TEL INSTRUMENT ELECTRONICS CORP - FORM 10-Q

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EX-32.2 - EX-32.2 - TEL INSTRUMENT ELECTRONICS CORP	ex32-2.htm
EX-10.1 - EX-10.1 - TEL INSTRUMENT ELECTRONICS CORP	ex10-1.htm
EX-32.1 - EX-32.1 - TEL INSTRUMENT ELECTRONICS CORP	ex32-1.htm
EX-31.2 - EX-31.2 - TEL INSTRUMENT ELECTRONICS CORP	ex31-2.htm
EX-31.1 - EX-31.1 - TEL INSTRUMENT ELECTRONICS CORP	ex31-1.htm
EXCEL - IDEA: XBRL DOCUMENT - TEL INSTRUMENT ELECTRONICS CORP	Financial_Report.xls

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: December 31, 2014

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

Commission File Number: 001-31990

TEL-INSTRUMENT ELECTRONICS CORP.

(Exact name of registrant as specified in its charter)

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

One Branca Road

East Rutherford, NJ 07073

(Address of principal executive offices)

(201) 933-1600

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	ý

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, 2015 there were 3,256,887 shares outstanding of the registrant’s common stock.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements.	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	19

Item 4.	Controls and Procedures.	19

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings.	20

Item 1A.	Risk Factors.	20

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	20

Item 3.	Defaults Upon Senior Securities.	20

Item 4.	Mine Safety Disclosures.	20

Item 5.	Other Information.	21

Item 6.	Exhibits.	21

Signatures		22

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31, 2014			March 31, 2014
	(unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	331,991			232,118
Accounts receivable, net		614,239			2,095,640
Inventories, net		4,583,365			4,025,391
Prepaid expenses and other current assets		463,661			263,592
Deferred financing costs		5,429			108,321
Deferred income tax asset		1,089,538			1,089,538
Total current assets		7,088,223			7,814,600

Equipment and leasehold improvements, net		310,566			450,873
Deferred financing costs – long-term		10,149			48,142
Deferred income tax asset – non-current		2,484,379			2,273,068
Other long-term assets		32,317			47,670
Total assets		9,925,634			10,634,353

LIABILITIES & STOCKHOLDERS’ EQUITY

Current liabilities:
Current portion of long-term debt, net of debt discount		382,169			718,848
Capital lease obligations – current portion		16,188			53,608
Accounts payable and accrued liabilities		3,728,861			3,332,181
Progress billings		256,816			775,475
Deferred revenues – current portion		81,388			37,452
Accrued payroll, vacation pay and payroll taxes		527,228			444,238
Total current liabilities		4,992,650			5,361,802

Subordinated notes payable - related parties		250,000			250,000
Capital lease obligations – long-term		8,971			21,320
Long-term debt		807,859			596,526
Deferred revenues – long-term		133,650			133,650
Warrant liability		423,059			354,309
Other long-term liabilities		45,600			56,100
Total liabilities		6,661,789			6,773,707

Commitments

Stockholders' equity:
Common stock, 4,000,000 shares authorized, par value $.10 per share, 3,256,887 and 3,251,387 shares issued and outstanding, respectively		325,686			325,136
Additional paid-in capital		8,042,893			7,987,100
Accumulated deficit		(5,104,734	)		(4,451,590	)
Total stockholders' equity		3,263,845			3,860,646
Total liabilities and stockholders' equity	$	9,925,634		$	10,634,353

See accompanying notes to condensed consolidated financial statements.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Nine Months Ended
	December 31, 2014			December 31, 2013			December 31, 2014			December 31, 2013

Net sales	$	5,030,097		$	4,089,029			11,746,847		$	11,323,585
Cost of sales		3,484,310			2,693,342			8,211,499			7,465,991

Gross margin		1,545,787			1,395,687			3,535,348			3,857,594

Operating expenses:
Selling, general and administrative		825,261			697,919			2,364,488			2,022,579
Engineering, research and development		494,721			449,477			1,476,343			1,378,426
Total operating expenses		1,319,982			1,147,396			3,840,831			3,401,005

Income (loss) from operations		225,805			248,291			(305,483	)		456,589

Other income (expense):
Amortization of debt discount		(14,373	)		(27,120	)		(75,308	)		(75,707	)
Loss on extinguishment of debt		(188,102	)		-			(188,102	)		(26,600	)
Amortization of deferred financing costs		(13,648	)		(27,827	)		(67,808	)		(81,987	)
Change in fair value of common stock warrants		37,330			(229,726	)		(68,750	)		(272,499	)
Interest income		-			129			-			163
Interest expense		(39,137	)		(50,828	)		(159,004	)		(252,295	)
Total other income (expense)		(217,930	)		(335,372	)		(558,972	)		(708,925	)

Income (loss) before income taxes		7,875			(87,081	)		(864,455	)		(252,336	)

Income tax expense (benefit)		28,819			58,852			(211,311	)		51,843

Net loss	$	(20,944	)	$	(145,933	)	$	(653,144	)	$	(304,179	)

Basic loss per common share	$	(0.01	)	$	(0.04	)	$	(0.20	)	$	(0.10	)
Diluted loss per common share	$	(0.01	)	$	(0.04	)	$	(0.20	)	$	(0.10	)

Weighted average shares outstanding:
Basic		3,255,028			3,247,387			3,253,045			3,189,123
Diluted		3,255,028			3,247,387			3,253,045			3,189,123

See accompanying notes to condensed consolidated financial statements.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended
	December 31, 2014			December 31, 2013

Cash flows from operating activities:
Net loss	$	(653,144	)	$	(304,179	)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes		(211,311	)		50,503
Depreciation and amortization		134,837			153,818
Provision for inventory obsolescence		5,000			-
Amortization of debt discount		75,308			75,707
Amortization of deferred financing costs		67,808			81,987
Loss on extinguishment of debt		188,102			26,600
Change in fair value of common stock warrant		68,750			272,499
Non-cash interest associated with conversion of note		-			21,003
Non-cash stock-based compensation		29,733			48,519

Changes in assets and liabilities:
Decrease (increase) in accounts receivable		1,481,401			(572,034	)
(Increase) decrease in inventories, net		(548,963	)		1,731,581
Increase in prepaid expenses & other		(184,716	)		(28,077	)
Increase (decrease) in accounts payable and other accrued liabilities		423,290			(2,137,411	)
Increase (decrease) in accrued payroll, vacation pay & withholdings		82,990			(48,090	)
(Decrease) increase in deferred revenues		43,936			107,000
(Decrease) increase in progress billings		(518,659	)		795,050
Decrease in other long-term liabilities		(10,500	)		-
Net cash provided by operating activities		473,862			274,476

Cash flows from investing activities:
Purchases of equipment		(8,541	)		(11,595	)
Net cash used in investing activities		(8,541	)		(11,595	)

Cash flows from financing activities:
Proceeds from note payable – related party		-			100,000
Proceeds from the exercise of stock options		-			23,370
Proceeds from term loan		1,200,000			-
Deferred financing costs		(16,287	)		-
Repayment of long-term debt		(1,499,392	)		(424,245	)
Repayment of capitalized lease obligations		(49,769	)		(55,956	)
Net cash used in financing activities		(365,448	)		(356,831	)

Net increase (decrease) in cash and cash equivalents		99,873			(93,950	)
Cash and cash equivalents at beginning of period		232,118			310,297
Cash and cash equivalents at end of period	$	331,991		$	216,347

Supplemental cash flow information:
Taxes paid	$	20,500		$	-
Interest paid	$	141,180		$	276,546

Supplemental non-cash information:
Converted accounts payable to equity		26,610			-
Converted debt to equity	$	-		$	700,000
Converted accrued interest to equity	$	-		$	37,400

See accompanying notes to condensed consolidated financial statements.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Tel-Instrument Electronics Corp. (the “Company” or “TIC”) as of December 31, 2014, the results of operations for the three and nine months ended December 31, 2014 and December 31, 2013, and statements of cash flows for the nine months ended December 31, 2014 and December 31, 2013. These results are not necessarily indicative of the results to be expected for the full year. The financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include disclosures normally made in an Annual Report on Form 10-K. The March 31, 2014 balance sheet included herein was derived from the audited financial statements included in the Company’s Annual Report on Form 10-K as of that date. Accordingly, the financial statements included herein should be reviewed in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2014 , as filed with the United States Securities and Exchange Commission (the “SEC”) on June 30, 2014 (the “Annual Report).

Note 2 – Summary of Significant Accounting Policies

During the nine months ended December 31, 2014, there have been no material changes in the Company’s significant accounting policies to those previously disclosed in the Annual Report.

Note 3 – Accounts Receivable, net

The following table sets forth the components of accounts receivable:

	December 31, 2014			March 31, 2014
Government	$	519,018		$	1,982,215
Commercial		122,503			140,707
Less: Allowance for doubtful accounts		(27,282	)		(27,282	)
	$	614,239		$	2,095,640

Note 4 – Inventories, net

Inventories consist of:

	December 31, 2014			March 31, 2014

Purchased parts	$	3,360,506		$	3,085,070
Work-in-process		1,387,572			1,134,714
Finished goods		45,287			10,607
Less: Inventory reserve		(210,000	)		(205,000	)
	$	4,583,365		$	4,025,391

Note 5 – Loss Per Share

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

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5 – Loss Per Share (continued)

Diluted loss per share for the three and nine months ended December 31, 2014 and 2013 does not include common stock equivalents, as these stock equivalents would be anti-dilutive.

	Three Months Ended			Three Months Ended
	December 31, 2014			December 31, 2013
Basic net loss per share computation:
Net loss	$	(20,944	)	$	(145,933	)
Weighted-average common shares outstanding		3,255,028			3,247,387
Basic net loss per share	$	(0.01	)	$	(0.04	)
Diluted net loss per share computation:
Net loss	$	(20,944	)	$	(145,933	)
Weighted-average common shares outstanding		3,255,028			3,247,387
Incremental shares attributable to the assumed exercise of outstanding stock options		-			-
Total adjusted weighted-average shares		3,255,028			3,247,387
Diluted net loss per share	$	(0.01	)	$	(0.04	)

	Nine Months Ended			Nine Months Ended
	December 31, 2014			December 31, 2013
Basic net loss per share computation:
Net loss	$	(653,144	)	$	(304,179	)
Weighted-average common shares outstanding		3,253,045			3,189,123
Basic net loss per share	$	(0.20	)	$	(0.10	)
Diluted net loss per share computation:
Net loss	$	(653,144	)	$	(304,179	)
Weighted-average common shares outstanding		3,253,045			3,189,123
Incremental shares attributable to the assumed exercise of outstanding stock options		-			-
Total adjusted weighted-average shares		3,253,045			3,189,123
Diluted net loss per share	$	(0.20	)	$	(0.10	)

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

Note 6 – Long-Term Debt

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

Note 7 – Term Loan

In November 2014, the Company entered into a term loan in the amount of $1,200,000 with Bank of America. The proceeds from the term loan were primarily used to pay off the remaining balance of the loan with BCA in the amount of $1,153,109, including accrued interest of $4,467 (see Note 6). The term loan is for three years, and expires in November 2017. Monthly payments are at $36,551 including interest at 6%. The term loan is collateralized by substantially all of the assets of the Company. At December 31, 2014 the outstanding balance was $1,169,449.

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8 – Segment Information

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

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

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

The table below presents information about reportable segments within the avionics business for the three and nine month periods ending December 31, 2014 and 2013:

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

Three Months Ended December 31, 2013	Avionics Government		Avionics Commercial		Avionics Total		Corporate Items		Total
Net sales	$	3,797,272		291,757		4,089,029		-		4,089,029
Cost of sales		2,415,427		277,915		2,693,342		-		2,693,342
Gross margin		1,381,845		13,842		1,395,687		-		1,395,687

Engineering, research, and development						449,477				449,477
Selling, general, and administrative						375,255		322,664		697,919
Amortization of debt discount								27,120		27,120
Amortization of deferred financing costs								27,827		27,827
Change in fair value of common stock warrants								229,726		229,726
Interest (income) expense, net								50,699		50,699
Total expenses						824,732		658,036		1,482,768

Income (loss) before income taxes					$	570,955	$	(658,036)	$	(87,081	)

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8 – Segment Information (continued)

Nine Months Ended December 31, 2014	Avionics Government		Avionics Commercial		Avionics Total		Corporate Items			Total
Net sales	$	10,002,850	$	1,743,997	$	11,746,847		-		$	11,746,847
Cost of sales		6,800,031		1,411,468		8,211,499		-			8,211,499
Gross margin		3,202,819		332,529		3,535,348		-			3,535,348

Engineering, research, and development						1,476,343		-			1,476,343
Selling, general and administrative						899,579		1,464,909			2,364,488
Amortization of debt discount						-		75,308			75,308
Amortization of deferred financing costs						-		67,808			67,808
Loss on extinguishment of debt								188,102			188,102
Change in fair value of common stock warrants						-		68,750			68,750
Interest expense, net						-		159,004			159,004
Total expenses						2,375,922		2,023,881			4,399,803

Income (loss) before income taxes					$	1,159,426	$	(2,023,881	)	$	(864,455	)

Nine Months Ended December 31, 2013	Avionics Government		Avionics Commercial		Avionics Total		Corporate Items			Total
Net sales		10,054,033		1,269,552		11,323,585		-			11,323,585
Cost of Sales		6,497,178		968,813		7,465,991		-			7,465,991
Gross Margin		3,556,855		300,739		3,857,594		-			3,857,594

Engineering, research, and development						1,378,426					1,378,426
Selling, general and administrative						933,033		1,089,546			2,022,579
Amortization of debt discount								75,707			75,707
Amortization of deferred financing costs								81,987			81,987
Loss on extinguishment of debt								26,600			26,600
Change in fair value of common stock warrants								272,499			272,499
Interest expense, net								252,132			252,132
Total expenses						2,311,459		1,798,471			4,109,930

Income (loss) before income taxes					$	1,546,135	$	(1,798,471	)	$	(252,336	)

Note 9 – Income Taxes

The Company adopted FASB ASC 740-10, “Accounting for Uncertainty in Income Taxes”, effective April 1, 2007 (“ASC 740-10”). ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company does not have any unrecognized tax benefits.

The tax effect of temporary differences, primarily net operating loss carryforwards, asset reserves and accrued liabilities, gave rise to the Company’s deferred tax asset in the accompanying December 31, 2014 and March 31, 2014 condensed consolidated balance sheets. Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reverse.

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10 – Fair Value Measurements

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

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

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

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

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

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

The valuation techniques that may be used to measure fair value are as follows:

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

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

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

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 December 30, 2014 and March 31, 2014. As required by ASC 820-10, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10 – Fair Value Measurements (continued)

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

December 31, 2014	Level I		Level II		Level III		Total
Total Assets	$	-	$	-	$	-	$	-

Warrant liability		-		-		423,059		423,059
Total Liabilities	$	-	$	-	$	423,059	$	423,059

March 31, 2014	Level I		Level II		Level III		Total
Total Assets	$	-	$	-	$	-	$	-

Warrant liability		-		-		354,309		354,309
Total Liabilities	$	-	$	-	$	354,309	$	354,309

The Company adopted the guidance of ASC 815 “Derivative and Hedging”, which requires that we mark the value of our warrant liability to market and recognize the change in valuation in our statement of operations each reporting period. Determining the warrant liability to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant. The fair value of the warrants prior to the quarter ended December 31, 2014 were calculated using the Black-Scholes valuation model.

The following table provides a summary of the changes in fair value of our Level 3 financial liabilities from March 31, 2014 through December 31, 2014, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to the liability held at December 31, 2014:

Level 3 Reconciliation	Beginning at beginning of period		(Gains) and losses for the period (realized and unrealized)		Purchases, issuances, sales and settlements, net		Transfers in or out of Level 3		Balance at the end of period

Warrant liability		354,309		68,750		-		-		423,059
Total Liabilities	$	354,309	$	68,750	$	-	$	-	$	423,059

The common stock warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign corporation. The warrants do not qualify for hedge accounting, and, as such, all changes in the fair value of these warrants are recognized as other income/expense in the statement of operations until such time as the warrants are exercised or expire. Since these common stock warrants do not trade in an active securities market, the Company 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.

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 per share as of the date of the Warrant Put Notice, less $0.01, multiplied by the number of warrants or 2) the product of the current market price per share as of the date of the Warrant Put Notice, less the purchase price of the warrant or warrants, multiplied by the number of warrants, if this amount is higher. Adjusted EBITDA means EBITDA, multiplied by 5, plus cash and cash equivalents less unpaid debt divided by the number of shares outstanding on a fully diluted basis. As such, the values of the warrants at December 31, 2014, reflect the higher of these two options for each specific warrant.

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10 – Fair Value Measurements (continued)

Values at Inception

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

Values at March 31, 2014

Date of Warrant		Expiration Date		Number of Warrants		Exercise Price		Fair Market Value Per Share		Expected Volatility			Remaining Life in Years		Risk Free Interest Rate			Warrant Liability
	09-10-2010		09-10-2019		136,920	$	6.70	$	4.42		43.35	%		5.45		1.73	%	$	123,564
	09-10-2010		09-10-2015		10,416	$	6.70	$	4.42		43.35	%		1.45		0.44	%	$	2,498
	07-26-2012		09-10-2019		50,000	$	3.35	$	4.42		43.35	%		5.45		1.73	%	$	77,626
	07-26-2012		09-10-2019		20,000	$	3.35	$	4.42		43.35	%		5.45		1.73	%	$	31,050
	11-20-2012		09-10-2019		20,000	$	3.56	$	4.42		43.35	%		5.45		1.73	%	$	29,892
	02-14-2013		09-10-2019		20,000	$	3.58	$	4.42		43.35	%		5.45		1.73	%	$	29,310
	07-12-2013		09-10-2019		20,000	$	3.33	$	4.42		43.35	%		5.45		1.73	%	$	31,163
	08-12-2013		09-10-2019		20,000	$	3.69	$	4.42		43.35	%		5.45		1.73	%	$	29,206

Values at December 31, 2014

Date of Warrant		Expiration Date		Number of Warrants		Exercise Price		Fair Market Value Per Share		Put Option Value		Market Price Option		Remaining Life in Years		Warrant Liability
	09-10-2010		09-10-2019		136,920	$	6.70	$	5.34	$	138,289		NA		4.70	$	138,289
	09-10-2010		09-10-2015		10,416	$	6.70	$	5.34		NA		NA		0.70	$	3,270*
	07-26-2012		09-10-2019		50,000	$	3.35	$	5.34	$	20,200		39,800		4.70	$	39,800
	07-26-2012		09-10-2019		20,000	$	3.35	$	5.34	$	50,500		99,500		4.70	$	99,500
	11-20-2012		09-10-2019		20,000	$	3.56	$	5.34	$	20,200		35,600		4.70	$	35,600
	02-14-2013		09-10-2019		20,000	$	3.58	$	5.34	$	20,200		33,400		4.70	$	33,400
	07-12-2013		09-10-2019		20,000	$	3.33	$	5.34	$	20,200		40,200		4.70	$	40,200
	08-12-2013		09-10-2019		20,000	$	3.69	$	5.34	$	20,200		33,000		4.70	$	33,000

* Based on Black-Scholes Calculation

Note 11 – Reclassifications

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

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 12 – Litigation

On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court, Sedgwick County, Kansas, Case No. 09 CV 1141 (the “Aeroflex Action”), alleging that the Company and its two employees misappropriated Aeroflex’s proprietary technology in connection with the Company winning a substantial contract from the U.S. Army (the “Award”), to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5. Aeroflex’s petition alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with its business relationship; conspired to harm Aeroflex and tortiously interfered with its contract and seeks injunctive relief and damages. The central basis of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology and confidential information in winning the Award. In February 2009, subsequent to the Company winning Award to the Company, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the U.S. Army Contracts Attorney and the U.S. Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed Aeroflex proprietary technology in winning the Award, and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest.

In December 2009, the Kansas District Court dismissed the Aeroflex Action on jurisdiction grounds. Aeroflex appealed this decision. In May 2012, the Kansas Supreme Court reversed the decision and remanded the Aeroflex Action to the District Court for further proceedings. The Company has been engaged in discovery and depositions for the last three quarters, which has resulted in substantially higher legal expense. The Amended Fifth Supplemental Modified Scheduling Order has the trial date set for February 29, 2016 and is estimated to last three weeks, but this date may be subject to postponement. The Company is optimistic as to the outcome of this litigation. However, the outcome of any litigation is unpredictable and an adverse decision in this matter could have a material adverse effect on our financial condition, results of operations or liquidity.

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

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

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

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

Note 13 – New Accounting Pronouncements

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

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

No other recently issued accounting pronouncements had or are expected to have a material impact on the Company’s condensed consolidated financial statements.

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

Forward Looking Statements

This Quarterly Report on Form 10-Q and other reports filed by the Company from time to time with the SEC (collectively the “Filings”) contain or may contain forward-looking statements (collectively the “Filings”) and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended March 31, 2014, filed with the SEC on June 30, 2014, relating to the Company’s industry, the Company’s operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.

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

Overview

After returning to profitability in fiscal year 2014, we had a slow start to the 2015 fiscal year as a result of program delays and a six week interruption in CRAFT shipments. Third quarter revenues for the current fiscal year, however, increased to over $5.0 million as compared to $4.1 million for the same quarter in the previous year, an increase of 23%. Currently, we are shipping CRAFT at a more consistent rate, including some of the higher priced units, TS-4530A KITS for the U.S. Army are in full production as well as the ITATS program. Our legacy business also continues to be consistent. We are still awaiting approval from the U.S. Army for the TS-4530A SETS, but this could take several additional months.

The following provides a brief summary of the status of our major programs at December 31, 2014:

CRAFT 708 and 719: The Company currently has approximately $10.3 million of open orders from the U.S. Navy on the CRAFT program (multi-purpose test set including Mode 5 test capability). The CRAFT test set replaces seven obsolete U.S. Navy test sets that collectively cost approximately $300,000, making the CRAFT test set an excellent value to the government. This unit has been well received by the end users. The Company has 180 CRAFT 708 units on order from the original contract with a remaining value of about $4 million. In late 2013, the U.S. Navy issued a follow-on $9.5 million Indefinite Delivery Indefinite Quantity (“IDIQ”) contract. At this time, the U.S. Navy has issued purchase orders for a total of 247 CRAFT 708 and CRAFT 719 units on this follow-on contract with a value of about $7.5 million. These new orders are at a higher price as compared to the initial U.S. Navy contract, and we believe that it should improve our gross margin as these units begin to be shipped in volume. Management also believes that the CRAFT program also has significant potential for sales into the balance of the U.S. Military, NATO, and internationally, as the new Mode 5 IFF systems are installed in overseas aircraft platforms. The Joint Strike Fighter (“JSF”) program by itself is expected to generate significant CRAFT orders as this program continues to ramp up limited rate production.

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

Overview (continued)

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

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

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

As such, we anticipate improvement in revenues and profitability in the future. We believe that the revenue increase from the TS-4530A and ITATS shipments will also enhance the Company’s liquidity position.

For the three months ended December 31, 2014, the Company recorded income from operations of $225,805 as compared to $248,291 for the same period in the prior year. Income from operations for the quarter ended December 31, 2014 was negatively impacted by significantly higher legal costs associated with the Aeroflex litigation. For the nine months ended December 31, 2014, the Company recorded an operating loss of $305,483 as compared to income from operations of $456,589 for the nine months ended December 31, 2013.

For the three months ended December 31, 2014, the Company recorded income before income taxes of $7,875 as compared to a loss before income taxes of $87,081 for the three months ended December 31, 2013. Excluding amortization of debt and financing costs, loss on extinguishment of debt and the change in fair value of common stock warrants, pre-tax income would be $186,668 for the three months ended December 31, 2014, as compared to $197,592 for the three months ended December 31, 2013.

For the nine months ended December 31, 2014, the Company recorded a loss before income taxes of $864,455 as compared to a loss before income taxes of $252,336 for the nine months ended December 31, 2013. Excluding amortization of debt and financing costs, loss on extinguishment of debt and the change in fair value of common stock warrants, the before tax loss would be $464,487 for the nine months ended December 31, 2014, as compared to income before taxes of $204,457 for the nine months ended December 31, 2013.

As a result of the substantial operating losses incurred in fiscal year 2013, the Company was not in compliance with the NYSE-MKT’s (the “Exchange”) continued listing standards. The Company also received a letter from the staff of the Exchange that, based on the Company’s financial statements at March 31, 2013, the Company was no longer in compliance with the minimum stockholders’ equity requirement of $4.0 million, and had also reported net losses in three of its last four fiscal years, as set forth in Section 1003(a)(ii) of the NYSE MKT Company Guide. On July 17, 2014, based on the review of publicly available and Section 1009(f) of the NYSE MKT Company Guide, the Exchange indicated that the Company had resolved the continued listing deficiencies with respect to both Sections 1003(a)(ii) and 1003(4)(iv) of the NYSE MKT Company Guide, since it has reported net income for the fiscal year ended March 31, 2014 and demonstrated that it has remedied its financial impairment. As is the case with all listed issuers on the NYSE-MKT, the Company’s continued listing eligibility will be assessed on an ongoing basis.

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

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

Based on existing and expected production releases, the Company believes that it will have adequate liquidity, and backlog to fund operating plans for at least the next twelve months. Currently, the Company has no material future capital expenditure requirements. However, there can be no assurances that the Company will achieve revenue and profitability goals or will not require additional financing.

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

Results of Operations

Sales

For the three and nine months ended December 31, 2014, sales increased $941,068 (23.0%) and $423,262 (3.7%) to $5,030,097 and $11,746,847, respectively, as compared to $4,089,029 and $11,323,585, respectively, for the three and nine months ended December 31, 2013.

Avionics government sales increased $658,127 (17.3%) to $4,455,399 for the three months ended December 31, 2014 as compared to $3,797,272 for the three months ended December 31, 2013. This increase is mostly attributed to the increased shipments for the CRAFT and ITATS as well as a modest increase in shipments for the TS-4530A program as we increase shipment of the KITS, which was mostly offset by the shipment of SETS in the three months ended December 31, 2013 as we were able to ship against a partial release from the U.S. Army. These increases were offset partially by lower sales of legacy products. Avionics government sales decreased only $51,183 (0.5%) to $10,002,850 for the nine months ended December 31, 2014 as compared to $10,054,033 for the same period in the prior year. In the prior year, the Company was able to ship against a partial release from the U.S. Army. During the nine months ended December 31, 2014, the Company had a six week interruption in CRAFT deliveries due to delayed component shipments from vendors and a technical issue with the U.S. Navy, which affected sales for these periods, but has been resolved. CRAFT shipments resumed in October. These decreases were partially offset by the shipment of the KITS for the TS-4530A program for which the Company received a full production release from the U.S. Army for kits on June 29, 2014, and the commencement of shipments for the Company’s ITATS program.

Commercial sales increased $282,941 (97.0%) and $474,445 (37.4%) to $574,698 and $1,743,997, respectively, for the three and nine months ended December 31, 2014, as compared to $291,757 and $1,269,552, respectively, for the three and nine months ended December 31, 2013 This increase in sales is primarily attributed to an increase in overhaul and repairs revenues, sales of spare parts as well as the Company being able to reduce its backlog for its commercial products. The economic conditions in the commercial market remain depressed and, therefore, this increase in commercial sales cannot be considered a trend.

Gross Margin

Gross margin increased $150,100 (10.8%) to $1,545,787 for the three months ended December 31, 2014, as compared to $1,395,687 for the three months ended December 31, 2013. This increase mostly attributed to the increase in volume and higher prices for certain products partially offset by higher material variances and labor and overhead variances due in part to additional staffing associated with the startup of the TS-4530A and ITATS programs. Gross margin decreased $322,246 (8.4%) to $3,535,348 for the nine months ended December 31, 2014, as compared to $3,857,594 for the nine months ended December 31, 2013. This decrease mostly attributed to higher material variances and labor and overhead variances due in part to additional staffing associated with the startup of the TS-4530A and ITATS programs partially offset by the slightly higher volume and higher prices for certain products. The gross margin percentage for the three months ended December 31, 2014 was 30.7%, as compared to 34.1% for the three months ended December 31, 2013. The gross margin percentage for the nine months ended December 31, 2014 was 30.1%, as compared to 34.1% for the nine months ended December 31, 2013.

Operating Expenses

Selling, general and administrative expenses increased $127,342 (18.2%) and $341,909 (16.9%) to $825,261 and $2,364,488, respectively, for the three and nine months ended December 31, 2014, as compared to $697,919 and $2,022,579, respectively, for the three and nine months ended December 31, 2013. This increase was primarily attributed to higher professional fees associated with the deposition phase Aeroflex litigation. Legal expenses associated with the Aeroflex litigation were $189,964 for the three months ended December 31, 2014, as compared to $15,493 for the same period last year. For the nine months ended December 31, 2014, legal expenses associated with the litigation were $382,992 as compared to $139,568 for the same period in the prior year.

Engineering, research and development expenses increased $45,244 (10.1%) and $97,917 (7.1%) to $494,721 and $1,476,343, respectively, for the three and nine months ended December 31, 2014, as compared to $449,477 and $1,378,426, respectively, for the three and nine months ended December 31, 2013. While the Company has completed development on its major programs, research and development resources have now been focused on new product development, sustaining engineering and enhancements to existing products.

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

Income (Loss) From Operations

As a result of the above, the Company recorded income from operations of $225,805 for the three months ended December 31, 2014, as compared to $248,291 for the three months ended December 31, 2013. For the nine months ended December 31, 2014, the Company recorded a loss from operations of $305,483 as compared to income from operations of $456,589 for the nine months ended December 31, 2013.

Other Income (Expense), Net

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

Income (Loss) before Income Taxes

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

Income Tax Benefit

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

Net Loss

As a result of the above, the Company recorded net losses of $20,944 and $653,144 for the three and nine months ended December 31, 2014, as compared to net losses of $145,933 and $304,179 for the three and nine months ended December 31, 2013.

Liquidity and Capital Resources

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

During the nine months ended December 31, 2014, the Company’s cash balance increased by $99,873 to $331,991. The Company’s principal sources and uses of funds were as follows:

Cash provided by operating activities. For the nine months ended December 31, 2014, the Company provided $473,862 in cash for operations as compared to providing $274,476 in cash for operations for the nine months ended December 31, 2013. This improvement is the result of the reduction in accounts receivable and increase in accounts payable and accrued liabilities offset partially by the increase in inventories, reduction in progress billings, and the higher operating loss.

Cash used in investing activities. For the nine months ended December 31, 2014, the Company used $8,541 of its cash for investing activities, as compared to $11,595 for the nine months ended December 31, 2013 as result of lower purchases of equipment.

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

Liquidity and Capital Resources (continued)

Cash used in financing activities. For the nine months ended December 31, 2014, the Company used $365,448 in financing activities as compared to using $356,831 for the nine months ended December 31, 2013. This is the result of lower debt repayments as a result of the debt refinancing offset mostly by lower proceeds from notes payable. During the nine months ended December 31, 2013, the Company received net proceeds from a related party note payable in the amount of $100,000.

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

There was no significant impact on the Company’s operations as a result of inflation for the nine months ended December 31, 2014.

These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2014, filed with the SEC on June 30, 2014 (the “Annual Report”).

Off-Balance Sheet Arrangements

As of December 31, 2014, the Company had no off-balance sheet arrangements.

Critical Accounting Policies

Our critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2014 consolidated financial statements included in our Annual Report.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We do not hold any derivative instruments and do not engage in any hedging activities.

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

The Company, including its principal executive officer and principal accounting officer, reviewed the Company’s internal control over financial reporting, pursuant to Rule 13(a)-15(e) under the Exchange Act and concluded that there was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

In December 2009, the Kansas District Court dismissed the Aeroflex Action on jurisdiction grounds. Aeroflex appealed this decision. In May 2012, the Kansas Supreme Court reversed the decision and remanded the Aeroflex Action to the District Court for further proceedings. The Company has been in engaged in discovery and depositions for the last three quarters, which has resulted in substantially higher legal expense. The Amended Fifth Supplemental Modified Scheduling Order has the trial date set for February 29, 2016 and is estimated to last three weeks, but this date may be subject to postponement. The Company is optimistic as to the outcome of this litigation. However, the outcome of any litigation is unpredictable and an adverse decision in this matter could have a material adverse effect on our financial condition, results of operations or liquidity.

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

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

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, 2014, filed with the SEC on June 30, 2014.

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

There were no unregistered sales of the Company’s equity securities during the quarter ended December 31, 2014, 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.

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Item 5. Other Information.

There is no other information required to be disclosed under this item which was not previously disclosed.

Item 6. Exhibits.

Exhibit No.		Description

10.1		Loan Agreement with Bank of America*

31.1		Certification of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002*

31.2		Certification of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002*

32.1		Certification of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

32.2		Certification of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

101.INS		XBRL Instance Document*

101.SCH		Taxonomy Extension Schema Document*

101.CAL		Taxonomy Extension Calculation Linkbase Document*

101.DEF		Taxonomy Extension Definition Linkbase Document*

101.LAB		Taxonomy Extension Label Linkbase Document*

101.PRE		Taxonomy Extension Presentation Linkbase Document*

* Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	TEL-INSTRUMENT ELECTRONICS CORP.


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


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

TEL INSTRUMENT ELECTRONICS CORP - FORM 10-Q - February 17, 2015

Attached files

TEL INSTRUMENT ELECTRONICS CORP Reports