telinstrument10q063013.htm

10-Q 1 telinstrument10q063013.htm telinstrument10q063013.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: June 30, 2013

¨ 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 August 5, 2013, there were 3,243,087 shares outstanding of the registrant’s common stock.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements.
		3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.
		14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.
		17
Item 4.	Controls and Procedures.
		17
PART II – OTHER INFORMATION

Item 1.	Legal Proceedings.	18

Item 1A.	Risk Factors.	18

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	18

Item 3.	Defaults Upon Senior Securities.	18

Item 4.	Mine Safety Disclosures.	18

Item 5.	Other Information.	18

Item 6.	Exhibits.	19

Signatures		20

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

TEL-INSTRUMENT ELECTRONICS CORP

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2013			March 31, 2013
	(unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	193,950			310,297
Accounts receivable, net		970,052			557,879
Inventories, net		5,477,243			6,241,181
Prepaid expenses and other		87,042			115,852
Deferred financing costs		108,321			108,321
Deferred income tax asset		1,238,421			1,238,421
Total current assets		8,075,029			8,571,951

Equipment and leasehold improvements, net		534,607			587,958
Deferred financing costs – long-term		129,383			156,463
Deferred income tax asset – non-current		2,564,059			2,546,190
Other assets		56,872			56,872
Total assets		11,359,950			11,919,434

LIABILITIES & STOCKHOLDERS’ EQUITY

Current liabilities:
Current portion long-term debt		598,663			1,229,643
Capital lease obligations – current portion		77,231			74,508
Accounts payable		2,815,982			4,272,431
Progress billing		858,050			-
Deferred revenues – current portion		11,930			18,460
Accrued payroll, vacation pay and payroll taxes		431,904			442,522
Accrued expenses		1,643,586			1,525,538
Total current liabilities		6,437,346			7,563,102

Subordinated notes payable-related parties		350,000			250,000
Capital lease obligations – long-term		55,695			76,055
Deferred revenues – long-term		236			1,045
Warrant liability		173,758			198,330
Long-term debt, net of debt discount		1,051,976			1,134,549
Total liabilities		8,069,011			9,223,081

Commitments

Stockholders' equity:
Common stock, par value $.10 per share, 3,211,739 and 3,011,739 issued and outstanding as of June 30, 2013 and March 31, 2013, respectively		321,171			301,171
Additional paid-in capital		7,768,658			7,108,300
Accumulated deficit		(4,798,890	)		(4,713,118	)
Total stockholders' equity		3,290,939			2,696,353
Total liabilities and stockholders' equity	$	11,359,950		$	11,919,434

See accompanying notes to condensed consolidated financial statements.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended
	June 30, 2013			June 30, 2012

Net sales	$	3,199,975		$	1,177,288
Cost of sales		2,013,817			893,594

Gross margin		1,186,158			283,694

Operating expenses:
Selling, general and administrative		653,250			653,888
Engineering, research and development		480,377			578,604
Total operating expenses		1,133,627			1,232,492

Income (loss) from operations		52,531			(948,798	)

Other income (expense):
Amortization of debt discount		(22,987	)		(13,392	)
Amortization of deferred financing costs		(27,080	)		(27,080	)
Change in fair value of common stock warrants		24,572			249,394
Loss on extinguishment of debt		(26,600	)		-
Interest expense		(104,077	)		(92,468	)
Total other income (expense)		(156,172	)		116,454

Loss before income taxes		(103,641	)		(832,344	)

Income tax benefit		(17,869	)		(163,544	)

Net loss	$	(85,772	)	$	(668,800	)

Net loss per share:
Basic loss per common share	$	(0.03	)	$	(0.25	)
Diluted loss per common share	$	(0.03	)	$	(0.25	)

Weighted average shares outstanding:
Basic		3,079,871			2,698,984
Diluted		3,079,871			2,698,984

See accompanying notes to condensed consolidated financial statements.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three months ended
	June 30, 2013			June 30, 2012

Cash flows from operating activities:
Net loss	$	(85,772	)	$	(668,800	)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes		(17,869	)		(163,845	)
Depreciation and amortization		53,351			53,231
Amortization of debt discount		22,987			13,392
Amortization of deferred financing costs		27,080			27,080
Loss on extinguishment of debt		26,600
Change in fair value of common stock warrant		(24,572	)		(249,394	)
Non-cash stock-based compensation		16,358			22,277

Changes in assets and liabilities:
(Increase) decrease in accounts receivable		(412,173	)		1,155,190
Decrease in unbilled government receivables		-			12,173
Decrease (increase) in inventories		763,938			(2,078,021	)
Decrease in prepaid expenses & other		28,810			85,668
Increase (decrease) in accounts payable		(1,456,449	)		970,865
(Decrease) increase in accrued payroll, vacation pay & withholdings		(10,618	)		44,469
Decrease in deferred revenues		(7,339	)		(10,169	)
Increase in progress billings		858,050			-
Increase in accrued expenses		155,448			540,561
Net cash used in operating activities		(62,170	)		(245,323	)

Cash flows from investing activities:
Purchases of equipment		-			(648	)
Net cash used in investing activities		-			(648	)

Cash flows from financing activities:
Proceeds from note payable – related party		100,000			-
Proceeds from the exercise of stock options		-			98,935
Repayment of long-term debt		(136,540	)		(85,059	)
Repayment of capitalized lease obligations		(17,637	)		(14,426	)
Net cash used in financing activities		(54,177	)		(550	)

Net decrease in cash and cash equivalents		(116,347	)		(246,521	)
Cash and cash equivalents at beginning of period		310,297			413,195
Cash and cash equivalents at end of period	$	193,950		$	166,674

Supplemental cash flow information:
Taxes paid	$	-		$	-
Interest paid	$	101,554		$	83,809

Supplemental non-cash information:
Converted debt to equity	$	600,000		$	-
Converted accrued interest to equity	$	37,400		$

See accompanying notes to condensed consolidated financial statements.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Tel-Instrument Electronics Corp (the “Company” or “TIC”) as of June 30, 2013, the results of operations for the three months ended June 30, 2013 and June 30, 2012, and statements of cash flows for the three months ended June 30, 2013 and June 30, 2012. 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, 2013 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, 2013.

Note 2 – Summary of Significant Accounting Policies

During the three months ended June 30, 2013, there have been no material changes in the Company’s significant accounting policies to those previously disclosed in the Company’s Form 10-K for the year ended March 31, 2013.

Note 3 – Accounts Receivable, net

The following table sets forth the components of accounts receivable:

	June 30, 2013			March 31, 2013
Government	$	813,376		$	423,165
Commercial		173,958			153,654
Less: Allowance for doubtful accounts		(17,282	)		(18,940	)
	$	970,052		$	557,879

Note 4 –Inventories, net

Inventories consist of:

	June30, 2013			March 31, 2013

Purchased parts	$	4,227,353		$	4,418,989
Work-in-process		1,404,489			1,636,325
Finished goods		45,401			385,867
Less: Inventory reserve		(200,000	)		(200,000	)

	$	5,477,243		$	6,241,181

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5 – Loss Per Share

Net (loss) income per share has been computed according to FASB ASC 260, “Earnings per Share,” which requires a dual presentation of basic and diluted earnings (loss) per share (“EPS”). Basic EPS represents net (loss) income 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.

Diluted loss per share for the three months ended June 30, 2013 and 2012 does not include common stock equivalents, as these stock equivalents would be anti-dilutive.

	Three Months Ended			Three Months Ended
	June 30, 2013			June 30, 2012
Basic net loss per share computation:
Net loss	$	(85,772	)	$	(668,800	)
Weighted-average common shares outstanding		3,079,871			2,698,984
Basic net loss per share	$	(0.03	)	$	(0.25	)
Diluted net loss per share computation:
Net loss	$	(85,772	)	$	(668,800	)
Weighted-average common shares outstanding		3,079,871			2,698,984
Incremental shares attributable to the assumed exercise of outstanding stock options		-			-
Total adjusted weighted-average shares		3,079,871			2,698,984
Diluted net loss per share	$	(0.03	)	$	(0..25	)

Note 6 – Long-Term Debt

In September 2010, the Company entered into an agreement with BCA Mezzanine Fund LLP (“BCA”) to loan the Company $2,500,000 in the form of a Promissory Note (the “Note”). The Note contains a number of affirmative and negative covenants which restrict our operations. For the quarter ended June 30, 2013, the Company was not in compliance with four covenants related to maintaining agreed upon financial ratios for fixed charges, leverage and debt service as well as a requirement for earnings before interest, taxes, depreciation and amortization (EBITDA). However, the Company received a waiver from BCA on each of the above mentioned covenants.

In consideration for the waiver for non-compliance of the financial covenants at March 31, 2013, on July 12, 2013 BCA received warrants to purchase 20,000 shares of the Company’s common stock. The common stock underlying the warrants is exercisable at a price of $3.33 per share and the warrants expire on September 10, 2019. Determining the warrant value to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant. The fair value of the warrant is calculated using the Black-Scholes valuation model. The value of the warrant will be recorded as a debt discount of $19,523, and will be amortized over the remaining life of the loan.

On July 26, 2012 the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with a private investor (the “Private Investor”). Pursuant to the terms of the Purchase Agreement, the Company issued (i) a senior secured promissory note in favor of the Private Investor in the aggregate principal amount of $600,000, approximately $489,000 net of expenses, accruing interest at a rate of 14% per annum and (ii) a common stock purchase warrant to purchase 50,000 shares of the Company’s common stock, par value $0.10 per share. The Note, together with all unpaid interest and principal was due on March 31, 2013. The common stock underlying the warrant is exercisable at a price of $3.35 per share and the warrant expires on September 10, 2019. In conjunction with the Purchase Agreement the Company entered into an (i) Investor Rights Agreement, (ii) Securities Agreement, (iii) Intercreditor Agreement and (iv) Subordination Agreement. The Company reported the foregoing on its Current Report on Form 8-K on August 3, 2012.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 6 – Long-Term Debt (continued)

Effective May 31, 2013, the Private Investor converted the outstanding principal of $600,000, penalty of $25,000 and accrued interest for the month of May in the amount of $12,400 for a total of $637,400 in to 200,000 shares of common stock at a price of $3.187 per share. The fair value of these shares at the date of conversion was $3.32 per share. As such, the Company recorded a loss on the extinguishment of debt in the amount of $26,600 and this amount is included in the accompanying statement of operations for the three months ended June 30, 2013. As further consideration to the Private Investor, the Company agreed that each time the Company issues any new Common Stock in the next two years (excluding the exercise of existing stock options and warrants currently outstanding), at a price lower than $3.187 per share purchase price, the Company will issue additional shares to the Private Investor, for no additional consideration, based on the differential between the $3.187 price and the price paid for the newly issued stock.

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.

The table below presents information about reportable segments within the avionics business for the three month periods ending June 30, 2013 and 2012:

Three Months Ended June 30, 2013	Avionics Government		Avionics Commercial		Avionics Total		Corporate Items			Total
Net sales		2,802,842		397,133		3,199,975		-			3,199,975
Cost of Sales		1,662,246		351,571		2,013,817		-			2,013,817
Gross Margin		1,140,596		45,562		1,186,158		-			1,186,158

Engineering, research, and development						480,377					480,377
Selling, general and administrative						264,145		389,105			653,250
Amortization of debt discount								22,987			22,987
Amortization of deferred financing costs								27,080			27,080
Loss on extinguishment of debt								26,600			26,600
Change in fair value of common stock warrants								(24,572	)		(24,572	)
Interest expense, net								104,077			104,077
Total expenses						744,522		545,277			1,289,799

Income (loss) before income taxes						441,636		(545,277	)		(103,641	)

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7 – Segment Information (continued)

Three Months Ended June 30, 2012	Avionics Government		Avionics Commercial		Avionics Total			Corporate Items			Total
Net sales		549,966		627,322		1,177,288			-			1,177,288
Cost of Sales		315,929		577,665		893,594			-			893,594
Gross Margin		234,037		49,657		283,694			-			283,694

Engineering, research, and development						578,604						578,604
Selling, general, and administrative						316,989			336,899			653,888
Amortization of debt discount									13,392			13,392
Amortization of deferred financing costs									27,080			27,080
Change in fair value of common stock warrants									(249,394	)		(249,394	)
Interest (income) expense, net									92,468			92,468
Total expenses						895,593			220,445			1,116,038

Loss before income taxes						(611,899	)		(220,445	)		(832,344	)

Note 8 – Income Taxes

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

The tax effect of temporary differences, primarily net operating loss carryforwards, asset reserves and accrued liabilities, gave rise to the Company’s deferred tax asset in the accompanying June 30, 2013 and March 31, 2013 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.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 9 – Fair Value Measurements

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

As defined in ASC 820-10, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the 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).

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 9 – Fair Value Measurements (continued)

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

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of June 30, 2013 and March 31, 2013. As required by FASB ASC 820-10, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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

June 30, 2013	Level I		Level II		Level III		Total
Total Assets	$	-	$	-	$	-	$	-

Warrant liability		-		-		173,758		173,758
Total Liabilities	$	-	$	-	$	173,758	$	173,758

March 31, 2013	Level I		Level II		Level III		Total
Total Assets	$	-	$	-	$	-	$	-

Warrant liability		-		-		198,330		198,330
Total Liabilities	$	-	$	-	$	198,330	$	198,330

The Company adopted the guidance of ASC 815, which requires that we mark the value of our warrant liability (see Note 6) to market and recognize the change in valuation in our statement of operations each reporting period. Determining the warrant liability to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant. The fair value of the warrants is 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, 2013 through June 30, 2013 as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to the liability held at June 30, 2013:

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		198,330		(24,572	)		-	-			173,758
Total Liabilities	$	198,330	$	(24,572	)	$	-	$	-	$	173,758

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 9 – Fair Value Measurements (continued)

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 recognizes a warrant liability and estimates the fair value of these warrants using the Black-Scholes options model using the following assumptions:

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

Values at March 31, 2013

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	$	3.50		41.45	%		6.45		1.24	%	$	81,080
	09-10-2010	09-10-2015		10,416	$	6.70	$	3.50		41.45	%		2.45		0.25	%	$	1,870
	07-26-2012	09-10-2019		50,000	$	3.35	$	3.50		41.45	%		6.33		1.24	%	$	53,269
	07-26-2012	09-10-2019		20,000	$	3.35	$	3.50		41.45	%		6.33		1.24	%	$	21,307
	11-20-2012	09-10-2019		20,000	$	3.56	$	3.50		41.45	%		6.50		1.24	%	$	20,664
	02-14-2013	09-10-2019		20,000	$	3.67	$	3.50		41.45	%		6.45		1.24	%	$	20,140

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 9 – Fair Value Measurements (continued)

Values at June 30, 2013

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	$	3.30		40.41	%		6.20		1.96	%	$	69,139
	09-10-2010	09-10-2015		10,416	$	6.70	$	3.30		40.41	%		2.30		0.36	%	$	1,188
	07-26-2012	09-10-2019		50,000	$	3.35	$	3.30		40.41	%		6.08		1.96	%	$	47,801
	07-26-2012	09-10-2019		20,000	$	3.35	$	3.30		40.41	%		6.08		1.96	%	$	19,120
	11-20-2012	09-10-2019		20,000	$	3.56	$	3.30		40.41	%		6.25		1.96	%	$	18,511
	02-14-2013	09-10-2019		20,000	$	3.67	$	3.30		40.41	%		6.20		1.96	%	$	17,999

The volatility calculation was based on the 42 months for the Company’s stock price prior to the measurement date, utilizing January 1, 2010 as the initial period, as the Company believes that this is the best indicator of future performance, and the source of the risk free interest rate is the US Treasury rate related to 10 year notes. The exercise price is per the agreement, the fair market value is the closing price of our stock on the date of measurement, and the expected life is based on management’s current estimate of when the warrants will be exercised. All inputs to the Black-Scholes options model are evaluated each reporting period.

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

In December 2009, the Kansas district court dismissed on jurisdiction grounds the Aeroflex Action. Aeroflex appealed this decision. In May 2012, the Kansas Supreme Court reversed the decision and remanded the Aeroflex Action to the district court for further proceedings. The district court has established discovery deadlines and the case is set for trial on January 14, 2014. Tel 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.

Note 12 – New Accounting Pronouncements

For the three months ended June 30, 2013, there have been no significant accounting pronouncements or changes in accounting pronouncements that have become effective that are expected to have a material impact on the Company’s financial position, operations or cash flows.

Note 13 – Subsequent Event

In June 2013, a related party received a note payable from the Company in exchange for $100,000 which the Company used for working capital needs. On July 24, 2013, the related party converted its note payable in the amount of $100,000 into 31,348 shares of the Company’s common stock at a price of $3.19 per share. The price was approved by the Board of Directors and was the same price as the 200,000 shares issued to the Private Investor upon the conversion of debt on May 31, 2013. The fair value of these shares at the date of conversion was $3.86 per share. As such, in July 2013, the Company recorded additional interest expense of $21,003.

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 contain or may contain forward-looking statements (collectively the “Filings”) and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended March 31, 2013, filed with the SEC on July 16, 2013 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

For the quarter ended June 30, 2013 sales increased $2,022,687 (171.8%) to $3,199,975 as compared to $1,177,288 for the quarter ended June 30, 2012. This increase is mostly attributed to the resumption of shipments on the CRAFT program as well as shipment for a partial release on the TS-4530A program. The Company is expecting significant revenue and profitability growth for the fiscal year ending March 31, 2014 as it expects to be in production on the CRAFT program for the full year, as well as shipping the $3.3 million limited rate production order it received in July 2013 on the TS-4530 program. The Company has received final AIMS certification for this TS-4530A, but a full production release on this contract will not be provided until the remaining logistics documentation items (e.g., technical manual) are approved by the U.S. Army. The Company currently has $18.3 million of existing TS-4530A orders on this Indefinite-Delivery-Indefinite Quantity (“IDIQ”) contract program. The Army has the option of purchasing up to an additional $18 million of units under this IDIQ contract. The commencement of TS-4530A volume shipments will augment the Company’s liquidity position as the Company has a substantial amount of the material in house to commence production.

During the first quarter, the Private Investor converted the outstanding principal of $600,000, penalty of $25,000 and accrued interest for the month of May in the amount of $12,400 for a total of $637,400 in to 200,000 shares of common stock at a price of $3.19 per share.

In June 2013 a related party received a note payable from the Company in exchange for $100,000, which the Company used for working capital needs. On July 24, 2013, the related party converted its note payable in the amount of $100,000 into 31,348 shares of the Company’s common stock at a price of $3.19 per share.

As a result of the substantial operating losses incurred in the last year, the Company is not currently in compliance with the NYSE-MKT’s continued listing standards. Based on the information provided by the Company on June 17, 2013, the Exchange has determined that the Company has made a reasonable demonstration of its ability to regain compliance. As such, the Company listing is being continued pursuant to an extension and will continue to be monitored against this plan with the next NYSE evaluation date being August 15, 2013. Failure to make progress against this plan could result in the Exchange staff initiating delisting provisions. The Company is optimistic that it will demonstrate sufficient progress to maintain our NYSE-MKT listing.

Table of Contents

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

Overview (continued)

In June 2013, the Company received a performance-based payment from the government in the amount of $858,050, which was used to pay old outstanding accounts payable of a significant vendor. The Company made solid progress during the first quarter in working down outstanding payables to its vendors. 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.

If the Company is unable to obtain a full rate production release on the TS-4530A program within a reasonable period of time and/or our vendors or lenders begin to pursue legal action demanding payments, it would result in a material adverse effect on the Company’s operations and its ability to pay its obligations. As such, the Company may need to pursue additional sources of financing and/or additional progress payments. There can be no assurances that the Company can secure additional financing.

At June 30, 2013, the Company’s backlog was approximately $34.2 million as compared to approximately $38.9 million at June 30, 2012.

Results of Operations

Sales

For the three months ended June 30, 2013 sales increased $2,022,867 (171.8%) to $3,199,975 for the three months ended June 30, 2013 as compared to $1,177,288 for the three months ended June 30, 2012.

Avionics Government sales increased $2,252,876 (409.6%) to $2,802,842 for the three months ended June 30, 2013 as compared to $549,966 for the same period last year. This increase is mostly attributed to the resumption of shipments on the CRAFT program, which were on temporary hold last year to correct issues discovered in prior deliveries and to incorporate the final AIMS approved software configuration which includes several product enhancements, as well as shipment for a partial release on the TS-4530A program

Commercial sales decreased $230,189 (36.7%) to $397,133 for the three months ended June 30, 2013 as compared to $627,322 for the three months ended June 30, 2012. The decrease in sales in primarily attributed to parts availability issues and lower sales from the overhaul and repairs business. The economic conditions in the commercial market remain depressed.

Gross Margin

Gross margin increased $902,464 (318.1%) to $1,186,158 for the three months ended June 30, 2013 as compared to $283,694 for the same period in the prior fiscal year. Gross profit was favorably impacted by the increase in sales volume as a result of the resumption of shipments on the CRAFT program, which were on temporary hold last year to correct issues discovered in prior deliveries and to incorporate the final AIMS approved software configuration which includes several product enhancements, as well as the shipment of units for the TS-4530A program. The gross margin percentage for the three months ended June 30, 2013 was 37.1%, as compared to 24.1% for the three months ended June 30, 2012.

Operating Expenses

Selling, general and administrative expenses decreased $638 (0.1%) to $653,250 for the three months ended June 30, 2013 as compared to $653,888 for the three months ended June 30, 2012. This decrease is primarily attributed to lower personnel costs mostly offset by increased professional fees and outside commissions. The increase in professional fees is primarily due to higher legal costs related to the Aeroflex civil action.

Engineering, research and development expenses decreased $98,227 (17.0%) to $480,377 for the three months ended June 30, 2013 as compared to $578,604 for the three months ended June 30, 2012, primarily as a result of a decrease in personnel costs as a result of the Company finalizing the engineering efforts on the CRAFT and TS-4530A programs.

Other Income (Expense), Net

For the three months ended June 30, 2013, total other expense was $156,172, as compared to other income of $116,454 for the three months ended June 30, 2012. This change is primarily due to the gain on the change in the valuation of common stock warrants of $249,394 in the prior fiscal year as compared to $24,572 for the three months ended June 30, 2013. This was partially offset by higher interest expense and an increase in the amortization of deferred charges and the loss on the extinguishment of debt.

Table of Contents

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 a loss before income taxes of $103,641 for the three months ended June 30, 2013, as compared to $832,344 for the three months ended June 30, 2012.

Income Taxes

For the three months ended June 30, 2013, the Company recorded an income tax benefit of $17,869 as compared to an income tax benefit of $163,544 for the three months ended June 30, 2012. For the three months ended June 30, 2013, the amount represents the statutory federal and state tax rate on the Company’s loss before taxes.

Net Income (Loss)

As a result of the above, the Company recorded a net loss of $85,772 for the three months ended June 30, 2013, as compared to a net loss of $668,800 for the three months ended June 30, 2012.

Liquidity and Capital Resources

At June 30, 2013, the Company had net working capital of $1,637,683 as compared to $1,008,849 at March 31, 2013. This change is primarily the result of the conversion of short-term debt into equity.

During the three months ended June 30 2013, the Company’s cash balances decreased by $116,347 to $193,950. The Company’s principal sources and uses of funds were as follows:

Cash used in operating activities. For the three months ended June 30, 2013, the Company used $62,170 in cash for operations as compared to using $245,323 in cash for operations for the three months ended June 30, 2012. This improvement is the result of the improvement in operating income, decrease in inventories and the increase in progress billings partially offset by the decrease in accounts payable and accounts receivable.

Cash used in investing activities. For the three months ended June 30, 2013, the Company did not use any cash for investing activities as compared to using $648 for the three months ended June 30, 2012.

Cash provided by financing activities. For the three months ended June 30, 2013, the Company used $54,177 in financing activities as compared to using $550 for the three months ended June 30, 2012. This increase was primarily the result of the increase in the repayment of long-term debt.

In June 2013, the Company received a performance-based payment from the government in the amount of $858,050, which was used to pay old outstanding accounts payable of a significant vendor.

Table of Contents

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

Liquidity and Capital Resources (continued)

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.

There was no significant impact on the Company’s operations as a result of inflation for the three months ended June 30, 2013. 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, 2013, filed with the SEC on July 16, 2013.

Off-Balance Sheet Arrangements

As of June 30, 2013, the Company had no off-balance sheet arrangements.

Critical Accounting Policies

Our critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended March 31, 2013. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2013 consolidated financial statements included in our annual report on Form 10-K for the year ended March 31, 2013.

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

Changes in Internal Control over Financial Reporting

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

Table of Contents

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

Other than described 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 or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our Common Stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

Item 1A. Risk Factors.

We believe there are no changes that constitute material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2013, filed with the SEC on July 16, 2013.

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

On July 24, 2013, a director of the Company purchased 31,348 shares of the Company’s Common Stock at a price of $3.19 per share for a total amount of $100,000 which was used for working capital needs.

Item 3. Defaults Upon Senior Securities.

Not applicable.

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.

Table of Contents

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

** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934

Table of Contents

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: August 14, 2013	By:	/s/ Jeffrey C. O’Hara
		Name: Jeffrey C. O’Hara
		Title: Chief Executive Officer Principal Executive Officer


Date: August 14, 2013	By:	/s/ Joseph P. Macaluso
		Name: Joseph P. Macaluso
		Title: Principal Financial Officer Principal Accounting Officer