TEL INSTRUMENT ELECTRONICS CORP - Annual Report: 2015 (Form 10-K)

telinstrument10k033115.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the fiscal year ended March 31, 2015

Commission File No. 001-31990

TEL-INSTRUMENT ELECTRONICS CORP.

(Exact name of Registrant as specified in its charter)

New Jersey	22-1441806
(State of incorporation)	(IRS Employer Identification Number)

One Branca Road East Rutherford, New Jersey	07073
(Address of principal executive offices)	(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Exchange on Which Registered
Common Stock $.10 par value	NYSE - MKT

Indicate by checkmark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by checkmark if registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Act). Yes o No x

The aggregate market value of the voting and non-voting common stock held by non-affiliates on September 30, 2014 (the last business day of our most recently completed second fiscal quarter) was $9,050,675 based on the closing price of $5.34 on September 30, 2014.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 3,256,887 shares of common stock, par value $0.10 per share, were outstanding as of June 18, 2015.

Table of Contents

TEL-INSTRUMENT ELECTRONICS CORP

TABLE OF CONTENTS

PART I.		Page

Item 1.	Business	4

Item 1A.	Risk Factors	9

Item 1B.	Unresolved Staff Comments	9

Item 2.	Properties	9

Item 3.	Legal Proceedings	9

Item 4.	Mine Safety Disclosures	10

PART II.

Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	11

Item 6.	Selected Financial Data	12

Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	17

Item 8.	Financial Statements and Supplementary Data	18

Item 9.	Changes in Disagreements With Accountants on Accounting and Financial Disclosure	45

Item 9A.	Controls and Procedures	45

Item 9B.	Other Information	45

PART III.

Item 10.	Directors, Executive Officers and Corporate Governance	46

Item 11.	Executive Compensation	49

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	52

Item 13.	Certain Relationships and Related Transactions and Director Independence	54

Item 14.	Principal Accounting Fees and Services	55

PART IV.

Item 15.	Exhibits and Financial Statement Schedules	56

Signatures		58

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Included in this Annual Report on Form 10-K are “forward-looking” statements, as well as historical information. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that the expectations reflected in these forward-looking statements will prove to be correct. Our actual results could differ materially from those anticipated in forward-looking statements as a result of certain factors, including matters described in the section titled “Risk Factors.” Forward-looking statements include those that use forward-looking terminology, such as the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “project,” “plan,” “will,” “shall,” “should,” and similar expressions, including when used in the negative. Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, these statements involve risks and uncertainties and we cannot assure you that actual results will be consistent with these forward-looking statements. Important factors that could cause our actual results, performance or achievements to differ from these forward-looking statements include the following:

• the availability and adequacy of our cash flow to meet our requirements;

• economic, competitive, demographic, business and other conditions in our local and regional markets;

• changes in our business and growth strategy;

• changes or developments in laws, regulations or taxes in the electronics/aerospace industry;

• actions taken or not taken by third-parties, including our vendors, customers and competitors;

• the availability of additional capital; and

• other factors discussed elsewhere in this Annual Report.

All forward-looking statements attributable to us are expressly qualified in their entirety by these and other factors. We undertake no obligation to update or revise these forward-looking statements, whether to reflect events or circumstances after the date initially filed or published, to reflect the occurrence of unanticipated events or otherwise unless required by applicable law.

Table of Contents

PART I

Item 1. Business

General

Tel-Instrument Electronics Corp. (“Tel”, “TIC” or the “Company”) has been in business since 1947, and is a leading designer and manufacturer of avionics test and measurement solutions for the global commercial air transport, general aviation, and government/military aerospace and defense markets. The Company designs, manufactures and sells instruments to test and measure, and calibrates and repairs a wide range of airborne navigation and communication equipment.

Tel’s instruments are used to test navigation and communications equipment installed in aircraft, both on the flight line (“ramp testers”) and in the maintenance shop (“bench testers”), and range in list price from $7,500 to $80,750 per unit. Tel continues to develop new products in anticipation of customers’ needs, and to maintain its strong market position. Its development of multifunction testers has made it easier for customers to perform ramp tests with less operator training, a fewer number of test sets, and lower product support costs.

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

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

We continue to evaluate other attractive potential market opportunities although our current capital structure limits our flexibility at this time.

Communications/Navigation (COMM/NAV) Radio Frequency (RF) Avionics Flight line Tester”) (“CRAFT”) (AN/USM-708 and AN/USM-719) with the U.S. Navy

The AN/USM-708, the basic CRAFT test set, is a key product for the Company as it represents a new generation technology product. The AN/USM-708 and AN/USM-719 (IFF only) contract was competitively awarded to the Company by the United States Navy. The AN/USM-708 CRAFT unit combines advanced IFF (including Mode 5 encryption technology) navigation, communication, and sonobuoy test capabilities in a portable test set, which will utilize a flexible and expandable digital-signal-processing-based architecture. Both the AN/USM-708 and the AN/USM-719 have been certified by the AIMS Program Office. This represents the culmination of a multi-year, multi-million dollar investment by the Company in Mode 5 technology and will provide a significant competitive advantage in the years to come. Management believes that the CRAFT program also has significant potential for sales into the balance of the U.S. Military, NATO, and internationally, as the new Mode 5 IFF systems are installed in overseas aircraft platforms. The Joint Strike Fighter (“JSF”) program by itself is expected to generate significant CRAFT orders as this program continues to ramp up limited rate production.

The contract for the AN/USM-708 and AN/USM-719 was a significant milestone for the Company because the development of this proprietary technology, which has been funded by the Company, establishes Tel’s position as a leader in the industry, and will meet the U.S. Navy’s test requirements for years to come. The Company believes that, given the unique nature of this design, this product will generate sales to other military customers. The CRAFT test set replaces seven obsolete U.S. Navy test sets that collectively cost approximately $300,000, making the CRAFT test set an excellent value to the government. This unit has been well received by the end users. The Company believes that the core technology in the AN/USM-708 can be the foundation for additional military and commercial products

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

Table of Contents

Item 1. Business (continued)

General (continued)

Communications/Navigation (COMM/NAV) Radio Frequency (RF) Avionics Flight line Tester”) (“CRAFT”) (AN/USM-708 and AN/USM-719) with the U.S. Navy (continued)

The Company received and shipped in fiscal year 2014 a $755,580 order from Lockheed Martin for 21 AN/USM-708 CRAFT test sets. In March 2015, the Company received an order for an additional 21 CRAFT test sets from Lockheed Martin in the amount of $775,369 with shipment expected to take place in the second and third quarters ending September 30, 30, 2015 and December 31, 2015, respectively. These units are to be used on the JSF program.

TS-4530A IFF test set with the U.S. Army Aviation and Missile Command

In February 2009, the Company was awarded a firm fixed price indefinite-delivery/indefinite-quantity (IDIQ) contract by the U.S. Army Aviation and Missile Command with a maximum dollar value of approximately $44 million, depending on the number of units purchased (see Item 3, Legal Proceedings). The Company’s win of the critical TS-4530A Mode 5 U.S. Army program represented another major event for our future. Management believes that this award, in conjunction with our U.S. Navy CRAFT Mode 5 program, provides Tel with undisputed market leadership in the Mode 5 IFF business and should provide a constant revenue stream for at least the next few years. This program takes full advantage of the significant investment that the Company has made in its proprietary Mode 5 technology.

The program is for Mode 5 conversion kits and new IFF test sets, which incorporate the Company’s proprietary electronics and IFF technology in addition to Mode S Enhanced Surveillance (“EHS”) and Automatic Dependent Surveillance - Broadcast (“ADS-B”) test functionality. The U.S. Army completed its production assurance review, and the Company has successfully completed testing conducted by the United States Department of Defense (“DOD”) AIMS Program Office to approve its TS-4530A Flight Line Test Set authorizing its use for Mark XIIA IFF Mode S (ELS/EHS/ADS-B) and TCAS systems. The TS-4530A program is a critical program which should help drive TIC’s revenue growth and profitability. (Please see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.)

The Company has received approximately $26.9 million in delivery orders on the TS-4530A program out of a maximum contract value of approximately $44 million. The Company received a full production release for the kits, and commenced shipment of these kits in July 2014. The U.S. Army has ordered about 50% of the maximum quantity of SETS, so any additional U.S. Army KIT or SET orders would be at higher commercial prices. The U.S. Army has requested that TIC increase the production of KITS to 150 units per month starting in 2015 to ensure that they do not lose any funding for several KIT delivery orders which expire late in calendar year 2015. The U.S. Army has indicated that it expects to authorize full rate production for the SETS in the second half of 2015. TIC continues to actively market the TS-4530A product both domestically and overseas, and has received a limited amount of orders outside the U.S. Army contract.

As of March 31, 2015, the Company has open orders for 1,367 kits and 687 sets, totaling $14.7 million.

Intermediate Level TACAN Test Set (“ITATS”) (AN/ARM-206) with the U.S. Navy)

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

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

Table of Contents

Item 1. Business (continued)

General (continued)

Intermediate Level TACAN Test Set (“ITATS”) (AN/ARM-206) with the U.S. Navy (continued)

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

Legacy Products

During fiscal 2015, the Company received the following significant orders for our legacy products:

·	U.S. Army for 35 T-47N Test Sets for a total of $601,230. This order is part of a five year IDIQ contract for up to 235 T-47N Test Sets. After receipt of this order, a total of 50 T-47N Test Sets could still be exercised under this IDIQ contract.

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

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

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

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

·	$552,330 from our commercial U.S. distributor for TR-220 Test Sets.

Historically, the Company receives regular smaller orders for both its commercial and government products, as these products are widely used in the Avionics Test Equipment market.

Competition

The Company manufactures and sells commercial and military products as a single avionics business, and its designs and products cross both markets.

The general aviation market consists of some 1,000 avionics repair and maintenance service shops at private and commercial airports in the United States which purchase test equipment to assist in the repair of aircraft electronics. The commercial aviation market consists of approximately 80 domestic and foreign commercial airlines.

The civilian market for avionic test equipment is dominated by two designers and manufacturers, Tel and Aeroflex, Inc. (“Aeroflex”), with Aeroflex being substantially larger than Tel. This market is relatively narrow and highly competitive. Tel has been successful because of its high quality, new technology, user friendly products and competitive prices. In recent years commercial airlines have experienced financial difficulties, and, as a result of this, sales of avionics test equipment to airlines have been weak.

The military market is large and is dominated by large corporations with substantially greater resources than the Company, including Aeroflex. Tel competitively bids for government contracts on the basis of the engineering quality and innovation of its products, competitive price, and "small business set asides" (i.e., statutory provisions requiring the military to entertain bids only from statutorily defined small businesses), and on bids for sub-contracts from major government suppliers. There are a limited number of competitors who are qualified to bid for “small business set asides.” The military market consists of many independent purchasing agencies and offices. The process of awarding contracts is heavily regulated by the U.S. Department of Defense.

Table of Contents

Item 1. Business (continued)

General (continued)

Competition (continued)

In recent years, the Company has won several large, competitively bid contracts from the military and has become the primary supplier for the U.S. Military, as well as the NATO countries, of flight line IFF test equipment. The CRAFT AN/USM-708, CRFAT AN/USM-719 and TS-4530A programs, discussed previously, involve a new generation of technology, including the next generation of IFF testing, and is expected to enable the Company to continue to be a major supplier of avionics test equipment to the military for years to come. Tel believes its new technology will also allow it to increase sales to the commercial market in the future.

Marketing and Distribution

Domestic commercial sales are made throughout the U.S. to commercial airlines and general aviation businesses directly or through distributors. No direct commercial customer accounted for more than 10% of commercial sales in fiscal years 2015 and 2014. Domestic distributors receive a 15%-20% discount for stocking, selling, and, in some cases, providing product calibration and repairs. Tel gives a 5% to 15% discount to non-stocking distributors, and to independent sales representatives, depending on their sales volume and promotional effort. The loss of any one of these distributors would not have a material adverse effect on the Company or its operations. Commercial sales represented 12% and 11% of total sales, respectively, for the fiscal years ended March 31, 2015 and 2014. No distributor represented more than 10% of commercial sales during fiscal years 2015 and 2014.

Marketing to the U.S. Government is made directly by employees of the Company or through independent sales representatives, who receive similar commissions to the commercial distributors. For the years ended March 31, 2015 and 2014, sales to the U.S. Government, including shipments through the government’s logistics centers, represented approximately 77% and 64%, respectively, of avionics sales. No other government customer represented over 10% of government sales for fiscal years 2015 and 2014.

International sales are made throughout the world to government and commercial customers, directly through American export agents, or through the Company’s overseas distributors at a discount reflecting a 20% to 22% selling commission, under written or oral, year-to-year arrangements. The Company has an exclusive distribution agreement with Muirhead Avionics and Accessories, Ltd (“Muirhead”), based in the United Kingdom, to represent the Company in parts of Europe, and with Victory Aerospace in Australia and New Zealand. Tel also sells its products through exclusive distributors in Spain, Portugal, and the Far East and is exploring distribution in other areas. For the years ended March 31, 2015 and 2014, total international sales were 10% and 16%, respectively, of sales. Additionally, the Company has an agreement with M.P.G. Instruments s.r.l., based in Italy, wherein this distributor has the exclusive sales rights for DME/P ramp and bench test units. The Company continues to explore additional marketing opportunities in other parts of the world, including the Far East. No international distributor accounted for more than 10% of total sales for the fiscal years ended March 31, 2015 and 2014. The Company has no material assets overseas.

Tel also provides customers with calibration and repair services. Repairs and calibrations accounted for 5% of sales for the years ended March 31, 2015 and 2014, respectively.

Future domestic market growth, if any, will be affected in part by whether the U.S. Federal Aviation Administration (“FAA”) implements plans to upgrade the U.S. air traffic control system regulations and by continuing recent industry trends towards more sophisticated avionics systems, both of which would require the design and manufacture of new test equipment. Military contracts are awarded and implemented by extensive government regulation. The Company believes its test equipment is recognized by its customers for its quality, durability, reliability, affordability, and by its advanced technology.

Table of Contents

Item 1. Business (continued)

General (continued)

Marketing and Distribution (continued)

Backlog

Set forth below is Tel’s avionics backlog at March 31, 2015 and 2014:

	Commercial		Government		Total

March 31, 2015	$	450,497	$	28,289,279	$	28,739,776
March 31, 2014	$	529,779	$	37,061,555	$	37,591,334

Tel believes that most of its backlog at March 31, 2015 will be delivered during the next three fiscal years. The backlog is pursuant to purchase orders, and all of the government contracts are fully funded. However, government contracts are always susceptible to termination for convenience by the government. Historically, the Company obtains orders which are required to be filled in less than 12 months, and therefore, these anticipated orders are not reflected in the backlog.

Suppliers

Tel obtains its purchased parts from a number of suppliers. These materials are standard in the industry, and the Company foresees no difficulty in obtaining purchased parts, as needed, at acceptable prices.

Patents and Environmental Laws

Tel has no patents or licenses which are material to its business, and there are no material costs incurred to comply with environmental laws.

Engineering, Research, and Development

In the fiscal years ended March 31, 2015 and 2014, Tel spent $1,961,275 and $1,853,338, respectively, on the engineering, research, and development of new and improved products. None of these amounts were sponsored by customers. Engineering, research, and development expenditures in fiscal year 2015 were made primarily for the T-4530A program, AN/USM-206, continuing engineering for the CRAFT program, and the incorporation of other product enhancements in existing designs as well as an upgrade of our T-760 Precision DME (Distance Measuring Equipment) Test Set. The Company also has been developing a new commercial navigation/communication test set designated the TR-36. The Company owns all of these designs with the exception of the AN/ARM-206 design.

Tel's management believes that continued significant expenditures for engineering, research, and development are necessary to enable Tel to expand its products, sales, and profits, and to remain competitive.

Personnel

At June 11, 2015, Tel had forty-two full-time employees in manufacturing, materials management, and quality assurance, eleven in administration and sales, including customer services and product support, and twelve in engineering, research and development, none of whom belongs to a union. From time to time, the Company also employs independent contractors to support its manufacturing, engineering, and sales organizations. At June 11, 2015, the Company utilized one independent contractor in manufacturing for assembly and test, one in sales and program management, and one in engineering. Tel has been successful in attracting skilled and experienced management, sales and engineering personnel.

Where You Can Find More Information

The public may read and copy any materials the Company files with the U.S. Securities and Exchange Commission (the “SEC”) at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030. The SEC maintains an Internet website (sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

Table of Contents

Item 1A. Risk Factors

We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

Item 1B. Unresolved Staff Comments

Not Applicable.

Item 2. Properties

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

Item 3. Legal Proceedings

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

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

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

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

Table of Contents

Item 3. Legal Proceedings (continued)

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

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

Item 4. Mine Safety Disclosures

Not applicable.

Table of Contents

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

a) Market Information

The common stock, $0.10 par value per share, of the registrant (“Common Stock”) is traded on the NYSE - MKT under the symbol “TIK”. The following table sets forth the high and low per share sale prices for our Common Stock for the periods indicated as reported for fiscal years 2015 and 2014 by the NYSE - MKT:

Fiscal Year
Ended March 31,
2015	High		Low
First Quarter	$	5.60	$	4.40
Second Quarter		5.78		4.99
Third Quarter		5.38		4.34
Fourth Quarter		6.55		4.30
2014
First Quarter	$	3.50	$	3.18
Second Quarter		4.18		3.21
Third Quarter		5.92		3.80
Fourth Quarter		6.48		4.18

b) Holders

The Company has approximately 202 holders of its Common Stock as of June 18, 2015. This figure does not take into account those shareholders whose certificates are held in the name of broker-dealers or other nominees.

c) Dividends

We have not declared or paid any dividends on our Common Stock and intend to retain any future earnings to fund development and growth of our business. Therefore, we do not anticipate paying dividends on our common stock for the foreseeable future. There are no restrictions on our present ability to pay dividends to stockholders of our common stock, other than those prescribed by law.

d) Securities Authorized for Issuance under Equity Compensation Plans

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

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

See “Equity Compensation Plan Information” under Item 12 below.

Table of Contents

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters (continued)

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

During fiscal year 2015, the Company issued 5,500 shares of common stock upon exercise of stock options granted pursuant to its 2006 Employee Stock Option Plan for an aggregate $26,610, which was added to working capital. All of the shares were issued pursuant to our S-8 Registration Statement filed on August 18, 2005 or pursuant to the exemption provided by Section 4 of the Securities Act of 1933. Please refer to Note 16 of the Notes to the Consolidated Financial Statements and Item 11, Executive Compensation, for information on the Company’s Employee Stock Option Plan of 2006.

In conjunction with the loan from BCA Mezzanine Fund, L.P. (“BCA”) (see Note 10 of the Notes to the Consolidated Financial Statements), the Company issued BCA a nine-year warrant exercisable for 136,920 shares, based upon 4.5% of the fully–diluted outstanding shares of the Company’s common stock at $6.70 per share, the average closing price over the three days preceding the closing of the loan on the NYSE – MKT. In the event of specific major corporate events or the maturity of the five-year loan, BCA can require the Company to purchase the warrant shares at the higher of the then exchange market price less, in the case of the warrant, the exercise price, or five times operating income per share.

The Company also issued warrants to a third party exercisable for 10,416 shares at $6.70 per share for five years in conjunction with the BCA loan as an additional finder’s fee.

In consideration for the waiver for non-compliance of the financial covenants and for the deferral of certain principal payments, BCA received warrants to purchase a total of 100,000 shares of Common Stock at prices ranging from $3.33 to $3.69 during fiscal years 2014 and 2013 (see Note 10 of the Notes to the Consolidated Financial Statements).

In conjunction with a loan from a private investor (see Note 10 of the Notes to the Consolidated Financial Statements), the Company issued a warrant exercisable for 50,000 shares of the Company’s common stock at $3.35 per share, expiring September 10, 2019.

Rule 10B-18 Transactions

During the year ended March 31, 2015, there were no repurchases of the Company’s common stock by the Company.

Recent Sales of Unregistered Securities

None.

Item 6. Selected Financial Data

The Company is a smaller reporting company as defined in Item 10 (f) of Regulation S-K and therefore is not required to provide the information under this item.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

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

Forward-looking statements include, among others, statements concerning the Company’s outlook, pricing trends and forces within the industry, the completion dates of projects, expected sales growth, cost reduction strategies and their results, long-term goals of the Company and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.

All predictions as to future results contain a measure of uncertainty and accordingly, actual results could differ materially. Among the factors that could cause a difference are changes in the general economy; changes in demand for the Company’s products or in the costs and availability of its raw materials; the actions of competitors; the success of our customers, technological change; changes in employee relations; government regulations; litigation, including its inherent uncertainty; difficulties in plant operations and materials transportation; environmental matters; and other unforeseen circumstances. A number of these factors are discussed in the Company’s filings with the SEC.

General

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

Overview

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

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

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

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

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

Overview (continued)

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

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

Results of Operations 2015 Compared to 2014

Sales

For the fiscal year ended March 31, 2015, total sales increased $2,367,681 (15.0%) to $18,195,972 as compared to $15,828,291 for the same period in the prior year. Total Avionics sales increased $2,694,476 (17.4%) to $18,195,972 for the year ended March 31, 2015 as compared to $15,501,496 for the fiscal year ended March 31, 2014.

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

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

Gross Margin

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

Operating Expenses

Selling, general and administrative expenses increased $2,384 (0.1%) to $3,149,031 for the fiscal year ended March 31, 2015, as compared to $3,146,647 for the fiscal year ended March 31, 2014. Higher professional fees associated with the deposition phase Aeroflex litigation were mostly offset by lower outside commission costs as well as lower profit sharing, and shared-based compensation expenses. Legal expenses associated with the Aeroflex litigation were $524,837 for the year ended March 31, 2015 as compared to $341,431 for the same period last year.

Engineering, research and development expenses increased $107,937 (5.8%) to $1,961,275 for fiscal year 2015 as compared to $1,853,338 for the prior fiscal year. While the Company has completed development on its major programs, research and development resources have now been focused on new product development, sustaining engineering and enhancements to existing products.

Income From Operations

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

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

Results of Operations 2015 Compared to 2014 (continued)

Other Expense

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

Income (Loss) before Income Taxes

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

Income Taxes

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

Net Income (Loss)

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

Liquidity and Capital Resources

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

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

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

Cash used in investing activities. For the year ended March 31, 2015, the Company used $11,221 of its cash for investing activities, as compared to $65,851 for the year ended March 31, 2014 as result of lower purchases of equipment.

Cash used in financing activities. For the year ended March 31, 2015, the Company used $436,263 in financing activities as compared to using $444,967 for the year ended March 31, 2014. This is the result of lower debt repayments as a result of the debt refinancing offset mostly by the proceeds from the new term. During the year ended March 31, 2014, the Company received net proceeds from a related party note payable in the amount of $100,000.

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

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

Liquidity and Capital Resources (continued)

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

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

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

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

Critical Accounting Policies

In preparing the financial statements and accounting for the underlying transactions and balances, the Company applies its accounting policies as disclosed in Note 2 of our Notes to Consolidated Financial Statements. The Company’s accounting policies that require a higher degree of judgment and complexity used in the preparation of financial statements include:

Revenue recognition - revenues are recognized at the time of shipment to, or acceptance by the customer, provided title and risk of loss is transferred to the customer. Provisions, when appropriate, are made where the right to return exists.

Revenues for repairs and calibrations of the Company’s products represented 5.4% and 5.2% of sales for the years ended March 31, 2015 and 2014, respectively. These revenues are for units that are periodically returned for annual calibrations and/or for repairs after the warranty period has expired. Revenues on repairs and calibrations are recognized at the time the repaired or calibrated unit is shipped, as it is at this time that the work is completed. The Company’s terms are F.O.B. Plant, and as such, delivery has occurred, and revenue recognized, when picked up and acknowledged by a common carrier.

Shipping and handling costs charged to customers are classified as sales, and the shipping and handling costs incurred are included in cost of sales.

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

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

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

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

Critical Accounting Policies (continued)

Warranty reserves – warranty reserves are based upon historical rates and specific items that are identifiable and can be estimated at time of sale. While warranty costs have historically been within our expectations and the provisions established, future warranty costs could be in excess of our warranty reserves. A significant increase in these costs could adversely affect operating results for the current period and any future periods these additional costs materialize. Warranty reserves are adjusted from time to time when actual warranty claim experience differs from estimates. For the year ended March 31, 2015 warranty costs were $279,955 as compared to $288,685 for the year ended March 31, 2014.

Accounts receivable – the Company performs ongoing credit evaluations of its customers and adjusts credit limits based on customer payment and current credit worthiness, as determined by review of their current credit information. The Company continuously monitors credits and payments from its customers and maintains provision for estimated credit losses based on its historical experience and any specific customer issues that have been identified. For the year ended March 31, 2015 approximately 77% of the Company’s sales were to the U.S. Government. While such credit losses have historically been within our expectation and the provision established, the Company cannot guarantee that it will continue to receive positive results.

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

Off Balance Sheet Arrangements

The Company is not party to any off-balance sheet arrangements that may affect its financial position or its results of operations.

New Accounting Pronouncements

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

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

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Item 8. Financial Statements and Supplementary Data

	Pages
(1) Financial Statements:

Report of Independent Registered Public Accounting Firm	19

Consolidated Balance Sheets - March 31, 2015 and 2014	20

Consolidated Statements of Operations - Years Ended March 31, 2015 and 2014	21

Consolidated Statements of Changes in Stockholders' Equity - Years Ended March 31, 2015 and 2014	22

Consolidated Statements of Cash Flows - Years Ended March 31, 2015 and 2014	23

Notes to Consolidated Financial Statements	24

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

Tel-Instrument Electronics Corp.

East Rutherford, New Jersey

We have audited the accompanying consolidated balance sheets of Tel-Instrument Electronics Corp. (the “Company”) as of March 31, 2015 and 2014 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tel-Instrument Electronics Corp. and subsidiary as of March 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ BDO USA, LLP

Woodbridge, New Jersey

June 25, 2015

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TEL-INSTRUMENT ELECTRONICS CORP.

Consolidated Balance Sheets

ASSETS	March 31, 2015			March 31, 2014
Current assets:
Cash	$	185,932		$	232,118
Accounts receivable, net of allowance for doubtful accounts of $24,975 and $27,282, respectively		1,625,171			2,095,640
Inventories, net		4,032,074			4,025,391
Prepaid expenses and other current assets		281,002			263,592
Deferred financing costs		5,429			108,321
Deferred tax asset		1,064,395			1,089,538
Total current assets		7,194,003			7,814,600

Equipment and leasehold improvements, net		270,792			450,873
Deferred financing costs – long-term		8,792			48,142
Deferred tax asset – non-current		2,377,583			2,273,068
Other assets		32,317			47,670

Total assets	$	9,883,487		$	10,634,353

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Current portion of long-term debt	$	387,839		$	718,848
Capital lease obligations – current portion		16,758			53,608
Accounts payable		2,811,781			2,289,858
Progress billings		-			775,475
Deferred revenues – current portion		18,609			37,452
Accrued expenses - vacation pay, payroll and payroll withholdings		594,114			444,238
Accrued expenses - related parties		170,348			123,036
Accrued expenses – other		595,437			919,287
Total current liabilities		4,594,886			5,361,802

Subordinated notes payable – related parties		250,000			250,000
Capital lease obligations – long-term		4,561			21,320
Long-term debt, net of debt discount		708,604			596,526
Warrant liability		518,962			354,309
Deferred revenues – long-term		133,650			133,650
Other long-term liabilities		33,000			56,100

Total liabilities		6,243,663			6,773,707

Commitments and contingencies

Stockholders’ equity
Common stock, 4,000,000 shares authorized, par value $.10 per share, 3,256,887 and 3,251,387 shares issued and outstanding, respectively		325,686			325,136
Additional paid-in capital		8,046,168			7,987,100
Accumulated deficit		(4,732,030	)		(4,451,590	)

Total stockholders’ equity		3,639,824			3,860,646

Total liabilities and stockholders’ equity	$	9,883,487		$	10,634,353

The accompanying notes are an integral part of the consolidated financial statements.

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TEL-INSTRUMENT ELECTRONICS CORP.

Consolidated Statements of Operations

	For the years ended March 31,
	2015			2014

Net sales	$	18,195,972		$	15,828,291

Cost of sales		12,755,280			9,464,404

Gross margin		5,440,692			6,363,887

Operating expenses:
Selling, general and administrative		3,149,031			3,146,647
Engineering, research and development		1,961,275			1,853,338

Total operating expenses		5,110,306			4,999,985

Income from operations		330,386			1,363,902

Other income (expense):
Amortization of debt discount		(75,308	)		(104,644	)
Amortization of deferred financing costs		(69,165	)		(108,321	)
Change in fair value of common stock warrants		(164,653	)		(114,869	)
Loss on extinguishment of debt		(188,102	)		(26,600	)
Interest income		-			226
Interest expense		(145,658	)		(275,321	)
Interest expense - related parties		(47,312	)		(30,000	)

Total other expense		(690,198	)		(659,529	)

Income (loss) before income taxes		(359,812	)		704,373

Provision (benefit) for income taxes		(79,372	)		442,845

Net income (loss)	$	(280,440	)	$	261,528


Basic income (loss) per common share	$	(0.09	)	$	0.08
Diluted income (loss) per common share	$	(0.09	)	$	0.10

Weighted average number of shares outstanding
Basic		3,253,992			3,204,028
Diluted		3,253,992			3,228,894

The accompanying notes are an integral part of the consolidated financial statements.

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TEL-INSTRUMENT ELECTRONICS CORP.

Consolidated Statements of Changes in Stockholders’ Equity

	Common Stock				Additional
	# of Shares Issued		Amount		Paid-In Capital		Accumulated Deficit			Total

Balances at April 1, 2013		3,011,739	$	301,171	$	7,108,300	$	(4,713,118	)	$	2,696,353

Stock-based compensation		-		-		84,742		-			84,742
Net income		-		-		-		261,528			261,528
Issuance of new shares in connection with conversion of debt into common stock		200,000		20,000		644,000		-			664,000
Issuance of new shares in connection with conversion of note payable into common stock		31,348		3,135		117,868		-			121,003
Issuance of common stock in connection with the exercise of stock options		8,300		830		32,190	-				33,020

Balances at March 31, 2014		3,251,387	$	325,136	$	7,987,100	$	(4,451,590	)	$	3,860,646

Stock-based compensation		-		-		33,008		-			33,008
Net loss		-		-		-		(280,440	)		(280,440	)
Issuance of common stock in connection with the exercise of stock options		5,500		550		26,060	-				26,610

Balances at March 31, 2015		3,256,887	$	325,686	$	8,046,168	$	(4,732,030	)	$	3,639,824

The accompanying notes are an integral part of the consolidated financial statements.

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TEL-INSTRUMENT ELECTRONICS CORP.

Consolidated Statements of Cash Flows

	For the years ended March 31,
	2015			2014
Cash flows from operating activities:
Net income (loss)	$	(280,440	)	$	261,528
Adjustments to reconcile net (loss) income to net cash (Used in) provided by operating activities:
Deferred income taxes		(79,372	)		423,345
Allowance for doubtful accounts		(2,487	)		10,000
Depreciation and amortization		177,291			202,936
Amortization of debt discount		75,308			104,644
Amortization of deferred financing costs		69,165			108,321
Change in fair value of common stock warrant		164,653			114,869
Provision for inventory obsolescence		24,287			5,000
Loss on extinguishment of debt		188,102			26,600
Non-cash interest expense associated with conversion of note payable		-			21,003
Non-cash stock-based compensation		33,008			84,742
Changes in assets and liabilities:
Decrease (increase) in accounts receivable		472,956			(1,547,761	)
(Increase) decrease in inventories		(16,959	)		2,210,790
Increase in prepaid expenses and other assets		(2,057	)		(138,538	)
Increase (decrease) in accounts payable		521,923			(1,982,573	)
(Decrease) increase in deferred revenues		(18,843	)		151,597
Increase in accrued payroll, vacation pay & withholdings		149,876			1,716
Decrease in accrued expenses – related party and other		(276,538	)		(457,155	)
(Decrease) increase in progress billings		(775,475	)		775,475
(Decrease) increase in other long-term liabilities		(23,100	)		56,100
Net cash provided by operating activities		401,298			432,639

Cash flows from investing activities:
Acquisition of equipment		(11,221	)		(65,851	)
Net cash used in investing activities		(11,221	)		(65,851	)

Cash flows from financing activities:
Proceeds from exercise of stock options		26,610			33,020
Proceeds from note payable – related party		-			100,000
Proceeds from issuance of debt		1,200,000			23,712
Expenses associated with long-term debt		(16,287	)		-
Repayment of long-term debt		(1,592,977	)		(526,064	)
Repayment of capitalized lease obligations		(53,609	)		(75,635	)
Net cash used in financing activities		(436,263	)		(444,967	)

Net decrease in cash		(46,186	)		(78,179	)
Cash, beginning of year		232,118			310,297
Cash, end of year	$	185,932		$	232,118

Supplemental cash flow information:
Taxes paid	$	20,500		$	1,340
Interest paid	$	166,040		$	310,489
Supplemental non-cash information:
Warrants issued to lender for waiver of debt covenants	$	-		$	41,110
Conversion of debt to equity	$	-		$	700,000
Conversion of accrued interest to equity	$	-		$	37,400

The accompanying notes are an integral part of the consolidated financial statements.

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TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements

1. Business, Organization, and Liquidity

Business and Organization

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

2. Summary of Significant Accounting Policies

Principles of Consolidation:

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

Revenue Recognition:

Revenues are recognized at the time of shipment to, or acceptance by the customer, provided title and risk of loss is transferred to the customer. Provisions, when appropriate, are made where the right to return exists.

Shipping and handling costs charged to customers are classified as sales, and the shipping and handling costs incurred are included in cost of sales.

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

Fair Value of Financial Instruments:

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

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

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TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

2. Summary of Significant Accounting Policies (continued)

Concentrations of Credit Risk:

Cash held in banks: The Company maintains cash balances at a financial institution that is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to federally insured limits. At times balances may exceed FDIC insured limits. The Company has not experienced any losses in such accounts.

Accounts Receivable: The Company’s avionics customer base is primarily comprised of airlines, distributors, and the U.S. Government. As of March 31, 2015, the Company believes it has no significant risk related to its concentration within its accounts receivable.

Inventories:

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

Equipment and Leasehold Improvements:

Office and manufacturing equipment are stated at cost, net of accumulated depreciation. Depreciation and amortization are provided on a straight-line basis over periods ranging from 3 to 5 years.

Leasehold improvements are amortized over the term of the lease or the useful life of the asset, whichever is shorter.

Maintenance, repairs, and renewals that do not materially add to the value of the equipment nor appreciably prolong its life are charged to expense as incurred.

When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in the Statement of Operations.

Engineering, Research and Development Costs:

Engineering, research and development costs are expensed as incurred.

Advertising Expenses:

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

Deferred Revenues:

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

Progress Billings:

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

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TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

2. Summary of Significant Accounting Policies (continued)

Net Income (Loss) per Common Share:

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

Accounting for Income Taxes:

The Company accounts for income taxes using the asset and liability method described in FASB ASC 740, “Income Taxes”. Deferred tax assets arise from a variety of sources, the most significant being: a) tax losses that can be carried forward to be utilized against profits in future years; b) expenses recognized for financial reporting purposes but disallowed in the tax return until the associated cash flow occurs; and c) valuation changes of assets which need to be tax effected for book purposes but are deductible only when the valuation change is realized.

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when such differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefit which is not more likely than not to be realized. In assessing the need for a valuation allowance, future taxable income is estimated, considering the realization of tax loss carryforwards. Valuation allowances related to deferred tax assets can also be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event it was determined that the Company would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such amounts through a charge to income in the period in which that determination is made. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through an increase to income in the period in which that determination is made. In its evaluation of a valuation allowance the Company takes into account existing contracts and backlog, and the probability that options under these contract awards will be exercised as well as sales of existing products. The Company prepares profit projections based on the revenue and expenses forecast to determine that such revenues will produce sufficient taxable income to realize the deferred tax assets.

The Company accounts for uncertainties in income taxes under ASC 740-10-50 which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740-10 requires that the Company determine whether the benefits of its tax positions are more-likely-than-not of being sustained upon audit based on the technical merits of the tax position. The Company recognizes the impact of an uncertain income tax position taken on its income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. The implementation of ASC 740-10 had no impact on the Company’s results of operations or financial position.

Despite the Company’s belief that its tax return positions are consistent with applicable tax laws, one or more positions may be challenged by taxing authorities. Settlement of any challenge can result in no change, a complete disallowance, or some partial adjustment reached through negotiations or litigation.

Interest and penalties related to income tax matters, if applicable, will be recognized as income tax expense. During the years ended March 31, 2015 and 2014 the Company did not incur any expense related to interest or penalties for income tax matters, and no such amounts were accrued as of March 31, 2015 and 2014.

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TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

2. Summary of Significant Accounting Policies (continued)

Stock-based Compensation:

The Company accounts for stock-based compensation in accordance with FASB ASC 718 which requires the measurement of stock-based compensation based on the fair value of the award on the date of grant. The Company recognizes compensation cost on awards on a straight-line basis over the vesting period, typically four years. The Company estimates the fair value of each option granted using the Black-Scholes option-pricing model.

Additional information and disclosure are provided in Note 16 below.

Long-Lived Assets:

The Company assesses the recoverability of the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future, undiscounted cash flows expected to be generated by an asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. No impairment losses have been recognized for the years ended March 31, 2015 and 2014, respectively.

Use of Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates include income taxes, warranty claims, inventory and accounts receivable valuations.

Reclassifications:

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

Accounts Receivable:

The Company performs ongoing credit evaluations of its customers and adjusts credit limits based on customer payment and current credit worthiness, as determined by review of their current credit information. The Company continuously monitors credit limits for and payments from its customers and maintains provision for estimated credit losses based on its historical experience and any specific customer issues that have been identified. While such credit losses have historically been within the Company’s expectation and the provision established, the Company cannot guarantee that this will continue.

Warranty Reserves:

Warranty reserves are based upon historical rates and specific items that are identifiable and can be estimated at time of sale. While warranty costs have historically been within the Company’s expectations and the provisions established, future warranty costs could be in excess of the Company’s warranty reserves. A significant increase in these costs could adversely affect the Company’s operating results for the period and the periods these additional costs materialize. Warranty reserves are adjusted from time to time when actual warranty claim experience differs from estimates. For the year ended March 31, 2015 warranty costs were $279,955 as compared to $288,685 for the year ended March 31, 2014 and are included in Cost of Sales in the accompanying statement of operations. See Note 7 below for warranty reserves.

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TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

2. Summary of Significant Accounting Policies (continued)

Risks and Uncertainties:

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

New Accounting Pronouncements:

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

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

3. Accounts Receivable

The following table sets forth the components of accounts receivable:

	March 31,
	2015			2014
Government	$	1,440,378		$	1,982,215
Commercial		209,768			140,707
Less: Allowance for doubtful accounts		(24,975	)		(27,282	)
	$	1,625,171		$	2,095,640

4. Inventories

Inventories consist of:

	March 31,
	2015			2014
Purchased parts	$	2,746,671		$	3,085,070
Work-in-process		1,514,356			1,134,714
Finished goods		334			10,607
Less: Allowance for obsolete inventory		(229,287	)		(205,000	)
	$	4,032,074		$	4,025,391

Work-in-process inventory includes $1,151,118 and $1,092,928 for government contracts at March 31, 2015 and 2014, respectively.

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TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

5. Equipment and Leasehold Improvements

Equipment and leasehold improvements consist of the following:

	March 31,
	2015			2014
Leasehold Improvements	$	94,413		$	94,413
Machinery and equipment		1,458,919			1,516,332
Automobiles		23,712			28,452
Sales equipment		572,236			586,265
Assets under capitalized leases		610,995			610,995
Less: Accumulated depreciation & amortization		(2,489,483	)		(2,385,584	)
	$	270,792		$	450,873

Depreciation and amortization expense related to the assets above for the years ended March 31, 2015 and 2014 was $177,291 and $202,936 respectively.

6. Intellectual Property

In January 2014, the Company received a $2.14 million contract modification on the ITATS program. The ITATS product (“AN/ARM-206”) is a fully automated TACAN test set for use in U.S. Navy Intermediate Level repair locations. This contract modification entails the sale of certain intellectual property (“IP”) to the U.S. Navy plus the sale of ancillary test support equipment and an increase in the recurring price to reflect several product enhancements. The Company sold certain IP in the amount of $1,526,795, of which $1,200,000 of the IP sale proceeds was paid to the Company’s subcontractor on this program to secure the IP. As a result, the net amount of $326,795 is recorded in net sales in the accompanying Statement of Operations. As part of this agreement with the Company’s subcontractor, upon payment of the $1,200,000, the outstanding amount due to the subcontractor in the amount of $790,535 was discharged and was recorded as a reduction of cost of goods sold. The Company also received $117,095 for engineering enhancements for this program, which was recorded as sales in fiscal year 2014. The sale of the IP for the ITATS program should have no impact on future sales of these units to the U.S. Navy or other customers.

7. Accrued Expenses

Accrued vacation pay, deferred wages, payroll and payroll withholdings consist of the following:

	March 31,
	2015		2014

Accrued vacation pay	$	328,777	$	267,991
Accrued compensation and payroll withholdings		265,337		176,247

	$	594,114	$	444,238

Accrued vacation pay, payroll and payroll withholdings includes $99,899 and $48,529 at March 31, 2015 and 2014, respectively, which is due to officers.

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TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

7. Accrued Expenses (continued)

Accrued expenses - other consist of the following:

	March 31,
	2015		2014

Accrued interest	$	3,230	$	17,672
Accrued outside contractor costs		1,245		104,610
Accrued commissions		117,523		188,840
Accrued legal costs		126,740		215,582
Warranty reserve		140,333		194,062
Accrued – other		206,366		198,521

	$	595,437	$	919,287

The following table provides a summary of the changes in warranty reserves for the years ended March 31, 2015 and 2014:

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

Accrued expenses – related parties consists of the following:

	March 31,
	2015		2014

Interest due to the estate of the Company’s former Chairman	$	85,174	$	61,518
Interest and other expenses due to the Company’s President/CEO		85,174		61,518

	$	170,348	$	123,036

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TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

8. Income Taxes

Income tax (benefit) provision:

	Fiscal Year Ended
	March 31,			March 31,
	2015			2014
Current:
Federal	$	-		$	16,000
State and local		-			3,500

Total current tax provision		-			19,500

Deferred:
Federal		(171,180	)		401,283
State and local		91,808			22,062

Total deferred tax provision (benefit)		(79,372	)		423,345

Total provision (benefit)	$	(79,372	)	$	442,845

The approximate values of the components of the Company’s deferred taxes at March 31, 2015 and 2014 are as follows:

	March 31,			March 31,
	2015			2014
Deferred tax assets:
Net operating loss carryforwards	$	2,865,606		$	2,662,953
Tax credits		329,032			282,187
Charitable contributions		17			-
Allowance for doubtful accounts		8,499			9,288
Reserve for inventory obsolescence		78,024			69,794
Inventory capitalization		76,820			98,182
Deferred payroll		29,264			29,279
Vacation accrual		111,880			91,240
Warranty reserve		47,754			66,070
Deferred revenues		51,812			58,253
Stock options		23,561			35,993
Non-compete agreement		9,868			11,848
Depreciation		(52,379	)		(52,481	)
Deferred tax asset		3,579,758			3,362,606
Less valuation allowance		(137,780	)		-

Deferred tax asset, net	$	3,441,978		$	3,362,606

Deferred tax asset – current	$	1,064,395		$	1,089,538
Deferred tax asset – long-term		2,377,583			2,273,068
Total	$	3,441,978		$	3,362,606

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TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

8. Income Taxes (Continued)

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

The foregoing amounts are management’s estimates and the actual results could differ from those estimates. Future profitability in this competitive industry depends on continually obtaining and fulfilling new profitable sales agreements and modifying products. The inability to obtain new profitable contracts or the failure of the Company’s engineering development efforts could reduce estimates of future profitability, which could affect the Company’s ability to realize the deferred tax assets.

A reconciliation of the income tax (benefit) provision at the statutory Federal tax rate of 34% to the income tax (benefit) provision recognized in the financial statements is as follows:

	March 31,			March 31,
	2015			2014

Income tax (benefit) provision – statutory rate	$	(122,338	)	$	239,487
Income tax expenses – state and local, net of federal benefit		(104	)		19,500
Permanent items		66,784			141,474
True-up of prior years deferred taxes		(162,527	)		19,536
Change in valuation allowance		137,780			(171	)
Other		1,033			23,019

Income tax provision (benefit)	$	(79,372	)	$	442,845

9. Subordinated Notes – Related Parties

On February 22, 2010 the Company borrowed $250,000 in exchange for issuing subordinated notes to two executive officers and directors in the amount of $125,000 (individually, the “Subordinated Note” and collectively, the “Subordinated Notes”). Each officer and director also received 5,000 options to purchase Common Stock at an exercise price of $8.00 per share, the market price at the date of grant. In September 2010, these officers/directors entered into an Intercreditor and Subordination agreement which subordinated their loans to the BCA Loan Agreement (see Note 10 to Notes to Consolidated Financial Statements). The notes were to become due April 1, 2011 with an interest rate of 1% per month, payable on a monthly basis within 14 days of the end of each month. The Intercreditor and Subordination Agreement amongst the parties precludes the payment of principal or interest under these subordinated notes unless and until the Senior Obligations have been paid in full or without the express written consent of Senior Lender. The holders of Subordinated Notes agreed that the Company’s failure to pay the monthly interest amounts pursuant to the terms of the February 22, 2010 Subordinated Notes will not constitute an event of default on such notes if the Company is precluded from making these payments pursuant to the limitations included in the loan agreement with BCA Mezzanine Fund L.L.P. (“BCA”). During fiscal year 2012, the Company’s Chairman, at the time, passed away. His surviving spouse has retained this Subordinated Note and continues to acknowledge the terms. Total interest expense was $47,312 and $30,000 for the years ended March 31, 2015 and 2014, respectively.

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TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

10. Long-Term Debt

BCA Mezzanine Fund LLP

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

The Company also issued warrants to BCA for 136,920 shares at an exercise price of $6.70 per share for nine years in conjunction with the issuance with the BCA Note. In connection with the initial warrants issued with this debt, the Company recorded a debt discount of $267,848. The debt discount was being amortized over the life of the loan.

In consideration for the waivers for non-compliance of the financial covenants, BCA received warrants to purchase shares of the Common Stock, which expire on September 10, 2019. Determining the warrant value to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant. The fair value of the warrant is calculated using the Black-Scholes valuation model. The table below summarizes the additional warrants received by BCA. The value of the warrants was charged to debt discount in the accompanying balance sheet, and the amount was amortized over the remaining term of the loan.

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

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

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TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

10. Long-Term Debt (continued)

Private Investor

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

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

Term Loan with Bank of America

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

Automobile Loan

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

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

2016	$	387,839
2017		412,349
2018		290,995
2019		5,260
2020		-

Total Principal		1,096,443
Less: Current Portion		(387,839	)
Total Long-Term Debt	$	708,604

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TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

11. Note Payable – Related Payable

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

12. Commitments

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

In addition, the Company has agreements to lease equipment for use in the operations of the business under operating leases.

The following is a schedule of approximate future minimum rental payments for operating leases subsequent to the year ended March 31, 2015.

	Years Ended March 31,
2016	$	269,414
2017		91,264
2018		6,317
2019		1,053
2020		--
	$	368,048

Total rent expense, including common charges related to the building as well as equipment rentals, was approximately $355,000 and $312,000 for the years ended March 31, 2015 and 2014, respectively.

The Company sponsors a 401k Plan in which employee contributions on a pre-tax basis are supplemented by matching contributions by the Company. The Company charged to operations $23,555 and $18,585 as its matching contribution to the Company’s 401k Plan for the years ended March 31, 2015 and 2014, respectively.

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TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

13. Capitalized Lease Obligations

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

At March 31, 2015, future payments under capital leases are as follows over each of the next five fiscal years:

2016	$	18,685
2017		4,671
2018		--
2019		--
2020		--
Total minimum lease payments		23,356
Less amounts representing interest		(2,037	)
Present value of net minimum lease payments		21,319
Less current portion		(16,758	)
Long-term capital lease obligation	$	4,561

14. Significant Customer Concentrations

For the years ended March 31, 2015 and 2014, sales to the U.S. Government represented approximately 77% and 64%, respectively of net sales. No other individual customer represented over 10% of net sales for these years. No direct customer accounted for more than 10% of commercial or government net sales. Our U.S. distributor accounted for 22% of commercial sales for the year ended March 31, 2015.

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

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

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

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

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TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

15. Stock Option Plans

In March 2006, the Board adopted the 2006 Stock Option Plan (the “Plan”) which reserved for issuance options to purchase up to 250,000 shares of its Common Stock. The stockholders approved the Plan at the December 2006 annual meeting. The Plan, which has a term of ten years from the date of adoption, is administered by the Board or by a committee appointed by the Board. The selection of participants, allotment of shares, and other conditions related to the grant of options, to the extent not set forth in the Plan, are determined by the Board. Options granted under the Plan are exercisable up to a period of 5 years from the date of grant at an exercise price which is not less than the fair market value of the common stock at the date of grant, except as to a stockholder owning 10% or more of the outstanding common stock of the Company, as to whom the exercise price must not be less than 110% of the fair market value of the common stock at the date of grant. Options, for the most part, are exercisable on a cumulative basis, 20% at or after each of the first, second, and third anniversary of the grant and 40% after the fourth year anniversary. These terms can be modified based upon approval of the Board.

The fair value of each option awarded is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of Common Stock. The expected life of the options granted represents the period of time from date of grant to expiration (5 years). The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant. The per share weighted-average fair value of stock options granted for the years ended March 31, 2015 and 2014 was $2.20 and $1.76, respectively, on the date of grant using the Black Scholes option-pricing model with the following assumptions:

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

A summary of the status of the Company’s stock option plans for the fiscal years ended March 31, 2015 and 2014 and changes during the years are presented below: (in number of options):

	Number of Options			Average Exercise Price		Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding options at April 1, 2013		114,600		$	5.53
Options granted		10,000		$	4.22
Options exercised		(8,300	)	$	3.98
Options canceled/forfeited		(28,300	)	$	3.67

Outstanding options at March 31, 2014		88,000		$	6.12	2.0 years	$	11,200
Options granted		10,000		$	5.14
Options exercised		(5,500	)	$	4.84
Options canceled/forfeited		(21,000	)	$	6.19

Outstanding options at March 31, 2015		71,500		$	6.06	1.9 years	$	64,000
Vested Options:
March 31, 2015:		59,900		$	6.20	1.5 years	$	53,760
March 31, 2014:		61,800		$	6.12	1.2 years	$	9,200

Remaining options available for grant were 248,278 and 237,278 as of March 31, 2015 and 2014, respectively.

The total intrinsic value of options exercised during the years ended March 31, 2015 and 2014 were $1,470 and $3,760, respectively. Cash received from the exercise of stock options for the years ended March 31, 2015 and 2014 was $26,610 and $33,020, respectively.

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TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

15. Stock Option Plan (continued)

For the years ended March 31, 2015 and 2014, the unamortized compensation expense for stock options was $19,934 and $39,255, respectively. Unamortized compensation expense is expected to be recognized over a weighted-average period of approximately 1 year.

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

Non-vested Shares	Shares			Weighted-Average Grant-Date Fair value

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

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

16. Net Diluted Income (Loss) per Share

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

	March 31, 2015			March 31, 2014
Basic net income (loss) per share computation:
Net income(loss)	$	(280,440	)	$	261,528
Weighted-average common shares outstanding		3,253,992			3,204,028
Basic net income (loss) per share	$	(0.09	)	$	0.08
Diluted net income (loss) per share computation
Net income (loss)	$	(280,440	)	$	261,528
Add: Change in fair value of warrants		-			71,757
Diluted income (loss)		(280,440	)		333,285
Weighted-average common shares outstanding		3,253,992			3,204,028
Incremental shares attributable to the assumed exercise of outstanding stock options and warrants		-			24,866
Total adjusted weighted-average shares		3,253,992			3,228,894
Diluted net income (loss) per share	$	(0.09	)	$	0.10

For the year ended March 31, 2015, all outstanding warrants and options were excluded from the computation of diluted loss per share because their effect would be anti-dilutive.

For the year ended March 31, 2014, 78,000 stock options and 147,336 warrants were excluded from the computation of diluted income per share as their effect would be anti-dilutive.

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TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

17. Segment Information

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

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

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

The table below presents information about reportable segments for the years ended March 31:

2015	Avionics Government		Avionics Commercial		Avionics Total		Corporate/ Reconciling Items			Total
Net sales	$	15,926,532	$	2,269,440	$	18,195,972	$	-		$	18,195,972
Cost of Sales		10,927,710		1,827,570		12,755,280		-			12,755,280

Gross Margin		4,998,822		441,870		5,440,692		-			5,440,692

Engineering, research, and development						1,961,275		-			1,961,275
Selling, general, and administrative						1,203,628		1,945,403			3,149,031
Amortization of debt discount						-		75,308			75,308
Amortization of deferred financing costs						-		69,165			69,165
Change in fair value of common stock warrant						-		164,653			164,653
Loss on extinguishment of debt					-			188,102			188,102
Interest expense, net					-			192,970			192,970
						3,164,903		2,635,601			5,800,504
Income (loss) before income taxes					$	2,275,789	$	(2,635,601	)	$	(359,812	)

Segment Assets	$	4,480,332	$	1,176,913	$	5,657,245	$	4,226,242		$	9,883,487

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TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

17. Segment Information (continued)

2014	Avionics Government		Avionics Commercial		Avionics Total		Corporate/ Reconciling Items			Total
Net sales	$	13,726,976	$	1,774,520	$	15,501,496	$	326,795	(1)	$	15,828,291
Cost of Sales		8,003,137		1,461,267		9,464,404		-			9,464,404

Gross Margin		5,723,839		313,253		6,037,092		326,795			6,363,887

Engineering, research, and development						1,853,338		-			1,853,338
Selling, general, and administrative						1,372,342		1,774,305			3,146,647
Amortization of debt discount						-		104,644			104,644
Amortization of deferred financing costs						-		108,321			108,321
Change in fair value of common stock warrant						-		114,869			114,869
Loss on extinguishment of debt					-			26,600			26,600
Interest expense, net					-			305,095			305,095
						3,225,680		2,433,834			5,659,514
Income (loss) before income taxes					$	2,811,412	$	(2,107,039	)	$	704,373

Segment Assets	$	5,801,273	$	319,758	$	6,121,031	$	4,513,322		$	10,634,353

(1) Represents sale of intellectual property

18. Quarterly Results of Operations (Unaudited)

Quarterly consolidated data for the years ended March 31, 2015 and 2014 is as follows:

	Quarter Ended
FY 2015	June 30			September 30			December 31			March 31

Net sales	$	3,129,076		$	3,587,674		$	5,030,097		$	6,449,125
Gross margin		1,120,217			869,344			1,545,787			1,905,344
Income before taxes		(497,187	)		(375,143	)		7,875			504,643
Net income (loss)		(384,005	)		(248,195	)		(20,944	)		372,704
Basic income (loss) per share		(0.12	)		(0.08	)		(0.01	)		0.11
Diluted income (loss) per share		(0.12	)		(0.08	)		(0.01	)		0.11

FY 2014	June 30			September 30			December 31			March 31
Net sales	$	3,199,975		$	4,034,581		$	4,089,029		$	4,504,706
Gross margin		1,186,158			1,275,749			1,395,687			2,506,293	(1)
Income (loss) before taxes		(103,641	)		(61,614	)		(87,081	)		956,709
Net income (loss)		(85,772	)		(72,474	)		(145,933	)		565,707
Basic income (loss) per share		(0.03	)		(0.02	)		(0.04	)		0.17
Diluted income (loss) per share		(0.03	)		(0.02	)		(0.04	)		0.14

(1) As part of the agreement with the Company’s subcontractor to secure the IP (see Note 6), upon payment of the $1,200,000, the outstanding amount due to the subcontractor in the amount of $790,535 was discharged and is recorded as a reduction of cost of goods sold.

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TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

19. Fair Value Measurements

FASB ASC 820, “Fair Value Measurements” defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and prescribes disclosures about fair value measurements.

As defined in ASC 820, 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 observability of those inputs. ASC 820 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 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 have variable rates that reflect currently available terms and conditions for similar debt.

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.

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TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

19. Fair Value Measurements (continued)

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of March 31, 2015 and March 31, 2014. As required by FASB ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

March 31, 2015	Level I		Level II		Level III		Total

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

March 31, 2014	Level I		Level II		Level III		Total

Warrant Liability	$	-	$	-	$	354,309	$	354,309
Total Liabilities	$	-	$	-	$	354,309	$	354,309

ASC 815, “Derivatives and Hedging” requires that we mark the value of our warrant to market and recognize the change in valuation in our statement of operations each reporting period. Determining the warrant liability to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant.

The following table provides a summary of the changes in fair value of our Level 3 financial liabilities for the years ended March 31, 2015 and 2014 as well as the unrealized gains or losses included in income.

	March 31, 2015		March 31, 2014
Fair value, at beginning of period	$	354,309	$	198,330

New issuances		-		41,110
Change in fair value		164,653		114,869

Fair value, at end of period	$	518,962	$	354,309

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 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 (as defined below) per share as of the date of the Warrant Put Notice, less $0.01, multiplied by the number of warrants or 2) the product of the current market price per share as of the date of the Warrant Put Notice, less the purchase price of the warrant or warrants, multiplied by the number of warrants, if this amount is higher. “Adjusted EBITDA” means EBITDA, multiplied by 5, plus cash and cash equivalents less unpaid debt divided by the number of shares outstanding on a fully diluted basis. As such, the values of the warrants at March 31, 2015 reflect the higher of these two options for each specific warrant.

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TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

19. 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		41.72	%		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 March 31, 2015

Date of Warrant		Expiration Date		Number of Warrants		Exercise Price		Fair Market Value Per Share		Put Option Value		Market Price Option		Remaining Life in Years		Warrant Liability
	09-10-2010		09-10-2019		136,920	$	6.70	$	6.42	$	90,367		NA		4.45	$	68,460
	09-10-2010		09-10-2015		10,416	$	6.70	$	6.42		NA		NA		0.45	$	7,002*
	07-26-2012		09-10-2019		50,000	$	3.35	$	6.42	$	30,000		153,500		4.45	$	153,500
	07-26-2012		09-10-2019		20,000	$	3.35	$	6.42	$	13,200		61,400		4.45	$	61,400
	11-20-2012		09-10-2019		20,000	$	3.56	$	6.42	$	13,200		57,200		4.45	$	57,200
	02-14-2013		09-10-2019		20,000	$	3.58	$	6.42	$	13,200		55,000		4.45	$	55,000
	07-12-2013		09-10-2019		20,000	$	3.33	$	6.42	$	13,200		61,800		4.45	$	61,800
	08-12-2013		09-10-2019		20,000	$	3.69	$	6.42	$	13,200		54,600		4.45	$	54,600

* Based on Black-Scholes Calculation

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TEL-INSTRUMENT ELECTRONICS CORP.

Notes To Consolidated Financial Statements (Continued)

20. Litigation

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.

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There are no reportable events under this item for the year ended March 31, 2015.

Item 9A. Controls and Procedures

a) Evaluation of disclosure controls and procedures.

As of March 31, 2015, management performed, with the participation of our Chief Executive Officer and Principal Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Based on the evaluation required by Rule 13a-15(b) under the Securities Exchange Act of 1934, our Chief Executive Officer and Principal Financial Officer concluded that as of March 31, 2015, such disclosure controls and procedures were not effective.

b) Management’s Annual Report on Internal Control over Financial Reporting

Tel’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with Generally Accepted Accounting Principles (“GAAP”).

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance of such reliability and may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has conducted, with the participation of our Chief Executive Officer and our Principal Accounting Officer, an assessment of the effectiveness of our internal control over financial reporting as of March 31, 2015. Management’s assessment of internal control over financial reporting framework was included in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the criteria set forth in Internal Control — Integrated Framework (2013), management concluded that our system of internal control over financial reporting was not effective as of March 31, 2015 due to the material weakness discussed below.

Our Chief Executive Officer and Principal Accounting Officer concluded that as of March 31, 2015 that the Company did not effectively monitor internal controls over inventory count procedures thus contributing to a material weakness in internal control. Our initial inventory observation procedures indicated that the counts were not performed correctly. The Company will implement additional testing and oversight controls to assure that the counting procedures are properly performed.

Notwithstanding the material weakness over inventory control procedures, management believes that the consolidated financial statements which are included in this Annual Report on Form 10-K fairly present, in all material respects, the financial position of the Company at March 31, 2015 and 2014 and their consolidated results of operations and cash flows for each of the two years in the period ended March 31, 2015 in conformity with U.S. generally accepted accounting principles.

Material Weakness and Related Remediation Initiatives

Through the efforts of management, external consultants, and our Audit Committee, we are currently in the process of executing a plan of action to remediate the material weakness identified above. We expect to complete this action plan during fiscal year 2016.

c) Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

Item 9B. Other Information

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

Name (age)	Position	Year First Elected a Director
Stephen A. Fletcher (1) (54)	Director	2011

George J. Leon (2) (3) (71)	Director	1986

Jeffrey C. O’Hara, CPA (1) (57)	Director; President since August 2007; Chief Executive Officer since December 2010; Chief Operating Officer since June 2006; Vice President since 2005	1998

Robert A. Rice (2) (3) (59)	Director	2004

Robert H. Walker (2) (3) (4) (79)	Director and Chairman of the Board since April 2011	1984

Michael W. Schirmer (57)	Effective May 12, 2014, the Board approved the appointment of Mr. Schirmer as the Company’s Chief Operating Officer.	-

(1)

Mr. Fletcher is the son of Mr. Harold K. Fletcher, the former Chairman of the Company who passed away in April 2011, and the brother-in-law of Jeffrey C. O’Hara, the Company’s Chief Executive Officer

(2)

Member of the Audit Committee

(3)

Member of the Compensation Committee

(4)

Mr. Walker was elected Chairman of the Board in April 2011.

Background of Directors and Officers

Stephen A. Fletcher is the Chief Executive Officer of Rand McNally, the country's most trusted source for maps, navigation and travel content (“Rand”). At Rand, Mr. Fletcher is driving growth of the Company's consumer and enterprise businesses through rapid expansion of core product lines and continued innovation of commercial transportation solutions ranging from advanced mileage and routing software to fleet management and electronic tracking. Prior to Rand, Mr. Fletcher served as a WW general manager at Kodak for more than six years and led a far-reaching organization with operations around the globe including research and development in the US, Germany and Singapore and manufacturing in the US, China and Mexico. Before Kodak, he was President and COO of Konica Minolta Printing Solutions in Ramsey, New Jersey where he quadrupled the business over six years. Mr. Fletcher was also President and CEO of the Tally Printer Corporation in Seattle, Washington and held marketing management positions at Apple Computer and Hewlett Packard.

George J. Leon has served as a member of the Board since 1986. Mr. Leon has substantial experience in finance, and as an investment manager. He is and has been an Investment Manager and beneficiary of the George Leon Family Trust for more than five (5) years.

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Item 10. Directors, Executive Officers and Corporate Governance (continued)

Background of Directors and Officers (continued)

Jeffrey C. O’Hara, CPA has served as a member of the Board since 1998, and was made a Vice President in 2005, COO in 2006, and has been President since 2007. Mr. O’Hara was appointed Chief Executive Officer of the Company in December 2010. Prior to joining the Company, Mr. O’Hara held various management positions at General Motors, and other mid-sized private companies. Mr. O’Hara has extensive financial, marketing and operations experience and he has held executive positions as both a Chief Financial Officer and President. Mr. O’Hara has also served on several boards of directors of other companies.

Robert H. Walker has served as member of our Board since 1984 and was elected Chairman of the Board in April 2011. Mr. Walker, prior to his retirement in 1998, had served as Executive Vice President of Robotic Vision Systems, Inc., which designs, manufactures, markets and sells automated two-dimensional and three-dimensional machine vision-based products and systems for inspection, measurement and identification. Mr. Walker also served as Chief Financial Officer of that company, whose shares were listed on the NASDAQ National Market. Mr. Walker qualifies as the Company’s “Audit Committee Financial Expert” as defined in the regulations promulgated under the Securities Exchange Act.

Robert A. Rice has served as a member of the Board since 2004. Mr. Rice is, and has been for more than 5 years, President and Owner of Spurwink Cordage, Inc. a textile manufacturing company located in New England, and is experienced in securities matters and business management.

Michael W. Schirmer has extensive experience in supply chain management, electronics manufacturing, and strategic planning and product commercialization. Mr. Schirmer has over 20 years of experience in electronics industry senior management. Mr. Schirmer served on a contract basis with the Company from November 2013 until appointed COO of the Company effective May 12, 2014. Mr. Schirmer directs the Company’s manufacturing and engineering operations. Prior to joining the Company, Mr. Schirmer served as Director of Manufacturing Operations for Eastman Kodak in Rochester, NY from 2004 to December 2012, and as a Manufacturing Consultant from January 2013 until November 2013.

Family Relationships

As described above, Stephen Fletcher is the son of the Company’s former Chairman and the brother-in-law of the Company Chief Executive Officer, Jeffrey O’Hara.

Audit Committee

The Board established a separately designated standing Audit Committee in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The Audit Committee is comprised of Messrs. Walker (chairman), Leon, and Rice. Messrs. Walker, Leon, and Rice are independent, as that term is defined under the Securities Exchange Act of 1934, and Mr. Walker is a financial expert as defined in that act. (See “Background of Directors” above.)

During fiscal 2015, all three members of the Committee attended all four (4) of the Audit Committee meetings. In the opinion of the Board, and as defined under NYSE MKT Rules, Messrs. Walker, Leon and Rice are independent of management and free of any relationship which might interfere with their exercise of independent judgment as members of this committee.

Compensation Committee

The Compensation Committee, consisting of George J. Leon, Chairman, Robert A. Rice and Robert H. Walker, is responsible for (1) reviewing and evaluating employee stock and other compensation programs and plans, (2) determining the compensation of the Chief Executive Officer, and (3) approving compensation arrangements, including keyman incentive compensation and stock option grants, for management and other employees. The Board created the Compensation Committee by resolution giving it the foregoing authority.

The Compensation Committee met once during the 2015 fiscal year; Messrs. Leon, Rice and Walker attended the meeting. Messrs. Leon, Rice and Walker are independent, as defined in the NYSE MKT Rules. See “Executive Compensation” below for a discussion of the Committee’s processes and procedures for reviewing and determining compensation.

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Item 10. Directors, Executive Officers and Corporate Governance (continued)

Section 16(a) Beneficial Ownership Reporting Compliance

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.

As of March 31, 2015, the end of the last fiscal year, the Company believes that all officers, directors and 10% beneficial owners, known to the Company, had timely filed required forms reporting beneficial ownership of Company securities, based solely on review of the Filings, and information furnished to the Company.

Code of Ethics

The Board has adopted a written Code of Ethics that applies to all of the Company’s officers and employees, including the Chief Executive Officer and the Principal Accounting Officer. A copy of the Code of Ethics has been previously filed. A copy of the Code of Ethics is available to anyone requesting a copy without cost by writing to the Company, attention Joseph P. Macaluso.

Shareholder Recommendations

There have been no material changes to the Company’s procedures by which shareholders may recommend nominees to the Board of Directors since the Company’s last Annual Report on Form 10-K.

Legal Proceedings

There are no material proceedings to which any director or officer, or any associate of any such director or officer, is a party that is adverse to our Company or any of our subsidiaries or has a material interest adverse to our Company or any of our subsidiaries. No director or executive officer has been a director or executive officer of any business which has filed a bankruptcy petition or had a bankruptcy petition filed against it during the past ten years. No director or executive officer has been convicted of a criminal offense or is the subject of a pending criminal proceeding during the past ten years. No director or executive officer has been the subject of any order, judgment or decree of any court permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities during the past ten years. No director or officer has been found by a court to have violated a federal or state securities or commodities law during the past ten years.

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Item 11. Executive Compensation

The following table presents information regarding compensation of our principal executive officer, and the two most highly compensated executive officers other than the principal executive officer for services rendered during fiscal years 2015 and 2014.

Summary Compensation Table

Name and Principal Position	Fiscal Year	Salary ($) (1)		Incentive ($) (2)		Option Awards ($) (3)		All Other Compensation ($) (4)		Total ($)

Jeffrey C. O’Hara, CEO President	2015		160,000		-		-		19,877		179,877
	2014		160,000		21,500		-		21,506		203,006

Michael Schirmer, Vice President of Operations (5)	2015		140,000		-		21,973		9,509		171,482
	2014		-		-		-		-		-

Joseph P. Macaluso PAO	2015		137,500		-		-		10,862		148,362
	2014		126,042		5,500		-		9,539		141,081

(1)	The amounts shown in this column represent the dollar value of base cash salary earned by each named executive officer (“NEO”).

(2)	No incentive compensation was made to the NEO’s in 2015, and therefore no amounts are shown.

(3)	Amounts in this column represent the fair value required by ASC Topic 718 to be included in our financial statements for all options granted during that year (see Note 16 to Notes to the Consolidated Financial Statements).

(4)	The amounts shown in this column represent amounts for medical and life insurance as well as the Company’s match in the 401(k) Plan.

(5)

Mr. Michael Schirmer was appointed COO of the Company effective May 12, 2014 with a base salary of $160,000. Mr. Schirmer also received incentive stock options to purchase 10,000 shares of Common Stock at an exercise price of $5.14 per share. In the event the Company is ever sold, Mr. Schirmer will receive nine (9) months of salary continuation, provided he does not receive a comparable position at the new company. Mr. Schirmer was also granted an incentive bonus of $10,750 for 2014.

Grants of Plan-based Awards Table for Fiscal Year

The following table sets forth information on stock options granted during or for the 2015 fiscal year to our named executive officers:

Name

Approval Date

Grant Date

All Other Option Awards:

Number of Shares of Stock (#)

Exercise or Base Price of

Option Awards ($/Share)

Grant date Fair Value of

Option Awards ($)

Michael Schirmer

05/12/14

10,000

5.14

21,973

The exercise price of the options granted was the fair market value at the date of grant of the shares underlying such options. The estimated fair value of the shares underlying such options was determined utilizing the methodology described in Note 16 of the notes to the consolidated financial statements.

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Item 11. Executive Compensation (continued)

Outstanding Equity Awards at Fiscal Year End

The following table sets forth the outstanding stock option grants held by named executive officers at the end of the 2015 fiscal year. The option exercise price set forth in the table is based on the closing market price on the date of grant.

Name	Number of Securities Underlying Unexercised Options (#) Exercisable		Number of Securities Underlying Unexercised Options (#) Unexercisable (1)		Option Exercise Price ($)		Option Expiration Date

Joseph P. Macaluso		2,400		1,600	$	6.59	12/14/16

Jeffrey C. O’Hara		-		15,000	$	7.62	12/15/15

Michael Schirmer		-		10,000	$	4.22	11/01/18

(1) Options are exercisable, on a cumulative basis, 20% at or after each of the first, second, and third anniversary of the grant and 40% after the fourth year anniversary.

Employment Contracts and Termination of Employment and Change-in-Control

Except for Mr. Schirmer’s agreement (disclosed above), there are no employment contracts, compensatory plans or arrangements, including payments to be received from the Company with respect to any executive officer of Tel which would in any way result in payments to any such person because of his or her resignation, retirement or other termination of employment with the Company, any change in control of the Company or a change in the person's responsibilities following a change in control of the Company.

Options Exercised and Stock Vested During Fiscal Year 2015

No shares were acquired upon exercising options awards by our NEO’s during fiscal year 2015.

Options granted to NEOs are consistent with the terms of options granted to other employees pursuant to the Employee Stock Option Plans (see Note 15 of the Notes to the Consolidated Financial Statements). Options granted to NEOs may be tax sheltered to the grantee, and their value constitutes a charge to the Company (see Notes 2 and 16 to the Consolidated Financial Statements).

Incentive Plan

The Company has a key man incentive compensation program. Each year the Compensation Committee determines a percentage of operating profits to be distributed among senior employees, including NEOs. The percentage determined is based on the general performance of the Company, and the amount of operating profits available for shareholders and for reinvestment in the business. This element of compensation provides an incentive for short-term performance.

The percentage of operating profits so determined is then distributed to senior employees, including NEOs and to a category entitled "incentive", based on (a) the amount of the employee's base salary, (b) his contribution to the Company, (c) the results of that contribution, (d) an estimated amount of his "special effort" on behalf of the Company, (e) his technical expertise, leadership, and management skills, and (f) the level of the overall compensation paid employees performing similar work in competitive companies. For the year ended March 31, 2014, the CEO will receive $20,000, COO will receive $10,750, and the PAO will receive $5,000. No incentive awards were made to the NEOs for the year ended March 31, 2015.

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Item 11. Executive Compensation (continued)

Other Benefits

The Company sponsors the Tel-Instrument Electronics Corp 401(k) Plan (the “401k Plan”), a tax qualified Code Section 401(k) retirement savings plan, for the benefit of its employees, including its NEOs. The 401k Plan encourages savings for retirement by enabling participants to make contributions on a pre-tax basis and to defer taxation on earnings on funds contributed to the 401k Plan. The Company makes matching contributions to the Plan. All NEOs can make contributions to the 401k Plan. The NEOs also participate in group health and life benefits generally on the same terms and conditions that apply to other employees.

Director Compensation

Directors who are not employees or officers of the Company receive $1,250 in cash and options, at the then market price, to purchase 1,000 shares of Common Stock for attendance at each in-person meeting and $625 in cash and options to purchase 500 shares of Common Stock for attendance at each formal telephonic meeting of the Board or of a standing committee. Non-employee directors may elect annually to accept the foregoing compensation or waive the stock option element and receive the $2,500 in cash for attendance at the in-person meeting and $1,250 in cash for each formal telephone meeting. During fiscal year 2015 non-employee directors earned the following compensation pursuant to this plan.

Name	Cash Compensation		Option Awards ($)(1)(2)		Total $
George J. Leon	$	12,500	$	-0-	$	12,500
Robert A. Rice	$	12,500	$	-0-	$	12,500
Robert H. Walker (3)	$	12,500	$	-0-	$	12,500
Stephen A. Fletcher	$	6,250	$	-0-	$	6,250

(1)	Amounts in this column, if any, represent the fair value required by ASC 718 to be included in our financial statements for all options granted during fiscal year 2015.

(2)	The numbers of currently exercisable options are set forth in the footnotes to Item 12 below.

(3)	Mr. Walker also receives a monthly stipend of $2,400 for his additional responsibility as Chairman of the Board.

Compensation Policy

The Company does not believe that its compensation policies are reasonably likely to increase corporate risk or have a material adverse effect on the Company.

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth certain information known to the Company with respect to the beneficial ownership as of June 23, 2015, by (i) all persons who are beneficial owners of five percent (5%) or more of the Company’s Common Stock, (ii) each director and nominee, (iii) the executive officers, and (iv) all current directors and executive officers as a group.

Name and Address	Number of Shares Beneficially Owned			Percentage of Class (1)

Named Directors and Officers

Stephen A. Fletcher, Director		-0-	(2)		0	%
7378 E. Main Street
Lima, NY 14485

George J. Leon, Director		460,171	(3)		14.1	%
168 Redpath Avenue
Toronto, Ontario, Canada M4P 2K6

Jeffrey C. O’Hara, Director		252,156	(4)		7.7	%
853 Turnbridge Circle
Naperville, IL 60540

Robert A. Rice, Director		118,404	(5)		3.6	%
5 Roundabout Lane
Cape Elizabeth, ME 04107

Robert H. Walker, Director		80,053	(6)		2.5	%
27 Vantage Court
Port Jefferson, NY 11777

Michael Schirmer		12,000	(7)		0.4	%
14 Turnberry Lane
Pittsford, NY 14534

Joseph P. Macaluso, PAO		25,113	(8)		0.8	%
167 Tennis Court
Wall Township, NJ 07719

All officers and directors as a group (6 persons)		948,997	(9)		28.8	%

Mrs. Sadie Fletcher		656,907	(10)		20.2	%
657 Downing Lane
Williamsville, NY 14221

Vincent J. Dowling, Jr.		285,400	(11)		8.8	%
54 Ledyard Road
West Hartford, CT 06117

All officers, directors and 5% holders as a group (8 persons)		1,891,304			45.0	%

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters (continued)

(1)	The class includes 3,256,887 shares outstanding in the calculation of the percentage of shares owned by a party. The Common Stock deemed to be owned by the named party, includes stock which is not outstanding but subject to currently exercisable options held by the individual named in accordance with Rule 13d-3(d)c) of the Exchange Act. The foregoing information is based on reports made by the named individuals.
(2)	Mr. Stephen A. Fletcher is the son of Mr. Harold K. Fletcher, former Chief Executive Officer and director of the Company. Mr. Stephen A. Fletcher is the son of Mrs. Sadie Fletcher who beneficially owns 656,907 shares by virtue of the Estate of Harold K. Fletcher. Mr. Fletcher disclaims beneficial ownership of the shares owned by the Estate of Harold K. Fletcher.
(3)	Includes 423,621 shares owned by the George Leon Family Trust, of which Mr. Leon is a beneficiary, and 4,500 shares subject to currently exercisable stock options. Mr. Leon acts as manager of the trust assets pursuant to an informal family, oral arrangement, and disclaims beneficial ownership of the shares owned by the trust.
(4)	Includes 15,000 shares subject to currently exercisable stock options owned by Mr. O’Hara.
(5)	Includes 5,000 shares subject to currently exercisable stock options owned by Mr. Rice.
(6)	Includes 5,000 shares subject to currently exercisable stock options owned by Mr. Walker.
(7)	Includes 12,000 shares subject to currently exercisable stock options owned by Mr. Schirmer.
(8)	Includes 2,400 shares subject to currently exercisable stock options owned by Mr. Macaluso.
(9)	Includes 43,900 shares subject to currently exercisable options held by all executive officers and directors of the Company (including those individually named above).
(10)	Represents 656,907 shares owned by the Estate of Harold K. Fletcher, former Chief Executive Officer and director of the Company. Mrs. Fletcher is the mother of Stephen A. Fletcher, a director of the Company.
(11)	Based on Schedule 13G filed with the SEC on February 11, 2015 and furnished to the Company.

Equity Compensation Plan Information

In March 2006, the Board adopted the 2006 Stock Option Plan (the “Plan”) which reserved for issuance options to purchase up to 250,000 shares of its Common Stock. The stockholders approved the Plan at the December 2006 annual meeting. The Plan, which has a term of ten years from the date of adoption, is administered by the Board or by a committee appointed by the Board. The selection of participants, allotment of shares, and other conditions related to the grant of options, to the extent not set forth in the Plan, are determined by the Board. Options granted under the Plan are exercisable up to a period of 5 years from the date of grant at an exercise price which is not less than the fair market value of the Common Stock at the date of grant, except as to a stockholder owning 10% or more of the outstanding Common Stock of the Company, as to whom the exercise price must not be less than 110% of the fair market value of the Common Stock at the date of grant. Options are exercisable, on a cumulative basis, 20% at or after each of the first, second, and third anniversary of the grant and 40% after the fourth year anniversary.

Additionally, at March 31, 2015 the Company had an individual employment agreement with one individual which provides for the grant of 10,000 options to purchase Common Stock with an exercise price of $5.14 per share. This employee contract has been approved by the Board, and was included as consideration for employment, but was not individually approved by shareholders. Since these options were granted under the Plan, they are included in the 71,500 shares in the second column of the following schedule.

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters (continued)

Equity Compensation Plan Information (continued)

The following table provides information as of March 31, 2015 regarding compensation plans under which equity securities of the Company are authorized for issuance.

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

* See discussion above and Note 16 of Notes to the Consolidated Financial Statements.

Item 13. Certain Relationships and Related Transactions and Director Independence

On February 22, 2010 the Company borrowed $250,000 in exchange for issuing subordinated notes to two executive officers and directors in the amount of $125,000 (individually, the “Subordinated Note” and collectively, the “Subordinated Notes”).. Each officer and director also received 5,000 options to purchase Common Stock at an exercise price of $8.00 per share, the market price at the date of grant. In September 2010, these officers/directors entered into an Intercreditor and Subordination agreement which subordinated their loans to the BCA Loan Agreement (see Note 10 to Notes to Consolidated Financial Statements). The notes were to become due April 1, 2011 with an interest rate of 1% per month, payable on a monthly basis within 14 days of the end of each month. The Intercreditor and Subordination Agreement amongst the parties precludes the payment of principal or interest under these subordinated notes unless and until the Senior Obligations have been paid in full or without the express written consent of Senior Lender. The holders of Subordinated Notes agreed that the Company’s failure to pay the monthly interest amounts pursuant to the terms of the February 22, 2010 Subordinated Notes will not constitute an event of default on such notes if the Company is precluded from making these payments pursuant to the limitations included in the loan agreement with BCA. During fiscal year 2012, the Company’s Chairman, at the time, passed away. His surviving spouse has retained this Subordinated Note and continues to acknowledge the terms. Total interest expense was $47,312 and $30,000 for the years ended March 31, 2015 and 2014, respectively.

In June 2013, a related party received a note payable from the Company in exchange for $100,000 which the Company used for working capital needs. On July 24, 2013, the related party converted its note payable in the amount of $100,000 into 31,348 shares of Common Stock at a conversion price of $3.187 per share. The price was approved by the Board and was the same price as the 200,000 shares issued to the Private Investor upon the conversion of debt on May 31, 2013. The fair value of these shares at the date of conversion was $3.86 per share. As such, in July 2013, the Company recorded additional interest expense of $21,003.

Director Independence

The Common Stock is currently quoted on the NYSE - MKT. On an annual basis, each director and executive officer will be obligated to disclose any transactions with the Company in which a director or executive officer, or any member of his or her immediate family, have a direct or indirect material interest in accordance with Item 407(a) of Regulation S-K. Following completion of these disclosures, the Board will make an annual determination as to the independence of each director pursuant to the Rules of the NYSE MKT.

As of June 18, 2015, the Board determined that the following directors are independent under these standards:

Robert Walker, George Leon and Robert Rice.

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Item 14. Principal Accounting Fees and Services

For the fiscal years ended March 31, 2015 and 2014, professional services were performed by BDO USA, LLP, the Company’s independent registered public accountant. Fees for those years were as follows:

	2015		2014

Audit Fees	$	120,350	$	118,000
Audit-Related Fees		-		-
Total Audit and Audit-Related Fees		120,350		118,000
Tax Fees		-		-
All Other Fees		-		-

Total	$	120,350	$	118,000

Audit Fees. This category includes the audit of the Company’s consolidated financial statements and reviews of the financial statements included in the Company’s Quarterly Reports on Form 10-Q. It also includes advice on accounting matters that arose during, or as a result of, the audit or the review of interim financial statements, and services which are normally provided in connection with regulatory filings, or in an auditing engagement.

Audit Related Fees, tax and other fees. No fees under these categories were paid to BDO USA, LLP in 2015 and 2014.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditor

The Audit Committee has established a policy which requires it to pre-approve all audit and permissible non-audit services, including audit-related and tax services, if any, to be provided by the independent auditor. Pre-approval is generally provided for up to one year and is detailed as to the particular service or category of service to be performed, and is subject to a detailed budget. The auditor and management are required to report periodically to the Audit Committee regarding the extent of services performed and the amount of fees paid to date, in accordance with the pre-approval.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

a.) The following documents are filed as a part of this report:

	Pages
Financial Statements:

Report of Independent Registered Public Accounting Firm	19

Consolidated Balance Sheets - March 31, 2015 and 2014	20

Consolidated Statements of Operations - Years Ended March 31, 2015 and 2014	21

Consolidated Statements of Changes in Stockholders' Equity - Years Ended March 31, 2015 and 2014	22

Consolidated Statements of Cash Flows - Years Ended March 31, 2015 and 2014	23

Notes to Consolidated Financial Statements	24

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Item 15. Exhibits and Financial Statement Schedules (continued)

c.) Exhibits identified in parentheses below on file with the Securities and Exchange Commission, are incorporated herein by reference as exhibits hereto.

*	(3.1)	Tel-Instrument Electronics Corp's Certificate of Incorporation, as amended.
*	(3.2)	Tel-Instrument Electronics Corp's By-Laws, as amended.
*	(3.3)	Tel-Instrument Electronics Corp's Restated Certificate of Incorporation dated November 8, 1996.
*	(4.1)	Specimen of Tel-Instrument Electronics Corp's Common Stock Certificate.
*	(10.2)	10% convertible subordinated note between Registrant and Harold K. Fletcher.
*	(10.3)	Purchase agreement between Registrant and Innerspace Technology
*	(10.4)	Agreement between Registrant and Semaphore Capital Advisors, LLC
*	(10.5)	2006 Stock Option Plan
*	(10.6)	Subordinated Note Between Registrant and Harold K. Fletcher
*	(10.7)	Subordinated Note Between Registrant and Jeffrey C. O’Hara
*	(10.8)	Shareholder Purchase Agreement between the Registrant and Harold K. Fletcher
*	(10.9)	Shareholder Purchase Agreement between the Registrant and Jeffrey C. O’Hara
*	(10.10)	Shareholder Purchase Agreement between the Registrant and George Leon
*	(10.11)	Loan Agreement with BCA Mezzanine Fund, LLP and Amendments 1-3
*	(10.12)	Intercreditor and Subordination Agreement among Harold. K. Fletcher, Jeffrey C. O’Hara and BCA Mezzanine Fund, LLP.
*	(10.13)	Subscription Agreement between Registrant and Subscriber, dated November 8, 2012
*	(10.14)	Loan Agreement with Bank of America
	(23.1)	Consent of Independent Registered Public Accounting Firm
	(31.1)	Certification by CEO pursuant to Rule 15d-14 under the Securities Exchange Act.
	(31.2)	Certification by PAO pursuant to Rule 15d-14 under the Securities Exchange Act.
	(32.1)	Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	(32.2)	Certification by PAO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	101.INS	XBRL Instance Document
	101.SCH	Taxonomy Extension Schema Document
	101.CAL	Taxonomy Extension Calculation Linkbase Document
	101.DEF	Taxonomy Extension Definition Linkbase Document
	101.LAB	Taxonomy Extension Label Linkbase Document
	101.PRE	Taxonomy Extension Presentation Linkbase Document

Incorporated by reference to previously filed documents.

The Company will furnish to a stockholder, upon request, any exhibit at cost.

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Signatures

Pursuant to the requirements of Section 13 or 15(d) 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
	(Registrant)

Dated: June 25, 2015	By:	/s/ Jeffrey C. O’Hara
		Jeffrey C. O’Hara
		CEO and Director
		(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated and by signature hereto.

Signature	Title	Date

/s/ Jeffrey C. O’Hara	CEO, President, and Director	June 25, 2015
Jeffrey C. O’Hara

/s/ Joseph P. Macaluso	Principal Accounting Officer	June 25, 2015
Joseph P. Macaluso

/s/ Stephen A. Fletcher	Director	June 25, 2015
Stephen A. Fletcher

/s/ George J. Leon	Director	June 25, 2015
George J. Leon

/s/ Robert A. Rice	Director	June 25, 2015
Robert A. Rice

/s/ Robert H. Walker	Chairman of the Board, Director	June 25, 2015
Robert H. Walker