UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
   
 
  x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: December 31, 2014

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

Commission File Number: 001-31990

TEL-INSTRUMENT ELECTRONICS CORP.
(Exact name of registrant as specified in its charter)

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

One Branca Road
East Rutherford, NJ 07073
(Address of principal executive offices)

(201) 933-1600
(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer
¨
 
Accelerated filer
¨
         
Non-accelerated filer
¨
 
Smaller reporting company
ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨    No ý

As of February 10, 2015 there were 3,256,887 shares outstanding of the registrant’s common stock.
 
 
 
 
TEL- INSTRUMENT ELECTRONICS CORP.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
   
Page
Item 1.
3
     
Item 2.
14
     
Item 3.
19
     
Item 4.
19
     
PART II – OTHER INFORMATION
     
Item 1.
  20
     
Item 1A.
  20
     
Item 2.
  20
     
Item 3.
  20
     
Item 4.
  20
     
Item 5.
  21
     
Item 6.
  21
     
  22
 
 
 
 
PART I – FINANCIAL INFORMATION
Item 1.  Financial Statements.
 
TEL-INSTRUMENT ELECTRONICS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS

   
December 31,
2014
   
March 31,
2014
 
   
(unaudited)
       
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
 
$
331,991
     
232,118
 
Accounts receivable, net
   
614,239
     
2,095,640
 
Inventories, net
   
4,583,365
     
4,025,391
 
Prepaid expenses and other current assets
   
463,661
     
263,592
 
Deferred financing costs
   
5,429
     
108,321
 
Deferred income tax asset
   
1,089,538
     
1,089,538
 
Total current assets
   
7,088,223
     
7,814,600
 
                 
Equipment and leasehold improvements, net
   
310,566
     
450,873
 
Deferred financing costs – long-term
   
10,149
     
48,142
 
Deferred income tax asset – non-current
   
2,484,379
     
2,273,068
 
Other long-term assets
   
32,317
     
47,670
 
Total assets
   
9,925,634
     
 10,634,353
 
                 
LIABILITIES & STOCKHOLDERS’ EQUITY
               
                 
Current liabilities:
               
Current portion of long-term debt, net of debt discount
   
382,169
     
718,848
 
Capital lease obligations – current portion
   
16,188
     
53,608
 
Accounts payable and accrued liabilities
   
3,728,861
     
3,332,181
 
Progress billings
   
256,816
     
775,475
 
Deferred revenues – current portion
   
81,388
     
37,452
 
Accrued payroll, vacation pay and payroll taxes
   
527,228
     
444,238
 
Total current liabilities
   
4,992,650
     
5,361,802
 
                 
Subordinated notes payable - related parties
   
250,000
     
250,000
 
Capital lease obligations – long-term
   
8,971
     
21,320
 
Long-term debt
   
807,859
     
596,526
 
Deferred revenues – long-term
   
133,650
     
133,650
 
Warrant liability
   
423,059
     
354,309
 
Other long-term liabilities
   
45,600
     
56,100
 
Total liabilities
   
6,661,789
     
6,773,707
 
                 
Commitments
               
                 
Stockholders' equity:
               
Common stock, 4,000,000 shares authorized, par value $.10 per share,
3,256,887 and 3,251,387 shares issued and outstanding, respectively
   
325,686
     
325,136
 
Additional paid-in capital
   
8,042,893
     
7,987,100
 
Accumulated deficit
   
(5,104,734
)
   
(4,451,590
)
Total stockholders' equity
   
3,263,845
     
3,860,646
 
Total liabilities and stockholders' equity
 
$
9,925,634
   
$
10,634,353
 
 
See accompanying notes to condensed consolidated financial statements.
 
 
TEL-INSTRUMENT ELECTRONICS CORP.
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
December 31,
2014
   
December 31,
2013
   
December 31,
2014
   
December 31,
2013
 
                         
Net sales
 
$
5,030,097
   
$
4,089,029
     
11,746,847
   
$
11,323,585
 
Cost of sales
   
3,484,310
     
2,693,342
     
8,211,499
     
7,465,991
 
                                 
Gross margin
   
1,545,787
     
1,395,687
     
3,535,348
     
3,857,594
 
                                 
Operating expenses:
                               
Selling, general and administrative
   
825,261
     
697,919
     
2,364,488
     
2,022,579
 
Engineering, research and development
   
494,721
     
449,477
     
1,476,343
     
1,378,426
 
Total operating expenses
   
1,319,982
     
1,147,396
     
3,840,831
     
3,401,005
 
                                 
Income (loss) from operations
   
225,805
     
248,291
     
(305,483
)
   
456,589
 
                                 
Other income (expense):
                               
Amortization of debt discount
   
(14,373
)
   
(27,120
)
   
(75,308
)
   
(75,707
)
Loss on extinguishment of debt
   
(188,102
)
   
-
     
(188,102
)
   
(26,600
)
Amortization of deferred financing costs
   
(13,648
)
   
(27,827
)
   
(67,808
)
   
(81,987
)
Change in fair value of common stock warrants
   
37,330
     
(229,726
)
   
(68,750
)
   
(272,499
)
Interest income
   
-
     
129
     
-
     
163
 
Interest expense
   
(39,137
)
   
(50,828
)
   
(159,004
)
   
(252,295
)
Total other income (expense)
   
(217,930
)
   
(335,372
)
   
(558,972
)
   
(708,925
)
                                 
Income (loss) before income taxes
   
7,875
     
(87,081
)
   
(864,455
)
   
(252,336
)
                                 
Income tax expense (benefit)
   
28,819
     
58,852
     
(211,311
)
   
51,843
 
                                 
Net loss
 
$
(20,944
)
 
$
(145,933
)
 
$
(653,144
)
 
$
(304,179
)
                                 
Basic loss per common share
 
$
(0.01
)
 
$
(0.04
)
 
$
(0.20
)
 
$
(0.10
)
Diluted loss per common share
 
$
(0.01
)
 
$
(0.04
)
 
$
(0.20
)
 
$
(0.10
)
                                 
Weighted average shares outstanding:
                               
Basic
   
3,255,028
     
3,247,387
     
3,253,045
     
3,189,123
 
Diluted
   
3,255,028
     
3,247,387
     
3,253,045
     
3,189,123
 
 
See accompanying notes to condensed consolidated financial statements.

 
TEL-INSTRUMENT ELECTRONICS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
Nine months ended
   
December 31,
2014
   
December 31,
2013
           
Cash flows from operating activities:
         
Net loss
 
$
(653,144
)
 
$
(304,179
)
Adjustments to reconcile net loss to net cash
used in operating activities:
               
Deferred income taxes
   
(211,311
)
   
50,503
 
Depreciation and amortization
   
134,837
     
153,818
 
Provision for inventory obsolescence
   
5,000
     
-
 
Amortization of debt discount
   
75,308
     
75,707
 
Amortization of deferred financing costs
   
67,808
     
81,987
 
Loss on extinguishment of debt
   
188,102
     
26,600
 
Change in fair value of common stock warrant
   
68,750
     
272,499
 
Non-cash interest associated with conversion of note
   
-
     
21,003
 
Non-cash stock-based compensation
   
29,733
     
48,519
 
                 
Changes in assets and liabilities:
               
Decrease (increase) in accounts receivable
   
1,481,401
     
(572,034
)
(Increase) decrease in inventories, net
   
(548,963
)
   
1,731,581
 
Increase in prepaid expenses & other
   
(184,716
)
   
(28,077
)
Increase (decrease) in accounts payable and other accrued liabilities
   
423,290
     
(2,137,411
)
Increase (decrease) in accrued payroll, vacation pay & withholdings
   
82,990
     
(48,090
)
(Decrease) increase in deferred revenues
   
43,936
     
107,000
 
(Decrease) increase in progress billings
   
(518,659
)
   
795,050
 
Decrease in other long-term liabilities
   
(10,500
)
   
-
 
Net cash provided by operating activities
   
473,862
     
274,476
 
                 
Cash flows from investing activities:
               
Purchases of equipment
   
(8,541
)
   
(11,595
)
Net cash used in investing activities
   
(8,541
)
   
(11,595
)
                 
Cash flows from financing activities:
               
Proceeds from note payable – related party
   
-
     
100,000
 
Proceeds from the exercise of stock options
   
-
     
23,370
 
Proceeds from term loan
   
1,200,000
     
-
 
Deferred financing costs
   
(16,287
)
   
-
 
Repayment of long-term debt
   
(1,499,392
)
   
(424,245
)
Repayment of capitalized lease obligations
   
(49,769
)
   
(55,956
)
Net cash used in financing activities
   
(365,448
)
   
(356,831
)
                 
Net increase (decrease) in cash and cash equivalents
   
99,873
     
(93,950
)
Cash and cash equivalents at beginning of period
   
232,118
     
310,297
 
Cash and cash equivalents at end of period
 
$
331,991
   
$
216,347
 
                 
Supplemental cash flow information:
               
Taxes paid
 
$
20,500
   
$
 -
 
Interest paid
 
$
141,180
   
$
276,546
 
                 
Supplemental non-cash information:
               
Converted accounts payable to equity
   
26,610
     
-
 
Converted debt to equity
 
$
-
   
$
700,000
 
Converted accrued interest to equity
 
$
-
   
$
37,400
 
 
See accompanying notes to condensed consolidated financial statements.
 
 
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 – Basis of Presentation

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

Note 2 – Summary of Significant Accounting Policies

During the nine months ended December 31, 2014, there have been no material changes in the Company’s significant accounting policies to those previously disclosed in the Annual Report.
 
Note 3 – Accounts Receivable, net

The following table sets forth the components of accounts receivable:

   
December 31,
2014
   
March 31,
2014
 
Government
 
$
519,018
   
$
1,982,215
 
Commercial
   
122,503
     
140,707
 
Less: Allowance for doubtful accounts
   
(27,282
)
   
(27,282
)
   
$
614,239
   
$
2,095,640
 
 
Note 4 – Inventories, net
 
Inventories consist of:
 
   
December 31,
2014
   
March 31,
2014
 
             
Purchased parts
 
$
3,360,506
   
$
3,085,070
 
Work-in-process
   
1,387,572
     
1,134,714
 
Finished goods
   
45,287
     
10,607
 
Less: Inventory reserve
   
(210,000
)
   
(205,000
)
   
$
4,583,365
   
$
4,025,391
 
 
Note 5 – Loss Per Share

Net loss per share has been computed according to FASB ASC 260, “Earnings per Share,” which requires a dual presentation of basic and diluted loss per share (“EPS”). Basic EPS represents net loss divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS reflects the potential dilution that could occur if securities, including warrants and options, were converted into common stock. The dilutive effect of outstanding warrants and options is reflected in earnings per share by use of the treasury stock method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amounts of average unrecognized compensation costs attributed to future services.
 
 
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 5 – Loss Per Share (continued)

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

   
Three Months Ended
   
Three Months Ended
 
   
December 31,
2014
   
December 31,
2013
 
Basic net loss per share computation:
           
Net loss
 
$
(20,944
)
 
$
(145,933
)
Weighted-average common shares outstanding
   
3,255,028
     
3,247,387
 
Basic net loss per share
 
$
(0.01
)
 
$
(0.04
)
Diluted net loss  per share computation:
               
Net loss
 
$
(20,944
)
 
$
(145,933
)
Weighted-average common shares outstanding
   
3,255,028
     
3,247,387
 
Incremental shares attributable to the assumed exercise of outstanding stock options
   
-
     
-
 
Total adjusted weighted-average shares
   
3,255,028
     
3,247,387
 
Diluted net loss per share
 
$
(0.01
)
 
$
(0.04
)
 
   
Nine Months Ended
   
Nine Months Ended
 
   
December 31,
2014
   
December 31,
2013
 
Basic net loss per share computation:
           
Net loss
 
$
(653,144
)
 
$
(304,179
)
Weighted-average common shares outstanding
   
3,253,045
     
3,189,123
 
Basic net loss per share
 
$
(0.20
)
 
$
(0.10
)
Diluted net loss  per share computation:
               
Net loss
 
$
(653,144
)
 
$
(304,179
)
Weighted-average common shares outstanding
   
3,253,045
     
3,189,123
 
Incremental shares attributable to the assumed exercise of outstanding stock options
   
-
     
-
 
Total adjusted weighted-average shares
   
3,253,045
     
3,189,123
 
Diluted net loss per share
 
$
(0.20
)
 
$
(0.10
)

For the three and nine months ended December 31, 2014 and 2013, all outstanding warrants and options were excluded from the computation of diluted loss per share because their effect would be anti-dilutive.
 
Note 6 – Long-Term Debt

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

Note 7 – Term Loan

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

Note 8 – Segment Information

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

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

Management evaluates the performance of its segments and allocates resources to them based on gross margin.  The Company’s general and administrative costs and sales and marketing expenses, and engineering costs are not segment specific.  As a result, all operating expenses are not managed on a segment basis.  Net interest includes expenses on debt and income earned on cash balances, both maintained at the corporate level.
 
The table below presents information about reportable segments within the avionics business for the three and nine month periods ending December 31, 2014 and 2013:
 
Three Months Ended
 December 31, 2014
 
Avionics
  Government
   
Avionics
  Commercial
   
Avionics
  Total
   
Corporate
  Items
   
Total
 
Net sales
 
$
4,455,399
   
$
574,698
   
$
5,030,097
     
-
   
$
5,030,097
 
Cost of sales
   
3,015,359
     
468,951
     
3,484,310
     
-
     
3,484,310
 
Gross margin
   
1,440,040
     
105,747
     
1,545,787
     
-
     
1,545,787
 
                                         
Engineering, research, and development
                   
494,721
     
-
     
494,721
 
Selling, general and administrative
                   
323,862
     
501,399
     
825,261
 
Amortization of debt discount
                   
-
     
14,373
     
14,373
 
Amortization of deferred financing costs
                   
-
     
13,648
     
13,648
 
Loss on extinguishment of debt
                   
-
     
188,102
     
188,102
 
Change in fair value of common stock warrants
                   
-
     
(37,330
)
   
(37,330
)
Interest expense, net
                   
-
     
39,137
     
39,137
 
Total expenses
                   
818,583
     
719,329
     
1,537,912
 
                                         
Income (loss) before income taxes
                 
$
727,204
   
$
(719,329
)
 
$
7,875
 
 
Three Months Ended
 December 31, 2013
 
Avionics
Government
   
Avionics
Commercial
   
Avionics
Total
   
Corporate
Items
   
 
Total
 
Net sales
 
$
3,797,272
     
291,757
     
4,089,029
     
-
     
4,089,029
 
Cost of sales
   
2,415,427
     
277,915
     
2,693,342
     
-
     
2,693,342
 
Gross margin
   
1,381,845
     
13,842
     
1,395,687
     
-
     
1,395,687
 
                                         
Engineering, research, and development
                   
449,477
             
449,477
 
Selling, general, and administrative
                   
375,255
     
322,664
     
697,919
 
Amortization of debt discount
                           
27,120
     
27,120
 
Amortization of deferred financing costs
                           
27,827
     
27,827
 
Change in fair value of common stock warrants
                           
229,726
     
229,726
 
Interest (income) expense, net
                           
50,699
     
50,699
 
Total expenses
                   
824,732
     
658,036
     
1,482,768
 
                                         
Income (loss) before income taxes
                 
$
570,955
   
$
(658,036)
   
$
(87,081
)
 
 
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 8 – Segment Information (continued)

Nine Months Ended
 December 31, 2014
 
Avionics
  Government
   
Avionics
  Commercial
   
Avionics
  Total
   
Corporate
  Items
   
Total
 
Net sales
 
$
10,002,850
   
$
1,743,997
   
$
11,746,847
     
-
   
$
11,746,847
 
Cost of sales
   
6,800,031
     
1,411,468
     
8,211,499
     
-
     
8,211,499
 
Gross margin
   
3,202,819
     
332,529
     
3,535,348
     
-
     
3,535,348
 
                                         
Engineering, research, and development
                   
1,476,343
     
-
     
1,476,343
 
Selling, general and administrative
                   
899,579
     
1,464,909
     
2,364,488
 
Amortization of debt discount
                   
-
     
75,308
     
75,308
 
Amortization of deferred financing costs
                   
-
     
67,808
     
67,808
 
Loss on extinguishment of debt
                           
188,102
     
188,102
 
Change in fair value of common stock warrants
                   
-
     
68,750
     
68,750
 
Interest expense, net
                   
-
     
159,004
     
159,004
 
Total expenses
                   
2,375,922
     
2,023,881
     
4,399,803
 
                                         
Income (loss) before income taxes
                 
$
1,159,426
   
$
(2,023,881
)
 
$
(864,455
)

Nine Months Ended
 December 31, 2013
 
Avionics
  Government
   
Avionics
  Commercial
   
Avionics
  Total
   
Corporate
  Items
   
Total
 
Net sales
   
10,054,033
     
1,269,552
     
11,323,585
     
-
     
11,323,585
 
Cost of Sales
   
6,497,178
     
968,813
     
7,465,991
     
-
     
7,465,991
 
Gross Margin
   
3,556,855
     
300,739
     
3,857,594
     
-
     
3,857,594
 
                                         
Engineering, research, and development
                   
1,378,426
             
1,378,426
 
Selling, general and administrative
                   
933,033
     
1,089,546
     
2,022,579
 
Amortization of debt discount
                           
75,707
     
75,707
 
Amortization of deferred financing costs
                           
81,987
     
81,987
 
Loss on extinguishment of debt
                           
26,600
     
26,600
 
Change in fair value of common stock warrants
                           
272,499
     
272,499
 
Interest expense, net
                           
252,132
     
252,132
 
Total expenses
                   
2,311,459
     
1,798,471
     
4,109,930
 
                                         
Income (loss) before income taxes
                  $
1,546,135
    $
(1,798,471
)
  $
(252,336
)

Note 9 – Income Taxes

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

The tax effect of temporary differences, primarily net operating loss carryforwards, asset reserves and accrued liabilities, gave rise to the Company’s deferred tax asset in the accompanying December 31, 2014 and March 31, 2014 condensed consolidated balance sheets.  Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reverse. 
 
 
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 10 – Fair Value Measurements

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

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

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

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

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

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

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

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

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

The carrying value of the Company’s borrowings is a reasonable estimate of its fair value as borrowings under the Company’s credit facility reflect currently available terms and conditions for similar debt.
 
The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of December 30, 2014 and March 31, 2014.  As required by ASC 820-10, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
 
 
    TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 10 – Fair Value Measurements (continued)

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
 
December 31, 2014
 
Level I
   
Level II
   
Level III
   
Total
 
Total Assets
 
$
-
   
$
-
   
$
-
   
$
-
 
                                 
Warrant liability
   
-
     
-
     
423,059
     
423,059
 
Total Liabilities
 
$
-
   
$
-
   
$
423,059
   
$
423,059
 

March 31, 2014
 
Level I
   
Level II
   
Level III
   
Total
 
Total Assets
 
$
-
   
$
-
   
$
-
   
$
-
 
                                 
Warrant liability
   
-
     
-
     
354,309
     
354,309
 
Total Liabilities
 
$
-
   
$
-
   
$
354,309
   
$
354,309
 
 
The Company adopted the guidance of ASC 815 “Derivative and Hedging”, which requires that we mark the value of our warrant liability to market and recognize the change in valuation in our statement of operations each reporting period. Determining the warrant liability to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant.  The fair value of the warrants prior to the quarter ended December 31, 2014 were calculated using the Black-Scholes valuation model.
 
The following table provides a summary of the changes in fair value of our Level 3 financial liabilities from March 31, 2014 through December 31, 2014, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to the liability held at December 31, 2014:

Level 3 Reconciliation
 
Beginning at beginning of period
   
(Gains) and losses for the period
(realized and unrealized)
   
Purchases, issuances, sales
and settlements, net
 
Transfers in or out of Level 3
   
Balance at the end of period
 
                               
Warrant liability
   
354,309
     
68,750
     
-
     
-
     
423,059
 
Total Liabilities
 
$
354,309
   
$
68,750
   
$
-
   
$
-
   
$
423,059
 
 
The common stock warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign corporation.  The warrants do not qualify for hedge accounting, and, as such, all changes in the fair value of these warrants are recognized as other income/expense in the statement of operations until such time as the warrants are exercised or expire.  Since these common stock warrants do not trade in an active securities market, the Company recognized a warrant liability and estimated the fair value of these warrants using the Black-Scholes options model using the following assumptions until the payment of the loan in November 2014.

With the payment of the loan in November 2014, the holder has the right, exercisable at any time, in writing (the “Warrant Put Notice”, to cause the Company, subject to the terms and conditions hereof, to purchase from the holder all, or any portion, of the warrant for the warrant put repurchase price (the “Repurchase Price”). The Repurchase Price is the greater of 1) Adjusted EBITDA per share as of the date of the Warrant Put Notice, less $0.01, multiplied by the number of warrants or 2) the product of the current market price per share as of the date of the Warrant Put Notice, less the purchase price of the warrant or warrants, multiplied by the number of warrants, if this amount is higher. Adjusted EBITDA means EBITDA, multiplied by 5, plus cash and cash equivalents less unpaid debt divided by the number of shares outstanding on a fully diluted basis. As such, the values of the warrants at December 31, 2014, reflect the higher of these two options for each specific warrant.
 
 
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 10 – Fair Value Measurements (continued)

Values at Inception
                                                                                                                              
Date of
Warrant
   
Expiration 
Date
   
Number of
Warrants
   
Exercise 
Price
   
Fair Market Value
Per Share
   
Expected
Volatility
   
Remaining 
Life in Years
   
Risk Free 
Interest Rate
   
Warrant 
Liability
 
 
09-10-2010
     
09-10-2019
     
136,920
   
$
6.70
   
$
6.70
     
28.51
%
   
9
     
2.81
%
 
$
267,848
 
 
09-10-2010
     
09-10-2015
     
10,416
   
$
6.70
   
$
6.70
     
28.51
%
   
5
     
1.59
%
 
$
13,808
 
 
07-26-2012
     
09-10-2019
     
50,000
   
$
3.35
   
$
3.90
     
42.04
%
   
7
     
0.94
%
 
$
66,193
 
 
07-26-2012
     
09-10-2019
     
20,000
   
$
3.35
   
$
3.90
     
42.04
%
   
7
     
0.94
%
 
$
26,477
 
 
11-20-2012
     
09-10-2019
     
20,000
   
$
3.56
   
$
3.50
     
42.45
%
   
6.83
     
1.09
%
 
$
21,441
 
 
02-14-2013
     
09-10-2019
     
20,000
   
$
3.58
   
$
3.80
     
41.25
%
   
6.58
     
1.43
%
 
$
23,714
 
 
07-12-2013
     
09-10-2019
     
20,000
   
$
3.33
   
$
3.32
     
40.26
%
   
6.17
     
2.00
%
 
$
19,523
 
 
08-12-2013
     
09-10-2019
     
20,000
   
$
3.69
   
$
3.69
     
40.20
%
   
6.08
     
2.01
%
 
$
21,587
 
 
Values at March 31, 2014

Date of 
Warrant
   
Expiration
Date
   
Number of
Warrants
   
Exercise 
Price
   
Fair Market Value
Per Share
   
Expected
Volatility
   
Remaining
Life in Years
   
Risk Free
Interest Rate
   
Warrant
Liability
 
 
09-10-2010
     
09-10-2019
     
136,920
   
$
6.70
   
$
4.42
     
43.35
%
   
5.45
     
1.73
%
 
$
123,564
 
 
09-10-2010
     
09-10-2015
     
10,416
   
$
6.70
   
$
4.42
     
43.35
%
   
1.45
     
0.44
%
 
$
2,498
 
 
07-26-2012
     
09-10-2019
     
50,000
   
$
3.35
   
$
4.42
     
43.35
%
   
5.45
     
1.73
%
 
$
77,626
 
 
07-26-2012
     
09-10-2019
     
20,000
   
$
3.35
   
$
4.42
     
43.35
%
   
5.45
     
1.73
%
 
$
31,050
 
 
11-20-2012
     
09-10-2019
     
20,000
   
$
3.56
   
$
4.42
     
43.35
%
   
5.45
     
1.73
%
 
$
29,892
 
 
02-14-2013
     
09-10-2019
     
20,000
   
$
3.58
   
$
4.42
     
43.35
%
   
5.45
     
1.73
%
 
$
29,310
 
 
07-12-2013
     
09-10-2019
     
20,000
   
$
3.33
   
$
4.42
     
43.35
%
   
5.45
     
1.73
%
 
$
31,163
 
 
08-12-2013
     
09-10-2019
     
20,000
   
$
3.69
   
$
4.42
     
43.35
%
   
5.45
     
1.73
%
 
$
29,206
 
 
Values at December 31, 2014
 
Date of 
Warrant
   
Expiration
Date
   
Number of
Warrants
   
Exercise
Price
   
Fair Market Value
Per Share
   
Put Option Value
   
Market Price Option
   
Remaining
Life in Years
   
Warrant
Liability
 
 
09-10-2010
     
09-10-2019
     
136,920
   
$
6.70
   
$
5.34
   
$
138,289
     
NA
     
4.70
   
$
138,289
 
 
09-10-2010
     
09-10-2015
     
10,416
   
$
6.70
   
$
5.34
   
 
NA
     
NA
     
0.70
   
$
3,270*
 
 
07-26-2012
     
09-10-2019
     
50,000
   
$
3.35
   
$
5.34
   
$
20,200
     
39,800
     
4.70
   
$
39,800
 
 
07-26-2012
     
09-10-2019
     
20,000
   
$
3.35
   
$
5.34
   
$
50,500
     
99,500
     
4.70
   
$
99,500
 
 
11-20-2012
     
09-10-2019
     
20,000
   
$
3.56
   
$
5.34
   
$
20,200
     
35,600
     
4.70
   
$
35,600
 
 
02-14-2013
     
09-10-2019
     
20,000
   
$
3.58
   
$
5.34
   
$
20,200
     
33,400
     
4.70
   
$
33,400
 
 
07-12-2013
     
09-10-2019
     
20,000
   
$
3.33
   
$
5.34
   
$
20,200
     
40,200
     
4.70
   
$
40,200
 
 
08-12-2013
     
09-10-2019
     
20,000
   
$
3.69
   
$
5.34
   
$
20,200
     
33,000
     
4.70
   
$
33,000
 
 
* Based on Black-Scholes Calculation
 
Note 11 – Reclassifications

Certain prior year and period amounts have been reclassified to conform to the current period presentation.
 
 
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 12 – Litigation

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

In December 2009, the Kansas District Court dismissed the Aeroflex Action on jurisdiction grounds. Aeroflex appealed this decision. In May 2012, the Kansas Supreme Court reversed the decision and remanded the Aeroflex Action to the District Court for further proceedings. The Company has been engaged in discovery and depositions for the last three quarters, which has resulted in substantially higher legal expense. The Amended Fifth Supplemental Modified Scheduling Order has the trial date set for February 29, 2016 and is estimated to last three weeks, but this date may be subject to postponement. The Company is optimistic as to the outcome of this litigation. However, the outcome of any litigation is unpredictable and an adverse decision in this matter could have a material adverse effect on our financial condition, results of operations or liquidity.
 
On October 9, 2013, the SEC notified the Company that it may be in violation of Section 16(a) for failure to accurately and timely file beneficial ownership reports (the “Filings”) for certain officers and directors .  The Company accepted responsibility for filing all such reports on behalf of each officer and director.

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

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

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

Note 13 – New Accounting Pronouncements

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

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

No other recently issued accounting pronouncements had or are expected to have a material impact on the Company’s condensed consolidated financial statements.
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

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

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

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

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

·  
CRAFT 708 and 719 : The Company currently has approximately $10.3 million of open orders from the U.S. Navy on the CRAFT program (multi-purpose test set including Mode 5 test capability). The CRAFT test set replaces seven obsolete U.S. Navy test sets that collectively cost approximately $300,000, making the CRAFT test set an excellent value to the government. This unit has been well received by the end users. The Company has 180 CRAFT 708 units on order from the original contract with a remaining value of about $4 million. In late 2013, the U.S. Navy issued a follow-on $9.5 million Indefinite Delivery Indefinite Quantity (“IDIQ”) contract. At this time, the U.S. Navy has issued purchase orders for a total of 247 CRAFT 708 and CRAFT 719 units on this follow-on contract with a value of about $7.5 million. These new orders are at a higher price as compared to the initial U.S. Navy contract, and we believe that it should improve our gross margin as these units begin to be shipped in volume. Management also believes that the CRAFT program also has significant potential for sales into the balance of the U.S. Military, NATO, and internationally, as the new Mode 5 IFF systems are installed in overseas aircraft platforms. The Joint Strike Fighter (“JSF”) program by itself is expected to generate significant CRAFT orders as this program continues to ramp up limited rate production.
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
 
Overview (continued)

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

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

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

As such, we anticipate improvement in revenues and profitability in the future. We believe that the revenue increase from the  TS-4530A and ITATS shipments will also enhance the Company’s liquidity position.
 
For the three months ended December 31, 2014, the Company recorded income from operations of $225,805 as compared to $248,291 for the same period in the prior year. Income from operations for the quarter ended December 31, 2014 was negatively impacted by significantly higher legal costs associated with the Aeroflex litigation.  For the nine months ended December 31, 2014, the Company recorded an operating loss of $305,483 as compared to income from operations of $456,589 for the nine months ended December 31, 2013. 
 
For the three months ended December 31, 2014, the Company recorded income before income taxes of $7,875 as compared to a loss before income taxes of $87,081 for the three months ended December 31, 2013. Excluding amortization of debt and financing costs, loss on extinguishment of debt and the change in fair value of common stock warrants, pre-tax income would be $186,668 for the three months ended December 31, 2014, as compared to $197,592 for the three months ended December 31, 2013.

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

As a result of the substantial operating losses incurred in fiscal year 2013, the Company was not in compliance with the NYSE-MKT’s (the “Exchange”) continued listing standards. The Company also received a letter from the staff of the Exchange that, based on the Company’s financial statements at March 31, 2013, the Company was no longer in compliance with the minimum stockholders’ equity requirement of $4.0 million, and had also reported net losses in three of its last four fiscal years, as set forth in Section 1003(a)(ii) of the NYSE MKT Company Guide. On July 17, 2014, based on the review of publicly available and Section 1009(f) of the NYSE MKT Company Guide, the Exchange indicated that the Company had resolved the continued listing deficiencies with respect to both Sections 1003(a)(ii) and 1003(4)(iv) of the NYSE MKT Company Guide, since it has reported net income for the fiscal year ended March 31, 2014 and demonstrated that it has remedied its financial impairment. As is the case with all listed issuers on the NYSE-MKT, the Company’s continued listing eligibility will be assessed on an ongoing basis.
 
At December 31, 2014, the Company’s backlog was approximately $32.6 million as compared to approximately $36.0 million at December 31, 2013.

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

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


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

Results of Operations
 
Sales

For the three and nine months ended December 31, 2014, sales increased $941,068 (23.0%) and $423,262 (3.7%) to $5,030,097 and $11,746,847, respectively, as compared to $4,089,029 and $11,323,585, respectively, for the three and nine months ended December 31, 2013.
 
Avionics government sales increased $658,127 (17.3%) to $4,455,399 for the three months ended December 31, 2014 as compared to $3,797,272 for the three months ended December 31, 2013. This increase is mostly attributed to the increased shipments for the CRAFT and ITATS as well as a modest increase in shipments for the TS-4530A program as we increase shipment of the KITS, which was mostly offset by the shipment of SETS in the three months ended December 31, 2013 as we were able to ship against a partial release from the U.S. Army. These increases were offset partially by lower sales of legacy products. Avionics government sales decreased only $51,183 (0.5%) to $10,002,850 for the nine months ended December 31, 2014 as compared to $10,054,033 for the same period in the prior year. In the prior year, the Company was able to ship against a partial release from the U.S. Army. During the nine months ended December 31, 2014, the Company had a six week interruption in CRAFT deliveries due to delayed component shipments from vendors and a technical issue with the U.S. Navy, which affected sales for these periods, but has been resolved.  CRAFT shipments resumed in October. These decreases were partially offset by the shipment of the KITS for the TS-4530A program for which the Company received a full production release from the U.S. Army for kits on June 29, 2014, and the commencement of shipments for the Company’s ITATS program.

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

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

Operating Expenses

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

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


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

Income (Loss) From Operations

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

Other Income (Expense), Net

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

Income (Loss) before Income Taxes

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

Income Tax Benefit

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

Net Loss

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

Liquidity and Capital Resources

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

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

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

Cash used in investing activities .  For the nine months ended December 31, 2014, the Company used $8,541 of its cash for investing activities, as compared to $11,595 for the nine months ended December 31, 2013 as result of lower purchases of equipment.
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
 
Liquidity and Capital Resources (continued)
 
Cash used in financing activities.  For the nine months ended December 31, 2014, the Company used $365,448 in financing activities as compared to using $356,831 for the nine months ended December 31, 2013.  This is the result of lower debt repayments as a result of the debt refinancing offset mostly by lower proceeds from notes payable. During the nine months ended December 31, 2013, the Company received net proceeds from a related party note payable in the amount of $100,000.

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

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

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

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

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

Critical Accounting Policies

Our critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2014 consolidated financial statements included in our Annual Report.
 
 
Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

We do not hold any derivative instruments and do not engage in any hedging activities.
 
Item 4.  Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

The Company, including its principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective. Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include controls and procedures designed to reasonably ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control over Financial Reporting  
 
The Company, including its principal executive officer and principal accounting officer, reviewed the Company’s internal control over financial reporting, pursuant to Rule 13(a)-15(e) under the Exchange Act and concluded that there was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
PART II – OTHER INFORMATION
 
Item 1.  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 to the Company, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the U.S. Army Contracts Attorney and the U.S. Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed Aeroflex proprietary technology in winning the Award, and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest.
 
In December 2009, the Kansas District Court dismissed the Aeroflex Action on jurisdiction grounds. Aeroflex appealed this decision. In May 2012, the Kansas Supreme Court reversed the decision and remanded the Aeroflex Action to the District Court for further proceedings. The Company has been in engaged in discovery and depositions for the last three quarters, which has resulted in substantially higher legal expense. The Amended Fifth Supplemental Modified Scheduling Order has the trial date set for February 29, 2016  and is estimated to last three weeks, but this date may be subject to postponement. The Company is optimistic as to the outcome of this litigation. However, the outcome of any litigation is unpredictable and an adverse decision in this matter could have a material adverse effect on our financial condition, results of operations or liquidity.
 
On October 9, 2013, the SEC notified the Company that it may be in violation of Section 16(a) for failure to accurately and timely file beneficial ownership reports (the “Filings”) for certain officers and directors .  The Company accepted responsibility for filing all such reports on behalf of each officer and director.

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

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

Other than the matters outlined above, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of executive officers of our Company, threatened against or affecting our Company, or our common stock in which an adverse decision could have a material effect.
 
Item 1A.  Risk Factors.

We believe there are no changes that constitute material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2014, filed with the SEC on June 30, 2014.

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

There were no unregistered sales of the Company’s equity securities during the quarter ended December 31, 2014, other than those previously reported in a Current Report on Form 8-K.

Item 3.  Defaults Upon Senior Securities.

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

Item 4.  Mine Safety Disclosures.

Not applicable. 
 

Item 5.  Other Information.

There is no other information required to be disclosed under this item which was not previously disclosed.
 
Item 6.  Exhibits.
 
Exhibit No.
 
Description
     
10.1
 
     
31.1
 
     
31.2
 
     
32.1
 
     
32.2
 
     
101.INS
 
XBRL Instance Document*
     
101.SCH
 
Taxonomy Extension Schema Document*
     
101.CAL
 
Taxonomy Extension Calculation Linkbase Document*
     
101.DEF
 
Taxonomy Extension Definition Linkbase Document*
     
101.LAB
 
Taxonomy Extension Label Linkbase Document*
     
101.PRE
 
Taxonomy Extension Presentation Linkbase Document*

* Filed herewith

 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
     
TEL-INSTRUMENT ELECTRONICS CORP.
 
         
           
Date: February 17, 2015
 
By:
 /s/ Jeffrey C. O’Hara
 
       
Name: Jeffrey C. O’Hara
 
       
Title:   Chief Executive Officer
            Principal Executive Officer
 

           
Date: February 17, 2015
 
By:
 /s/ Joseph P. Macaluso
 
       
Name: Joseph P. Macaluso
 
       
Title:   Principal Financial Officer
            Principal Accounting Officer
 
 
 
 
 
 
22
 
Exhibit 10.1

 

Loan Agreement
Date of Agreement: November 13, 2014

                                                             Account Number: XXXXXXXXX
Principal Amount:      $1,200,000

 
Introduction . This Agreement dated and effective as of November 13, 2014, is entered into between Tel-Instrument Electronics Corp. (the "Borrower") and Bank of America, NA (the "Bank"). The Borrower agrees to the following terms and conditions:
 
1.   LOAN

1.1        Loan Amount . The Bank agrees to provide a term loan to the Borrower in the amount of One Million Two Hundred Thousand and 00/100 Dollars ($1,200,000.00) (the "Commitment").
 
1.2        Availability Period . The loan is available in one disbursement from the Bank on the date of this Agreement.

1.3        Interest Rate . The interest rate is 6% per year.

1.4         Repayment Terms . The Borrower will repay principal and interest in equal combined installments of Thirty-Six Thousand Five Hundred Fifty-One and 26/100 Dollars ($36,551.26) beginning on December 13, 2014, and on the Same day of each month thereafter, and ending on November 13, 2017 (the "Repayment Period"). In any event, on the last day of the Repayment Period, the Borrower will repay the remaining principal balance plus any interest then due. Each installment, when paid, will be applied first to the payment of interest accrued. The balance of each installment will be applied to the repayment of principal.
 
1.5         Prepayments .
 
(a)         The Borrower may prepay the loan in full or in part at any time. The prepayment will be applied to the most remote payment of principal due under this Agreement
 
(b)         Each prepayment, whether voluntary, by reason of acceleration or otherwise, will be accompanied by the amount of accrued interest on the amount prepaid, and the prepayment fee described below.
 
(c)         The prepayment fee will be the sum of fees calculated separately for each Prepaid Installment, as follows:
 
(i)           The Bank will first determine the amount of interest which would have accrued each month for the Prepaid Installment had it remained outstanding until the applicable Original Payment Date, using the interest rate applicable to the Prepaid Installment under this Agreement;
 
(ii)         The Bank will then subtract from each monthly interest amount determined in (i), above, the amount of interest which would accrue for that Prepaid Installment if it were reinvested from the date of prepayment through the Original Payment Date, using the Treasury Rate.
 
(iii)        If (i) minus (ii) for the Prepaid Installment is greater than zero, the Bank will discount the monthly differences to the date of prepayment by the Treasury Rate. The Bank will then add together all of the discounted monthly differences for the Prepaid Installment.
 
(d)        The following definitions will apply to the calculation of the prepayment fee:
 
(i)            "Original Payment Dates" mean the dates on which the prepaid principal would have been paid if there had been no prepayment.  If any of the principal would have been paid later than the end of the fixed rate interest period in effect at the time of prepayment, then the Original Payment Date for that amount will be the last day of the interest period.
 
 
 
 
 
(ii)          "Prepaid Installment" means the amount of the prepaid principal which would have been paid on a single Original Payment Date.
 
(iii)        "Treasury Rate" means the interest rate yield for U.S. Government Treasury Securities which the Bank determines could be obtained by reinvesting a specified Prepaid Installment in such securities from the date of prepayment through the Original Payment Date. The Bank may adjust the Treasury Rate to reflect the compounding, accrual basis, or other costs of the prepaid amount Each of the rates is the Bank's estimate only and the Bank is under no obligation to actually reinvest any prepayment The rates will be based on information from either the Telerate or Reuters information services, The Wall Street Journal, or other information sources the Bank deems appropriate.

2.   COLLATERAL

2.1       Personal Property . The personal property listed below now owned or owned in the future by the parties listed below will secure Borrower's obligations to the Bank under this Agreement The collateral is further defined in security agreement(s) executed by the owners of the collateral. In addition, all personal property collateral owned by the Borrower securing this Agreement shall also secure all other present and future obligations of the Borrower to the Bank and to any affiliate of the Bank (excludlng any consumer credit covered by the federal Truth in Lending law, unless the Borrower has otherwise agreed in writing or received written notice thereof). All personal property collateral securing any other present or future obligations of the Borrower to the Bank shall also secure this Agreement.

(a)        Equipment and fixtures owned by the Borrower.

(b)        Inventory owned by the Borrower.

(c)        Receivables owned by the Borrower.
 
3.   LOAN ADMINISTRATION AND FEES
 
3.1         Fees .
 
(a)       The Borrower will pay to the Bank the fees set forth on Schedule A.
 
3.2         Collection of Payments .
 
(a)         Payments will be made by debit to a deposit account, if direct debit is provided for in this Agreement or is otherwise authorized by the Borrower. For payments not made by direct debit, payments will be made by mail to the address shown on the Borrower's statement, or by such other method as may be permitted by the Bank.

(b)        Each disbursement by the Bank and each payment by the Borrower will be evidenced by records kept by the Bank which will, absent manifest error, be conclusively presumed to be correct and accurate and constitute an
account stated between the Borrower and the Bank.
 
3.3         Borrower's Instructions .
 
(a)        Subject to the terms. conditions and procedures stated elsewhere in this Agreement, the Bank may honor instructions for advances or repayments and any other instructions under this Agreement given by the Borrower (if an individual), or by anyone of the individuals the Bank reasonably believes is authorized to sign loan agreements on behalf of the Borrower, or any other individual(s) designated by anyone of such authorized signers (each an "Authorized Individual"). The Bank may honor any such instructions made by anyone of the Authorized Individuals. whether such instructions are given in writing or by telephone, telefax or Internet and intranet websites designated by the Bank with respect to separate products or services offered by the Bank.
 
 
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3.4        Direct Debit .
 
(a)        The Borrower agrees that on the due date of any amount due under this Agreement, the Bank will debit the amount due from deposit account number NJ-004044013471 owned by the Borrower, or such other of Borrower's accounts with the Bank as designated in writing by the Borrower (the "Designated Account"). Should there be insufficient funds in the Designated Account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by the Borrower.
 
(b)        The Borrower may terminate this direct debit arrangement at any time by sending written notice to the Bank. If the Borrower terminates this arrangement, then the principal amount outstanding under this Agreement will at the option of the Bank bear interest at a rate per annum which is one (1.0) percentage point higher than the rate of interest otherwise provided under this Agreement and the amount of each payment will be increased accordingly.
 
3.5        Banking Days . Unless otherwise provided in this Agreement, a banking day is a day other than a Saturday, Sunday or other day on which commercial banks are authorized to close, or are in fact closed, in the state where the Bank's lending office is located. All payments and disbursements which would be due or which are received on a day which is not a banking day will be due or applied, as applicable, to the credit on the next banking day.
 
3.6        Interest Calculation . Except as otherwise stated in this Agreement, all interest and fees, if any, will be computed on the basis of a 360-day year and the actual number of days elapsed. This results in more interest or a higher fee than if a 365-day year is used. Installments of principal which are not paid when due under this Agreement shall continue to bear interest until paid.
 
3.7        Default Rate . Upon the occurrence of any default or after maturity or after judgment has been rendered on any obligation under this Agreement, all amounts outstanding under this Agreement, including any unpaid interest, fees, or costs, will at the option of the Bank bear interest at a rate which is 6.0 percentage points) higher than the rate of interest otherwise provided under this Agreement. This may result in compounding of interest. This will not constitute a waiver of
any default.

4.   CONDITIONS
 
Before the Bank is required to extend any credit to the Borrower under this Agreement, it must receive any documents and other items it may reasonably require, in form and content acceptable to the Bank, including any items specifically listed below.
 
4.1        Authorizations . If the Borrower or any guarantor is anything other than a natura! person, evidence that the execution, delivery and performance by the Borrower and/or such guarantor of this Agreement and any instrument or agreement required under this Agreement have been duly authorized.
 
4.2        Governing Documents . If required by the Bank, a copy of the Borrower's organizational documents.
 
4.3        Security Agreements . Signed original security agreements covering the .personal property collateral! which the Bank requires.
 
4.4        Perfection and Evidence of Priority . Evidence that the security interests and liens in favor of the Bank are valid, enforceable, properly perfected in a manner acceptable to the Bank and prior to all others' rights and interests, except those the Bank consents to in writing. All title documents for motor vehicles which are part of the collateral must show the Bank's interest.
 
4.5        Payment of Fees . Payment of all fees, expenses and other amounts due and owing to the Bank. If any fee is not paid in cash, the Bank may, in its discretion, treat the fee as a principal advance under this Agreement or deduct the fee from the loan proceeds.
 
4.6        Environmental Information . A completed Bank form Environmental Questionnaire .
 
 
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5.   REPRESENTATION AND WARRANTIES
 
When the Borrower signs this Agreement, and until the Bank is repaid in full, the Borrower makes the following representations and warranties. Each request for an extension of credit constitutes a renewal of these representations and warranties as of the date of the request:
 
5.1        Formation . If the Borrower is anything other than a natural person, it is duly formed and existing under the laws of the state or other jurisdiction where organized.

5.2        Authorization . This Agreement, and any instrument or agreement required under this Agreement, are within the Borrower's powers, have been duly authorized, and do not conflict with any of its organizational papers.
 
5.3         Good Standing . In each state in which the Borrower does business, it is properly licensed, in good standing, and, where required, in compliance with fictitious name statutes.
 
5.4        Financial Information . All financial and other information that has been or will be supplied to the Bank is sufficiently complete to give the Bank accurate knowledge of the Borrowers (and any guarantor's) financial condition, including all material contingent liabilities. Since the date of the most recent financial statement provided to the Bank, there has been no material adverse change in the business condition (financial or otherwise), operations, properties or prospects of the Borrower (or any guarantor). If the Borrower is comprised of the trustees of a trust, the above representations shall also pertain to the trustor(s) of the trust.
 
5.5         Lawsuits . There is no lawsuit, tax claim or other dispute pending or threatened against the Borrower which, if lost, would impair the Borrower's financial condition or ability to repay the loan, except as have been disclosed in writing to the Bank.
 
5.6         Other Obligations . The Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation, except as have been disclosed in writing to the Bank.
 
5.7         Tax Matters . The Borrower has no knowledge of any pending assessments or adjustments of its income tax for any year and all taxes due have been paid, except as have been disclosed in writing to the Bank.
 
5.8         No Event of Default . There is no event which is, or with notice or lapse of time or both would be, a default under this Agreement.
 
5.9         Collateral . All collateral required in this Agreement is owned by the grantor of the security interest free of any title defects or any liens or interests of others, except those which have been approved by the Bank in writing.
 
5.10       ERISA Plans.

(a)        Each Plan (other than a multiemployer plan) is in compliance in all material respects with ERISA, the Code and other federal or state law, including all applicable minimum funding standards and there have been no prohibited transactions with respect to any Plan (other than a multiemployer plan), which has resulted or could reasonably be expected to result in a material adverse effect.
 
(b)        With respect to any Plan subject to Title IV of ERISA:

(i)         No reportable event has occurred under Section 4043(c) of ERISA which requires notice.
 
(ii)        No action by the Borrower or any ERISA Affiliate to terminate or withdraw from any Plan has been taken and no notice of intent to terminate a Plan has been filed under Section 4041 or 4042 of ERISA.

(c)        The following terms have the meanings indicated for purposes of this Agreement:

(i)          "Code" means the Internal Revenue Code of 1986, as amended.
 
 
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(ii)        "ERISA" means the Employee Retirement Income Security Act of 1974, as amended.

(iii)       "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Borrower within the meaning of Section 414(b} or (c) of the Code.
 
(iv)       "Plan" means a plan within the meaning of Section 3(2) of ERISA maintained or contributed to by the Borrower or any ERISA Affiliate, including any multiemployer plan within the meaning of Section 4001(a)(3) of ERISA.
 
6.   COVENANTS
   
The Borrower agrees, so long as credit is available under this Agreement and until the Bank is repaid in full:
 
6.1        Use of Proceeds . To use the proceeds of the credit only for business purposes.
 
6.2       Financial Information . To provide the following financial information and statements in form and content acceptable to the Bank, and such additional information as requested by the Bank from time to time. The Bank reserves the right, upon written notice to the Borrower, to require the Borrower to deliver financial information and statements to the Bank more frequently than otherwise provided below, and to use such additional information and statements to measure any applicable financial covenants in this Agreement.
 
(a)        Within 120 days of Borrower's fiscal year end:
 
(i)         The annual financial statements of the Borrower, certified and dated by an authorized financial officer. These financial statements must be audited (with an opinion satisfactory to the Bank) by a Certified Public Accountant acceptable to the Bank.
 
(ii)        A detailed accounts payable aging of the Borrower by invoice or a summary aging by account creditor, as specified by the Bank.
 
(iii)       A detailed receivables aging of the Borrower by invoice or a summary aging by account debtor, as specified by the Bank.
 
(iv)        Copies of the Form 10-K Annual Report, with the Securities and Exchange Commission.
 
6.3         Other Debts . Not to have outstanding or incur any direct or contingent liabilities or lease obligations (other than
those to the Bank or to any affiliate of the Bank), or become liable for the liabilities of others, without the Bank's written consent. This does not prohibit:

(a)        Acquiring goods, supplies, or merchandise on normal trade credit.

(b)        Liabilities, lines of credit and leases in existence on the date of this Agreement disclosed in writing to the Bank.

(c)        If the Borrower is a natural person, additional debts of the Borrower as an individual for consumer purposes.
 
6.4        Other Liens . Not to create, assume, or allow any security interest or lien (including judicial liens) on property the Borrower now or later owns, except
 
(a)         Liens and security interests in favor of the Bank or any affiliate of the Bank.
 
(b)         Liens outstanding on the date of this Agreement disclosed in writing to the Bank.

(c)        Liens in favor of BCA Mezzanine Fund, L.P., a Delaware limited partnership as related to the execution of Stock Warrants pursuant to the Common Stock Warrant Agreement between the Borrower and BCA Mezzanine Fund, L.P. dated September 10, 2010, July 13,2012, November 20,2012, February 19,2013, July 12, 2013, and August12, 2013 so long as said liens are subordinated to the Bank's first security interest in all corporate assets.
 
 
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(d)        Liens in favor of Millennium Trust Company, LLC Custodian FBO Vincent J. Dowling, Jr., Roth IRA (Account No. 287B5524), an Illinois limited liability company, as related to the execution of Stock Warrants pursuant to the Common Stock Warrant Agreement between Borrower and Millennium Trust Company, LLC Custodian FBO Vincent J. Dowling, Jr., Roth IRA (Account No. 287B5524) dated July 26, 2012 and revised on April 11, 2014, so long as said liens are subordinated to the Bank's first security interest in all corporate assets.
 
6.5         Maintenance of Assets .

(a)        Not to sell, assign, lease, transfer or otherwise dispose of any part of the Borrower's business or the Borrower's assets except inventory sold in the ordinary course of the Borrower's business.
 
(b)         Not to sell, assign, lease, transfer or otherwise dispose of any assets for less than fair market value, or enter into any agreement to do so.
 
(c)        Not to enter into any sale and leaseback agreement covering any of its fixed assets.

(d)         To maintain and preserve all rights, privileges, and franchises the Borrower now has.
 
(e)         To make any repairs, renewals, or replacements to keep the Borrower's properties in good working condition.
 
6.6        Loans .  Not to make any loans, advances or other extensions of credit to any individual or entity except for extensions of credit  in the nature of accounts receivable arising from the sale or lease of goods or services in the ordinary course of business to non-affiliated entities.
 
6.7        Change of Management. Not to make any substantial change in the present executive or management personnel of the Borrower.
 
6.8        Change of Ownership . If the Borrower is anything other than a natural person, not to cause, permit, or suffer any change in capital ownership such that there is a material change, as determined by the Bank in its sole discretion, in the direct or indirect capital ownership of the Borrower.
 
6.9        Additional Negative Covenants . Not to, without the Bank's written consent

(a)         Enter into any consolidation, merger, or other combination, or become a partner in a partnership, a member of a joint venture, or a member of a limited liability company.
 
(b)        Acquire or purchase a business or its assets.
 
(c)        Engage in any business activities substantially different from the Borrower's present business.
 
(d)        Liquidate or dissolve the Borrower's business.
 
6.10     Notices to Bank . To promptly notify the Bank in writing of:

(a)         Any event of default under this Agreement, or any event which, with notice or lapse of time or both, would constitute an event of default.

(b)        Any change in the Borrower's name, legal structure, principal residence, or name on any driver's license or special identification card issued by any state (for an individual), state of registration (for a registered entity), place of business, or chief executive office if the Borrower has more than one place of business.
 
 
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6.11       Insurance .
 
(a)        General Business Insurance. To maintain insurance as is usual for the business it is in.
 
(b)         Insurance Covering Collateral. To maintain all risk property damage insurance policies (including without limitation windstorm coverage, and hurricane coverage as applicable) covering the tangible property comprising the collateral. Each insurance policy must be for the full replacement cost of the collateral and include a replacement cost endorsement. The insurance must be issued by an insurance company acceptable to the Bank and must include a lender's loss payable endorsement in favor of the Bank in a form acceptable to the Bank.

(c)         Evidence of lnsurance. Upon the request of the Bank, to deliver to the Bank a copy of each insurance policy, or, if permitted by the Bank, a certificate of insurance listing all insurance in force.
 
6.12      Compliance with Laws . To comply with the laws (including any fictitious or trade name statute), regulations, and orders of any government body with authority over the Borrower's business. The Bank shall have no obligation to make any advance to the Borrower except in compliance with all applicable laws and regulations and the Borrower shall fully cooperate with the Bank in complying with all such applicable laws and regulations.
 
6.13      Books and Records. To maintain adequate books and records.
 
6.14      Audits . To allow the Bank and its agents to inspect the Borrower's properties and examine, audit, and make copies of books and records at any reasonable time. If any of the Borrower's properties, books or records are in the possession of a third party, the Borrower authorizes that third party to permit the Bank or its agents to have access to perform inspections or audits and to respond to the Bank's requests for information concerning such properties, books
and records.
 
6.15      Perfection of liens . To help the Bank perfect and protect its security interests and liens, and reimburse it for related costs it incurs to protect its security interests and liens.
 
6.16      Cooperation . To take any action reasonably requested by the Bank to carry out the intent of this Agreement.
 
6.17      Bank as Principal Depository . To maintain the Bank or one of its affiliates as its principal depository bank, including for the maintenance of business, cash management, operating and administrative deposit accounts.

7.   HAZARDOUS SUBSTANCES
 
7.1          Indemnity Regarding Hazardous Substances . The Borrower will indemnify and hold harmless the Bank from any loss or liability the Bank incurs in connection with or as a result of this Agreement, which directly or indirectly arises out of the use, generation, manufacture, production, storage, release, threatened release, discharge, disposal or presence of a hazardous substance. This indemnity will apply whether the hazardous substance is on, under or about the Borrower's property or operations or property leased to the Borrower. The indemnity includes but is not limited to attorneys' fees (including the reasonable estimate of the allocated cost of in-house counsel and staff). The indemnity extends to the Bank, its parent, subsidiaries and all of their directors, officers, employees, agents, successors, attorneys and assigns
 
7.2        Compliance Regarding Hazardous Substances . The Borrower represents and warrants that the Borrower has complied with all current and future laws, regulations and ordinances or other requirements of any governmental authority relating to or imposing liability or standards of conduct concerning protection of health or the environment or hazardous substances.
 
7.3        Notices Regarding Hazardous Substances . Until full repayment of the loan, the Borrower will promptly notify the Bank in writing of any threatened or pending investigation of the Borrower or its operations by any governmental agency under any current or future law, regulation or ordinance pertaining to any hazardous substance.
 
 
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7.4         Site Visits, Observations and Testing . The Bank and its agents and representatives will have the right at any reasonable time, after giving reasonable notice to the Borrower, to enter and visit any locations where the collateral securing this Agreement (the "Collateral") is located for the purposes of observing the Collateral, taking and removing environmental samples, and conducting tests. The Borrower shall reimburse the Bank on demand for the costs of any such environmental investigation and testing. The Bank will make reasonable efforts during any site visit, observation or testing conducted pursuant to this paragraph to avoid interfering with the Borrower's use of the Collateral. The Bank is under no duty to observe the Collateral or to conduct tests, and any such acts by the Bank will be solely for the purposes of protecting the Bank's security and preserving the Bank's rights under this Agreement. No site visit, observation or testing or any report or findings made as a result thereof ("Environmental Report") (I) will result in a waiver of any default of the Borrower; (ii) impose any liability on the Bank; or (iii) be a representation or warranty of any kind regarding the Collateral (including its condition or value or compliance with any laws) or the Environmental Report (including its accuracy or completeness). In the event the Bank has a duty or obligation under applicable laws, regulations or other requirements to disclose an Environmental Report to the Borrower or any other party, the Borrower authorizes the Bank to
make such a disclosure. The Bank may also disclose an Environmental Report to any regulatory authority, and to any other parties as necessary or appropriate in the Bank's judgment. The Borrower further understands and agrees that any Environmental Report or other information regarding a site visit, observation or testing that is disclosed to the Borrower by the Bank or its agents and representatives is to be evaluated (including any reporting or other disclosure obligations of the Borrower) by the Borrower without advice or assistance from the Bank.
 
7.5        Definition of Hazardous Substances . "Hazardous substances" means any substance, material or waste that is or becomes designated or regulated as "toxic," "hazardous," "pollutant," or "contaminant" or a similar designation or regulation under any current or future federal, state or local law (Whether under common law, statute, regulation or otherwise) or judicial or administrative interpretation of such, including without limitation petroleum or natural gas.
 
7.6        Continuing Obligation . The Borrower's obligations to the Bank under this Article, except the obligation to give
notices to the Bank, shall survive termination of this Agreement and repayment of the Borrower's obligations to the Bank under this Agreement

8.    DEFAULT AND REMEDIES
 
Without limiting any of the Bank's rights and remedies in this Agreement, if any of the following events of default occurs, the Bank may do one or more of the following without prior notice: declare the Borrower in default, stop making any additional credit available to the Borrower, and require the Borrower to repay its entire debt immediately. If an event which, with notice or the passage of time, will constitute an event of default has occurred and is continuing, the Bank has no obligation to make advances  or extend additional credit under this Agreement. In addition, if any event of default occurs, the Bank shall have all rights, powers and remedies available under any instruments and agreements required by or executed in connection with this Agreement, as well as all rights and remedies available at law or in equity. If an event of default occurs under the paragraph entitled "Bankruptcy/Receivers," below, with respect to the Borrower, then the entire debt outstanding under this Agreement will automatically be due immediately.
 
8.1        Failure to Pay . The Borrower fails to make a payment under this Agreement when due.
 
8.2        Covenants. Any default in the performance of or compliance with any obligation, agreement or other provision contained in this Agreement (other than those specifically described as an event of default in this Article).
 
8.3        Other Bank Agreements . Any default occurs under any guaranty, subordination agreement, security agreement, deed of trust, mortgage, or other document required by or delivered in connection with this Agreement or any such document is no longer in effect, or any guarantor purports to revoke or disavow the guaranty; or any representation or warranty made by any guarantor is false when made or deemed to be made; or any default occurs under any other agreement the Borrower (or any Obligor) has with the Bank or any affiliate of the Bank. For purposes of this Agreement, "Obligor" shall mean any guarantor, any party pledging collateral to the Bank, or, if the Borrower is comprised of the trustees of a trust, any trustor.
 
8.4        Cross-default . Any default occurs under any agreement in connection with any credit the Borrower (or any Obligor) has obtained from anyone else or which the Borrower (or any Obligor) or any of the Borrower's related entities or affiliates has guaranteed.
 
8.5        False Information . The Borrower or any Obligor has given the Bank false or misleading information or representations.
 
 
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8.6        Bankruptcy/~Receivers . The Borrower, any Obligor, or any general partner of the Borrower or of any Obligor files a bankruptcy petition, a bankruptcy petition is filed against any of the foregoing parties and such petition is not dismissed within a period of forty-five (45) days after the filing, or the Borrower, any Obligor, or any general partner of the Borrower or of any Obligor makes a general assignment for the benefit of creditors; or a receiver or similar official is appointed for a substantial portion of Borrower's or any Obligor's business; or the business is terminated, or such Obligor is liquidated or dissolved
 
8.7        Revocation or Termination . If the Borrower is comprised of the trustee(s) of a trust, the trust is revoked or otherwise terminated or all or a substantial part of the Borrower's assets are distributed or otherwise disposed of.
 
8.8        Lien Priority . The Bank fails to have an enforceable first lien (except for any prior liens to which the Bank has consented in writing) on or security interest in any property given as security for this Agreement (or any guaranty).
 
8.9        Judgments. Any judgments or arbitration awards are entered against the Borrower or any Obligor.
 
8.10      Death. If the Borrower or any Obligor is a natural person, the Borrower or such Obligor dies or becomes legally incompetent; if the Borrower or any Obligor is ~ trust, a trustor dies or becomes legally incompetent; if the Borrower or any Obligor is a partnership, any general partner dies or becomes legally incompetent.
 
8.11      Material Adverse Change . A material adverse change occurs, or is reasonably likely to occur, in the Borrower's (or any Obligor's) business condition (financial or otherwise), operations, or properties, or ability to repay the credit
 
8.12      Government Action . Any government authority takes action that the Bank believes materially adversely affects the Borrower's or any Obligor's financial condition or ability to repay.
 
8.13      ERISA Plans . A reportable event occurs under Section 4043(c) of ERISA, or any Plan termination (or commencement of proceedings to terminate a Plan) or the full or partial withdrawal from a Plan under Section 4041 or 4042 of ERISA occurs; provided such event or events could reasonably be expected, in the judgment of the Bank, to have
a material adverse effect.

9.  ENFORCING THIS AGREEMENT; MISCELLANEOUS
 
9.1        GAAP . Except as otherwise stated in this Agreement, all financial information provided to the Bank and all financial covenants will be made under generally accepted accounting principles, consistently applied or another basis acceptable to the Bank.
 
9.2        Governing Law . Except to the extent that any law of the United States may apply, this Agreement shall be governed and interpreted according to the laws of New Jersey (the "Governing Law State"), without regard to any choice of law, rules or principles to the contrary. Nothing in this paragraph shall be construed to limit or otherwise affect any rights or remedies of the Bank under federal law,
 
9.3        Venue and Jurisdiction . The Borrower agrees that any action or suit against the Bank arising out of or relating to this Agreement shall be filed in federal court or state court located in the Governing Law State. The Borrower agrees that the Bank shall not be deemed to have waived its rights to enforce this section by filing an action or suit against the Borrower in a venue outside of the Governing Law State. If the Bank does commence an action or suit arising out of or relating to this Agreement, the Borrower agrees that the case may be filed in federal court or state court in the Governing Law State. The Bank reserves the right to commence an action or suit in any other jurisdiction where the Borrower, any Guarantor, or any collateral has any presence or is located, The Borrower consents to personal jurisdiction and venue in such forum selected by the Bank and waives any right to contest jurisdiction and venue and the convenience of any such forum, The provisions of this section are material inducements to the Bank's acceptance of this Agreement.
 
9.4        Successors and Assigns . This Agreement is binding on the Borrower's and the Bank's successors and assignees. The Borrower agrees that it may not assign this Agreement without the Bank's prior consent.
 
 
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9.5        Waiver of Jury Trial . EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER DOCUMENT EXECUTED IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (a) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (b) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER DOCUMENTS CONTEMPLATED HEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION AND (c) CERTIFIES THAT THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE.
 
9.6        Severability; Waivers . If any part of this Agreement is not enforceable, the rest of the Agreement may be enforced. The Bank retains all rights, even if it makes a loan after default. If the Bank waives a default, it may enforce a later default. Any consent or waiver under this Agreement must be in writing.
 
9.7        Expenses .
 
(a)        The Borrower shall pay to the Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees, expended or incurred by the Bank in connection with (i) the negotiation and preparation of this Agreement and any related agreements, the Bank's continued administration of this Agreement and such related agreements, and the preparation of any amendments and waivers related to this Agreement or such related agreements, (ii) filing, recording and search fees. appraisal fees, field examination fees, title report fees, and documentation fees with respect to any collateral and books and records of the Borrower or any Obligor, (iii) the Bank's costs or losses arising from any changes in law which are allocated to this Agreement or any credit outstanding under this Agreement, and (iv) costs or expenses required to be paid by the Borrower or any Obligor that are paid, incurred or advanced by the Bank,
 
(b)        The Borrower will indemnify and hold the Bank harmless from any loss, liability, damages, judgments, and costs of any kind relating to or arising directly or indirectly out of (i) this Agreement or any document required hereunder, (ii) any credit extended or committed by the Bank to the Borrower hereunder, and (iii) any litigation or proceeding related to or arising out of this Agreement, any such document, or any such credit, including, without limitation, any act resulting from the Bank complying with instructions the Bank reasonably believes are made by any Authorized Individual. This paragraph will survive this Agreement's termination, and will benefit the Bank and its officers, employees, and agents.

(c)         The Borrower shall reimburse the Bank for any reasonable costs and attorneys' fees incurred by the Bank in connection with (i) the enforcement or preservation of the Bank's rights and remedies and/or the collection of any obligations of the Borrower which become due to the Bank and in connection with any "workout" or restructuring, and (ii) the prosecution or defense of any action in any way related to this Agreement, the credit provided hereunder or any related agreements, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by the Bank or any other person) relating to the Borrower or any other person or entity.
 
9.8        Individual Liability . If the Borrower is a natural person, the Bank may proceed against the Borrower's business and non-business property in enforcing this and other agreements relating to this loan. If the Borrower is a partnership, the Bank may proceed against the business and non-business property of each general partner of the Borrower in enforcing this and other agreements relating to this loan.
 
9.9        Joint and Several Liability . If two or more Borrowers sign this Agreement, each Borrower agrees that it is jointly and severally liable to the Bank for the payment of all obligations arising under this Agreement, and that such liability is independent of the obligations of the other Borrowers.
 
 
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9.10      Set-Off . Upon and after the occurrence of an event of default under this Agreement, (a) the Borrower hereby authorizes the Bank, at any time and from time to time, without notice, which is hereby expressly waived by the Borrower, and whether or not the Bank shall have declared any credit subject hereto to be due and payable in accordance with the terms hereof, to set off against, and to appropriate and apply to the payment of, the Borrower's Obligations (whether matured or unmatured, fixed or contingent. liquidated or unliquidated), any and all amounts owing by the Bank to the Borrower (Whether payable in U.S. dollars or any other currency, whether matured or unmatured, and in the case of deposits, whether general or special (except trust and escrow accounts), time or demand and however evidenced), and (b) pending any such action, to the extent necessary, to hold such amounts as collateral to secure such Obligations and to return as unpaid for insufficient funds any and all checks and other items drawn against any deposits so held as the Bank, in its sole discretion, may elect. The Borrower hereby grants to the Bank a security interest in all deposits and accounts maintained with the Bank to secure the payment of all Obligations of the Borrower to the Bank under this Agreement and all agreements, instruments and documents related to this Agreement "Obligations" means all obligations, now or hereafter existing, of the Borrower to the Bank under this Agreement and under any other agreement or instrument executed in connection with this Agreement.
 
9.11      One Agreement . This Agreement and any related security or other agreements required by this Agreement constitute the entire agreement between the Borrower and the Bank with respect to each credit subject hereto and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof.
In the event of any conflict between this Agreement and any other agreements required by this Agreement, this Agreement will prevail.
 
9.12      Notices . Unless otherwise provided in this Agreement or in another agreement between the Bank and the Borrower, all notices required under this Agreement shall be personally delivered or sent by first class mail. postage prepaid. or by overnight courier to the addresses on the signature page of this Agreement, or to such other addresses as the Bank and the Borrower may specify from time to time in writing. Notices and other communications shall be effective (i) if mailed, upon the earlier of receipt or five (5) days after deposit in the U.S. mail, first class, postage prepaid, or (ii) if hand-delivered, by courier or otherwise (including telegram, lettergram or mailgram). when delivered.
 
9.13       Headings . Article and paragraph headings are for reference only and shall not affect the interpretation or meaning of any provisions of this Agreement. Ref #: 1001739330" Tel-Instrument Electronics Corp.
 
9.14      Counterparts . This Agreement may be executed in any number of counterparts, each of which, when so executed, shall be deemed to be an original, and all of which when taken together shall constitute one and the same Agreement. Delivery of an executed counterpart of this Agreement (or of any agreement or document required by this Agreement and any amendment to this Agreement) by telecopy or other electronic imaging means shall be as effective as delivery of a manually executed counterpart of this Agreement; provided, however, that the telecopy or other electronic image shall be promptly followed by an original if required by the Bank.
 
9.15      Borrower Information; Reporting to Credit Bureaus. The Borrower authorizes the Bank at any time to verify or check any information given by the Borrower to the Bank, check the Borrower's credit references, verify employment, and obtain credit reports. The Borrower agrees that the Bank shall have the right at all times to disclose and report to credit reporting agencies and credit rating agencies such information pertaining to the Borrower and/or all guarantors as is consistent with the Bank's policies and practices from time to time in effect.
 
9.16      Customary Advertising Material . The Borrower and each Obligor consent to the publication by the Bank of customary advertising material relating to the transactions contemplated hereby using the name, product photographs, logo or trademark of the Borrower or such Obligor.
 
9.17     Amendments . This Agreement may be amended or modified only in writing signed by each party hereto.
 
9.18      Limitation of Interest and Other Charges . If, at any time, the rate of interest, together with all amounts which constitute interest and which are reserved, charged or taken by the Bank as compensation for fees, services or expenses incidental to the making, negotiating or collection of the loan evidenced hereby, shall be deemed by any competent court of law, governmental agency or tribunal to exceed the maximum rate of interest permitted to be charged by the Bank to the Borrower under applicable law, then, during such time as such rate of interest would be deemed excessive, that portion of each sum paid attributable to that portion of such interest rate that exceeds the maximum rate of interest so permitted shall be deemed a voluntary prepayment of principal. As used herein, the term "applicable law" shall mean the law in effect as of the date hereof; provided, however, that in the event there is a change in the law which results in a higher permissible rate of interest, then this Agreement shall be governed by such new law as of its effective date.
 
 
11
 
 
This Agreement is executed as of the date stated at the top of the first page,
 
 
 
 
Borrower:   Tel -Instrument Electronics Corp.
 
 
 
 
Address where notices to Tel-Instrument Electronics Corp, are to be sent:
 
1 Branca Road
East Rutherford, NJ 07073
Address where notices to the Bank are to be sent:
 
Doc Retention -GCF
CT2-515-BB-03
70 Batterson Park Road
Farmington, CT 06032
 
 
Federal law requires Bank of America, N.A. (the "Bank") to provide the following notice. The notice is not part of the foregoing agreement or instrument and may not be altered. Please read the notice carefully.
 
(1) USA PATRIOT ACT NOTICE
 
Federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account or obtains a loan. The Bank will ask for the Borrower's legal name, address, tax ID number or social security number and other identifying information. The Bank may also ask for additional information or documentation or take other actions reasonably necessary to verify the identity of the Borrower, guarantors or other related persons.
 
 
 
Ref #: 1001739330: -Tel-Instrument
Electronics Corp. AFS Loan Agreement
 
 
12
 
 
SCHEDULE A
FEES
 
 
(a)        Loan Fee. The Borrower agrees to pay a loan fee in the amount of Ten Thousand and 00/100 Dollars ($10,000.00). This fee is due on the date of this Agreement.
 
(b)       Waiver Fee. If the Bank, at its discretion, agrees to waive or amend any terms of this Agreement, the Borrower will, at the Bank's option, pay the Bank a fee for each waiver or amendment in an amount advised by the Bank at the time the Borrower requests the waiver of amendment. Nothing in this paragraph shall imply that the Bank is obligated to agree to any waiver or amendment requested by the Borrower. The Bank may impose additional requirements as a condition to any waiver or amendment.
 
(c)         Late Fee. To the extent permitted by law, the Borrower agrees to pay a late fee in an amount not to exceed four percent (4%) of any payment that is more than fifteen (15) days late. The imposition and payment of a late fee shall not constitute a waiver of the Bank's rights with respect to the default.
 
 
 
 
 
 
 
 
 
 
13
 
 
Exhibit 31.1
 
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
 
I, Jeffrey C. O’Hara, certify that:
 
1.
I have reviewed this Form 10-Q of Tel-Instrument Electronics Corp;
     
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods present in this report;
     
4.
Along with the Principal Financial Officer, I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have:
     
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
 
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
 
d)
Disclosed in this report any change in the registrant’s internal control over financing reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
     
5.
I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     
 
b)
Any fraud, whether or not material, that involved management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 Date: February 17, 2015
By:
/s/ Jeffrey C. O’Hara
 
   
Jeffrey C. O’Hara
 
   
Principal Executive Officer
Tel-Instrument Electronics Corp
 
 
 
 
 
 
Exhibit 31.2
 
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

I, Joseph P. Macaluso, certify that:
 
1.
I have reviewed this Form 10-Q of Tel-Instrument Electronics Corp;
     
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods present in this report;
     
4.
Along with the Principal Executive Officer, I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have:
     
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
 
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
 
d)
Disclosed in this report any change in the registrant’s internal control over financing reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
     
5.
I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     
 
b)
Any fraud, whether or not material, that involved management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 Date: February 17, 2015
By:
/s/ Joseph P. Macaluso
 
   
Joseph P. Macaluso
 
   
Principal Financial Officer
Tel-Instrument Electronics Corp
 
 

 
 
 
Exhibit 32.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
 
In connection with this Quarterly Report of Tel-Instrument Electronics Corp (the “Company”), on Form 10-Q for the quarter ended December 31, 2014, as filed with the U.S. Securities and Exchange Commission on the date hereof, I, Jeffrey C. O’Hara, Principal Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1)
Such Quarterly Report on Form 10-Q for the quarter ended December 31, 2014, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)
The information contained in such Quarterly Report on Form 10-Q for the quarter ended December 31, 2014, fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
Date: February 17, 2015
By:
/s/ Jeffrey C. O’Hara
 
   
Jeffrey C. O’Hara
 
   
Principal Executive Officer
Tel-Instrument Electronics Corp
 
       
 
 
 
 
 
Exhibit 32.2
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
 
In connection with this Quarterly Report of Tel-Instrument Electronics Corp (the “Company”), on Form 10-Q for the quarter ended December 31, 2014, as filed with the U.S. Securities and Exchange Commission on the date hereof, I, Joseph P. Macaluso, Principal Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1)
Such Quarterly Report on Form 10-Q for the quarter ended December 31, 2014, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)
The information contained in such Quarterly Report on Form 10-Q for the quarter ended December 31, 2014, fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
Date: February 17, 2015
By:
/s/ Joseph P. Macaluso
 
   
Joseph P. Macaluso
 
   
Principal Financial Officer
Tel-Instrument Electronics Corp