Company, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the Army Contracts Attorney and the 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 court dismissed the Aeroflex civil suit against the Company. While this decision was based on jurisdictional issues, the ruling did note that Aeroflex, after discovery proceedings, did not provide any evidence that Tel or its employees misappropriated Aeroflex trade secrets. The Kansas ruling also referenced the Army’s findings, in its response to the General Accountability Office (“GAO”), which rejected Aeroflex’s claims and determined that Tel used its own proprietary technology on this program. Aeroflex has elected to appeal this Kansas decision and has agreed to stay any action against the two former employees until a decision is reached. The appeal was argued in the Kansas Supreme Court in January 2011 and the Company does not anticipate a decision for some time. Tel remains confident as to the outcome of this appeal and any potential follow-on litigation. An estimate of possible loss, if any cannot be made in view of, among other things, the Army findings and the decision of the Kansas Court, discussed above, as well as the fact that there has not yet been discovery of the merits of the claims and defenses.

Note 13           New Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-04, guidance to improve consistency in application of existing fair value measurement and disclosure requirements.  The standard is intended to clarify the application of the requirements, not to establish valuation standards or affect valuation practices outside of financial reporting.  The guidance is effective for interim and annual periods beginning on or after December 15, 2011, with early adoption prohibited.  
In June 2011, the FASB issued ASU 2011-05, guidance to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  The standard eliminates the current option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The amendment does not affect how earnings per share is calculated or presented.  The guidance is effective for interim and annual periods beginning after December 15, 2011.  Early adoption is permitted. The Company currently does not have other comprehensive income. Should the company have other comprehensive income in the future, we will determine if we will present it on a single continuous statement of comprehensive income or in two separate but consecutive statements.

With the exception of the pronouncements noted above, no other accounting standards or interpretations issued or recently adopted are expected to have a material impact on the Company’s financial position, operations or cash flows.

 
Item 2.             MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Forward Looking Statements

A number of the statements made by the Company in this report may be regarded as “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include, among others, statements concerning the Company’s outlook, pricing trends and forces within the industry, the completion dates of capital projects, expected sales growth, cost reduction strategies and their results, long-term goals of the Company and other statements of expectations, beliefs, including statements regarding litigation and utilization of deferred tax assets, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.

All predictions as to future results contain a measure of uncertainty and accordingly, actual results could differ materially.  Among the factors that could cause a difference are:  changes in the general economy; changes in demand for the Company’s products or in the cost and availability of its raw materials; the actions of its competitors; the success of our customers; technological change; changes in employee relations; government regulations; litigation, including its inherent uncertainty; difficulties in plant operations and materials; transportation, environmental matters; and other unforeseen circumstances.  A number of these factors are discussed in the Company’s filings with the Securities and Exchange Commission.
 
Critical Accounting Policies

In preparing the financial statements and accounting for the underlying transactions and balances, the Company applies its accounting policies as disclosed in Note 2 of our Notes to Financial Statements included in our Form 10-K.  The Company’s accounting policies that require a higher degree of judgment and complexity used in the preparation of financial statements include:

Revenue recognition – revenues are recognized at the time of shipment to, or acceptance by customer provided title and risk of loss is transferred to the customer.  Provisions, when appropriate, are made where the right to return exists.  In certain instances, the Company may offer the unit on trial basis. The Company does not recognize revenue until the unit has been accepted. The Company only offers product on a trial basis in rare instances, and no provision has been made at June 30, 2011 and March 31, 2011.
 
Revenues on repairs and calibrations are recognized at the time the repaired or calibrated unit is shipped, as it is at the time that the work is completed.
 
Due to the unique nature of the ITATS program wherein a significant portion of this contract will not be delivered for over a year, revenues under this contract have been recognized on a percentage-of-completion basis, which recognizes sales and profit as they are earned, rather than at the time of shipment.  Revenues and profits are estimated using the cost-to-cost method of accounting where revenues are recognized and profits recorded based upon the ratio of costs incurred to date to our estimate of total costs at completion. The ratio of costs incurred to our estimate of total costs at completion is applied to the contract value to determine the revenues and profits. When adjustments in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized by recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods. The Company also receives progress billings on this program, which is a funding mechanism by the government to assist contractors on long-term contracts prior to delivery. In July 2011, the Company secured a $599k contract modification from the U.S. Navy to incorporate product enhancements to the ITATS AN/ARM-206 TACAN test set resulting from Navy technical evaluation testing. These changes, and the required product verification testing, are expected to take an estimated nine to 12 months to complete. This additional funding will not have a material bottom line impact as most of the engineering work for this contract will be sub-contracted to DRS Sustainment Systems located in St. Louis. Production deliveries of the 102 ITATS units are now expected to begin in the middle of the next calendar year.
 
 
Shipping and handling costs charged to customers are classified as revenue, and the shipping and handling costs incurred are included in cost of goods sold.
 
Payments received prior to the delivery of units or services performed are recorded as deferred revenues

Inventory reserves – inventory reserves or write-downs are estimated for excess, slow-moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. These estimates are based on current assessments about future demands, market conditions and related management initiatives.  If market conditions and actual demands are less favorable than those projected by management, additional inventory write-downs may be required. While such estimates have historically been within our expectation and the provision established, the Company cannot guarantee that its estimates will continue to be within the provision established.

Accounts receivable - the Company performs ongoing credit evaluations of its customers and adjusts credit limits based on customer payment and current credit worthiness, as determined by review of their current credit information.  The Company continuously monitors credits and payments from its customers and maintains provision for estimated credit losses based on its historical experience and any specific customer issues that have been identified. While such credit losses have historically been within our expectation and the provision established, the Company cannot guarantee that its estimates will continue to be within the provision established.

Warranty reserves – warranty reserves are based upon historical rates and specific items that are identifiable and can be estimated at time of sale.  While warranty costs have historically been within expectations and the provisions established, future warranty costs could be in excess of the Company’s warranty reserves.  A significant increase in these costs could adversely affect the Company’s operating results for the period and the periods these additional costs materialize.  Warranty reserves are adjusted from time to time when actual warranty claim experience differs from estimates.

Income taxes - deferred tax assets arise from a variety of sources, the most significant being: a) tax losses that can be carried forward to be utilized against profits in future years; b) expenses recognized in the books but disallowed in the tax return until the associated cash flow occurs; and c) valuation changes of assets which need to be tax effected for book purposes but are taxable only when the valuation change is realized. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when such differences are expected to reverse.  The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefit which is not more likely than not to be realized. In assessing the need for a valuation allowance, future taxable income is estimated, in order to determine the amount of realization of tax loss carryforwards. Valuation allowances related to deferred tax assets can also be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels.
 
In the event it is determined that the Company would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such recorded amounts through a charge to income in the period in which that determination is made. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through an increase to income in the period in which that determination is made.  In its evaluation of a valuation allowance the Company takes into account existing contracts and backlog, and the probability that options under these contract awards will be exercised as well as sales of existing products. The Company prepares profit projections based on the revenue and expenses forecast to determine that such revenues will produce sufficient taxable income to realize the deferred tax assets.
 
All projections contain a measure of uncertainty and accordingly, actual results could differ materially.  As in the case of many development projects, there can be delays which can cause expected revenues to be delayed, and additional expenses to be incurred. Our revenue projections were based upon the contract award, which includes the number of units which are expected to be delivered, and our expectation for the completion of the development and production start-up.
 
 
Our projections were largely predicated upon the receipt of timely production orders for the CRAFT 708 based on contractual requirements from our U.S. Navy customer and prior experience with U.S. Navy developmental contracts. The delivery of these units and the associated revenues were delayed due in large part to an extended Navy technical evaluation process that did not successfully conclude until April 2011. The CRAFT 708 is testing new technology and incorporated many functions which were never combined together, and, as such, the duration of the testing and Navy technical evaluation (which is outside the Company’s control) took much longer than prior programs. It is as a result of these delays that the Company incurred losses and the increase in the deferred asset. The Company has successfully completed technical evaluation and has received a production order for $16.2 million. The Company believes, although no assurance can be given, that with this order in combination with existing business and the completion and delivery of units for the TS-4530A program that it will be able to realize its deferred tax asset associated with its net operating loss carryforwards.
 
Fair Value Measurements – the Company adopted the guidance of ASC 815, which requires that we mark the value of our warrant liability (see Note 10) to market and recognize any 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 warrant is calculated using the Black-Scholes valuation model.
 
The common stock warrant was not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign corporation. The warrants do not qualify for hedge accounting, and, as such, all changes in the fair value of these warrants are recognized as other income/expense in the statement of operations until such time as the warrants are exercised or expire. Since these common stock warrants do not trade in an active securities market, the Company recognizes a warrant liability and estimates the fair value of these warrants using the Black-Scholes options model.

The volatility calculation was based on the 18 months for the Company’s stock price prior to the measurement date, utilizing January 1, 2010 as the initial period, as the Company believes that this is the best indicator of future performance, and the source of the risk free interest rate is the US Treasury rate related to 10 year notes. The exercise price is per the agreement, the fair market value is the closing price of our stock on the date of measurement, and the expected life is based on management’s current estimate of when the warrants will be exercised. If the Company used different measurements in calculating the volatility of its stock, it could have an impact on its balance sheet and statement of operations. However, the Company believes the measurement period used is the best predictor of the value of the warrant. All inputs to the Black-Scholes options model are evaluated each reporting period.
 
General

Management’s discussion and analysis of results of operations and financial condition is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position of the Company together with its subsidiary.  This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying financial notes and Management’s Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended March 31, 2011.
 
 
Overview

For the first quarter of Fiscal year 2012, the Company recorded its third consecutive quarter of profitability. For the three months ended June 30, 2011, the Company recorded net income of $175,849 as compared to a net loss of $275,412 for the same period in the prior year. Sales for the three months ended June 30, 2011 increased $1,534,931 (62.5%) to $3,990,211 as compared to the same period last year. Net income was affected by non-cash charges of approximately $199,000 attributed to the Company’s note and warrant issued to BCA Mezzanine Fund LLP in fiscal year 2011, as discussed in Note 6 to the Condensed Consolidated Financial Statements.

As a result of the Company’s improving operations and financial results, sales and profits have continued to increase, and there have been improvements in the Company’s liquidity and stockholders’ equity, which currently exceeds the NYSE Amex requirement of $4 million. The Company has also rescheduled its move to the new facility until this fall.

The U.S. Navy evaluated the Company’s AN/USM-708 test set, which utilizes new generation technology, and concluded it was suitable for fleet use.

The Company announced that it has secured the production release from the U.S. Navy for the $16.2 million CRAFT AN/USM 708 delivery order the Company received in April 2011. Production deliveries on this 732 unit order are expected to begin in the fourth quarter of the current calendar year. The CRAFT 708 is a multi-purpose flight-line test set that will replace up to eight older test sets currently being used by the U.S. Navy.

The Company also has secured a $599k contract modification from the U.S. Navy to incorporate product enhancements to The ITATS AN/ARM-206 TACAN test set resulting from Navy technical evaluation testing. These changes, and the required product verification testing, are expected to take an estimated nine to 12 months to complete. This additional funding will not have a material bottom line impact as most of the engineering work for this contract will be sub-contracted to DRS Sustainment Systems located in St. Louis. Production deliveries of the 102 ITATS units ($5.3 million) are now expected to begin in the middle of the next calendar year.

The TS-4530A product is currently in Army product verification and AIMS testing which is scheduled to be completed in the next several months. Volume production of the TS-4530A is currently scheduled to begin in the third quarter of the current fiscal year subject to receipt of required regulatory approvals.
 
The Company believes, although no assurance can be given, that with the U.S. Navy’s evaluation approval of the AN/USM-708, and the resolution of the issues regarding the ITATS contract, the Company can look forward to continued financial growth in the near and mid-term. Future approval of the TS-4530A unit will enhance this outlook.

At June 30, 2011 the Company’s backlog was approximately $48.4 million, including the order for 102 ITATS units in the amount of $5 million for which a production order has not yet been released, as compared to approximately $25.4 million at June 30, 2010.

The Company believes that it has adequate liquidity, borrowing resources and backlog to fund operating plans for at least the next twelve months. Currently, the Company has no material capital expenditure requirements. The Company believes it will have moderate moving and capital expenditure costs associated with the upcoming move to a new facility located in East Rutherford, NJ.
 
 
Results of Operations

Sales

For the first quarter ended June 30, 2011 total sales increased $1,534,931 (62.5%) to $3,990,211 as compared to $2,455,280 for the same quarter in the prior year. Avionics Government sales increased $1,297,119 (70.2%) to $3,145,592 for the period as compared to $1,848,473 for the same period last year. This increase in Avionics Government sales is primarily attributed to an increase in shipments of the AN/UPM -708, the TR-100AF TACAN test sets to the U.S. Air Force and initial pilot production units of the TS-4530A test sets  offset partially by lower sales of the AN/USM-719. Commercial sales increased $237,812 (39.2%) to $844,619 for the three months ended June 30, 2011 as compared to $606,807 in the same period in the prior year. This increase is primarily attributed to an increase in its repair and overhaul business.
 
Gross Margin

Gross margin increased $779,251 (72%) to $1,861,631 for the three months ended June 30, 2011 as compared to $1,082,380 for the same three months in the prior fiscal year.  This increase is mostly attributed to the increase in sales volume. The gross margin percentage for the three months ended June 30, 2011 was 46.7% as compared to 44.1% for the three months ended June 30, 2010. This change in gross margin percentage is a result of a change in mix of products sold.

Operating Expenses

Selling, general and administrative expenses increased $40,778 (5.4%) to $798,822 for the three months ended June 30, 2011, as compared to $758,044 for the three months ended June 30, 2010. This increase is attributed mainly to an increase in investor relations expenses and accrued bonus compensation expense offset partially by lower administrative salaries and outside commission expenses.

Engineering, research and development expenses increased $91,692 (12.1%) to $849,038 for three months ended June 30, 2011 as compared to $757,346 for the three months ended June 30, 2010, primarily as a result of an increase in salaries as a result of efforts related to finalize the AN/USM-708 product and efforts related to the TS-4530A program. The Company has completed the design of the AN/USM-708 and the TS-4530A program is undergoing product verification.
 
Other Income (Expense), net

Interest expense and amortization of debt issuance costs increased to $143,169 mostly as a result of interest on the new $2.5 million loan from BCA, which carries a higher face amount and interest rate. Amortization of debt discount is in connection with (i) the stock options issued in conjunction with the officers’ subordinated notes and (ii) warrants issued in conjunction with the loan from BCA. The amortization of deferred debt expense is also associated with the loan from BCA. The Company also incurred a non-cash loss associated with the revaluation of warrants issued in conjunction with the loan to BCA in the amount of $168,586 (see Note 10 of Notes to the Condensed Consolidated Financial Statements). The Company also recorded a gain of $300,029 from proceeds on a life insurance policy.
 
 
Income (Loss) before Income Taxes

As a result of the above, the Company recorded income before income taxes of $202,138 for the quarter ended June 30, 2011 as compared to a loss before income taxes of $458,637 for the quarter ended June 30, 2010.

Income Taxes

For the three months ended June 30, 2011, the Company recorded an income tax provision of $26,289 as compared to an income tax benefit of $183,225 for the three months ended June 30, 2010. The change is the result of the net income in the current year. These amounts represent the effective federal and state tax rate of approximately 40% on the Company’s net income or loss before taxes.  The proceeds on the life insurance policy are not taxable, and the loss on the change in fair value of the common stock warrants is not deductible.

Net Income (Loss)

As a result of the above, the Company recorded net income of $175,849 for the quarter ended June 30, 2011 as compared to a net loss of $275,412 for the quarter ended June 30, 2010.

Liquidity and Capital Resources

At June 30, 2011, the Company had working capital of $4,712,880 as compared to $4,374,523 at March 31, 2011.

During the three months ended June 30 2011, the Company increased cash by $591,638. The Company’s principal sources and uses of funds were as follows:

Cash provided by/used in operating activities.  For the three months ended June 30, 2011, the Company provided $308,329 in cash from operations as compared to using $91,408 in cash for the three months ended June 30, 2010. This increase is primarily attributed to the higher net income and decrease in accounts receivable and inventories offset partially by lower accounts payable and the liquidation of progress billings.
 
Cash used in investing activities. The Company did not use any of its cash for investing activities for the three months ended June 30, 2011. Net cash used in investing activities was $83,201 for the three months ended June 30, 2010 due primarily to the purchases of equipment.
 
Cash provided by financing activities. Net cash provided by financing activities for the three months ended June 30, 2011 was $283,039 as compared to $156,075 for the three months ended June 30, 2010. This increase is attributed to the proceeds from a life insurance policy.

In September 2010, the Company, pursuant to an agreement with BCA Mezzanine Fund LP, borrowed $2.5 million for five years (see Note 6 to the Condensed Consolidated Financial Statements).
 
On certain government contracts the Company has been granted progress payments from the government, which allows the Company to bill and collect a portion of its incurred costs on long-term programs before shipment of units, thus helping to fund the costs of these programs.
 
The Company believes that it has adequate liquidity, borrowing resources and backlog to fund operating plans for at least the next twelve months. The Company will have moderate moving and capital expenditure costs associated with the upcoming move.

There was no significant impact on the Company’s operations as a result of inflation for the three months ended June 30, 2011.  These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended March 31, 2011.
 
 
Item 4.            Controls and Procedures
 
Controls and Procedures
 
Evaluation of disclosure controls and procedures.

The Company, including its principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective. Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include controls and procedures designed to reasonably ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting  
 
There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
Part II. Other Information

Item 1.            Legal Proceedings

See discussion in Item 3 of the Company’s Report on Form 10-K for the fiscal year ended March 31, 2011 and Note 12 to the Condensed Consolidated Financial Statements above.

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

 None.

Item 6.             Exhibits
 
31.1
 
31.2
 
32.1
 
**101.INS
XBRL Instance Document
 
**101.SCH
XBRL Taxonomy Extension Schema
 
**101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
**101.DEF
XBRL Taxonomy Extension Definition Linkbase
 
**101.LAB
XBRL Taxonomy Extension Label Linkbase
 
**101.PRE
XBRL Taxonomy Extension Presentation Linkbase
 
 
** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934.
 

 

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:  August 22, 2011
By:
/s/ Jeffrey C. O’Hara  
    Jeffrey C. O’Hara  
   
CEO
 
       
Date:  August 22, 2011
By:
/s/ Joseph P. Macaluso  
    Joseph P. Macaluso  
    Principal Accounting Officer