TEL INSTRUMENT ELECTRONICS CORP - FORM 10-Q

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EX-31.1 - EX-31.1 - TEL INSTRUMENT ELECTRONICS CORP	ex31-1.htm
EX-32.2 - EX-32.2 - TEL INSTRUMENT ELECTRONICS CORP	ex32-2.htm
EX-31.2 - EX-31.2 - TEL INSTRUMENT ELECTRONICS CORP	ex31-2.htm
EX-32.1 - EX-32.1 - TEL INSTRUMENT ELECTRONICS CORP	ex32-1.htm

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, 2015

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

Commission File Number: 001-31990

TEL-INSTRUMENT ELECTRONICS CORP.

(Exact name of registrant as specified in its charter)

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

One Branca Road

East Rutherford, NJ 07073

(Address of principal executive offices)

(201) 933-1600

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting 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, 2016 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.	15

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.	20

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, 2015			March 31, 2015
	(unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	629,053		$	185,932
Accounts receivable, net		1,027,437			1,625,171
Inventories, net		4,808,364			4,032,074
Prepaid expenses and other current assets		251,417			281,002
Deferred financing costs		5,429			5,429
Deferred income tax asset		1,064,395			1,064,395
Total current assets		7,786,095			7,194,003

Equipment and leasehold improvements, net		193,434			270,792
Deferred financing costs – long-term		4,720			8,792
Deferred income tax asset – non-current		1,764,767			2,377,583
Other long-term assets		33,509			32,317
Total assets		9,782,525			9,883,487

LIABILITIES & STOCKHOLDERS’ EQUITY

Current liabilities:
Current portion of long-term debt, net of debt discount		411,912			387,839
Capital lease obligations – current portion		8,971			16,758
Accounts payable and accrued liabilities		2,339,126			3,577,566
Deferred revenues – current portion		23,275			18,609
Accrued payroll, vacation pay and payroll taxes		809,133			594,114
Total current liabilities		3,592,417			4,594,886

Subordinated notes payable - related parties		45,000			250,000
Capital lease obligations – long-term		-			4,561
Long-term debt		411,594			708,604
Deferred revenues – long-term		134,385			133,650
Warrant liability		1,216,541			518,962
Other long-term liabilities		14,100			33,000
Total liabilities		5,414,037			6,243,663

Commitments

Stockholders' equity:
Common stock, 4,000,000 shares authorized, par value $0.10 per share, 3,256,887 and 3,256,887 shares issued and outstanding, respectively		325,686			325,686
Additional paid-in capital		8,069,714			8,046,168
Accumulated deficit		(4,026,912	)		(4,732,030	)
Total stockholders' equity		4,368,488			3,639,824
Total liabilities and stockholders' equity	$	9,782,525		$	9,883,487

See accompanying notes to condensed consolidated financial statements.

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TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Nine Months Ended
	December 31, 2015			December 31, 2014			December 31, 2015			December 31, 2014

Net sales	$	5,970,865		$	5,030,097			18,635,174		$	11,746,847
Cost of sales		3,936,108			3,484,310			12,541,656			8,211,499

Gross margin		2,034,757			1,545,787			6,093,518			3,535,348

Operating expenses:
Selling, general and administrative		767,923			825,261			2,517,487			2,364,488
Engineering, research and development		541,502			494,721			1,477,290			1,476,343
Total operating expenses		1,309,425			1,319,982			3,994,777			3,840,831

Income (loss) from operations		725,332			225,805			2,098,741			(305,483	)

Other income (expense):
Amortization of debt discount		-			(14,373	)		-			(75,308	)
Loss on extinguishment of debt		-			(188,102	)		-			(188,102	)
Amortization of deferred financing costs		(1,357	)		(13,648	)		(4,072	)		(67,808	)
Change in fair value of common stock warrants		(246,751	)		37,330			(697,579	)		(68,750	)
Interest expense		(23,687	)		(39,137	)		(79,156	)		(159,004	)
Total other expense		(271,795	)		(217,930	)		(780,807	)		(558,972	)

Income (loss) before income taxes		453,537			7,875			1,317,934			(864,455	)

Income tax expense (benefit)		226,951			28,819			612,816			(211,311	)

Net income (loss)	$	226,586		$	(20,944	)	$	705,118		$	(653,144	)

Basic income (loss) per common share	$	0.07		$	(0.01	)	$	0.22		$	(0.20	)
Diluted income (loss) per common share	$	0.07		$	(0.01	)	$	0.22		$	(0.20	)

Weighted average shares outstanding:
Basic		3,256,887			3,255,028			3,256,887			3,253,045
Diluted		3,261,690			3,255,028			3,261,955			3,253,045

See accompanying notes to condensed consolidated financial statements.

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TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	December 31, 2015			December 31, 2014

Cash flows from operating activities:
Net income (loss)	$	705,118		$	(653,144	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Deferred income taxes		612,816			(211,311	)
Depreciation and amortization		122,399			134,837
Provision for bad debts		1,205			-
Provision for inventory obsolescence		35,713			5,000
Amortization of debt discount		-			75,308
Amortization of deferred financing costs		4,072			67,808
Loss on extinguishment of debt		-			188,102
Change in fair value of common stock warrant		697,579			68,750
Non-cash stock-based compensation		23,546			29,733

Changes in assets and liabilities:
Decrease in accounts receivable		596,529			1,481,401
Increase in inventories		(812,003	)		(548,963	)
Decrease (increase) in prepaid expenses & other assets		28,393			(184,716	)
(Decrease) increase in accounts payable and other accrued expenses		(1,238,440	)		423,290
Increase in accrued payroll, vacation pay & withholdings		215,019			82,990
Decrease in deferred revenues		5,401			43,936
Decrease in progress billings		-			(518,659	)
Decrease in other long-term liabilities		(18,900	)		(10,500	)
Net cash provided by operating activities		978,447			473,862

Cash flows from investing activities:
Purchases of equipment		(45,041	)		(8,541	)
Net cash used in investing activities		(45,041	)		(8,541	)

Cash flows from financing activities:
Proceeds from bank loan		18,000			1,200,000
Deferred financing costs		-			(16,287	)
Repayment of notes to related parties		(205,000	)		-
Repayment of long-term debt		(290,937	)		(1,499,392	)
Repayment of capitalized lease obligations		(12,348	)		(49,769	)
Net cash used in financing activities		(490,285	)		(365,448	)

Net increase in cash and cash equivalents		443,121			99,873
Cash and cash equivalents at beginning of period		185,932			232,118
Cash and cash equivalents at end of period	$	629,053		$	331,991

Supplemental cash flow information:
Taxes paid	$	-		$	20,500
Interest paid	$	46,793		$	141,180

Supplemental non-cash information:
Converted accounts payable to equity		$	-			$	26,610

See accompanying notes to condensed consolidated financial statements.

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Tel-Instrument Electronics Corp. (the “Company” or “TIC”) as of December 31, 2015, the results of operations for the three and nine months ended December 31, 2015 and December 31, 2014, and statements of cash flows for the nine months ended December 31, 2015 and December 31, 2014. These results are not necessarily indicative of the results to be expected for the full year. The financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include disclosures normally made in an Annual Report on Form 10-K. The March 31, 2015 balance sheet included herein was derived from the audited financial statements included in the Company’s Annual Report on Form 10-K as of that date. Accordingly, the financial statements included herein should be reviewed in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2015, as filed with the United States Securities and Exchange Commission (the “SEC”) on June 25, 2015 (the “Annual Report).

Note 2 – Summary of Significant Accounting Policies

During the nine months ended December 31, 2015, there have been no material changes in the Company’s significant accounting policies to those previously disclosed in the Annual Report.

Note 3 – Accounts Receivable, net

The following table sets forth the components of accounts receivable:

	December 31, 2015			March 31, 2015
Government	$	901,705		$	1,440,378
Commercial		151,732			209,768
Less: Allowance for doubtful accounts		(26,000	)		(24,975	)
	$	1,027,437		$	1,625,171

Note 4 – Inventories, net

Inventories consist of:

	December 31, 2015			March 31, 2015

Purchased parts	$	3,117,916		$	2,746,671
Work-in-process		1,856,431			1,514,356
Finished goods		99,017			334
Less: Inventory reserve		(265,000	)		(229,287	)
	$	4,808,364		$	4,032,074

Note 5 – Income (Loss) Per Share

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

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5 – Income (Loss) Per Share (continued)

	Three Months Ended		Three Months Ended
	December 31, 2015		December 31, 2014
Basic net income (loss) per share computation:
Net income (loss)	$	226,586	$	(20,944	)
Weighted-average common shares outstanding		3,256,887		3,255,028
Basic net income (loss) per share	$	0.07	$	(0.01	)
Diluted net income (loss) per share computation
Net income (loss)	$	226,586	$	(20,944	)
Add: Change in fair value of warrants		-		-
Diluted income (loss)		226,586		(20,944	)
Weighted-average common shares outstanding		3,256,887		3,255,028
Incremental shares attributable to the assumed exercise of outstanding stock options and warrants		4,803		-
Total adjusted weighted-average shares		3,261,690		3,255,028
Diluted net income (loss) per share	$	0.07	$	(0.01	)

	Nine Months Ended		Nine Months Ended
	December 31, 2015		December 31, 2014
Basic net income (loss) per share computation:
Net income (loss)	$	705,118	$	(653,144	)
Weighted-average common shares outstanding		3,256,887		3,253,045
Basic net income (loss) per share	$	0.22	$	(0.20	)
Diluted net income (loss) per share computation
Net income (loss)	$	705,118	$	(653,144	)
Add: Change in fair value of warrants		-		-
Diluted income (loss)		705,118		(653,144	)
Weighted-average common shares outstanding		3,256,887		3,253,045
Incremental shares attributable to the assumed exercise of outstanding stock options and warrants		5,068		-
Total adjusted weighted-average shares		3,261,955		3,253,045
Diluted net income (loss) per share	$	0.22	$	(0.20	)

The following table summarizes securities that, if exercised, would have an anti-dilutive effect on earnings per share:

	December 31, 2015		December 31, 2014
Stock options		80,000		85,500
Warrants		286,920		297,336
		366,920		382,836

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 6 – Long-Term Debt

Term Loans with Bank of America

In November 2014, the Company entered into a term loan in the amount of $1,200,000 with Bank of America. The term loan is for three years, and 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, 2015 and March 31, 2015, the outstanding balances were $791,539 and $1,076,894, respectively.

In July 2015, the Company entered into a term loan in the amount of $18,000 with Bank of America. The term loan is for three years, and expires in July 2018. Monthly payments are at $536 including interest at 4.5%. The term loan is collateralized by substantially all of the assets of the Company. At December 31, 2015 and March 31, 2015, the outstanding balances were $15,646 and $-0-, respectively.

Automobile Loan

In March 2014, the Company entered into a loan with Ford Credit to purchase a van for the Company in the amount of $23,712. Such note has a term of five (5) years with an annual interest rate of 8.79% with monthly payments of $492. The outstanding balances at December 31, 2015 and March 31, 2015 were $16,321 and $19,549, respectively.

Note 7 – Segment Information

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

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

Management evaluates the performance of its segments and allocates resources to them based on gross margin. The Company’s general and administrative costs and sales and marketing expenses, and engineering costs are not segment specific. As a result, all operating expenses are not managed on a segment basis. Net interest includes expenses on debt and income earned on cash balances, both maintained at the corporate level. Segment assets include accounts receivable and work-in-process inventory. Asset information, other than accounts receivable and work-in-process inventory, is not reported, since the Company does not produce such information internally. All long-lived assets are located in the U.S.

The table below presents information about reportable segments within the avionics business for the three and nine month periods ending December 31, 2015 and 2014:

Three Months Ended December 31, 2015	Avionics Government		Avionics Commercial		Avionics Total		Corporate Items			Total
Net sales	$	5,658,695	$	312,170	$	5,970,865	$	-		$	5,970,865
Cost of sales		3,709,998		226,110		3,936,108		-			3,936,108
Gross margin		1,948,697		86,060		2,034,757		-			2,034,757

Engineering, research, and development						541,502		-			541,502
Selling, general and administrative						203,249		564,674			767,923
Amortization of deferred financing costs						-		1,357			1,357
Change in fair value of common stock warrants						-		246,751			246,751
Interest expense, net						-		23,687			23,687
Total expenses						744,751		836,469			1,581,220
Income (loss) before income taxes					$	1,290,006	$	(836,469	)	$	453,537

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7 – Segment Information (continued)

Three Months Ended December 31, 2014	Avionics Government		Avionics Commercial		Avionics Total		Corporate Items			Total
Net sales	$	4,455,399	$	574,698	$	5,030,097		-		$	5,030,097
Cost of sales		3,015,359		468,951		3,484,310		-			3,484,310
Gross margin		1,440,040		105,747		1,545,787		-			1,545,787

Engineering, research, and development						494,721		-			494,721
Selling, general and administrative						323,862		501,399			825,261
Amortization of debt discount						-		14,373			14,373
Amortization of deferred financing costs						-		13,648			13,648
Loss on extinguishment of debt						-		188,102			188,102
Change in fair value of common stock warrants						-		(37,330	)		(37,330	)
Interest expense, net						-		39,137			39,137
Total expenses						818,583		719,329			1,537,912
Income (loss) before income taxes					$	727,204	$	(719,329	)	$	7,875

Nine Months Ended December 31, 2015	Avionics Government		Avionics Commercial		Avionics Total		Corporate Items			Total
Net sales	$	17,248,766	$	1,386,408	$	18,635,174	$	-		$	18,635,174
Cost of sales		11,506,710		1,034,946		12,541,656		-			12,541,656
Gross margin		5,742,056		351,462		6,093,518		-			6,093,518

Engineering, research, and development						1,477,290		-			1,477,290
Selling, general and administrative						908,829		1,608,658			2,517,487
Amortization of deferred financing costs						-		4,072			4,072
Change in fair value of common stock warrants						-		697,579			697,579
Interest expense, net						-		79,156			79,156
Total expenses						2,386,119		2,389,465			4,775,584
Income (loss) before income taxes					$	3,707,399	$	(2,389,465	)	$	1,317,934

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

Engineering, research, and development						1,476,343		-			1,476,343
Selling, general and administrative						899,579		1,464,909			2,364,488
Amortization of debt discount						-		75,308			75,308
Amortization of deferred financing costs						-		67,808			67,808
Loss on extinguishment of debt								188,102			188,102
Change in fair value of common stock warrants						-		68,750			68,750
Interest expense, net						-		159,004			159,004
Total expenses						2,375,922		2,023,881			4,399,803
Income (loss) before income taxes					$	1,159,426	$	(2,023,881	)	$	(864,455	)

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8 – Income Taxes

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

The tax effect of temporary differences, primarily net operating loss carryforwards, asset reserves and accrued liabilities, gave rise to the Company’s deferred tax asset in the accompanying December 31, 2015 and March 31, 2015 condensed consolidated balance sheets. Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reverse.

Note 9 – 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.

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 9 – Fair Value Measurements (continued)

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of December 31, 2015 and March 31, 2015. As required by ASC 820-10, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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

December 31, 2015	Level I		Level II		Level III		Total
Total Assets	$	-	$	-	$	-	$	-

Warrant liability		-		-		1,216,541		1,216,541
Total Liabilities	$	-	$	-	$	1,216,541	$	1,216,541

March 31, 2015	Level I		Level II		Level III		Total
Total Assets	$	-	$	-	$	-	$	-

Warrant liability		-		-		518,962		518,962
Total Liabilities	$	-	$	-	$	518,962	$	518,962

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

The following table provides a summary of the changes in fair value of our Level 3 financial liabilities from March 31, 2015 through December 31, 2015, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to the liability held at December 31, 2015:

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

Warrant liability	$	518,962	$	697,579	$	-	$	-	$	1,216,541
Total Liabilities	$	518,962	$	697,579	$	-	$	-	$	1,216,541

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.

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 9 – Fair Value Measurements (continued)

With the payment of the loan in November 2014, the holder has the right, exercisable at any time, in writing (the “Warrant Put Notice”), to cause the Company, subject to the terms and conditions hereof, to purchase from the holder all, or any portion, of the warrant for the warrant put repurchase price (the “Repurchase Price”). The Repurchase Price is the greater of 1) Adjusted EBITDA (as defined below) per share as of the date of the Warrant Put Notice, less $0.01, multiplied by the number of warrants or 2) the product of the current market price per share as of the date of the Warrant Put Notice, less the purchase price of the warrant or warrants, multiplied by the number of warrants, if this amount is higher. “Adjusted EBITDA” 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, 2015, reflect the higher of these two options for each specific warrant.

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, 2015

Date of Warrant		Expiration Date		Number of Warrants		Exercise Price		Fair Market Value Per Share		Put Option Value		Market Price Option		Remaining Life in Years		Warrant Liability
	09-10-2010		09-10-2019		136,920	$	6.70	$	6.42	$	68,460		NA		4.45	$	68,460
	09-10-2010		09-10-2015		10,416	$	6.70	$	6.42		NA		NA		0.45	$	7,002	*
	07-26-2012		09-10-2019		50,000	$	3.35	$	6.42	$	30,000		153,500		4.45	$	153,500
	07-26-2012		09-10-2019		20,000	$	3.35	$	6.42	$	13,200		61,400		4.45	$	61,400
	11-20-2012		09-10-2019		20,000	$	3.56	$	6.42	$	13,200		57,200		4.45	$	57,200
	02-14-2013		09-10-2019		20,000	$	3.58	$	6.42	$	13,200		55,000		4.45	$	55,000
	07-12-2013		09-10-2019		20,000	$	3.33	$	6.42	$	13,200		61,800		4.45	$	61,800
	08-12-2013		09-10-2019		20,000	$	3.69	$	6.42	$	13,200		54,600		4.45	$	54,600

* Based on Black-Scholes Calculation and expired in September 2015.

Values at December 31, 2015

Date of Warrant		Expiration Date		Number of Warrants		Exercise Price		Fair Market Value Per Share		Put Option Value		Market Price Option		Remaining Life in Years		Warrant Liability
	09-10-2010		09-10-2019		136,920	$	6.70	$	4.85	$	580,541		NA		3.70	$	580,541
	07-26-2012		09-10-2019		50,000	$	3.35	$	4.85	$	212,000		75,000		3.70	$	212,000
	07-26-2012		09-10-2019		20,000	$	3.35	$	4.85	$	84,800		30,000		3.70	$	84,800
	11-20-2012		09-10-2019		20,000	$	3.56	$	4.85	$	84,800		25,800		3.70	$	84,800
	02-14-2013		09-10-2019		20,000	$	3.58	$	4.85	$	84,800		23,600		3.70	$	84,800
	07-12-2013		09-10-2019		20,000	$	3.33	$	4.85	$	84,800		30,400		3.70	$	84,800
	08-12-2013		09-10-2019		20,000	$	3.69	$	4.85	$	84,800		23,200		3.70	$	84,800

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10 – Reclassifications

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

Note 11 – 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 the Award, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the U.S. Army Contracts Attorney and the U.S. Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed Aeroflex proprietary technology in winning the Award, and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest.

In December 2009, the Kansas District Court dismissed the Aeroflex Action on jurisdiction grounds. Aeroflex appealed this decision. In May 2012, the Kansas Supreme Court reversed the decision and remanded the Aeroflex Action to the Kansas District Court for further proceedings. The Company has been engaged in discovery and depositions for the last three quarters, which has resulted in substantially higher legal expense. The August 31, 2015 Amended Supplemental Modified Scheduling Order has the trial date set for October 24, 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.

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 12 – New Accounting Pronouncements

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

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

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 12 – New Accounting Pronouncements (continued)

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

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

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

In May 2014, the FASB issued ASU 2014-09 that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the new guidance to determine the impact, if any, it will have on its consolidated financial statements.

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

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

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

Table of Contents

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

Forward Looking Statements

This Quarterly Report on Form 10-Q and other reports filed by the Company from time to time with the SEC (collectively the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended March 31, 2015, filed with the SEC on June 25, 2015, relating to the Company’s industry, the Company’s operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

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

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

Overview

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

Fiscal year 2016 highlights:

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

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

Table of Contents

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

Overview (continued)

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

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

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

Introduction of the TR-36 Navigation/Communication Test Set (the ‘TR-36”), representing our first new production introduction into the commercial market for the last 10 years. The TR-36 provides comprehensive ramp testing in a user-friendly, light weight high-precision instrument for rapid functional testing of VOR, LOC/GS, MB, and VHF COMM (AM/FM), ELT and EPIRB avionic equipment all in a weather proof package with color display. We believe this product will be very competitive in this market.

·	Investment in new lightweight, hand held test set design for commercial and military customers that we hope will expand our product line and allow us to compete in this very large radio test set market.

Engagement of our new partner, Blue Star Engineering and Electronics Ltd. (“Blue Star”). Blue Star will handle all the Company’s interests in India, Nepal, Sri Lanka, Maldives and Bangladesh for both General Aviation and Military markets. The market in this region represents a significant opportunity for the Company.

·	As developments of our major programs are complete, engineering efforts have been directed to new product development, and we have a few new products in the pipeline, in addition to the recently introduced TR-36.

In November 2014, the Company entered into a 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. (“BCA”) in the amount of $1,153,109, including accrued interest of $4,467. The term of the loan is for 3 years and expires in November, 2017. Monthly payments are at $36,551 including interest at 6%.

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

Results of Operations

Sales

For the three months ended December 31, 2015, sales increased $940,768 (18.7%) to $5,970,865 as compared to $5,030,097 for the three months ended December 31, 2014.

Avionics government sales increased $1,203,296 (27.0%) to $5,658,695 for the three months ended December 31, 2015 as compared to $4,455,399 for the three months ended December 31, 2014. The increase in revenues is mostly attributed to the increase in shipments of the AN/USM-708 test set, TS-4530A SETS and the AN/ARM-206 test set associated with the Company’s three major programs. Commercial sales decreased $262,528(45.7%) to $312,170 for the three months ended December 31, 2015 as compared to $574,698 for the three months ended December 31, 2014. This decrease is attributed to lower sales of the TR-220 as well as lower sales for calibration and repairs and spare parts.

For the nine months ended December 31, 2015, sales increased $6,888,327 (58.6%) to $18,635,174 as compared to $11,746,847 for the nine months ended December 31, 2014.

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

Table of Contents

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

Results of Operations (continued)

Gross Margin

Gross margin increased $488,970 (31.6%) and $2,558,170 (72.4%) to $2,034,757 and $6,093,518, respectively, for the three and nine months ended December 31, 2015 as compared to $1,545,787 and $3,535,348, respectively, for the three and nine months ended December 30, 2014. This increase is mostly attributed to the increase in volume of sales, especially for the CRAFT, TS-4530A and ITATS programs. Gross margin was also favorably impacted by the increase in selling prices for the CRAFT program for the new orders. The gross margin percentage for the three months ended December 30, 2015 was 34.1%, as compared to 30.7% for the three months ended December 31, 2014. The gross margin percentage for the nine months ended December 31, 2015 was 32.7%, as compared to 30.1% for the nine months ended December 31, 2014.

Operating Expenses

Selling, general and administrative expenses decreased $57,338 (6.9%) to $767,923 for the three months ended December 31, 2015, as compared to $825,261 for the three months ended December 31, 2014. This decrease was primarily attributed to a favorable settlement of an accrued liability and slightly lower litigation expenses mostly offset by higher accrued bonus compensation, salaries and related expenses, commissions and consulting fees. Legal expenses associated with the Aeroflex litigation were $150,289 for the three months ended December 31, 2015 as compared to $180,755 for the same period last year.

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

Engineering, research and development expenses increased $46,781 (9.5%) and $947 to $541,502 and $1,477,290, respectively for the three and nine months ended December 31, 2015 as compared to $494,721 and $1,476,343, respectively, for the three and nine months ended December 31, 2014. While the Company has completed development on its major programs, research and development resources have now been focused on new product development, sustaining engineering and enhancements to existing products. The Company continues to invest in new products and introduced a new commercial Nav/Comm test set earlier this year. We are making some modifications to this unit based on customer feedback and already have received orders for this new unit. This is a large and important market segment for the Company, and we are optimistic that this new product will help us regain market share in this segment. We are also taking advantage of our CRAFT and TS-4530A technology to develop smaller hand-held products in the 12 months, which will broaden our product line for both commercial and military applications. We have added additional personnel to research and development activities to accelerate our time to market.

Income (Loss) From Operations

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

Other Income (Expense), Net

For the three months ended December 31, 2015, total other expense was $271,795 as compared to other expense of $217,930 for the three months ended December 31, 2014. This increase is primarily due to the non-cash loss of $246,751 on the change in the valuation of common stock warrants for the three months ended December 31, 2015 as compared to a gain of $37,330 in the valuation of common stock warrants in same period in the prior year. Interest expense declined as a result of the lower interest rate on the new loan and the lower outstanding loan balance. Amortization of deferred financing charges and debt discount were lower as a result of the repayment of the loan with BCA, as these remaining expenses were recorded as a loss on the extinguishment of debt for the three months ended December 31, 2014.

For the nine months ended December 31, 2015, total other expense was $780,807 as compared to other expense of $558,972 for the nine months ended December 31, 2014. This change is primarily due to the non-cash loss of $697,579 on the change in the valuation of common stock warrants for the nine months ended December 31, 2015 as compared to a loss of $68,750 in the valuation of common stock warrants in same period in the prior year. Interest expense declined as a result of the lower interest rate on the new loan and the lower outstanding loan balance. Amortization of deferred financing charges and debt discount were lower as a result of the repayment of the loan with BCA, as these remaining expenses were recorded as a loss on the extinguishment of debt for the nine month ended December 31, 2014.

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

Results of Operations (continued)

Income (Loss) before Income Taxes

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

Income Tax Provision/Benefit

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

Net Income (Loss)

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

Liquidity and Capital Resources

At December 31, 2015, the Company had net working capital of $4,193,678 as compared to $2,599,117 at March 31, 2015. This change is primarily the result of the increase in cash and inventories and the large decrease in accounts payable and accrued liabilities partially offset by the decrease in accounts receivable.

During the nine months ended December 31, 2015, the Company’s cash balance increased by $443,121 to $629,053. The Company’s principal sources and uses of funds were as follows:

Cash provided by operating activities. For the nine months ended December 31, 2015, the Company provided $978,447 in cash for operations as compared to providing $473,862 in cash for operations for the nine months ended December 31, 2014. This increase in cash from operations is the result of the improvement in income from operations, lower payments of progress billings offset partially by an increase in accounts receivable and decrease in accounts payable and accrued expenses as well as a decrease in the Company’s deferred tax asset.

Cash used in investing activities. For the nine months ended December 31, 2015, the Company used $45,041 of its cash for investing activities, as compared to $8,541 for the nine months ended December 31, 2014 as a result of an increase in the purchase of capital equipment.

Cash used in financing activities. For the nine months ended December 31, 2015, the Company used $490,285 in financing activities as compared to using $365,448 for the nine months ended December 31, 2014 as a result of lower capital lease obligations. The Company paid down $205,000 of its notes to related parties. Repayments of long-term debt decreased as a result of the refinancing with Bank of America in November 2014.

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

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

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

These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2015, filed with the SEC on June 25, 2015 (the “Annual Report”).

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

Off-Balance Sheet Arrangements

As of December 31, 2015, the Company had no material off-balance sheet arrangements.

Critical Accounting Policies

Our critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2015 consolidated financial statements included in our Annual Report.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

The Company's Chief Executive Officer and the Company's Principal Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company's disclosure controls and procedures were not effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act as a result of the material weakness in the Company’s internal control over financial reporting previously disclosed under Item 9A of the Company’s Annual Report.

The Company is actively engaged in implementing the remediation efforts described in the Company’s Annual Report which are designed to address this material weakness. While progress has been made, additional time is needed to fully implement and demonstrate the effectiveness of the remediation efforts. The Company is committed to designing, implementing and operating effective controls, and management continues to regularly assess the progress and sufficiency of the ongoing initiatives and make adjustments as and when necessary.

Notwithstanding the ineffectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q and the material weakness in our internal control over financial reporting that existed as of that date, management believes that (i) this Quarterly Report on Form 10-Q does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this Quarterly Report on Form 10-Q and (ii) the unaudited condensed consolidated financial statements, and other financial information, included in this Quarterly Report on Form 10-Q fairly present in all material respects in accordance with GAAP our financial condition, results of operations and cash flows as of, and for, the dates and periods presented.

Changes in Internal Control over Financial Reporting

The Company is taking actions to remediate the material weakness related to its internal control over financial reporting, as described above. Other than the changes disclosed above, there were no material changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(e) and 15d-15(e) under the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations of Internal Controls

The Company’s management, including the Chief Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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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 Kansas District Court for further proceedings. The August 31, 2015 Amended Supplemental Modified Scheduling Order has the trial date set for October 24, 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.

Item 1A. Risk Factors.

We believe there are no changes that constitute material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2015, filed with the SEC on June 25, 2015.

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

There were no unregistered sales of the Company’s equity securities during the quarter ended December 31, 2015 other than those previously reported in a Current Report on Form 8-K.

Item 3. Defaults upon Senior Securities.

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

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

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

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Item 6. Exhibits.

Exhibit No.		Description

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 16, 2016	By:	/s/ Jeffrey C. O’Hara
		Name: Jeffrey C. O’Hara
		Title: Chief Executive Officer Principal Executive Officer


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

TEL INSTRUMENT ELECTRONICS CORP - FORM 10-Q - February 16, 2016

Attached files

TEL INSTRUMENT ELECTRONICS CORP Reports