TEL INSTRUMENT ELECTRONICS CORP - FORM 10-Q

Attached files

file	filename
EX-32.2 - EX-32.2 - TEL INSTRUMENT ELECTRONICS CORP	ex32-2.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

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, 2017

¨ 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, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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 8, 2018, there were 3,255,887 shares outstanding of the registrant’s common stock.

TEL-INSTRUMENT ELECTRONICS CORP.

TABLE OF CONTENTS

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

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	23

Item 4.	Controls and Procedures.	23

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings.	24

Item 1A.	Risk Factors.	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	25

Item 3.	Defaults Upon Senior Securities.	25

Item 4.	Mine Safety Disclosures.	25

Item 5.	Other Information.	25

Item 6.	Exhibits.	26

Signatures		27

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31, 2017			March 31, 2017
	(unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	263,983		$	287,873
Accounts receivable, net		1,660,757			1,556,382
Inventories, net		4,309,324			4,208,179
Restricted cash to support appeal bond		2,000,000			-
Prepaid expenses and other current assets		107,450			188,578
Total current assets		8,341,514			6,241,012

Equipment and leasehold improvements, net		197,602			161,427
Other long-term assets		35,109			33,509
Total assets		8,574,225			6,435,948

LIABILITIES & STOCKHOLDERS’ DEFICIT

Current liabilities:
Current portion of long-term debt		3,696			291,991
Line of credit		1,000,000			200,000
Capital lease obligations – current portion		6,718			6,268
Accounts payable and accrued liabilities		2,431,763			2,072,955
Federal and state taxes payable		-			4,105
Deferred revenues – current portion		54,671			123,720
Accrued legal damages		4,930,523			2,800,000
Accrued payroll, vacation pay and payroll taxes		396,207			527,413
Total current liabilities		8,823,578			6,026,452

Capital lease obligations – long-term		8,664			13,760
Long-term debt		-			2,124
Deferred revenues – long-term		353,280			352,973
Warrant liability		-			95,000
Total liabilities		9,185,522			6,490,309

Commitments

Mezzanine Equity:
Preferred stock, 1,000,000 shares authorized, par value $0.10 per share, 500,000 shares 8% Cumulative Series A Convertible Preferred issued and outstanding		2,990,667			-
Total mezzanine equity		2,990,667			-

Stockholders’ (deficit):
Common stock, 4,000,000 shares authorized, par value $0.10 per share, 3,255,887 shares issued and outstanding, respectively		325,586			325,586
Paid-in capital in excess of par value, common stock		8,099,882			8,107,369
Accumulated deficit		(12,027,432	)		(8,487,316	)
Total stockholders’ deficit		(3,601,964	)		(54,361	)
Total liabilities, mezzanine equity and stockholders’ deficit	$	8,574,225		$	6,435,948

See accompanying notes to condensed consolidated financial statements.

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Nine Months Ended
	December 31, 2017			December 31, 2016			December 31, 2017			December 31, 2016

Net sales	$	2,625,793		$	4,236,519			7,955,035		$	14,654,917
Cost of sales		1,689,113			2,602,268			5,377,195			9,318,425

Gross margin		936,680			1,634,251			2,577,840			5,336,492

Operating expenses:
Selling, general and administrative		548,391			582,880			1,881,072			2,042,922
Litigation expenses		134,765			282,490			560,610			609,330
Legal damages		30,523			-			2,130,523			-
Engineering, research and development		546,691			615,007			1,691,631			1,783,655
Total operating expenses		1,260,370			1,480,377			6,263,836			4,435,907

(Loss) income from operations		(323,690	)		153,874			(3,685,996	)		900,585

Other income (expense):
Proceeds from life insurance		-			-			92,678			-
Amortization of deferred financing costs		(649	)		(1,359	)		(3,363	)		(4,072	)
Change in fair value of common stock warrants		5,000			37,000			95,000			288,203
Interest expense		(14,097	)		(11,620	)		(38,435	)		(46,953	)
Total other income (expense)		(9,746	)		24,021			145,880			237,178

(Loss) income before income taxes		(333,436	)		177,895			(3,540,116	)		1,137,763

Income tax expense		-			36,382			-			313,886

Net (loss) income		(333,436	)		141,513			(3,540,116	)		823,877

Preferred stock dividends		(30,667	)		-			(30,667	)		-

Net (loss) income attributable to common shareholders	$	(364,103	)	$	141,513		$	(3,570,783	)	$	823,877

Basic (loss) income per common share	$	(0.11	)	$	0.04		$	(1.10	)	$	0.25
Diluted (loss) income per common share	$	(0.11	)	$	0.03		$	(1.10	)	$	0.23

Weighted average shares outstanding:
Basic		3,255,887			3,255,887			3,255,887			3,255,887
Diluted		3,255,887			3,265,135			3,255,887			3,266,532

See accompanying notes to condensed consolidated financial statements.

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	December 31, 2017			December 31, 2016

Cash flows from operating activities:
Net (loss) income	$	(3,540,116	)	$	823,877
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Deferred income taxes		-			317,509
Depreciation and amortization		53,221			95,209
Provision for inventory obsolescence		50,000			20,000
Amortization of deferred financing costs		3,363			4,072
Change in fair value of common stock warrant		(95,000	)		(288,203	)
Non-cash stock-based compensation		23,180			24,536

Changes in assets and liabilities:
Decrease (increase) in accounts receivable		(104,375	)		396,430
(Increase) decrease in inventories		(151,145	)		185,145
Decrease (increase) in prepaid expenses & other assets		76,165			(28,774	)
Increase (decrease) in accounts payable and other accrued expenses		358,808			(299,359	)
Decrease in federal and state taxes		(4,105	)		(53,623	)
Decrease in accrued payroll, vacation pay & withholdings		(131,206	)		(224,072	)
(Decrease) increase in deferred revenues		(68,742	)		338,792
Increase in accrued legal damages		2,130,523			-
Restricted cash for appeal bond		(2,000,000	)
Decrease in other long-term liabilities		-			(7,800	)
Net cash (used in) provided by operating activities		(3,399,429	)		1,303,739

Cash flows from investing activities:
Purchases of equipment		(89,396	)		(37,070	)
Net cash used in investing activities		(89,396	)		(37,070	)

Cash flows from financing activities:
Proceeds from line of credit		800,000			-
Proceeds from issuance of preferred stock, net of expenses		2,960,000			-
Payment of warrant liability		-			(720,000	)
Repayment of long-term debt		(290,419	)		(322,894	)
Repayment of subordinated notes - related parties		-			(25,000	)
Repayment of capitalized lease obligations		(4,646	)		(9,254	)
Net cash provided by (used in) financing activities		3,464,935			(1,077,148	)

Net decrease in cash and cash equivalents		(23,890	)		189,521
Cash and cash equivalents at beginning of period		287,873			972,633
Cash and cash equivalents at end of period	$	263,983		$	1,162,154

Supplemental cash flow information:
Taxes paid	$	5,000		$	87,374
Interest paid	$	50,374		$	107,768

See accompanying notes to condensed consolidated financial statements.

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Tel-Instrument Electronics Corp. (the “Company” or “TIC” or “Tel”) as of December 31, 2017, the results of operations for the three and nine months ended December 31, 2017 and December 31, 2016, and statements of cash flows for the nine months ended December 31, 2017 and December 31, 2016. 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, 2017 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, 2017, as filed with the United States Securities and Exchange Commission (the “SEC”) on July 14, 2017 (the “Annual Report).

Note 2 - Liquidity and Going Concern

These condensed consolidated financial statements have been prepared in conformity with GAAP, which contemplates continuation of the Company as a going concern. As discussed in Note 15 to the Notes to the Condensed Consolidated Financial Statements, the Company has recorded total damages of $4,930,523 as a result of the jury verdict associated with the Aeroflex litigation as well as the Court’s decision on punitive damages. The jury found no misappropriation of Aeroflex trade secrets but it did rule that the Company tortiously interfered with a prospective business opportunity and awarded damages. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex. The Court conducted further hearings on the Company’s post-trial motions which sought to reduce the damages award of $2.8 million, as well as the punitive damages claim. The Court denied the Company’s motions and awarded Aeroflex an additional $2.1 million of punitive damages, which brings the total Tel damages awarded in this case to approximately $4.9 million. The Company has filed motions in January 2018 for the Court to reconsider the amount of damages on the grounds that they are duplicative and not legally supportable. A hearing on this motion is expected within the next 30 days and a final decision is expected within the next two to three months. The Judge could deny our motions, reduce the amount of damages or even order a new trial. Once a final decision has been rendered, the Company has 30 days to file an appeal. The Company has posted a $2,000,000 bond to prevent Aeroflex from enforcement actions until a final decision has been rendered by the Court. This $2 million bond amount would remain in place during the appeal process (See Note 5). The Company believes it has excellent grounds to appeal this verdict. The appeal process would be expected to take several years to complete.

The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The ability of the Company to continue as a going concern is dependent upon its ability to achieve profitable operations and/or raise additional capital to support the appeal process or pay any final damages amount. In November 2017, the Company signed a subscription agreement in which the Company received $3 million for Series A Convertible Preferred Stock (See Note 14 to the Notes to the Condensed Financial Statements). These funds were used to finance an appeal and provide funds for operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Note 3 – Summary of Significant Accounting Policies

During the nine months ended December 31, 2017, there have been no material changes in the Company’s significant accounting policies to those previously disclosed in the Annual Report.

Note 4 – Accounts Receivable, net

The following table sets forth the components of accounts receivable:

	December 31, 2017			March 31, 2017
Government	$	1,461,090		$	1,392,482
Commercial		207,167			171,400
Less: Allowance for doubtful accounts		(7,500	)		(7,500	)
	$	1,660,757		$	1,556,382

Note 5 – Restricted Cash to support appeal bond

The Company transferred $2,000,000 to a restricted cash account to secure a letter of credit which was used for collateral for the appeal bond (See Notes 14 and 15).

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 6 – Inventories, net

Inventories consist of:

	December 31, 2017			March 31, 2017

Purchased parts	$	3,839,370		$	3,197,378
Work-in-process		817,543			1,272,235
Finished goods		32,411			68,566
Less: Inventory reserve		(380,000	)		(330,000	)
	$	4,309,324		$	4,208,179

Note 7 – Net Income (Loss) per Share

Net income (loss) per share has been computed according to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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.

	Three Months Ended			Three Months Ended
	December 31, 2017			December 31, 2016
Basic net (loss) income per share computation:
Net (loss) income	$	(364,103	)	$	141,513
Weighted-average common shares outstanding		3,255,887			3,255,887
Basic net (loss) income per share	$	(0.11	)	$	0.04
Diluted net (loss) income per share computation
Net (loss) income	$	(364,103	)	$	141,513
Add: Change in fair value of warrants		-			37,000
Diluted (loss) income	$	(364,103	)		104,513
Weighted-average common shares outstanding		3,255,887			3,255,887
Incremental shares attributable to the assumed exercise of outstanding stock options and warrants		-			9,248
Total adjusted weighted-average shares		3,255,887			3,265,135
Diluted net (loss) income per share	$	(0.11	)	$	0.03

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7 – Net Income (Loss) per Share (continued)

	Nine Months Ended			Nine Months Ended
	December 31, 2017			December 31, 2016
Basic net (loss) income per share computation:
Net (loss) income	$	(3,570,783	)	$	823,877
Weighted-average common shares outstanding		3,255,887			3,255,887
Basic net(loss)income per share	$	(1.10	)	$	0.25
Diluted net (loss) income per share computation
Net (loss) income	$	(3,570,783	)	$	823,877
Change in fair value of warrants		-			70,000
Diluted (loss) income	$	(3,570,783	)		753,877
Weighted-average common shares outstanding		3,255,887			3,255,887
Incremental shares attributable to the assumed exercise of outstanding stock options and warrants		-			10,645
Total adjusted weighted-average shares		3,255,887			3,266,532
Diluted net (loss) income per share	$	(1.10	)	$	0.23

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

	December 31, 2017		December 31, 2016
Convertible preferred stock		1,000,000		-
Stock options		75,000		71,000
Warrants		50,000		-
		1,125,000		71,000

Note 8 – 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 was for three years, and matured in November 2017. Monthly payments were $36,551 including interest at 6%. The term loan was collateralized by substantially all of the assets of the Company. This loan was fully repaid in November 2017. At December 31, 2017 and March 31, 2017, the outstanding balances were $-0- and $285,810, 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 matures 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, 2017 and March 31, 2017, the outstanding balances were $3,696 and $8,305, respectively. At December 31, 2017, $3,696 was classified as current.

Note 9 - Line of Credit

On March 21, 2016, the Company entered into a line of credit agreement with Bank of America, which expired March 31, 2017. In March 2017, the line of credit was renewed and the expiration date extended until March 31, 2018. The new line provides a revolving credit facility with borrowing capacity of up to $1,000,000. There are no covenants or borrowing base calculations associated with this line of credit. Interest on any outstanding balances is payable monthly at an annual interest rate equal to the LIBOR (London Interbank Offered Rates) Daily Floating plus 3.75 percentage points. The Company’s interest rate was 5.319% at December 31, 2017. The line is collateralized by substantially all of the assets of the Company. During the nine months ended December 31, 2017, the Company borrowed $800,000 from this line of credit. As of December 31, 2017 and March 31, 2017, the outstanding balances were $1,000,000 and $200,000, respectively. As of December 31, 2017 the remaining availability under this line is $-0-.

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10 – Deferred Revenues

In June 2016, the Company negotiated a settlement with a customer in the amount of $679,935 for price increases due to delays on a production release. Deferred revenues are recognized based upon the shipment of units under this contract. During the nine months ended December 31, 2017, the Company recognized the remaining balance of $73,302 as compared to $470,288 for the nine months ended December 30, 2016. As of December 31, 2017, the remaining deferred revenues related to the above-mentioned settlement was $-0- as compared to $73,302 at March 31, 2017.

During the nine months ended December 31, 2017, the Company recognized revenues in the amount of $70,000 that pertained to fiscal year 2017 shipments and that were not recorded in fiscal year 2017.

Note 11 – 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, 2017 and 2016:

Three Months Ended December 31, 2017	Avionics Government		Avionics Commercial		Avionics Total		Corporate Items			Total
Net sales	$	1,825,744	$	800,049	$	2,625,793	$	-		$	2,625,793
Cost of sales		1,013,481		675,632		1,689,113		-			1,689,113
Gross margin		812,263		124,417		936,680		-			936,680

Engineering, research, and development						546,691		-			546,691
Selling, general and administrative						225,610		322,781			548,391
Litigation costs								134,765			134,765
Legal damages								30,523			30,523
Amortization of deferred financing costs						-		649			649
Change in fair value of common stock warrants						-		(5,000	)		(5,000	)
Proceeds from life insurance								-			-
Interest expense, net						-		14,097			14,097
Total expenses						772,301		497,815			1,270,116
Income (loss) before income taxes					$	164,379	$	(497,815	)	$	(333,436	)

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 11 – Segment Information (continued)

Three Months Ended December 31, 2016	Avionics Government		Avionics Commercial		Avionics Total		Corporate Items			Total
Net sales	$	3,771,384	$	465,135	$	4,236,519	$	-		$	4,236,519
Cost of sales		2,297,157		305,111		2,602,268		-			2,602,268
Gross margin		1,474,227		160,024		1,634,251		-			1,634,251

Engineering, research, and development						615,007		-			615,007
Selling, general and administrative						256,599		326,281			582,880
Litigation costs								282,490			282,490
Amortization of deferred financing costs						-		1,359			1,359
Change in fair value of common stock warrants						-		(37,000	)		(37,000	)
Interest expense, net						-		11,620			11,620
Total expenses						871,606		584,750			1,456,356
Income (loss) before income taxes					$	762,645	$	(584,750	)	$	177,895

Nine Months Ended December 31, 2017	Avionics Government		Avionics Commercial		Avionics Total		Corporate Items			Total
Net sales	$	5,826,763	$	2,128,272	$	7,955,035	$	-		$	7,955,035
Cost of sales		3,489,223		1,887,972		5,377,195		-			5,377,195
Gross margin		2,337,540		240,300		2,577,840		-			2,577,840

Engineering, research, and development						1,691,631		-			1,691,631
Selling, general and administrative						861,795		1,019,277			1,881,072
Litigation costs								560,610			560,610
Legal damages								2,130,523			2,130,523
Amortization of deferred financing costs						-		3,363			3,363
Change in fair value of common stock warrants						-		(95,000	)		(95,000	)
Proceeds from life insurance								(92,678	)		(92,678	)
Interest expense, net						-		38,435			38,435
Total expenses						2,553,426		3,564,530			6,117,956
Income (loss) before income taxes					$	24,414	$	(3,564,530	)	$	(3,540,116	)

Nine Months Ended December 31, 2016	Avionics Government		Avionics Commercial		Avionics Total		Corporate Items			Total
Net sales	$	12,981,768	$	1,673,149	$	14,654,917	$	-		$	14,654,917
Cost of sales		8,067,636		1,250,789		9,318,425		-			9,318,425
Gross margin		4,914,132		422,360		5,336,492		-			5,336,492

Engineering, research, and development						1,783,655		-			1,783,655
Selling, general and administrative						946,589		1,096,333			2,042,922
Litigation costs								609,330			609,330
Amortization of deferred financing costs						-		4,072			4,072
Change in fair value of common stock warrants						-		(288,203	)		(288,203	)
Interest expense, net						-		46,953			46,953
Total expenses						2,730,244		1,468,485			4,198,729
Income (loss) before income taxes					$	2,606,248	$	(1,468,485	)	$	1,137,763

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 12 – 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. 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. The Company has provided a 100% valuation allowance against its deferred tax asset at December 31, 2017 and March 31, 2017.

On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted into law and the new legislation contains several key tax provisions that affected us, including a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as re-measuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. The Tax Act had no impact on the accompanying financial statements.

Note 13 – 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.

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 13 – Fair Value Measurements (continued)

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

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

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

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

The carrying value of the Company’s borrowings is a reasonable estimate of its fair value as borrowings under the Company’s credit facility reflect currently available terms and conditions for similar debt.

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of December 31, 2017 and March 31, 2017. 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, 2017

Level I

Level II

Level III

Total

Total Assets

Warrant liability

Total Liabilities

March 31, 2017	Level I		Level II		Level III		Total
Total Assets	$	-	$	-	$	-	$	-

Warrant liability		-		-		95,000		95,000
Total Liabilities	$	-	$	-	$	95,000	$	95,000

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 following table provides a summary of the changes in fair value of our Level 3 financial liabilities from March 31, 2017 through December 31, 2017, 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, 2017:

Level 3 Reconciliation	Balance 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	$	95,000	$	(95,000	)	$	-	$	-	$	-
Total Liabilities	$	95,000	$	(95,000	)	$	-	$	-	$	-

The Company has remaining warrants with an outside investor to purchase 50,000 shares of the Company’s common stock at an exercise price of $3.35 per share or exercising the “put option” to the Company. The warrant liability of the 50,000 warrants was $-0- at December 31, 2017 as compared to $95,000 at March 31, 2017.

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 14 – Series A 8% Convertible Preferred Stock

On November 14, 2017, the Company entered into definitive subscription agreements with an accredited investor, pursuant to which the investor purchased an aggregate of 500,000 shares of the Company’s Series A Preferred Stock (the “Series A Preferred”) for an aggregate of $3 million. The Company intends to use such proceeds for the payment of any Court judgment and/or settlement related to the Aeroflex Wichita, Inc. litigation, working capital purposes, and for payment of fees and expenses associated with this transaction. The Closing occurred following the satisfaction of customary closing conditions. The securities issued pursuant to the Subscription Agreements were not registered under the Securities Act of 1933, as amended (the “Securities Act”), but qualified for exemption under Section 4(a)(2) of the Securities Act. The securities were exempt from registration under Section 4(a)(2) of the Securities Act because the issuance of such securities by the Company did not involve a “public offering,” as defined in Section 4(a)(2) of the Securities Act, due to the insubstantial number of persons involved in the transaction, size of the offering, manner of the offering and number of securities offered. The Company did not undertake an offering in which it sold a high number of securities to a high number of investors. In addition, these shareholders had the necessary investment intent as required by Section 4(a)(2) of the Securities Act since they agreed to, and received, share certificates bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(a)(2) of the Securities Act.

The shares of Series A Preferred have a stated value of $6.00 per share (the “Series A Stated Value”) and are convertible into Common Stock at a price of $3.00 per share. The holders of shares of the Series A Preferred shall be entitled to receive dividends out of any assets legally available, to the extent permitted by New Jersey law, at an annual rate equal to 8% of the Series A Stated Value of such shares of Series A Preferred, calculated on the basis of a 360 day year, consisting of twelve 30-day months, and shall accrue from the date of issuance of such shares of Series A Preferred, payable quarterly in cash. Any unpaid dividends shall accrue at the same rate. To the extent not paid on the last day of March, June, September and December of each calendar year, all dividends on any share of Series A Preferred shall accumulate whether or not declared by the Board and shall remain accumulated dividends until paid. As of December 31, 2017, the Company accrued $30,667 for dividends within mezzanine equity on the accompanying Balance Sheet. Since there were not sufficient authorized shares to allow for full conversion of the preferred stock into common stock at December 31, 2017, preferred stock was classified as mezzanine equity. At the January 2018 annual meeting approval was obtained for the additional authorized shares. As such, future financial statements will have preferred stock classified as permanent stockholders’ equity.

The Holders will vote together with the holders of the Company’s Common Stock on an as-converted basis on each matter submitted to a vote of holders of Common Stock (whether at a meeting of shareholders or by written consent). Effective beginning on the third anniversary of the Original Issue Date, and upon 30 days’ written notice to the Holders of Series A Preferred, the Company may, in its sole discretion, redeem the Series A Preferred at the aggregate Series A Stated Value plus any accrued and accumulated but unpaid dividends.

Note 15 – Litigation

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

On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court located in 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, to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5 (the “Award”). Aeroflex’s petition, seeking injunctive relief and damages, alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with Aeroflex’s business relationship; conspired to harm Aeroflex and tortiously interfered with Aeroflex’s contract. 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

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 15 – Litigation (continued)

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 on Aeroflex’s 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.

On May 23, 2016, the Company filed a motion for summary judgment based on Aeroflex’s lack of jurisdictional standing to bring the case. The motion asserts that Aeroflex does not own the intellectual property at issue since it is a bare licensee of Northrop Grumman. Northrop Grumman has declined to join this suit as plaintiff. Aeroflex lacks standing to sue alone. Also, the motion raises the fact that Aeroflex allowed the license to expire, Aeroflex’s claims are either moot or Aeroflex lacks standing to sue for damages alleged to have accrued after the license ended in 2011. The motion for summary judgment was denied.

The Aeroflex trial on remand in the Kansas District Court began in March 2017. After a nine-week trial, the jury rendered its verdict. The jury found no misappropriation of Aeroflex trade secrets but it did rule that the Company tortiously interfered with a prospective business opportunity and awarded damages of $1.3 million for lost profits. The jury also ruled that Tel tortiously interfered with Aeroflex’s non-disclosure agreements with two former Aeroflex employees and awarded damages of $1.5 million for lost profits, resulting in total damages against the Company of $2.8 million. The jury also found that the former Aeroflex employees breached their non-disclosure agreements with Aeroflex and awarded damages against these two individuals totaling $525,000. The jury also decided that punitive damages should be allowed against the Company.

Following the verdict, the Company filed a motion for judgment as a matter of law. In the motion, the Company renewed its motion for judgment on Aeroflex’s tortious interference with prospective business opportunity claim arguing that such claim is barred by the statute of limitations. Alternatively, the motion asserts there is insufficient evidence supporting the lost profit award on that claim. Additionally, the motion for judgment addresses inconsistency between the awards against the former Aeroflex employees for breach of the non-disclosure agreements and the award against the Company for interfering with those agreements. Alternatively, the motion asserts there is insufficient evidence supporting the lost profit award on that claim.

During July 2017, the Court heard the Company’s motion for judgment as well as conducting a hearing as to the amount of a punitive damages award. Kansas statutes limit punitive damages to a maximum of $5 million.

Aeroflex submitted a motion to the Court requesting that the judge award punitive damages at the maximum $5 million amount. In October 2017, the Court denied the Company’s motions and awarded Aeroflex an additional $2.1 million of punitive damages, which brings the total Tel damages awarded in this case to approximately $4.9 million.

The Company has filed motions in January 2018 for the Court to reconsider the amount of damages on the grounds that they are duplicative and not legally supportable. A hearing on this motion is expected within the next 30 days and a final decision is expected within the next two to three months. The Judge could deny our motions, reduce the amount of damages or even order a new trial. Once a final decision has been rendered, the Company has 30 days to file an appeal. The Company has posted a $2,000,000 bond to prevent Aeroflex from enforcement actions until a final decision has been rendered by the Court. This $2 million bond amount would remain in place during the appeal process (See Note 5). The Company believes it has excellent grounds to appeal this verdict. The appeal process would be expected to take several years to complete.

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.

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 16 – New Accounting Pronouncements

In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments should be applied prospectively to an award modified on or after the adoption date. For public business entities, this update is effective for financial statements issued for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted. We are evaluating whether this ASU will have a material impact on our consolidated financial statements.

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09 (“Improvements to Employee Share-Based Payment Accounting”) which simplifies several aspects of accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard was effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. The Company adopted this standard and it did not have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 (“Leases”), which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. The new standard is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. The adoption of this ASU will increase assets and liabilities for operating leases. The Company is evaluating the impact that the adoption of this standard will have on the Company’s consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, which is an update to Topic 740, “Income Taxes”. This update requires that all deferred tax assets and liabilities be classified as non-current. The Company adopted this update, which is reflected in the accompanying balance sheets. The adoption of this update did not have any impact on the Company’s results of operations.

In August 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements - Going Concern to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern. The guidance requires management to assess whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. When management identifies such conditions or events, a footnote disclosure is required to disclose their nature, as well as management’s plans to alleviate the substantial doubt to continue as a going concern. The standard became effective for our fiscal year end 2017.

In May 2014, the FASB issued ASU 2014-09 that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. In March 2016, the FASB issued ASU 2016-08 which further clarifies the guidance on the principal versus agent considerations within ASU 2014-09. In April 2016, the FASB issued ASU 2016-10 to expand the guidance on identifying performance obligations and licensing within ASU 2014-09. In May 2016, the FASB issued ASU 2016-12 to improve revenue recognition in the areas of collectability, presentation of sales tax and other similar taxes collected from customers, noncash consideration, contract modifications and completed contracts at transition. This update also amends the disclosure requirements within ASU 2014-09 for entities that retrospectively apply the guidance. The latest amendments are intended to address implementation issues that were raised by stakeholders and discussed by the Revenue Recognition Transition Resource Group, and provide additional practical expedients. These standards are effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company is assessing their implementation process and the potential impact on its existing revenue accounting policies and newly required financial statement disclosures. The Company has not yet determined the impact from the adoption of the new standard on either its financial position or results of operations.

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 16 – New Accounting Pronouncements (continued)

ASU 2016-18, Restricted Cash, updates Topic 230, Statement of Cash Flows, to require that a statement of cash flows explain the change during the period in restricted cash or restricted cash equivalents, in addition to changes in cash and cash equivalents. That is, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Consequently, transfers between cash and restricted cash will not be presented as a separate line item in the operating, investing or financing sections of the cash flow statement. The ASU includes examples of the revised presentation guidance, and additional presentation and disclosure requirements apply. The ASU is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied retrospectively to each period presented. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.

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

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

Forward Looking Statements

This Quarterly Report on Form 10-Q and other reports filed by the Company from time to time with the SEC (collectively the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended March 31, 2017, filed with the SEC on July 14, 2017, 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 Aeroflex litigation (see Note 15) has been hugely disappointing and has strained our finances even with the preferred stock offering. If the Judge does not change the result or vacate the damage award based on our latest motions, we will appeal this decision. The Company has filed motions in January 2018 for the Court to reconsider the amount of damages on the grounds that they are duplicative and not legally supportable. A hearing on this motion is expected within the next 30 days and a final decision is expected within the next two to three months. The Judge could deny our motions, reduce the amount of damages or even order a new trial. Once a final decision has been rendered, the Company has 30 days to file an appeal. The Company has posted a $2,000,000 bond to prevent Aeroflex from enforcement actions until a final decision has been rendered by the Court. This $2 million bond amount would remain in place during the appeal process (See Note 5). The Company believes it has excellent grounds to appeal this verdict. The appeal process would be expected to take several years to complete. We believe that we will have approximately 2-3 years to generate sufficient cash or secure additional financing to support the repayment of the remaining $2.9 million not covered by the $2 million appeal bond, if we do not prevail with the appeal.

The Company continues to pursue international opportunities with its “Drive to Mode 5” marketing campaign. All allied countries have a “drop dead” date of January 1, 2020 for implementing Mode 5 capability; as a result, we believe that this international Mode 5 business will remain strong for at least the next three years. 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 new T-47/M5 Mode 5 IFF test set will be a cost-effective upgrade option for our large installed base of Mode 4 test sets and we have seen substantial interest and orders for this test set from a number of countries. In addition to international Mode 4 business, we also believe that we will receive some sizable orders from the U.S. Department of Defense (the “DOD”) for additional TS-4530A test sets this calendar year. We believe that this will help drive revenues and profitability growth.

We have intensified our marketing efforts and increased our investment in research and development. We continue to emphasize the importance of capturing the majority share of the large IFF international market which we believe could generate substantial revenues starting later this fiscal year, and we have been working with international partners to ensure that we are well-positioned in this market. The new T-47M5 Mode 5 IFF test set will be a cost-effective upgrade option for our large installed base of Mode 4 test sets and we began shipment of this test set in the quarter ended December 31, 2017. Our business development team met with several European and Far Eastern customers with the intention of securing volume Mode 5 orders which should commence later this calendar year. We are currently pursuing opportunities in Australia and New Zealand and other areas in the Middle East and Far East.

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

Overview (continued)

The Company believes its real long-term growth potential is in our new line of modular hand-held test sets. We expect that these hand-held test sets will provide us with the opportunity to expand from our relatively narrow avionics test market niche and enter the much larger secure communications radio test market. We are actively working to identify and secure partners to enter this growth market and we believe that our new hardware platform provides unmatched capabilities in a market leading form factor. Production prototypes of this new test set were available for view at the January 17, 2018 Annual Meeting. We are also working closely with our other military customers on new potential market opportunities that will be needed to maintain our sales and profitability growth.

The commercial avionics industry is undergoing a great deal of regulatory change including the requirement that all aircraft be equipped with ADS-B transponders as well as the introduction of new UAT navigation for the general aviation market. We believe that our new hand-held products, which we are planning to introduce in the near term, will generate increased market share at attractive gross margin levels. The Company is also targeting the extremely large commercial and military radio test set market which is many times the size of our traditional avionics test market. 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.

We continue to evaluate other attractive potential market opportunities.

On November 14, 2017 the Company completed a $3 million issuance of its Series A Preferred Stock with an existing investor. This preferred stock includes an 8% dividend rate and is convertible into shares of our common stock at a price of $3.00 per share. The proceeds from this transaction are to be used to finance the appeal and for working capital purposes.

On March 21, 2016, the Company entered into a line of credit agreement with Bank of America, which expired March 31, 2017. In March 2017, the line of credit was renewed and the expiration date extended until March 31, 2018. The Company plans to renew this line of credit, but there is no assurance that the line will be renewed or that the terms will be the same. The line provides a revolving credit facility with borrowing capacity of up to $1,000,000. There are no covenants or borrowing base calculations associated with this line of credit. Interest on any outstanding balances is payable monthly at an annual interest rate equal to the LIBOR (London Interbank Offered Rates) Daily Floating plus 3.75 percentage points. The Company’s interest rate was 5.319% at December 31, 2017. The line is collateralized by substantially all of the assets of the Company. During the nine months ended December 31, 2017, the Company borrowed $800,000 from this line of credit. As of December 31, 2017 and March 31, 2017, the outstanding balances were $1,000,000 and $200,000, respectively. As of December 31, 2017 the remaining availability under this line is $-0-.

On July 27, 2017, the Company received a letter from the staff of the NYSE American (the “Exchange”) stating that, based on Tel’s financial statements at March 31, 2017, Tel is not in compliance with Section 1003(a)(i) of the NYSE American Company Guide, which requires that a company’s stockholders’ equity be $2.0 million or more if it has reported net losses in two of its last three fiscal years (the “Stockholders’ Equity Requirement”). As of March 31, 2017, the Company had a stockholders’ deficit of $54,361, which resulted from litigation costs, the accrual of $2.8 million in damages, as well as the recording of a valuation allowance against the Company’s deferred tax asset of $3.5 million, which resulted in the Company recording a net loss of $4.8 million for the fiscal year ended March 31, 2017, thus bringing the Company below the Stockholders’ Equity Requirement.

The Company submitted is plan to the Exchange, a plan advising of the actions the Company has taken or will take to regain compliance with the Stockholders’ Equity Requirement by January 29, 2019. In October 2017, the Exchange accepted the Company’s plan. The Company continues to provide updates to the Exchange.

Tel’s stock will continue to be listed on the NYSE American while Tel works to regain compliance with the Stockholders’ Equity Requirement. The Company’s common stock will continue to trade under the symbol “TIK”. The Company’s receipt of such notification from the Exchange does not affect the Company’s business, operations or reporting requirements with the U.S. Securities and Exchange Commission.

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

Results of Operations

Sales

For the three months ended December 31, 2017, total net sales decreased $1,610,726 (38.0%) to $2,625,793, as compared to $4,236,519 for the three months ended December 31, 2016. Avionics government sales decreased $1,945,640 (51.6%) to $1,825,744 for the three months ended December 31, 2017, as compared to $3,771,384 for the three months ended December 31, 2016. The decrease in sales is mostly attributed to the decrease in shipment of the U.S. Army TS-4530A Kits and Sets, and the CRAFT units associated with the U.S. Navy programs, which contracts have now been completed and the T-47N, partially offset by the increase in sales associated with the initial shipments of the T-47/M5. Commercial sales increased $334.914 (72.0%) to $800,049 for the three months ended December 31, 2017 as compared to $465,135 for the three months ended December 31, 2016. This increase is attributed to the increased sales from our repair business as well as increased shipments of the TR-220 to a major U.S. airline.

For the nine months ended December 31, 2017, total net sales decreased $6,699,882 (45.7%) to $7,955,035, as compared to $14,654,917 for the nine months ended December 31, 2016. Avionics government sales decreased $7,155,005 (55.1%) to $5,826,763 for the nine months ended December 31, 2017, as compared to $12,981,768 for the nine months ended December 31, 2016. The decrease in sales is mostly attributed to the decrease in shipment of the U.S. Army TS-4530A Kits and Sets, and the CRAFT and ITATS units associated with the U.S. Navy programs, which contracts have now been completed. Commercial sales increased $455,123 (27.2%) to $2,128,272 for the nine months ended December 31, 2017 as compared to $1,673,149 for the nine months ended December 31, 2016. This increase is attributed to the increased sales of the TR-220 and the increase in sales from our repair business.

Gross Margin

For the three and nine months ended December 31, 2017, total gross margin decreased $697,571 (42.7%) and $2,758.652 (51.7%) to $936,680 and $2,577,840, respectively, as compared to $1,634,251 and $5,336,492 for the three and nine months ended December 31, 2016, respectively, primarily as a result of the lower volume as well as labor and overhead variances as a result of the lower volume. The gross margin percentage for the three months ended December 31, 2017 was 35.7%, as compared to 38.6% for the three months ended December 31, 2016. The gross margin percentage for the nine months ended December 31, 2017 was 32.4%, as compared to 36.4% for the nine months ended December 31, 2016.

Operating Expenses

Selling, general and administrative expenses decreased $34,489 (5.9%) and $161,850 (7.9%) to $548,391 and $1,881,072, respectively, for the three and nine months ended December 31, 2017, as compared to $582,880 and $2,042,922 for the three months ended December 31, 2016, respectively. These decreases were primarily attributed to lower salaries and related expenses and lower accrued profit sharing expenses offset partially by higher commission fees, shareholder communication expenses and consulting fees.

Litigation expenses decreased $147,725 and $48,720 to $134,765 and $560,610, respectively, for the three and nine months ended December 31, 2017 as compared to $282,490 and $609,330 for the three and nine months ended December 31, 2016. The litigation expenses in the quarter ended December 31, 2017 related to the legal expenses for the additional court motions and securing the appeal bond.

The Company recorded $30,323 and $2,130,523 in additional legal damages for the three and nine months ended December 31, 2017 as a result of the Court’s decision regarding punitive damages. The additional expenses for the quarter related to the accrued interest on the assessed damages.

Engineering, research and development expenses decreased $68,316 (11.1%) and $92,024 (5.2%) to $546,691 and $1,691,631, respectively, for the three and nine months ended December 31, 2017 as compared to $615,007 and $1,783,655 for the three and nine months ended December 31, 2016. The Company continues to invest in new products by taking advantage of our CRAFT and TS-4530A technology to develop smaller hand-held products, which will broaden our product line for both commercial and military applications. The Company has completed its development of the T-47/M5 Mode 5 test set, which began initial shipments in the quarter ended December 31, 2017, and which we believe will compete effectively in the international market.

(Loss) Income from Operations

As a result of the above, the Company recorded losses from operations of $323,690 and $3,685,996 for the three and nine months ended December 31, 2017, as compared to income from operations of $153,874 and $900,585 for the three and nine months ended December 31, 2016.

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

Other Income (Expense), Net

For the three months ended December 31, 2017, total other expense was $9,746, as compared to other income of $24,021 for the three months December 31, 2016. This decrease in other income is primarily due to the loss on the change in the valuation of common stock warrants as compared to a gain in the same period last year.

For the nine months ended December 31, 2017, total other income was $145,880, as compared to other income of $237,178 for the nine months December 31, 2016. This decrease in other income is primarily due to the lower gain on the change in the valuation of common stock warrants as compared to a gain in the same period last year offset partially by proceeds from a life insurance policy.

(Loss) Income before Income Taxes

As a result of the above, the Company recorded a loss before taxes of $333,436 and $3,540,116 for the three and nine months ended December 31, 2016, as compared to income before taxes of $177,895 and $1,137,763 for the three and nine months ended December 31, 2016.

Income Tax Provision/Benefit

For the three and nine months ended December 31, 2017, the Company recorded no income tax benefit as such amount was offset by a valuation allowance. For the three and nine months ended December 31, 2016, the Company reported provisions for income tax in the amounts of $36,382 and $313,886, respectively.

Net (Loss) Income

As a result of the above, the Company recorded net losses of $333,436 and $3,540,116 for the three and nine months ended December 31, 2017, as compared to net income of $141,513 and $823,877 for the three and nine months ended December 31, 2016.

Liquidity and Capital Resources

At December 31, 2017, the Company had net negative working capital of $512,731 as compared to positive working capital of $214,560 at March 31, 2017. This change is primarily the result of the additional legal damages offset partially by the cash received from the issuance of preferred stock which was used to obtain a letter of credit to secure the appeal bond and additional amounts drawn from the line of credit.

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

During the nine months ended December 31, 2017, the Company’s cash balance decreased by $23,890 to $263,983. The Company’s principal sources and uses of funds were as follows:

Cash used in operating activities. For the nine months ended December 31, 2017, the Company used $3,399,429 in cash for operations as compared to providing $1,303,739 in cash from operations for the nine months ended December 31, 2016. This increase in cash used for operations is the result of using $2,000,000 to obtain a letter of credit to secure the appeal bond, lower operating income, increase in accounts receivable and inventories offset partially by the increase in accounts payable and accrued expenses and accrued legal damages.

Cash used in investing activities. For the nine months ended December 31, 2017, the Company used $89,396 of its cash for investment activities, as compared to $37,070 for the nine months ended December 31, 2016 as a result of an increase in the purchase of capital equipment.

Cash provided by (used in) financing activities. For the nine months ended December 31, 2017, the Company provided $3,464,935 in cash from financing activities as compared to using $1,077,148 for the nine months ended December 31, 2016 primarily as a result of the proceeds from issuance of preferred stock and amounts from the line of credit. The nine months ended December 31, 2016 included a $720,000 payment of a warrant liability that did not occur this year.

In November 2014, the Company entered into a term loan in the amount of $1,200,000 with Bank of America. The term loan was for three years, and matures in November 2017. Monthly payments are at $36,551 including interest at 6%. The term loan was collateralized by substantially all of the assets of the Company. This loan was fully repaid in November 2017. At December 31, 2017 and March 31, 2017, the outstanding balances were $-0- and $285,810, respectively.

On March 21, 2016, the Company entered into a line of credit agreement with Bank of America, which expired March 31, 2017. In March 2017, the line of credit was renewed and the expiration date extended until March 31, 2018. The Company plans to renew this line of credit, but there is no assurance that the line will be renewed or that the terms will be the same. The line provides a revolving credit facility with borrowing capacity of up to $1,000,000. There are no covenants or borrowing base calculations associated with this line of credit. Interest on any outstanding balances is payable monthly at an annual interest rate equal to the LIBOR (London Interbank Offered Rates) Daily Floating plus 3.75 percentage points. The Company’s interest rate was 5.319% at December 31, 2017. The line is collateralized by substantially all of the assets of the Company. During the nine months ended December 31, 2017, the Company borrowed $800,000 from this line of credit. As of December 31, 2017 and March 31, 2017, the outstanding balances were $1,000,000 and $200,000, respectively. As of December 31, 2017 the remaining availability under this line is $-0-.

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

Liquidity and Capital Resources (continued)

The Aeroflex litigation (see Note 15) has been hugely disappointing and has strained our finances even with the closing of our preferred stock offering. If the Judge does not change the result or vacate the damage award based on our latest motions, we will appeal this decision. The Company has filed motions in January 2018 for the court to reconsider the amount of damages on the grounds that they are duplicative and not legally supportable. A hearing on this motion is expected within the next 30 days and a final decision is expected within the next two to three months. The Judge could deny our motions, reduce the amount of damages or even order a new trial. Once a final decision has been rendered, the Company has 30 days to file an appeal. The Company has posted a $2,000,000 bond to prevent Aeroflex from enforcement actions until a final decision has been rendered by the Court. This $2 million bond amount would remain in place during the appeal process (See Note 5). The Company believes it has excellent grounds to appeal this verdict. The appeal process would be expected to take several years to complete. We will have approximately 3 years to generate sufficient cash or secure additional financing to support the repayment of the remaining $2.9 million not covered by the $2 million appeal bond, if we do not prevail with the appeal.

In November 2017, the Company signed a subscription agreement in which the Company received $3 million for Series A Convertible Preferred Stock (See Note 14 to the Notes to the Condensed Financial Statements). These funds will be used to finance an appeal and provide funds for operations.

Currently, the Company has no material future capital expenditure requirements.

There was no significant impact on the Company’s operations as a result of inflation for the nine months ended December 31, 2017.

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, 2017, filed with the SEC on July 14, 2017 (the “Annual Report”).

Off-Balance Sheet Arrangements

As of December 31, 2017, 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 2017 consolidated financial statements included in our Annual Report.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

The Company, including its principal executive 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.

(b) 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.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

PART II – OTHER INFORMATION

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, 2017, filed with the SEC on July 14, 2017.

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, 2017 other than those previously reported in a Current Report on Form 8-K filed with the Securities and Exchange Commission on November 16, 2017, regarding the issuance of Series A Preferred Stock.

Item 3. Defaults upon Senior Securities.

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

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

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

Item 6. Exhibits.

Exhibit No.		Description

3.1		Certificate of Amendment to Certificate of Incorporation (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on November 16, 2017.)

10.1		Form of Subscription Agreement (incorporated to the Company’s Current Report on Form 8-K filed with the SEC on November 16, 2017.)

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

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

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

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

101.INS		XBRL Instance Document*

101.SCH		Taxonomy Extension Schema Document*

101.CAL		Taxonomy Extension Calculation Linkbase Document*

101.DEF		Taxonomy Extension Definition Linkbase Document*

101.LAB		Taxonomy Extension Label Linkbase Document*

101.PRE		Taxonomy Extension Presentation Linkbase Document*

* Filed herewith

SIGNATURES

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

	TEL-INSTRUMENT ELECTRONICS CORP.


Date: February 14, 2018	By:	/s/ Jeffrey C. O’Hara
		Name: Jeffrey C. O’Hara
		Title: Chief Executive Officer Principal Executive Officer


Date: February 14, 2018	By:	/s/ Joseph P. Macaluso
		Name: Joseph P. Macaluso
		Title: Principal Financial Officer Principal Accounting Officer

TEL INSTRUMENT ELECTRONICS CORP - FORM 10-Q - February 14, 2018

Attached files

TEL INSTRUMENT ELECTRONICS CORP Reports