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EX-32.1 - EX-32.1 - TEL INSTRUMENT ELECTRONICS CORPex32-1.htm
EX-31.1 - EX-31.1 - TEL INSTRUMENT ELECTRONICS CORPex31-1.htm


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

 
FORM 10-K
 

 
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended March 31, 2015
 
Commission File No. 001-31990

TEL-INSTRUMENT ELECTRONICS CORP.
(Exact name of Registrant as specified in its charter)
 
New Jersey
22-1441806
(State of incorporation) 
(IRS Employer Identification Number)
   
One Branca Road
East Rutherford, New  Jersey
07073
(Address of principal executive offices)
(Zip Code)
 
Registrant's telephone number, including area code:   (201) 933-1600

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Exchange on Which Registered
Common Stock $.10 par value 
NYSE - MKT
                                                                                                                                 
Indicate by checkmark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No x
 
Indicate by checkmark if registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o No x
 
Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o    Accelerated filer o      Non-accelerated filer o       Smaller reporting company x
 
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Act).  Yes o No x
 
The aggregate market value of the voting and non-voting common stock held by non-affiliates on September 30, 2014 (the last business day of our most recently completed second fiscal quarter) was $9,050,675 based on the closing price of $5.34 on September 30, 2014.
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 3,256,887 shares of common stock, par value $0.10 per share, were outstanding as of June 18, 2015.  
 
 
TEL-INSTRUMENT ELECTRONICS CORP
 
TABLE OF CONTENTS
 
PART I.
 
Page
     
Item 1.
  4
     
Item 1A.
  9
     
Item 1B.
  9
     
Item 2.
  9
     
Item 3.
  9
     
Item 4.  
  10
     
PART II.
   
     
Item 5.
  11
     
Item 6.
  12
     
Item 7.
  13
     
Item 7A.
  17
     
Item 8.
  18
     
Item 9.
  45
     
Item 9A.
  45
     
Item 9B.
  45
     
PART III.
   
     
Item 10.
  46
     
Item 11.
  49
     
Item 12.
  52
     
Item 13.
  54
     
Item 14.
  55
     
PART IV.
   
     
Item 15.
  56
     
  58
 
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
 
Included in this Annual Report on Form 10-K are “forward-looking” statements, as well as historical information. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that the expectations reflected in these forward-looking statements will prove to be correct. Our actual results could differ materially from those anticipated in forward-looking statements as a result of certain factors, including matters described in the section titled “Risk Factors.” Forward-looking statements include those that use forward-looking terminology, such as the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “project,” “plan,” “will,” “shall,” “should,” and similar expressions, including when used in the negative. Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, these statements involve risks and uncertainties and we cannot assure you that actual results will be consistent with these forward-looking statements. Important factors that could cause our actual results, performance or achievements to differ from these forward-looking statements include the following:
 
•       the availability and adequacy of our cash flow to meet our requirements;
 
•       economic, competitive, demographic, business and other conditions in our local and regional markets;
 
•       changes in our business and growth strategy;
 
•       changes or developments in laws, regulations or taxes in the electronics/aerospace industry;
 
•       actions taken or not taken by third-parties, including our vendors, customers and competitors;
 
•       the availability of additional capital; and
 
•       other factors discussed elsewhere in this Annual Report.
 
All forward-looking statements attributable to us are expressly qualified in their entirety by these and other factors.  We undertake no obligation to update or revise these forward-looking statements, whether to reflect events or circumstances after the date initially filed or published, to reflect the occurrence of unanticipated events or otherwise unless required by applicable law.
 
 
PART I
 
Item 1.           Business
 
General
 
Tel-Instrument Electronics Corp. (“Tel”, “TIC” or the “Company”) has been in business since 1947, and is a leading designer and manufacturer of avionics test and measurement solutions for the global commercial air transport, general aviation, and government/military aerospace and defense markets.  The Company designs, manufactures and sells instruments to test and measure, and calibrates and repairs a wide range of airborne navigation and communication equipment.
 
Tel’s instruments are used to test navigation and communications equipment installed in aircraft, both on the flight line (“ramp testers”) and in the maintenance shop (“bench testers”), and range in list price from $7,500 to $80,750 per unit.  Tel continues to develop new products in anticipation of customers’ needs, and to maintain its strong market position.  Its development of multifunction testers has made it easier for customers to perform ramp tests with less operator training, a fewer number of test sets, and lower product support costs.

The Company has become a major manufacturer and supplier of Identification Friend or Foe (“IFF”) flight line test equipment. The Company has been awarded two major contracts from both the U.S. Navy and the U.S. Army for IFF flight line test equipment (see below). The products under these contracts represent cutting edge technology and, together with derivative products, should provide Tel with a competitive advantage for years to come. Revenues from these programs will be the foundation for our growth for the next few years.

Tel believes it has built a solid infrastructure to support a rapidly growing business, and the outlook for the Company is positive with revenue growth expected over the next few years as a result of these new programs and other new products.

We continue to evaluate other attractive potential market opportunities although our current capital structure limits our flexibility at this time.
 
Communications/Navigation (COMM/NAV) Radio Frequency (RF) Avionics Flight line Tester”) (“CRAFT”) (AN/USM-708 and AN/USM-719) with the U.S. Navy

The AN/USM-708, the basic CRAFT test set, is a key product for the Company as it represents a new generation technology product. The AN/USM-708 and AN/USM-719 (IFF only) contract was competitively awarded to the Company by the United States Navy. The AN/USM-708 CRAFT unit combines advanced IFF (including Mode 5 encryption technology) navigation, communication, and sonobuoy test capabilities in a portable test set, which will utilize a flexible and expandable digital-signal-processing-based architecture. Both the AN/USM-708 and the AN/USM-719 have been certified by the AIMS Program Office. This represents the culmination of a multi-year, multi-million dollar investment by the Company in Mode 5 technology and will provide a significant competitive advantage in the years to come. Management believes that the CRAFT program also has significant potential for sales into the balance of the U.S. Military, NATO, and internationally, as the new Mode 5 IFF systems are installed in overseas aircraft platforms. The Joint Strike Fighter (“JSF”) program by itself is expected to generate significant CRAFT orders as this program continues to ramp up limited rate production.
 
The contract for the AN/USM-708 and AN/USM-719 was a significant milestone for the Company because the development of this proprietary technology, which has been funded by the Company, establishes Tel’s position as a leader in the industry, and will meet the U.S. Navy’s test requirements for years to come. The Company believes that, given the unique nature of this design, this product will generate sales to other military customers. The CRAFT test set replaces seven obsolete U.S. Navy test sets that collectively cost approximately $300,000, making the CRAFT test set an excellent value to the government. This unit has been well received by the end users. The Company believes that the core technology in the AN/USM-708 can be the foundation for additional military and commercial products

The initial contract was for 1,200 test sets with a contract value of approximately $31 million.  The Company has received orders for all 1,200 test sets, as well as approximately $4.7 million for testing, documentation and qualification units.  In October 2013, the Company received an additional award for CRAFT products with a maximum value of $9.5 million. This new contract is in support of the U.S. Navy, U.S. Marine Corps, U.S. Army and various Foreign Military Sales customers under the Foreign Military Sales program. The Company has received orders totaling approximately $7.5 million under this new contract. This brings the total contract value to over $40 million with total orders received exceeding $38 million. As of March 31, 2015, the Company had open orders for AN/USM-708 and AN/USM-719 for 283 test sets, totaling approximately $7.6 million.


Item 1.           Business (continued)
 
General (continued)
 
Communications/Navigation (COMM/NAV) Radio Frequency (RF) Avionics Flight line Tester”) (“CRAFT”) (AN/USM-708 and AN/USM-719) with the U.S. Navy (continued)
 
The Company received and shipped in fiscal year 2014 a $755,580 order from Lockheed Martin for 21 AN/USM-708 CRAFT test sets. In March 2015, the Company received an order for an additional 21 CRAFT test sets from Lockheed Martin in the amount of $775,369 with shipment expected to take place in the second and third quarters ending September 30, 30, 2015 and December 31, 2015, respectively. These units are to be used on the JSF program.
 
TS-4530A IFF test set with the U.S. Army Aviation and Missile Command
 
In February 2009, the Company was awarded a firm fixed price indefinite-delivery/indefinite-quantity (IDIQ) contract by the U.S. Army Aviation and Missile Command with a maximum dollar value of approximately $44 million, depending on the number of units purchased (see Item 3, Legal Proceedings). The Company’s win of the critical TS-4530A Mode 5 U.S. Army program represented another major event for our future. Management believes that this award, in conjunction with our U.S. Navy CRAFT Mode 5 program, provides Tel with undisputed market leadership in the Mode 5 IFF business and should provide a constant revenue stream for at least the next few years. This program takes full advantage of the significant investment that the Company has made in its proprietary Mode 5 technology.
 
The program is for Mode 5 conversion kits and new IFF test sets, which incorporate the Company’s proprietary electronics and IFF technology in addition to Mode S Enhanced Surveillance (“EHS”) and Automatic Dependent Surveillance - Broadcast (“ADS-B”) test functionality. The U.S. Army completed its production assurance review, and the Company has successfully completed testing conducted by the United States Department of Defense (“DOD”) AIMS Program Office to approve its TS-4530A Flight Line Test Set authorizing its use for Mark XIIA IFF Mode S (ELS/EHS/ADS-B) and TCAS systems. The TS-4530A program is a critical program which should help drive TIC’s revenue growth and profitability. (Please see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.)
 
The Company has received approximately $26.9 million in delivery orders on the TS-4530A program out of a maximum contract value of approximately $44 million. The Company received a full production release for the kits, and commenced shipment of these kits in July 2014. The U.S. Army has ordered about 50% of the maximum quantity of SETS, so any additional U.S. Army KIT or SET orders would be at higher commercial prices. The U.S. Army has requested that TIC increase the production of KITS to 150 units per month starting in 2015 to ensure that they do not lose any funding for several KIT delivery orders which expire late in calendar year 2015. The U.S. Army has indicated that it expects to authorize full rate production for the SETS in the second half of 2015. TIC continues to actively market the TS-4530A product both domestically and overseas, and has received a limited amount of orders outside the U.S. Army contract.
 
As of March 31, 2015, the Company has open orders for 1,367 kits and 687 sets, totaling $14.7 million.
 
Intermediate Level TACAN Test Set (“ITATS”) (AN/ARM-206) with the U.S. Navy)

The AN/ARM-206 or ITATS is a bench test set combining advanced digital technology with state of the art automated testing capabilities. The ITATS product is a fully automated TACAN test set for use in U.S. Navy Intermediate Level repair locations. This product represents an important expansion to Tel’s current product line, and the automated testing capabilities will provide a significant labor savings benefit to our customers. This contract with the U.S. Navy has options for approximately 148 units with a total value of over $12 million. Given the unique nature of the design, this unit could also generate sales to other military customers, both domestically and overseas.

The ITATS development program is complete and the U.S. Navy issued a production release in February 2013 for 102 units at a contract value of $5.3 million. TIC has been having issues getting vendors on board with this program due to program and payment delays to vendors. As a result, the U.S. Navy issued a cure letter notice on June 6, 2013. The Company and the U. S. Navy worked together to secure a favorable outcome for both parties. As a result, the Company, with the help of the U.S. Navy, has resolved the open issues. The Company began ITATS production in the second quarter of fiscal year 2015, and continues to ramp up production. We also continue to market this unit to other domestic and international customers.
 

Item 1.           Business (continued)
 
General (continued)

Intermediate Level TACAN Test Set (“ITATS”) (AN/ARM-206) with the U.S. Navy (continued)
 
In January 2014, the Company received a $2.14 million contract modification on the ITATS program This contract modification entails the sale of certain intellectual property (“IP”) to the U.S. Navy plus the sale of ancillary test support equipment, and a modest increase in the recurring price to reflect several product enhancements. As part of this contract modification, the Company sold certain IP in the aggregate amount of $1,526,795 of which $1,200,000 of the IP sale proceeds was paid to the Company’s subcontractor on this program. As part of this agreement with the Company’s subcontractor, upon payment of the $1,200,000, the outstanding amount due to the subcontractor in the amount of $790,535 was discharged. The Company also received $117,095 for engineering enhancements for this program. The sale of the IP for the ITATS program should have no impact on sales of these units to the U.S. Navy or other customers. As of March 31, 2015, the Company has open orders for 69, totaling $3,879,000, including enhancements.

Legacy Products

During fiscal 2015, the Company received the following significant orders for our legacy products:
 
·  
U.S. Army for 35 T-47N Test Sets for a total of $601,230. This order is part of a five year IDIQ contract for up to 235 T-47N Test Sets. After receipt of this order, a total of 50 T-47N Test Sets could still be exercised under this IDIQ contract.

·  
$289,900 from South Africa for T-47G Test Sets.

·  
$162,400 from South Korea for T-47G Test Sets.

·  
$136,200 from U.A.E for T-47N Test Sets.

·  
$105,000 from Italy for Precision DME Test Set.

·  
$552,330 from our commercial U.S. distributor for TR-220 Test Sets.
 
Historically, the Company receives regular smaller orders for both its commercial and government products, as these products are widely used in the Avionics Test Equipment market.

Competition
 
The Company manufactures and sells commercial and military products as a single avionics business, and its designs and products cross both markets.
 
The general aviation market consists of some 1,000 avionics repair and maintenance service shops at private and commercial airports in the United States which purchase test equipment to assist in the repair of aircraft electronics. The commercial aviation market consists of approximately 80 domestic and foreign commercial airlines.
 
The civilian market for avionic test equipment is dominated by two designers and manufacturers, Tel and Aeroflex, Inc. (“Aeroflex”), with Aeroflex being substantially larger than Tel.  This market is relatively narrow and highly competitive.  Tel has been successful because of its high quality, new technology, user friendly products and competitive prices.  In recent years commercial airlines have experienced financial difficulties, and, as a result of this, sales of avionics test equipment to airlines have been weak.
 
The military market is large and is dominated by large corporations with substantially greater resources than the Company, including Aeroflex.  Tel competitively bids for government contracts on the basis of the engineering quality and innovation of its products, competitive price, and "small business set asides" (i.e., statutory provisions requiring the military to entertain bids only from statutorily defined small businesses), and on bids for sub-contracts from major government suppliers.  There are a limited number of competitors who are qualified to bid for “small business set asides.”  The military market consists of many independent purchasing agencies and offices. The process of awarding contracts is heavily regulated by the U.S. Department of Defense. 
 

 Item 1.          Business (continued)
 
General (continued)
 
Competition (continued)

In recent years, the Company has won several large, competitively bid contracts from the military and has become the primary supplier for the U.S. Military, as well as the NATO countries, of flight line IFF test equipment. The CRAFT AN/USM-708, CRFAT AN/USM-719 and TS-4530A programs, discussed previously, involve a new generation of technology, including the next generation of IFF testing, and is expected to enable the Company to continue to be a major supplier of avionics test equipment to the military for years to come. Tel believes its new technology will also allow it to increase sales to the commercial market in the future.
 
Marketing and Distribution
 
Domestic commercial sales are made throughout the U.S. to commercial airlines and general aviation businesses directly or through distributors. No direct commercial customer accounted for more than 10% of commercial sales in fiscal years 2015 and 2014.  Domestic distributors receive a 15%-20% discount for stocking, selling, and, in some cases, providing product calibration and repairs. Tel gives a 5% to 15% discount to non-stocking distributors, and to independent sales representatives, depending on their sales volume and promotional effort.  The loss of any one of these distributors would not have a material adverse effect on the Company or its operations. Commercial sales represented 12% and 11% of total sales, respectively, for the fiscal years ended March 31, 2015 and 2014. No distributor represented more than 10% of commercial sales during fiscal years 2015 and 2014.
 
Marketing to the U.S. Government is made directly by employees of the Company or through independent sales representatives, who receive similar commissions to the commercial distributors. For the years ended March 31, 2015 and 2014, sales to the U.S. Government, including shipments through the government’s logistics centers, represented approximately 77% and 64%, respectively, of avionics sales. No other government customer represented over 10% of government sales for fiscal years 2015 and 2014.
 
International sales are made throughout the world to government and commercial customers, directly through American export agents, or through the Company’s overseas distributors at a discount reflecting a 20% to 22% selling commission, under written or oral, year-to-year arrangements. The Company has an exclusive distribution agreement with Muirhead Avionics and Accessories, Ltd (“Muirhead”), based in the United Kingdom, to represent the Company in parts of Europe, and with Victory Aerospace in Australia and New Zealand.  Tel also sells its products through exclusive distributors in Spain, Portugal, and the Far East and is exploring distribution in other areas.  For the years ended March 31, 2015 and 2014, total international sales were 10% and 16%, respectively, of sales. Additionally, the Company has an agreement with M.P.G. Instruments s.r.l., based in Italy, wherein this distributor has the exclusive sales rights for DME/P ramp and bench test units. The Company continues to explore additional marketing opportunities in other parts of the world, including the Far East. No international distributor accounted for more than 10% of total sales for the fiscal years ended March 31, 2015 and 2014. The Company has no material assets overseas. 
 
Tel also provides customers with calibration and repair services. Repairs and calibrations accounted for 5% of sales for the years ended March 31, 2015 and 2014, respectively.
 
Future domestic market growth, if any, will be affected in part by whether the U.S. Federal Aviation Administration (“FAA”) implements plans to upgrade the U.S. air traffic control system regulations and by continuing recent industry trends towards more sophisticated avionics systems, both of which would require the design and manufacture of new test equipment. Military contracts are awarded and implemented by extensive government regulation. The Company believes its test equipment is recognized by its customers for its quality, durability, reliability, affordability, and by its advanced technology.

 
Item 1.           Business (continued)
 
General (continued)

Marketing and Distribution (continued)

Backlog
 
Set forth below is Tel’s avionics backlog at March 31, 2015 and 2014:
 
   
Commercial
   
Government
   
Total
 
                   
March 31, 2015
 
$
450,497
   
$
28,289,279
   
$
28,739,776
 
March 31, 2014
 
$
529,779
   
$
37,061,555
   
$
37,591,334
 
 
Tel believes that most of its backlog at March 31, 2015 will be delivered during the next three fiscal years. The backlog is pursuant to purchase orders, and all of the government contracts are fully funded.  However, government contracts are always susceptible to termination for convenience by the government. Historically, the Company obtains orders which are required to be filled in less than 12 months, and therefore, these anticipated orders are not reflected in the backlog.

Suppliers
 
Tel obtains its purchased parts from a number of suppliers.  These materials are standard in the industry, and the Company foresees no difficulty in obtaining purchased parts, as needed, at acceptable prices.
 
Patents and Environmental Laws
 
Tel has no patents or licenses which are material to its business, and there are no material costs incurred to comply with environmental laws.

Engineering, Research, and Development
 
In the fiscal years ended March 31, 2015 and 2014, Tel spent $1,961,275 and $1,853,338, respectively, on the engineering, research, and development of new and improved products.  None of these amounts were sponsored by customers. Engineering, research, and development expenditures in fiscal year 2015 were made primarily for the   T-4530A program, AN/USM-206, continuing engineering for the CRAFT program, and the incorporation of other product enhancements in existing designs as well as an upgrade of our T-760 Precision DME (Distance Measuring Equipment) Test Set. The Company also has been developing a new commercial navigation/communication test set designated the TR-36. The Company owns all of these designs with the exception of the AN/ARM-206 design.
 
Tel's management believes that continued significant expenditures for engineering, research, and development are necessary to enable Tel to expand its products, sales, and profits, and to remain competitive.
 
Personnel
 
At June 11, 2015, Tel had forty-two full-time employees in manufacturing, materials management, and quality assurance, eleven in administration and sales, including customer services and product support, and twelve in engineering, research and development, none of whom belongs to a union. From time to time, the Company also employs independent contractors to support its manufacturing, engineering, and sales organizations. At June 11, 2015, the Company utilized one independent contractor in manufacturing for assembly and test, one in sales and program management, and one in engineering. Tel has been successful in attracting skilled and experienced management, sales and engineering personnel.

Where You Can Find More Information

The public may read and copy any materials the Company files with the U.S. Securities and Exchange Commission (the “SEC”) at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030.  The SEC maintains an Internet website (sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
 
 
 Item 1A.       Risk Factors
 
We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

Item 1B.        Unresolved Staff Comments

Not Applicable.
 
Item 2.           Properties
 
The Company leases its only facility in East Rutherford, NJ (approximately 27,000 square feet) under an operating lease agreement which expires July 31, 2016. The lease is for a five year period, beginning August 1, 2011, with a five year option in a one-story facility that will allow for a rapid ramp-up in production volume to support the Company’s customer delivery commitments (see Note 12 of the Notes to the Consolidated Financial Statements). Under terms of the lease, the Company is also responsible for its proportionate share of the additional rent to include all real estate taxes, insurance, snow removal, landscaping and other building charges. The Company is also responsible for the utility costs for the premises.  Tel is unaware of any environmental problems in connection with its location and because of the nature of its manufacturing activities, does not anticipate such problems.

Item 3.           Legal Proceedings
 
On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court, Sedgwick County, Kansas, Case No. 09 CV 1141 (the “Aeroflex Action”), alleging that the Company and its two employees misappropriated Aeroflex’s proprietary technology in connection with the Company winning a substantial contract from the U.S. Army (the “Award”), to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5. Aeroflex’s petition alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with its business relationship; conspired to harm Aeroflex and tortiously interfered with its contract and seeks injunctive relief and damages. The central basis of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology and confidential information in winning the Award.  In February 2009, subsequent to the Company winning Award, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the U.S. Army Contracts Attorney and the U.S. Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed Aeroflex proprietary technology in winning the Award, and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest.

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

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

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

Item 3.           Legal Proceedings (continued)
 
The Company made an Offer to Settle to the SEC and in September 2014 the SEC accepted such offer. The Company has also revised its procedures for Section 16(a) reports to ensure complete compliance.

Other than the matters outlined above, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of executive officers of our Company, threatened against or affecting our Company, or our common stock in which an adverse decision could have a material effect.
 
Item 4.           Mine Safety Disclosures
 
Not applicable.
 
 
 
 
PART II
 
Item 5.           Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
a) Market Information
 
The common stock, $0.10 par value per share, of the registrant (“Common Stock”) is traded on the NYSE - MKT under the symbol “TIK”.  The following table sets forth the high and low per share sale prices for our Common Stock for the periods indicated as reported for fiscal years 2015 and 2014 by the NYSE - MKT:
 
Fiscal Year
           
Ended March 31,
           
2015
 
High
   
Low
 
First Quarter
 
$
5.60
   
$
4.40
 
Second Quarter
   
5.78
     
4.99
 
Third Quarter
   
5.38
     
4.34
 
Fourth Quarter
   
6.55
     
4.30
 
2014
               
First Quarter
 
$
3.50
   
$
3.18
 
Second Quarter
   
4.18
     
3.21
 
Third Quarter
   
5.92
     
3.80
 
Fourth Quarter
   
6.48
     
4.18
 

b) Holders

The Company has approximately 202 holders of its Common Stock as of June 18, 2015. This figure does not take into account those shareholders whose certificates are held in the name of broker-dealers or other nominees.
 
c) Dividends
 
We have not declared or paid any dividends on our Common Stock and intend to retain any future earnings to fund development and growth of our business. Therefore, we do not anticipate paying dividends on our common stock for the foreseeable future. There are no restrictions on our present ability to pay dividends to stockholders of our common stock, other than those prescribed by law.

d) Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information as of March 31, 2014 regarding compensation plans under which equity securities of the Company are authorized for issuance.

 
Plan category
 
Number of securities to be issued upon exercise of outstanding options
   
Weighted average exercise price of outstanding options
   
Number of options remaining available for future issuance under Equity Compensation Plans
 
Equity Compensation Plans approved by shareholders
   
71,500
   
$
6.06
     
 248,278
 
Equity Compensation Plans not approved by shareholders
   
--
     
--
     
--
 
Total
   
71,500
   
$
6.06
     
248,278
 

See “Equity Compensation Plan Information” under Item 12 below.
 
 
Item 5.           Market for Registrant's Common Stock and Related Stockholder Matters (continued)

d) Securities Authorized for Issuance under Equity Compensation Plans (continued)

During fiscal year 2015, the Company issued 5,500 shares of common stock upon exercise of stock options granted pursuant to its 2006 Employee Stock Option Plan for an aggregate $26,610, which was added to working capital.  All of the shares were issued pursuant to our S-8 Registration Statement filed on August 18, 2005 or pursuant to the exemption provided by Section 4 of the Securities Act of 1933. Please refer to Note 16 of the Notes to the Consolidated Financial Statements and Item 11, Executive Compensation, for information on the Company’s Employee Stock Option Plan of 2006.
 
In conjunction with the loan from BCA Mezzanine Fund, L.P. (“BCA”) (see Note 10 of the Notes to the Consolidated Financial Statements), the Company issued BCA a nine-year warrant exercisable for 136,920 shares, based upon 4.5% of the fully–diluted outstanding shares of the Company’s common stock at $6.70 per share, the average closing price over the three days preceding the closing of the loan on the NYSE – MKT. In the event of specific major corporate events or the maturity of the five-year loan, BCA can require the Company to purchase the warrant shares at the higher of the then exchange market price less, in the case of the warrant, the exercise price, or five times operating income per share.
 
The Company also issued warrants to a third party exercisable for 10,416 shares at $6.70 per share for five years in conjunction with the BCA loan as an additional finder’s fee.
 
In consideration for the waiver for non-compliance of the financial covenants and for the deferral of certain principal payments, BCA received warrants to purchase a total of 100,000 shares of Common Stock at prices ranging from $3.33 to $3.69 during fiscal years 2014 and 2013 (see Note 10 of the Notes to the Consolidated Financial Statements).
 
In conjunction with a loan from a private investor (see Note 10 of the Notes to the Consolidated Financial Statements), the Company issued a warrant exercisable for 50,000 shares of the Company’s common stock at $3.35 per share, expiring September 10, 2019.

Rule 10B-18 Transactions
 
During the year ended March 31, 2015, there were no repurchases of the Company’s common stock by the Company.
 
Recent Sales of Unregistered Securities

None.

Item 6.           Selected Financial Data

The Company is a smaller reporting company as defined in Item 10 (f) of Regulation S-K and therefore is not required to provide the information under this item. 
 
 
Item 7.           Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward Looking Statements

A number of the statements made by the Company in this report may be regarded as “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1965.

Forward-looking statements include, among others, statements concerning the Company’s outlook, pricing trends and forces within the industry, the completion dates of projects, expected sales growth, cost reduction strategies and their results, long-term goals of the Company and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.
 
All predictions as to future results contain a measure of uncertainty and accordingly, actual results could differ materially.  Among the factors that could cause a difference are changes in the general economy; changes in demand for the Company’s products or in the costs and availability of its raw materials; the actions of competitors; the success of our customers, technological change; changes in employee relations; government regulations; litigation, including its inherent uncertainty; difficulties in plant operations and materials transportation; environmental matters; and other unforeseen circumstances.  A number of these factors are discussed in the Company’s filings with the SEC. 

General

Management’s discussion and analysis of results of operations and financial condition is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position of the Company together with its subsidiary.  This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying financial notes, and with the Critical Accounting Policies noted below.  The Company’s fiscal year begins on April 1 and ends on March 31.  Unless otherwise noted, all references in this document to a particular year shall mean the Company’s fiscal year ending on March 31.

Overview

After returning to profitability in fiscal year 2014, we had a slow start to the 2015 fiscal year as a result of program delays and a six week interruption in CRAFT shipments. However, the Company finished strong with revenues of $11,479,222 for the second half of fiscal year 2015 as compared to $6,716,750 in the first half of the year. Currently, we are shipping CRAFT at a more consistent rate, including some of the higher priced units, TS-4530A KITS for the U.S. Army at full production as well as the ITATS TACAN Test Sets. Our legacy business also continues to be consistent. We are still awaiting approval from the U.S. Army for the TS-4530A SETS, but this could take several additional months due to internal U.S. Army approval procedures.

For the year ended March 31, 2015, total sales increased $2,367,681 (15.0%) to $18,195,972 as compared to $15,828,291 for the year ended March 31, 2014. Operating income was $330,386 for the year ended March 31, 2015 as compared to $1,363,902 for the year ended March 31, 2014. For the year ended March 31, 2015, the Company had a loss before taxes of $359,812 as compared to income before taxes of $704,373 for the year ended March 31, 2014 (Results of Operations below for further discussion).  See also Item 1 - Business for details of our major programs.

As a result of the substantial operating losses incurred in fiscal year 2013, the Company was not in compliance with the NYSE-MKT’s (the “Exchange”) continued listing standards. The Company also received a letter from the staff of the Exchange that, based on the Company’s financial statements at March 31, 2013, the Company was no longer in compliance with the minimum stockholders’ equity requirement of $4.0 million, and had also reported net losses in three of its last four fiscal years, as set forth in Section 1003(a)(ii) of the NYSE MKT Company Guide. On July 17, 2014, based on the review of publicly available and Section 1009(f) of the NYSE MKT Company Guide, the Exchange indicated that the Company had resolved the continued listing deficiencies with respect to both Sections 1003(a)(ii) and 1003(4)(iv) of the NYSE MKT Company Guide, since it has reported net income for the fiscal year ended March 31, 2014 and demonstrated that it has remedied its financial impairment. As is the case with all listed issuers on the NYSE-MKT, the Company’s continued listing eligibility will be assessed on an ongoing basis. The Company is optimistic that it will maintain its NYSE-MKT listing. 
 
In November 2014, the Company entered into a loan agreement with a bank for $1,200,000. The proceeds from the loan were used to pay off the remaining balance of the loan with BCA in the amount of $1,153,109, including accrued interest of $4,467.  The term of the loan is for three (3) year and expires in November, 2017. Monthly payments are at $36,551 including interest at 6%. 
 
 
Item 7.           Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Overview (continued)

At March 31, 2015, the Company’s backlog was approximately $28.7 million as compared to approximately $37.6 million at March 31, 2014. 

Based on existing and expected production releases, the Company believes that it will have adequate liquidity and backlog to fund operating plans for at least the next twelve months.  Currently, the Company has no material future capital expenditure requirements. However, there can be no assurances that the Company will return to profitable operations or will not require additional financing.
 
Results of Operations 2015 Compared to 2014
 
Sales
 
For the fiscal year ended March 31, 2015, total sales increased $2,367,681 (15.0%) to $18,195,972 as compared to $15,828,291 for the same period in the prior year. Total Avionics sales increased $2,694,476 (17.4%) to $18,195,972 for the year ended March 31, 2015 as compared to $15,501,496 for the fiscal year ended March 31, 2014.

Avionics government sales increased $2,199,556 (16.0%) to $15,926,532 for the year ended March 31, 2015 as compared to $13,726,976 for the year ended March 31, 2014.  This increase is mostly attributed to the increased shipments for the ITATS and CRAFT programs as well as an increase in shipments for the TS-4530A KITS for which the Company received a production release in July 2014. These increases were partially offset by lower shipment of the TS-4530A Limited Rate Initial Production (“LRIP”) SETS, for which the Company is still awaiting a productions release, but was able to ship against a partial release from the U.S. Army in fiscal year 2014, lower sales of the AN/USM-708 test sets to other customers, and lower sales of legacy products. During the year ended March 31, 2015 the Company had a six week interruption in CRAFT deliveries due to delayed component shipments from vendors, and a technical issue with the U.S. Navy, which affected sales for these periods, but this matter has been resolved.  CRAFT shipments resumed in October.

Commercial sales increased $494,920 (27.9%) to $2,269,440 for the year ended March 31, 2015 as compared to $1,774,520 for the same period in the prior fiscal year.  This increase is primarily attributed to an increase in overhaul and repair revenues.     

Gross Margin
 
Gross margin dollars decreased $923,195 (14.5%) to $5,440,692 for the fiscal year ended March 31, 2015 as compared to $6,363,887 for the prior fiscal year.  This decrease is mostly attributed to higher material costs and labor and overhead costs due in part to additional staffing associated with the startup of the TS-4530A and ITATS programs.  Gross profit percentage was also favorably impacted in fiscal year 2014 by the reversal of a liability in the amount of $790,535, which was discharged by the vendor. The gross margin percentage for the fiscal year ended March 31, 2015 was 30.3% as compared to 40.2% for the fiscal year ended March 31, 2014.  

Operating Expenses
 
Selling, general and administrative expenses increased $2,384 (0.1%) to $3,149,031 for the fiscal year ended March 31, 2015, as compared to $3,146,647 for the fiscal year ended March 31, 2014.   Higher professional fees associated with the deposition phase Aeroflex litigation were mostly offset by lower outside commission costs as well as lower profit sharing, and shared-based compensation expenses.  Legal expenses associated with the Aeroflex litigation were $524,837 for the year ended March 31, 2015 as compared to $341,431 for the same period last year.
 
Engineering, research and development expenses increased $107,937 (5.8%) to $1,961,275 for fiscal year 2015 as compared to $1,853,338 for the prior fiscal year.  While the Company has completed development on its major programs, research and development resources have now been focused on new product development, sustaining engineering and enhancements to existing products.

Income From Operations

As a result of the above, the Company recorded income from operations in the amount of $300,386 for the fiscal year ended March 31, 2015 as compared $1,363,902 for the year ended March 31, 2014.


Item 7.           Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
 
Results of Operations 2015 Compared to 2014 (continued)

Other Expense
 
Other expense increased to $690,198 for the year ended March 31, 2015 as compared to $659,529 for the year ended March 31, 2015. This change is primarily due to the higher non-cash loss on the change in the valuation of common stock warrants as compared to the same period last year, loss on the extinguishment of debt associated with payoff of the loan with BCA partially offset lower interest expense and lower amortization of debt discount and deferred financing costs.

Income (Loss) before Income Taxes

As a result of the above, the Company recorded a loss before taxes of $359,812 for the year ended March 31, 2015 as compared to income before taxes of $704,373 for the fiscal year ended March 31, 2014.
 
Income Taxes

For the year ended March 31, 2015, the Company recorded an income tax benefit of $77,372 as compared to a provision for income taxes in the amount of $442,845 for the year ended March 31, 2014.  For the year ended March 31, 2014, the Company recorded a provision for income taxes as the Company recorded a profit before taxes for the current fiscal year.

Net Income (Loss)

As a result of the above, the Company recorded a net loss of $280,440 for the year ended March 31, 2015 as compared to net income in the amount of $261,528 for the year ended March 31, 2014.

Liquidity and Capital Resources
 
At March 31, 2015, the Company had net working capital of $2,599,117 as compared to $2,452,798 at March 31, 2014. This increase in working capital is primarily the result of the repayment of progress billings and the current portion of long-term debt partially offset by decrease in accounts receivable and the increase in accounts payable and accrued liabilities.

During the year ended March 31, 2015, the Company’s cash balance decreased by $46,186 to 185,932.  The Company’s principal sources and uses of funds were as follows:

Cash provided by operating activities. For the year ended March 31, 2015, the Company provided $401,298 in cash for operations as compared to providing $432,639 in cash for operations for the year ended March 31, 2014.  This reduction is the result of the lower operating profit, reduction in progress billings and the reduction in accounts payable mostly offset by the increase in inventories.

Cash used in investing activities.  For the year ended March 31, 2015, the Company used $11,221 of its cash for investing activities, as compared to $65,851 for the year ended March 31, 2014 as result of lower purchases of equipment.
 
Cash used in financing activities. For the year ended March 31, 2015, the Company used $436,263 in financing activities as compared to using $444,967 for the year ended March 31, 2014.  This is the result of lower debt repayments as a result of the debt refinancing offset mostly by the proceeds from the new term. During the year ended March 31, 2014, the Company received net proceeds from a related party note payable in the amount of $100,000.
 
In November 2014, the Company entered into loan agreement with a bank for $1,200,000. The proceeds from the loan was used to pay off the remaining balance of the loan with BCA in the amount of $1,153,109, including accrued interest of $4,467.  The term of the loan is for 3 years and expires in November 2017. Monthly payments are at $36,551 including interest at 6%.
 
 
Item 7.           Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Liquidity and Capital Resources (continued)

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

At March 31, 2015, the Company’s backlog was approximately $28.7 million as compared to approximately $37.6 million at March 31, 2014. Historically, the Company obtains a substantial volume of orders which are required to be filled in less than twelve months, and, therefore, these anticipated orders are not reflected in the backlog.

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

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

Critical Accounting Policies
 
In preparing the financial statements and accounting for the underlying transactions and balances, the Company applies its accounting policies as disclosed in Note 2 of our Notes to Consolidated Financial Statements.  The Company’s accounting policies that require a higher degree of judgment and complexity used in the preparation of financial statements include:
 
Revenue recognition - revenues are recognized at the time of shipment to, or acceptance by the customer, provided title and risk of loss is transferred to the customer.  Provisions, when appropriate, are made where the right to return exists.
 
Revenues for repairs and calibrations of the Company’s products represented 5.4% and 5.2% of sales for the years ended March 31, 2015 and 2014, respectively. These revenues are for units that are periodically returned for annual calibrations and/or for repairs after the warranty period has expired. Revenues on repairs and calibrations are recognized at the time the repaired or calibrated unit is shipped, as it is at this time that the work is completed. The Company’s terms are F.O.B. Plant, and as such, delivery has occurred, and revenue recognized, when picked up and acknowledged by a common carrier.
 
Shipping and handling costs charged to customers are classified as sales, and the shipping and handling costs incurred are included in cost of sales.

Payments received prior to the delivery of units or services performed are recorded as deferred revenues.

With respect to warranty revenues, upon the completion of two years from the date of sale, considered to be the warranty period, the Company offers customers an optional warranty. Amounts received for warranties are recorded as deferred revenue and recognized over the respective terms of the agreements.

Inventory reserves – inventory reserves or write-downs are estimated for excess, slow-moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. These estimates are based on current assessments about future demands, market conditions and related management initiatives.  If market conditions and actual demands are less favorable than those projected by management, additional inventory write-downs may be required. While such write-downs have historically been within our expectation and the provision established, the Company cannot guarantee that it will continue to receive positive results.
 
 
Item 7.           Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Critical Accounting Policies (continued)
 
Warranty reserves – warranty reserves are based upon historical rates and specific items that are identifiable and can be estimated at time of sale.  While warranty costs have historically been within our expectations and the provisions established, future warranty costs could be in excess of our warranty reserves.  A significant increase in these costs could adversely affect operating results for the current period and any future periods these additional costs materialize.  Warranty reserves are adjusted from time to time when actual warranty claim experience differs from estimates. For the year ended March 31, 2015 warranty costs were $279,955 as compared to $288,685 for the year ended March 31, 2014.
 
Accounts receivable – the Company performs ongoing credit evaluations of its customers and adjusts credit limits based on customer payment and current credit worthiness, as determined by review of their current credit information.  The Company continuously monitors credits and payments from its customers and maintains provision for estimated credit losses based on its historical experience and any specific customer issues that have been identified. For the year ended March 31, 2015 approximately 77% of the Company’s sales were to the U.S. Government. While such credit losses have historically been within our expectation and the provision established, the Company cannot guarantee that it will continue to receive positive results.

Income taxes - deferred tax assets arise from a variety of sources, the most significant being: a) tax losses that can be carried forward to be utilized against profits in future years; b) expenses recognized in the books but disallowed in the tax return until the associated cash flow occurs; and c) valuation changes of assets which need to be tax effected for book purposes but are deductible only when the valuation change is realized. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when such differences are expected to reverse.  The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefit which is not more likely than not to be realized. In assessing the need for a valuation allowance, future taxable income is estimated, considering the realization of tax loss carryforwards. Valuation allowances related to deferred tax assets can also be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event it was determined that the Company would not be able to realize all or a portion of its deferred tax assets in the future, the Company would reduce such amounts through a charge to income in the period in which that determination is made. Conversely, if it were determined that it would be able to realize the deferred tax assets in the future in excess of the net carrying amounts, Tel would decrease the recorded valuation  allowance through an increase to income in the period in which that determination is made.  In its evaluation of a valuation allowance, the Company takes into account existing contracts and backlog, and the probability that options under these contract awards will be exercised as well as sales of existing products. The Company prepares profit projections based on the revenue and expenses forecast to determine that such revenues will produce sufficient taxable income to realize the deferred tax assets.
 
Off Balance Sheet Arrangements
 
The Company is not party to any off-balance sheet arrangements that may affect its financial position or its results of operations.
 
New Accounting Pronouncements

In May 2014, FASB issued ASU 2014-09, "Revenue from Contracts with Customers." This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This ASU is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, the Company will adopt this ASU on April 1, 2017. Companies may use either a full retrospective or modified retrospective approach to adopt this ASU and management is currently evaluating which transition approach to use. The Company is currently evaluating the impact of ASU 2014-09.

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

Item 7A.        Quantitative and Qualitative Disclosures About Market Risk
 
We do not hold any derivative instruments and do not engage in any hedging activities.
 

Item 8.           Financial Statements and Supplementary Data
 
 
 
Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders of
Tel-Instrument Electronics Corp.
East Rutherford, New Jersey 
 
We have audited the accompanying consolidated balance sheets of Tel-Instrument Electronics Corp. (the “Company”) as of March 31, 2015 and 2014 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended.   These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tel-Instrument Electronics Corp. and subsidiary as of March 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
 
 
/s/ BDO USA, LLP              
 
Woodbridge, New Jersey
 
 
June 25, 2015
 
 
TEL-INSTRUMENT ELECTRONICS CORP.
Consolidated Balance Sheets

ASSETS
 
March 31, 2015
   
March 31, 2014
 
Current assets:
           
Cash
 
$
185,932
   
$
232,118
 
Accounts receivable, net of allowance for doubtful accounts
     of $24,975 and $27,282, respectively
   
1,625,171
     
2,095,640
 
Inventories, net
   
4,032,074
     
4,025,391
 
Prepaid expenses and other current assets
   
281,002
     
263,592
 
Deferred financing costs
   
5,429
     
108,321
 
Deferred tax asset
   
1,064,395
     
1,089,538
 
             Total current assets
   
7,194,003
     
7,814,600
 
                 
Equipment and leasehold improvements, net
   
270,792
     
450,873
 
Deferred financing costs – long-term
   
8,792
     
48,142
 
Deferred tax asset – non-current
   
2,377,583
     
2,273,068
 
Other assets
   
32,317
     
47,670
 
                 
Total assets
 
$
9,883,487
   
$
10,634,353
 
                 
LIABILITIES AND STOCKHOLDERS’  EQUITY
               
                 
Current liabilities:
               
Current portion of long-term debt
 
$
387,839
   
$
718,848
 
Capital lease obligations – current portion
   
16,758
     
53,608
 
Accounts payable
   
2,811,781
     
2,289,858
 
Progress billings
   
-
     
775,475
 
Deferred revenues – current portion
   
18,609
     
37,452
 
Accrued expenses - vacation pay, payroll and payroll withholdings
   
594,114
     
444,238
 
Accrued expenses - related parties
   
170,348
     
123,036
 
Accrued expenses – other
   
595,437
     
919,287
 
             Total current liabilities
   
4,594,886
     
5,361,802
 
                 
Subordinated notes payable – related parties
   
250,000
     
250,000
 
Capital lease obligations – long-term
   
4,561
     
21,320
 
Long-term debt, net of debt discount
   
708,604
     
596,526
 
Warrant liability
   
518,962
     
354,309
 
Deferred revenues – long-term
   
133,650
     
133,650
 
Other long-term liabilities
   
33,000
     
56,100
 
                 
Total liabilities
   
6,243,663
     
6,773,707
 
                 
Commitments and contingencies
               
                 
Stockholders’ equity
               
Common stock, 4,000,000 shares authorized, par value $.10 per share,
       3,256,887 and 3,251,387 shares issued and outstanding, respectively
   
325,686
     
325,136
 
Additional paid-in capital
   
8,046,168
     
7,987,100
 
Accumulated deficit
   
(4,732,030
)
   
(4,451,590
)
                 
             Total stockholders’ equity
   
3,639,824
     
3,860,646
 
                 
Total liabilities and stockholders’ equity
 
$
9,883,487
   
$
10,634,353
 

The accompanying notes are an integral part of the consolidated financial statements.
 
 
TEL-INSTRUMENT ELECTRONICS CORP.
Consolidated Statements of Operations
 
   
For the years ended March 31,
 
   
2015
   
2014
 
             
Net sales
 
$
18,195,972
   
$
15,828,291
 
                 
Cost of sales
   
12,755,280
     
9,464,404
 
                 
              Gross margin
   
5,440,692
     
6,363,887
 
                 
Operating expenses:
               
  Selling, general and administrative
   
3,149,031
     
3,146,647
 
  Engineering, research and development
   
1,961,275
     
1,853,338
 
                 
              Total operating expenses
   
5,110,306
     
4,999,985
 
                 
Income from operations
   
330,386
     
1,363,902
 
                 
Other income (expense):
               
   Amortization of debt discount
   
(75,308
)
   
(104,644
)
   Amortization of deferred financing costs
   
(69,165
)
   
(108,321
)
   Change in fair value of common stock warrants
   
(164,653
)
   
(114,869
)
   Loss on extinguishment of debt
   
(188,102
)
   
(26,600
)
   Interest income
   
-
     
226
 
   Interest expense
   
(145,658
)
   
(275,321
)
   Interest  expense -  related parties
   
(47,312
)
   
(30,000
)
                 
Total other expense
   
(690,198
)
   
(659,529
)
                 
Income (loss) before income taxes
   
(359,812
)
   
704,373
 
                 
   Provision (benefit) for income taxes
   
(79,372
)
   
442,845
 
                 
Net income (loss)
 
$
(280,440
)
 
$
261,528
 
                 
                 
Basic income (loss) per common share
 
$
(0.09
)
 
$
0.08
 
Diluted income (loss) per common share
 
$
(0.09
)
 
$
0.10
 
                 
Weighted average number of shares outstanding
               
Basic
   
3,253,992
     
3,204,028
 
Diluted
   
3,253,992
     
3,228,894
 

The accompanying notes are an integral part of the consolidated financial statements.
 
 
TEL-INSTRUMENT ELECTRONICS CORP.
Consolidated Statements of Changes in Stockholders’ Equity
 
   
Common Stock
   
Additional
             
   
# of Shares 
 Issued
   
Amount
   
Paid-In 
Capital
   
Accumulated
Deficit
   
Total
 
                               
Balances  at April 1, 2013
   
3,011,739
   
$
301,171
   
$
7,108,300
   
$
(4,713,118
)
 
$
2,696,353
 
                                         
Stock-based compensation
   
-
     
-
     
84,742
     
-
     
84,742
 
Net income
   
-
     
-
     
-
     
261,528
     
261,528
 
Issuance of new shares in connection with conversion of debt into common stock
   
200,000
     
20,000
     
644,000
     
-
     
664,000
 
Issuance of new shares in connection with conversion of note payable into common stock
   
31,348 
     
3,135 
     
117,868
     
     
121,003
 
Issuance of common stock in connection with the exercise of stock options
   
8,300
     
830
     
32,190
   
-
     
33,020
 
                                         
Balances  at March 31, 2014
   
3,251,387
   
$
325,136
   
$
7,987,100
   
$
(4,451,590
)
 
$
3,860,646
 
                                         
Stock-based compensation
   
-
     
-
     
33,008
     
-
     
33,008
 
Net loss
   
-
     
-
     
-
     
(280,440
)
   
(280,440
)
Issuance of common stock in connection with the exercise of stock options
   
5,500
     
550
     
26,060
   
-
     
26,610
 
                                         
Balances at March 31, 2015
   
3,256,887
   
$
325,686
   
$
8,046,168
   
$
(4,732,030
)
 
$
3,639,824
 

The accompanying notes are an integral part of the consolidated financial statements.
 
 
TEL-INSTRUMENT ELECTRONICS CORP.
Consolidated Statements of Cash Flows
                                                                                             
   
For the years ended March 31,
 
   
2015
   
2014
 
Cash flows from operating activities:
           
Net income (loss)
 
$
(280,440
)
 
$
261,528
 
Adjustments to reconcile net (loss) income to net cash
(Used in) provided by operating activities:
               
Deferred income taxes
   
(79,372
)
   
423,345
 
Allowance for doubtful accounts
   
(2,487
)
   
10,000
 
Depreciation and amortization
   
177,291
     
202,936
 
Amortization of debt discount
   
75,308
     
104,644
 
Amortization of deferred financing costs
   
69,165
     
108,321
 
Change in fair value of common stock warrant
   
164,653
     
114,869
 
Provision for inventory obsolescence
   
24,287
     
5,000
 
Loss on extinguishment of debt
   
188,102
     
26,600
 
Non-cash interest expense associated with conversion of note payable
   
-
     
21,003
 
Non-cash stock-based compensation
   
33,008
     
84,742
 
Changes in assets and liabilities:
               
Decrease (increase)  in accounts receivable
   
472,956
     
(1,547,761
)
(Increase) decrease in inventories
   
(16,959
)
   
2,210,790
 
Increase in prepaid expenses and other assets
   
(2,057
)
   
(138,538
)
Increase (decrease) in accounts payable
   
521,923
     
(1,982,573
)
(Decrease) increase in deferred revenues
   
(18,843
)
   
151,597
 
Increase in accrued payroll, vacation pay & withholdings
   
149,876
     
1,716
 
Decrease in accrued expenses – related party and other
   
(276,538
)
   
(457,155
)
(Decrease) increase in progress billings
   
(775,475
)
   
775,475
 
(Decrease) increase in other long-term liabilities
   
(23,100
)
   
56,100
 
Net cash provided by operating activities
   
401,298
     
432,639
 
                 
Cash flows from investing activities:
               
Acquisition of equipment
   
(11,221
)
   
(65,851
)
Net cash used in investing activities
   
(11,221
)
   
(65,851
)
                 
Cash flows from financing activities:
               
Proceeds from exercise of stock options
   
26,610
     
33,020
 
Proceeds from note payable – related party
   
-
     
100,000
 
Proceeds from issuance of debt
   
1,200,000
     
23,712
 
Expenses associated with long-term debt
   
(16,287
)
   
-
 
Repayment of long-term debt
   
(1,592,977
)
   
(526,064
)
Repayment of capitalized lease obligations
   
(53,609
)
   
(75,635
)
Net cash used in financing activities
   
(436,263
)
   
(444,967
)
                 
Net decrease in cash
   
(46,186
)
   
(78,179
)
Cash, beginning of year
   
232,118
     
310,297
 
Cash, end of year
 
$
185,932
   
$
232,118
 
                 
Supplemental cash flow information:
               
Taxes paid
 
$
20,500
   
$
1,340
 
Interest paid
 
$
166,040
   
$
310,489
 
Supplemental non-cash information:
               
Warrants issued to lender for waiver of debt covenants
 
$
-
   
$
41,110
 
Conversion of debt to equity
 
$
-
   
$
700,000
 
Conversion of accrued interest to equity
 
$
-
   
$
37,400
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 

TEL-INSTRUMENT ELECTRONICS CORP.
 
Notes To Consolidated Financial Statements

1.                    Business, Organization, and Liquidity

Business and Organization

Tel-Instrument Electronics Corp. (“Tel” or the “Company”) has been in business since 1947.  The Company is a leading designer and manufacturer of avionics test and measurement instruments for the global, commercial air transport, general aviation, and government/military defense markets.  Tel provides instruments to test, measure, calibrate, and repair a wide range of airborne navigation and communication equipment.  The Company sells its equipment in both domestic and international markets. Tel continues to develop new products in anticipation of customers’ needs and to maintain its strong market position.  Its development of multi-function testers has made it easier for customers to perform ramp tests with less operator training, fewer test sets, and lower product support costs.  The Company has become a major manufacturer and supplier of Identification Friend or Foe (“IFF”) flight line test equipment and over the last few years was awarded three major military contracts.

2.                    Summary of Significant Accounting Policies

Principles of Consolidation:

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, and include the Company and its wholly-owned subsidiary. All significant inter-company accounts and transactions have been eliminated.

Revenue Recognition:

Revenues are recognized at the time of shipment to, or acceptance by the customer, provided title and risk of loss is transferred to the customer.  Provisions, when appropriate, are made where the right to return exists.
 
Revenues for repairs and calibrations of the Company’s products represented 5.4% and 5.2% of sales for the years ended March 31, 2015 and 2014, respectively. These revenues are for units that are periodically returned for annual calibrations and/or for repairs after the warranty period has expired. Revenues on repairs and calibrations are recognized at the time the repaired or calibrated unit is shipped, as it is at this time that the work is completed. The Company’s terms are F.O.B. Plant, and as such, delivery has occurred, and revenue recognized, when picked up and acknowledged by a common carrier.
 
Shipping and handling costs charged to customers are classified as sales, and the shipping and handling costs incurred are included in cost of sales.

Payments received prior to the delivery of units or services performed are recorded as deferred revenues.

With respect to warranty revenues, upon the completion of two years from the date of sale, considered to be the warranty period, the Company offers customers an optional warranty. Amounts received for warranties are recorded as deferred revenue and recognized over the respective terms of the agreements.

Fair Value of Financial Instruments:

The Company estimates that the fair value of all financial instruments at March 31, 2015 and March 31, 2014, as defined in Financial Accounting Standards Board (“FASB”) ASC 825 “Financial Instruments”, does not differ materially, except for the items discussed below, from the aggregate carrying values of its financial instruments recorded in the accompanying consolidated balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value.

The carrying amounts reported in the consolidated balance sheets as of March 31, 2015 and March 31, 2014 for cash, accounts receivable and accounts payable approximate the fair value because of the immediate or short-term maturity of these financial instruments.  Each reporting period we evaluate market conditions including available interest rates, credit spreads relative to our credit rating and liquidity in estimating the fair value of our debt. After considering such market conditions, we estimate that the fair value of debt approximates its carrying value. The warrant liability is measured at fair value (see Note 20).
 
 
TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

2.                    Summary of Significant Accounting Policies (continued)

Concentrations of Credit Risk:
 
Cash held in banks: The Company maintains cash balances at a financial institution that is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to federally insured limits. At times balances may exceed FDIC insured limits. The Company has not experienced any losses in such accounts.
 
Accounts Receivable: The Company’s avionics customer base is primarily comprised of airlines, distributors, and the U.S. Government. As of March 31, 2015, the Company believes it has no significant risk related to its concentration within its accounts receivable.

Inventories:
 
Inventories are stated at the lower of cost or market.  Cost is determined on a first-in, first-out basis.  Inventories are written down if the estimated net realizable value is less than the recorded value. The Company reviews the carrying cost of inventories by product to determine the adequacy of reserves for obsolescence. In accounting for inventories, the Company must make estimates regarding the estimated realizable value of inventory. The estimate is based, in part, on the Company’s forecasts of future sales and age of inventory. In accordance with industry practice, service parts inventory is included in current assets, although service parts are carried for established requirements during the serviceable lives of the products and, therefore, not all parts are expected to be sold within one year.

Equipment and Leasehold Improvements:
 
Office and manufacturing equipment are stated at cost, net of accumulated depreciation.  Depreciation and amortization are provided on a straight-line basis over periods ranging from 3 to 5 years.
 
Leasehold improvements are amortized over the term of the lease or the useful life of the asset, whichever is shorter.
 
Maintenance, repairs, and renewals that do not materially add to the value of the equipment nor appreciably prolong its life are charged to expense as incurred.
 
When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in the Statement of Operations.

Engineering, Research and Development Costs:

Engineering, research and development costs are expensed as incurred.

Advertising Expenses:

Advertising expenses consist primarily of costs for direct advertising. The Company expenses all advertising costs as incurred, and classifies these costs under selling, general and administrative expenses.  Advertising costs amounted to $-0- for the years ended March 31, 2015 and 2014, respectively.

Deferred Revenues:

Amounts billed in advance of the period in which the service is rendered or product delivered are recorded as deferred revenue.  At March 31, 2015 and 2014, deferred revenues totaled $152,259 and $171,102, respectively. See above for additional information regarding our revenue recognition policies.

Progress Billings:

Progress billings are a form of government funding for fixed-price contracts that are provided in recognition of the need for working capital, for long lead items, and work in-process expenditures. These payments from the government are recorded as progress billings in the liability section of the balance sheet. These amounts are reduced as the end item product is shipped. At March 31, 2015 and 2014, progress billings totaled $-0- and $775,475, respectively.
 
 
TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

2.                    Summary of Significant Accounting Policies (continued)

Net Income (Loss) per Common Share:

Basic net income (loss) per share attributable to common stockholders is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period.  Diluted income per share is computed by dividing diluted net income by the weighted-average number of common shares outstanding during the period, including common stock equivalents, such as stock options and warrants using the treasury stock method.  Diluted loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period, and excludes the anti-dilutive effects of common stock equivalents.

Accounting for Income Taxes:
 
The Company accounts for income taxes using the asset and liability method described in FASB ASC 740, “Income Taxes”. Deferred tax assets arise from a variety of sources, the most significant being: a) tax losses that can be carried forward to be utilized against profits in future years; b) expenses recognized for financial reporting purposes but disallowed in the tax return until the associated cash flow occurs; and c) valuation changes of assets which need to be tax effected for book purposes but are deductible only when the valuation change is realized.
 
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when such differences are expected to reverse.  The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefit which is not more likely than not to be realized. In assessing the need for a valuation allowance, future taxable income is estimated, considering the realization of tax loss carryforwards. Valuation allowances related to deferred tax assets can also be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event it was determined that the Company would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such amounts through a charge to income in the period in which that determination is made. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through an increase to income in the period in which that determination is made.  In its evaluation of a valuation allowance the Company takes into account existing contracts and backlog, and the probability that options under these contract awards will be exercised as well as sales of existing products. The Company prepares profit projections based on the revenue and expenses forecast to determine that such revenues will produce sufficient taxable income to realize the deferred tax assets.
 
The Company accounts for uncertainties in income taxes under ASC 740-10-50 which 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. ASC 740-10 requires that the Company determine whether the benefits of its tax positions are more-likely-than-not of being sustained upon audit based on the technical merits of the tax position. The Company recognizes the impact of an uncertain income tax position taken on its income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. The implementation of ASC 740-10 had no impact on the Company’s results of operations or financial position.

Despite the Company’s belief that its tax return positions are consistent with applicable tax laws, one or more positions may be challenged by taxing authorities. Settlement of any challenge can result in no change, a complete disallowance, or some partial adjustment reached through negotiations or litigation.
 
Interest and penalties related to income tax matters, if applicable, will be recognized as income tax expense. During the years ended March 31, 2015 and 2014 the Company did not incur any expense related to interest or penalties for income tax matters, and no such amounts were accrued as of March 31, 2015 and 2014.
 

TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

2.                    Summary of Significant Accounting Policies (continued)

Stock-based Compensation:
 
The Company accounts for stock-based compensation in accordance with FASB ASC 718 which requires the measurement of stock-based compensation based on the fair value of the award on the date of grant. The Company recognizes compensation cost on awards on a straight-line basis over the vesting period, typically four years. The Company estimates the fair value of each option granted using the Black-Scholes option-pricing model.
 
Additional information and disclosure are provided in Note 16 below.
 
Long-Lived Assets:
 
The Company assesses the recoverability of the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future, undiscounted cash flows expected to be generated by an asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. No impairment losses have been recognized for the years ended March 31, 2015 and 2014, respectively.

Use of Estimates:
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  The most significant estimates include income taxes, warranty claims, inventory and accounts receivable valuations.
 
Reclassifications:
 
Certain prior year amounts have been reclassified to conform to the current year presentation.
 
Accounts Receivable:
 
The Company performs ongoing credit evaluations of its customers and adjusts credit limits based on customer payment and current credit worthiness, as determined by review of their current credit information.  The Company continuously monitors credit limits for and payments from its customers and maintains provision for estimated credit losses based on its historical experience and any specific customer issues that have been identified.  While such credit losses have historically been within the Company’s expectation and the provision established, the Company cannot guarantee that this will continue.
 
Warranty Reserves:
 
Warranty reserves are based upon historical rates and specific items that are identifiable and can be estimated at time of sale.  While warranty costs have historically been within the Company’s expectations and the provisions established, future warranty costs could be in excess of the Company’s warranty reserves.  A significant increase in these costs could adversely affect the Company’s operating results for the period and the periods these additional costs materialize.  Warranty reserves are adjusted from time to time when actual warranty claim experience differs from estimates. For the year ended March 31, 2015 warranty costs were $279,955 as compared to $288,685 for the year ended March 31, 2014 and are included in Cost of Sales in the accompanying statement of operations. See Note 7 below for warranty reserves.
 
 
TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

2.                    Summary of Significant Accounting Policies (continued)
 
Risks and Uncertainties:
 
The Company’s operations are subject to a number of risks, including but not limited to changes in the general economy, demand for the Company’s products, the success of its customers, research and development results, reliance on the government and commercial markets, litigation, and the renewal of its line of credit.  The Company has major contracts with the U.S. Government, which like all government contracts are subject to termination.
 
New Accounting Pronouncements:

In May 2014, FASB issued ASU 2014-09, "Revenue from Contracts with Customers." This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This ASU is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, the Company will adopt this ASU on April 1, 2017. Companies may use either a full retrospective or modified retrospective approach to adopt this ASU, and management is currently evaluating which transition approach to use. The Company is currently evaluating the impact of ASU 2014-09.

No other recently issued accounting pronouncements had or are expected to have a material impact on the Company’s consolidated financial statements.
 
3.                    Accounts Receivable
 
The following table sets forth the components of accounts receivable:
 
   
March 31,
 
   
2015
   
2014
 
Government
 
$
1,440,378
   
$
1,982,215
 
Commercial
   
209,768
     
140,707
 
Less: Allowance for doubtful accounts
   
(24,975
)
   
(27,282
)
   
$
1,625,171
   
$
2,095,640
 
 
4.                    Inventories
 
Inventories consist of:
 
   
March 31,
 
   
2015
   
2014
 
Purchased parts
 
$
2,746,671
   
$
3,085,070
 
Work-in-process
   
1,514,356
     
1,134,714
 
Finished  goods
   
334
     
10,607
 
Less: Allowance for obsolete inventory
   
(229,287
)
   
(205,000
)
   
$
4,032,074
   
$
4,025,391
 
 
Work-in-process inventory includes $1,151,118 and $1,092,928 for government contracts at March 31, 2015 and 2014, respectively.
 
 
TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)
 
5.                    Equipment and Leasehold Improvements
 
Equipment and leasehold improvements consist of the following:
 
   
March 31,
 
   
2015
   
2014
 
Leasehold Improvements
 
$
94,413
   
$
94,413
 
Machinery and equipment
   
1,458,919
     
1,516,332
 
Automobiles
   
23,712
     
28,452
 
Sales equipment
   
572,236
     
586,265
 
Assets under capitalized leases
   
610,995
     
610,995
 
Less: Accumulated depreciation & amortization
   
(2,489,483
)
   
(2,385,584
)
   
$
270,792
   
$
450,873
 
 
Depreciation and amortization expense related to the assets above for the years ended March 31, 2015 and 2014 was $177,291 and $202,936 respectively.

6.                    Intellectual Property

In January 2014, the Company received a $2.14 million contract modification on the ITATS program. The ITATS product (“AN/ARM-206”) is a fully automated TACAN test set for use in U.S. Navy Intermediate Level repair locations. This contract modification entails the sale of certain intellectual property (“IP”) to the U.S. Navy plus the sale of ancillary test support equipment and an increase in the recurring price to reflect several product enhancements. The Company sold certain IP in the amount of $1,526,795, of which $1,200,000 of the IP sale proceeds was paid to the Company’s subcontractor on this program to secure the IP.  As a result, the net amount of $326,795 is recorded in net sales in the accompanying Statement of Operations. As part of this agreement with the Company’s subcontractor, upon payment of the $1,200,000, the outstanding amount due to the subcontractor in the amount of $790,535 was discharged and was recorded as a reduction of cost of goods sold. The Company also received $117,095 for engineering enhancements for this program, which was recorded as sales in fiscal year 2014. The sale of the IP for the ITATS program should have no impact on future sales of these units to the U.S. Navy or other customers.
 
7.                    Accrued Expenses
 
Accrued vacation pay, deferred wages, payroll and payroll withholdings consist of the following:
 
   
March 31,
 
   
2015
   
2014
 
             
Accrued vacation pay
 
$
328,777
   
$
267,991
 
Accrued compensation and payroll withholdings
   
265,337
     
176,247
 
                 
   
$
594,114
   
$
444,238
 
 
Accrued vacation pay, payroll and payroll withholdings includes $99,899 and $48,529 at March 31, 2015 and 2014, respectively, which is due to officers.
 
 
TEL-INSTRUMENT ELECTRONICS CORP.
 
Notes To Consolidated Financial Statements (Continued)
 
7.                    Accrued Expenses (continued)
 
Accrued expenses - other consist of the following:
 
   
March 31,
 
   
2015
   
2014
 
             
Accrued interest
 
$
3,230
   
$
17,672
 
Accrued outside contractor costs
   
1,245
     
104,610
 
Accrued commissions
   
117,523
     
188,840
 
Accrued legal costs
   
126,740
     
215,582
 
Warranty reserve
   
140,333
     
194,062
 
Accrued – other
   
206,366
     
198,521
 
                 
   
$
595,437
   
$
919,287
 
 
The following table provides a summary of the changes in warranty reserves for the years ended March 31, 2015 and 2014:

   
March 31, 2015
   
March 31, 2014
 
Warranty reserve, at beginning of period
 
$
194,062
   
$
287,470
 
Warranty expense
   
279,955
     
288,685
 
Warranty deductions
   
(333,684
)
   
(382,093
Warranty reserve, at end of period
 
$
140,333
   
$
194,062
 

Accrued expenses – related parties consists of the following:
 
   
March 31,
 
   
2015
   
2014
 
             
Interest due to the estate of the Company’s former Chairman
 
$
85,174
   
61,518
 
Interest and other expenses due to the Company’s President/CEO
   
85,174
     
61,518
 
                 
   
$
170,348
   
$
123,036
 

 
TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

8.                    Income Taxes
 
Income tax (benefit) provision:
         
   
Fiscal Year Ended
 
   
March 31,
   
March 31,
 
   
2015
   
2014
 
Current:
           
               Federal
 
$
-
   
$
16,000
 
               State and local
   
-
     
3,500
 
                 
               Total current tax provision
   
-
     
19,500
 
                 
Deferred:
               
               Federal
   
(171,180
   
401,283
 
               State and local
   
91,808
     
22,062
 
              
               
               Total deferred tax provision  (benefit)
   
(79,372
   
423,345
 
                 
Total provision (benefit)
 
$
(79,372
 
$
442,845
 
 
The approximate values of the components of the Company’s deferred taxes at March 31, 2015 and 2014 are as follows:
 
   
March 31,
   
March 31,
 
   
2015
   
2014
 
Deferred tax assets:
           
   Net operating loss carryforwards
 
$
2,865,606
   
$
2,662,953
 
   Tax credits
   
329,032
     
282,187
 
   Charitable contributions
   
17
     
-
 
   Allowance for doubtful accounts
   
8,499
     
9,288
 
   Reserve for inventory obsolescence
   
78,024
     
69,794
 
   Inventory capitalization
   
76,820
     
98,182
 
   Deferred payroll
   
29,264
     
29,279
 
   Vacation accrual
   
111,880
     
91,240
 
   Warranty reserve
   
47,754
     
66,070
 
   Deferred revenues
   
51,812
     
58,253
 
   Stock options
   
23,561
     
35,993
 
   Non-compete agreement
   
9,868
     
11,848
 
   Depreciation
   
(52,379
)
   
(52,481
)
   Deferred tax asset
   
3,579,758
     
3,362,606
 
   Less valuation allowance
   
(137,780
   
-
 
                 
   Deferred tax asset, net
 
$
3,441,978
   
$
3,362,606
 
                 
   Deferred tax asset – current
 
$
1,064,395
   
$
1,089,538
 
   Deferred tax asset – long-term
   
2,377,583
     
2,273,068
 
   Total
 
$
3,441,978
   
$
3,362,606
 

 
TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

8.                    Income Taxes (Continued)

The recognized deferred tax asset is based upon the expected utilization of its benefit from future taxable income. The Company has federal net operating loss (“NOL”) carryforwards of approximately $8,422,000 as of March 31, 2015. These carryforward losses are available to offset future taxable income, and begin to expire in the year 2027. New Jersey State NOL carryforwards approximate $7,112,000 as of March 31, 2015. NJ NOL carryforwards expire in 20 years, and certain of these amounts begin to expire in 2030.

The foregoing amounts are management’s estimates and the actual results could differ from those estimates. Future profitability in this competitive industry depends on continually obtaining and fulfilling new profitable sales agreements and modifying products.  The inability to obtain new profitable contracts or the failure of the Company’s engineering development efforts could reduce estimates of future profitability, which could affect the Company’s ability to realize the deferred tax assets.
 
A reconciliation of the income tax (benefit) provision at the statutory Federal tax rate of 34% to the income tax (benefit) provision recognized in the financial statements is as follows:
 
   
March 31,
   
March 31,
 
   
2015
   
2014
 
             
Income tax (benefit) provision  – statutory rate
 
$
(122,338
 
$
239,487
 
Income tax expenses – state and local, net of federal benefit
   
(104
)    
19,500
 
Permanent items
   
66,784
     
141,474
 
True-up of prior years deferred taxes
   
(162,527
   
19,536
 
Change in valuation allowance
   
137,780
     
(171
)
Other
   
1,033
     
23,019
 
                 
Income tax provision (benefit)
 
$
(79,372
 
$
442,845
 
 
9.                    Subordinated Notes – Related Parties
 
On February 22, 2010 the Company borrowed $250,000 in exchange for issuing subordinated notes to two executive officers and directors in the amount of $125,000 (individually, the “Subordinated Note” and collectively, the “Subordinated Notes”). Each officer and director also received 5,000 options to purchase Common Stock at an exercise price of $8.00 per share, the market price at the date of grant. In September 2010, these officers/directors entered into an Intercreditor and Subordination agreement which subordinated their loans to the BCA Loan Agreement (see Note 10 to Notes to Consolidated Financial Statements).  The notes were to become due April 1, 2011 with an interest rate of 1% per month, payable on a monthly basis within 14 days of the end of each month. The Intercreditor  and Subordination Agreement amongst the parties precludes the payment of principal or interest under these subordinated notes unless and until the Senior Obligations have been paid in full or without the express written consent of Senior Lender.  The holders of Subordinated Notes agreed that the Company’s failure to pay the monthly interest amounts pursuant to the terms of the February 22, 2010 Subordinated Notes will not constitute an event of default on such notes if the Company is precluded from making these payments pursuant to the limitations included in the loan agreement with BCA Mezzanine Fund L.L.P. (“BCA”). During fiscal year 2012, the Company’s Chairman, at the time, passed away. His surviving spouse has retained this Subordinated Note and continues to acknowledge the terms. Total interest expense was $47,312 and $30,000 for the years ended March 31, 2015 and 2014, respectively.

 
TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

10.                  Long-Term Debt

BCA Mezzanine Fund LLP

In September 2010 the Company entered into an agreement with BCA (“the “BCA Loan Agreement”) to lend the Company $2.5 million in the form of a promissory note (“the “BCA Note”). The Company incurred expenses of $541,604 in connection with this loan, including legal fees, investment banking fees and other transaction fees, including third party warrants exercisable for 10,416 shares at $6.70 per share for five years in conjunction with the BCA loan as a finder’s fee.  These expenses were included as deferred financing costs in the accompanying balance sheets, and were amortized over the term of the loan using the straight-line method which approximates the effective interest rate method. For the years ended March 31, 2015 and 2014, the Company recorded amortization of deferred financing costs in the amount of $69,165 and $108,321. On November 13, 2014, the Company paid off the BCA Note, and as a result, wrote-off the remaining balance of deferred charges in the amount of $89,365, and such amount is included in Loss on Extinguishment of Debt in the accompanying statement of operations for the year ended March 31, 2015. As of March 31, 2015, there were no unamortized deferred financing costs related to the BCA loan. As of March 31, 2014, the Company had unamortized deferred financing costs in the amount of $156,463 of which $108,321 was classified as a current asset and $48,142 was classified as long-term.  
 
The Company also issued warrants to BCA for 136,920 shares at an exercise price of $6.70 per share for nine years in conjunction with the issuance with the BCA Note. In connection with the initial warrants issued with this debt, the Company recorded a debt discount of $267,848. The debt discount was being amortized over the life of the loan.

In consideration for the waivers for non-compliance of the financial covenants, BCA received warrants to purchase shares of the Common Stock, which 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 table below summarizes the additional warrants received by BCA. The value of the warrants was charged to debt discount in the accompanying balance sheet, and the amount was amortized over the remaining term of the loan.

Total amortization expense associated with the initial warrants, additional warrants and fees were $75,308 and $104,644 for the years ended March 31, 2015 and 2014, respectively.  On November 13, 2014, the Company paid off the BCA Note, and as a result, wrote off the remaining balance of unamortized discount in the amount of $98,737, and such amount is included in Loss on Extinguishment of Debt in the accompanying statement of operations for the year ended March 31, 2015. As of March 31, 2015 and 2014, the Company had unamortized discount associated with the initial warrants, additional warrants and fees of $-0- and $174,046, respectively, and were classified as a reduction of long-term debt in the accompanying consolidated balance sheets.

All warrants issued to BCA are recorded as a liability and are marked to fair value each reporting period, and the resulting change is reflected in the consolidated statements of operations (see Note 20 to the Consolidated Financial Statements). 

                                                                                                                              
TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

10.                  Long-Term Debt (continued)

Private Investor

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 Common Stock. Such 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 the following (i) an Investor Rights Agreement, (ii) a Securities Agreement, (iii) an Intercreditor Agreement and (iv) a Subordination Agreement. 
 
In connection with the warrants issued in conjunction with this debt, the Company recorded a debt discount and warrant liability, which is being marked to fair value at the end of each period (see Note 20 to Notes to the Consolidated Financial Statements).  The Company adjusts the value of the warrant liability (see Note 20 to Notes to the Consolidated Financial Statements) to fair value and recognizes the change in valuation in our statement of operations each reporting period. Determining the fair value of the warrant liability requires estimates to be used utilizing the Black-Scholes valuation model and the value at issuance was $66,193. The corresponding debt discount was amortized over the life of the loan and was fully amortized as of March 31, 2013.

Term Loan with Bank of America

On November 13, 2014, the Company entered into a term loan in the amount of $1,200,000 with Bank of America. The proceeds from the term loan were primarily used to pay off the remaining balance of the BCA Note in the amount of $1,153,109, including accrued interest of $4,467 (see above). The term loan is for three years, and expires on November 13, 2017. Monthly payments are at $36,551 including interest at 6%. The term loan is collateralized by substantially all of the assets of the Company. At March 31, 2015, the outstanding balance was $1,076,894, of which $383,486 is classified as current. The Company incurred expenses of $16,287 in connection with this loan, including legal fees and other transaction fees. These expenses are included as deferred financing costs in the accompanying balance sheets, and are amortized over the term of the loan, using the straight-line method which approximates the effective interest rate method. For the year ended March 31, 2015, the Company recorded amortization of deferred financing costs in the amount of $2,066. As of March 31, 2015, the Company had unamortized deferred financing costs in the amount of $14,221 of which $5,429 is classified as a current asset, and $8,792 as a long-term asset.

Automobile Loan

In March 2014, the Company entered into a loan with Ford Credit for its van in the amount of $23,712. Such note has a term of five (5) years with an annual interest rate of 8.79% with monthly payments of $492.  The outstanding balances at March 31, 2015 and 2014 were $19,549 and $23,538, respectively.

The annual maturities of long-term debt for the five fiscal years subsequent to March 31, 2015 are as follows:

2016
 
$
387,839
 
2017
   
412,349
 
2018
   
290,995
 
2019
   
5,260
 
2020
   
-
 
         
Total Principal
   
1,096,443
 
Less: Current Portion
   
(387,839
)
Total Long-Term Debt
 
$
708,604
 


TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

11.                  Note Payable – Related Payable

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 Common Stock at a price of $3.19 per share. The price was approved by the board of directors (the “Board”) of the Company 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.

12.                  Commitments
 
The Company leases its only facility in East Rutherford, NJ under an operating lease agreement which expires July 31, 2016. The Company also has an option to renew this lease for an additional 5 years after expiration. Under terms of the lease, the Company is also responsible for its proportionate share of the additional rent, to include all real estate taxes, insurance, snow removal, landscaping and other building charges. The Company is also responsible for the utility costs for the premises.
 
In addition, the Company has agreements to lease equipment for use in the operations of the business under operating leases.

The following is a schedule of approximate future minimum rental payments for operating leases subsequent to the year ended March 31, 2015.
 
   
Years Ended March 31,
 
2016
 
$
269,414
 
2017
   
91,264
 
2018
   
6,317
 
2019
   
1,053
 
2020
   
--
 
   
$
368,048
 
                
Total rent expense, including common charges related to the building as well as equipment rentals, was approximately $355,000 and $312,000 for the years ended March 31, 2015 and 2014, respectively.
 
The Company sponsors a 401k Plan in which employee contributions on a pre-tax basis are supplemented by matching contributions by the Company. The Company charged to operations $23,555 and $18,585 as its matching contribution to the Company’s 401k Plan for the years ended March 31, 2015 and 2014, respectively.
 

TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

13.                  Capitalized Lease Obligations

The Company has entered into lease commitments for furniture and equipment that meet the requirements for capitalization. The equipment has been capitalized and shown in equipment and leasehold improvements in the accompanying balance sheets.  The related obligations are also recorded in the accompanying consolidated balance sheets and are based upon the present value of the future minimum lease payments with interest rates ranging from 12% to 15%.  The net book value of equipment acquired under capitalized lease obligations amounted to $79,938 and $164,274 at March 31, 2015 and 2014, respectively. There were no new capital lease obligations during fiscal years 2015 and 2014.  As of March 31, 2015 and 2014, accumulated amortization under capital leases was $531,057 and $446,721, respectively.

At March 31, 2015, future payments under capital leases are as follows over each of the next five fiscal years:
 
 2016
 
$
18,685
 
 2017
   
4,671
 
 2018
   
--
 
 2019
   
--
 
 2020
   
--
 
Total minimum lease payments
   
23,356
 
Less amounts representing interest
   
(2,037
)
Present value of net minimum lease payments
   
21,319
 
Less current portion
   
(16,758
)
Long-term capital lease obligation
 
$
4,561
 
 
14.                  Significant Customer Concentrations
 
For the years ended March 31, 2015 and 2014, sales to the U.S. Government represented approximately 77% and 64%, respectively of net sales.  No other individual customer represented over 10% of net sales for these years.  No direct customer accounted for more than 10% of commercial or government net sales. Our U.S. distributor accounted for 22% of commercial sales for the year ended March 31, 2015.

Net sales to foreign customers were $1,809,495 and $2,517,159 for the years ended March 31, 2015 and 2014, respectively.  All other sales were to customers located in the U.S. The following table presents net sales by U.S. and foreign countries:

   
2015
   
2014
 
United States
 
$
16,386,477
   
$
13,311,132
 
Foreign countries
   
1,809,495
     
2,517,159
 
Total Avionics Sales
 
$
18,195,972
   
$
15,828,291
 

Net sales related to any single foreign country did not comprise more than 10% of consolidated net sales. The Company had no assets outside the United States.

Receivables from the U.S. Government represented approximately 59% and 26%, respectively, of total receivables at March 31, 2015 and 2014, respectively. As of March 31, 2015, no other individual customer accounted for over 10% of the Company’s outstanding accounts receivable. As of March 31, 2014, two other individual customers accounted for a total of 60% of the Company’s outstanding accounts receivable.
 

TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

15.                  Stock Option Plans
 
In March 2006, the Board adopted the 2006 Stock Option Plan (the “Plan”) which reserved for issuance options to purchase up to 250,000 shares of its Common Stock.  The stockholders approved the Plan at the December 2006 annual meeting.  The Plan, which has a term of ten years from the date of adoption, is administered by the Board or by a committee appointed by the Board. The selection of participants, allotment of shares, and other conditions related to the grant of options, to the extent not set forth in the Plan, are determined by the Board.  Options granted under the Plan are exercisable up to a period of 5 years from the date of grant at an exercise price which is not less than the fair market value of the common stock at the date of grant, except as to a stockholder owning 10% or more of the outstanding common stock of the Company, as to whom the exercise price must not be less than 110% of the fair market value of the common stock at the date of grant. Options, for the most part, are exercisable on a cumulative basis, 20% at or after each of the first, second, and third anniversary of the grant and 40% after the fourth year anniversary. These terms can be modified based upon approval of the Board.
 
The fair value of each option awarded is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of Common Stock. The expected life of the options granted represents the period of time from date of grant to expiration (5 years). The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant. The per share weighted-average fair value of stock options granted for the years ended March 31, 2015 and 2014 was $2.20 and $1.76, respectively, on the date of grant using the Black Scholes option-pricing model with the following assumptions:

   
Dividend Yield
   
Risk-free Interest rate
   
Volatility
   
Life
2015
   
0.0
%
   
1.68
%
   
47.21
%
 
5 years
2014
   
0.0
%
   
1.37
%
   
46.31
%
 
5 years

A summary of the status of the Company’s stock option plans for the fiscal years ended March 31, 2015 and 2014 and changes during the years are presented below: (in number of options):
 
   
Number of Options
   
Average Exercise Price
   
Average Remaining
Contractual Term
   
Aggregate Intrinsic
Value
 
Outstanding options at April 1, 2013
   
114,600
   
$
5.53
             
Options granted
   
10,000
   
$
4.22
             
Options exercised
   
(8,300
)
 
$
3.98
             
Options canceled/forfeited
   
(28,300
)
 
$
3.67
             
                             
Outstanding options at March 31, 2014
   
88,000
   
$
6.12
   
2.0 years
   
$
11,200
 
Options granted
   
10,000
   
$
5.14
               
Options exercised
   
(5,500
)
 
$
4.84
               
Options canceled/forfeited
   
(21,000
)
 
$
6.19
               
                               
Outstanding options at March 31, 2015
   
71,500
   
$
6.06
   
1.9 years
   
$
64,000
 
Vested Options:
                             
      March 31, 2015:
   
59,900
   
$
6.20
   
1.5 years
   
$
53,760
 
      March 31, 2014:
   
61,800
   
$
6.12
   
1.2 years
   
$
9,200
 
 
Remaining options available for grant were 248,278 and 237,278 as of March 31, 2015 and 2014, respectively.
 
The total intrinsic value of options exercised during the years ended March 31, 2015 and 2014 were $1,470 and $3,760, respectively. Cash received from the exercise of stock options for the years ended March 31, 2015 and 2014 was $26,610 and $33,020, respectively.
 
 
TEL-INSTRUMENT ELECTRONICS CORP.
 
Notes To Consolidated Financial Statements (Continued)
 
15.                  Stock Option Plan (continued)
 
For the years ended March 31, 2015 and 2014, the unamortized compensation expense for stock options was $19,934 and $39,255, respectively. Unamortized compensation expense is expected to be recognized over a weighted-average period of approximately 1 year.

A summary of the Company’s non-vested shares as of March 31, 2015, and changes during the year ended March 31, 2015 is presented below:

Non-vested Shares
 
Shares
   
Weighted-Average
Grant-Date
Fair value
 
             
Non-vested at April 1, 2014
   
26,200
   
$
6.18
 
Granted
   
10,000
   
$
5.14
 
Vested
   
(24,600
)
 
$
6.10
 
Forfeited
   
-
   
$
-
 
Non-vested at March 31, 2015
   
11,600
   
$
5.34
 

The compensation cost that has been charged was $33,008 and $84,742 for the fiscal years ended March 31, 2015 and 2014, respectively. The total income tax benefit recognized in the statement of operations for share-based compensation arrangements was $1,216 and $3,468 for the fiscal years ended March 31, 2015 and 2014, respectively, and relates to the compensation cost associated with non-qualified stock options

16.                  Net Diluted Income (Loss) per Share

Net income (loss) per share has been computed according to FASB ASC 260, “Earnings per Share,” which requires a dual presentation of basic and diluted 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.
 
   
March 31, 2015
   
March 31, 2014
 
Basic net income (loss) per share computation:
           
  Net income(loss)
 
$
(280,440
 
$
261,528
 
  Weighted-average common shares outstanding
   
3,253,992
     
3,204,028
 
  Basic net  income (loss) per share
 
$
(0.09
 
$
0.08
 
Diluted net income (loss) per share computation
               
  Net income (loss)
 
$
(280,440
 
$
261,528
 
  Add: Change in fair value of warrants
   
-
     
71,757
 
  Diluted income (loss)
   
(280,440
   
333,285
 
  Weighted-average common shares outstanding
   
3,253,992
     
3,204,028
 
  Incremental shares attributable to the assumed exercise
     of outstanding stock options and warrants
   
-
     
24,866
 
  Total adjusted weighted-average shares