UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


________________________________________




FORM 10-Q





QUARTERLY REPORT PURSUANT TO SECTION 13 OR


15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended June 30, 2010





Commission File No. 33-18978








TEL-INSTRUMENT ELECTRONICS CORP.


(Exact name of the Registrant as specified in Charter)





New Jersey                                                                                                                                                                               22-1441806


(State of Incorporation)                                                                                                                                                       (I.R.S. Employer ID Number)





728 Garden Street, Carlstadt, New Jersey                                                                                                                                         07072


(Address of Principal Executive Offices)                                                                                                                                        (Zip Code)





Registrant’s Telephone No. including Area Code: 201-933-1600





Indicateby 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.


YesXNo___





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




Large accelerated filer        Accelerated filer      Non-accelerated filer     Smaller reporting company X





(Do not check if a smaller reporting company)





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       No ___





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




Indicate the number of shares outstanding of the issuer's common stock, as of the latest practical date:


2,624,323 shares of Common stock, $.10 par value as of August 20, 2010.









TEL-INSTRUMENT ELECTRONICS CORPORATION


TABLE OF CONTENTS











PAGE





Part I – Financial Information





Item 1.           Condensed Consolidated Financial Statements (Unaudited):






Condensed Consolidated Balance Sheets


June 30, 2010 and March 31, 2010                                                                                                                                    3





Condensed Consolidated Statements of Operations -


Three Months Ended June 30, 2010 and 2009                                                                                                                4





Condensed Consolidated Statements of Cash Flows -


Three Months Ended June 30, 2010 and 2009 5




Notes to Condensed Consolidated Financial Statements                                                                                           6-12


Item 2.           Management’s Discussion and Analysis of the Results of


Operations and Financial Condition                                                                                                                               13-18





Item 4.           Controls and Procedures                                                                                                                                                    19





Part II – Other Information





Item 1.           Legal Proceedings                                                                                                                                                                19





Item 2.           Unregistered sales of Equity Securities and Use of Proceeds                                                                                      19





Item 6.           Exhibits                                                                                                                                                                                   19








Signatures                                                                                                                                                                               20





Certifications












Item 1 - Financial Statements




TEL-INSTRUMENT ELECTRONICS CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETSJune 30, 2010


March 31, 2010(unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
154,514


$
173,048Accounts receivable, net


842,785



939,143Unbilled government receivables


1,491,111



1,491,111Inventories, net


2,361,924



2,242,227Prepaid expenses and other


90,324



87,535Deferred income tax asset


1,420,728



1,234,788Total current assets


6,361,386



6,167,852Equipment and leasehold improvements, net


380,622



336,131Deferred income tax asset – non-current


1,176,223



1,176,223Other assets


74,409



54,131Total assets

$
7,992,640


$
7,734,337LIABILITIES & STOCKHOLDERS’ EQUITYCurrent liabilities:Line of credit


750,000



600,000Subordinated notes payable-related parties, net of debt discount


232,692



226,923Accounts payable


1,133,071



1,145,572Progress Billings


520,106



69,412Deferred revenues


30,155



50,279Accrued payroll, vacation pay and payroll taxes


486,058



420,572Accrued expenses


1,202,411



1,335,506Total current liabilities


4,354,493



3,848,264Deferred revenues


25,703



27,957Total liabilities


4,380,196



3,876,221CommitmentsStockholders' equity:Common stock, par value $.10 per share, 2,616,861 and

2,615,361 issued and outstanding as of June 30,

2010 and March 31, 2010, respectively


261,686



261,536Additional paid-in capital


5,510,681



5,481,091Accumulated deficit


(2,159,923
)


(1,884,511
)Total stockholders' equity


3,612,444



3,858,116Total liabilities and stockholders' equity

$
7,992,640


$
7,734,337See accompanying notes to condensed consolidated financial

Statements















TEL-INSTRUMENT ELECTRONICS CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)





Three Months EndedJune 30, 2010


June 30, 2009Net sales

$
2,455,280


$
2,342,199Cost of sales


1,372,900



1,263,737Gross margin


1,082,380



1,078,462Operating expenses:Selling, general and administrative


758,044



807,397Engineering, research and development


757,346



944,612Total operating expenses


1,515,390



1,752,009Loss from operations


(433,010
)


(673,547
)Other income (expense):Amortization of debt discount


(5,769
)


-Interest income


47



370Interest expense


(23,505
)


(7,472
)Gain on sales of capital asset


3,600



-Loss before income taxes


(458,637
)


(680,649
)Income tax benefit


(183,225
)


(271,918
)Net loss

$
(275,412
)

$
(408,731
)Net loss:Basic and diluted loss per common share

$
(0.11
)

$
(0.16
)Weighted average shares outstanding:Basic and diluted


2,615,625



2,478,761See accompanying notes to condensed consolidated financial statements















TEL-INSTRUMENT ELECTRONICS CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)





Three Months endedJune 30, 2010
June 30, 2009Cash flows from operating activities:Net loss

$
(275,412
)

$
(408,731
)Adjustments to reconcile net loss to net

cash used in operating activities:Deferred income taxes


(185,940
)


(272,220
)Depreciation


42,310



46,144Gain on sale of asset


(3,600
)Amortization of debt discount


5,769



-Non-cash stock-based compensation


23,665



17,705Changes in assets and liabilities:Decrease in accounts receivable


96,358



189,732Increase in unbilled government receivables


-



(149,733
)(Increase) decrease in inventories


(119,697
)


197,396Increase in prepaid expenses & other


(2,789
)


(7,980
)Increase in other assets


(20,278
)


(1,045
)(Decrease) increase in accounts payable


(12,501
)


413,836Increase (decrease) in accrued payroll, vacation pay

and payroll taxes


65,486



(30,328
)Decrease in deferred revenues


(22,378
)


(3,751
)Increase in progress billings


450,694



-Decrease in accrued expenses


(133,095
)


(265,253
)Net cash used in operating activities


(91,408
)


(274,228
)Cash flows from investing activities:Proceeds from the sale of capital asset


3,600



-Purchases of equipment


(86,801
)


(11,313
)Net cash used in investing activities


(83,201
)


(11,313
)Cash flows from financing activities:Proceeds from the exercise of stock options


6,075



-Proceeds from borrowings from line of credit


150,000



150,000Net cash provided by financing activities


156,075



150,000Net decrease in cash and cash equivalents


(18,534
)


(135,541
)Cash and cash equivalents at beginning of period


173,048



601,887Cash and cash equivalents at end of period

$
154,514


$
466,346Taxes paid

$
-


$
-Interest paid

$
9,269


$
4,391


See accompanying notes to condensed consolidated financial statements

















TEL-INSTRUMENT ELECTRONICS CORP.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





Note 1                   Basis of Presentation





In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Tel-Instrument Electronics Corp. as of June 30, 2010, the results of operations for the three months ended June 30, 2010 and June 30, 2009, and statements of cash flows for the three months ended June 30, 2010 and June 30, 2009.  These results are not necessarily indicative of the results to be expected for the full year.





The financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include disclosures normally made in an Annual Report on Form 10-K.  The March 31, 2010 balance sheet included herein was derived from the audited financial statements included in the Company’s annual report on Form 10-K as of that date. Accordingly, the financial statements included herein should be reviewed in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010.








Note 2
Revenue Recognition – Percentage-of-Completion – ITATS (“Intermediate Level TACAN Test Set”) (AN/ARM-206)





Due to the unique nature of the ITATS program, wherein a significant portion of this contract will not be delivered for over a year, revenues under this contract are recognized on a percentage-of-completion basis, which recognizes sales and profit as they are earned, rather than at the time of shipment.  This contract is nearing completion and a major portion of the revenues associated with this program have been recognized. Revenues and profits are estimated using the cost-to-cost method of accounting where revenues are recognized and profits recorded based upon the ratio of costs incurred to estimate of total costs at completion. The ratio of costs incurred to date to the estimate of total costs at completion is applied to the contract value to determine the revenues and profits. When adjustments in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized by recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods. The Company also receives progress billings on this program, which is a funding mechanism by the government to assist contractors on long-term contracts prior to delivery. (See Critical Accounting Policies – Revenue Recognition). These progress payments are applied to Unbilled Government Receivables resulting from revenues recognized under percentage-of-completion accounting.








Note 3                      Accounts Receivable, net





The following table sets forth the components of accounts receivable:




June 30, 2010


March 31, 2010Government


$
531,209


$
735,184Commercial



351,495



243,878Less: Allowance for doubtful accounts



(39,919
)


(39,919
)$
842,785


$
939,143











TEL-INSTRUMENT ELECTRONICS CORP.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


(Unaudited)








Note 4            Inventories, net








Inventories consist of:




June 30, 2010


March 31, 2010Purchased parts


$
1,399,441


$
1,432,782Work-in-process



1,326,933



1,142,851Finished goods



60,550



76,594Less: Inventory reserve



(425,000
)


(410,000
)$
2,361,924


$
2,242,227





Note 5                      Earnings (Loss) Per Share





Financial Accounting Standards Board (“FASB”) ASC 260 (Prior authoritative Financial Accounting SFAS No. 128, "Earnings Per Share") requires presentation of basic earnings per share ("basic EPS") and diluted earnings per share ("diluted EPS").





The Company’s basic income (loss) per common share is based on net income (loss) for the relevant period, divided by the weighted average number of common shares outstanding during the period.  Diluted income (loss) per common share is based on net income (loss), divided by the weighted average number of common shares outstanding during the period, including common share equivalents, such as outstanding stock options. Diluted loss per share for the periods ended June 30, 2010 and 2009 do not include common stock equivalents, as these stock equivalents would be anti-dilutive.




Three Months

Ended


Three Months EndedJune 30, 2010


June 30, 2009Basic net loss per share computation:Net loss attributable to common stockholders

$
(275,412
)

$
(408,731
)Weighted-average common shares outstanding


2,615,625



2,478,761Basic net  loss per share attributable to common stockholders

$
(0.11
)

$
(0.16
)Diluted net loss per share computationNet loss attributable to common stockholders

$
(275,412
)

$
(408,731
)Weighted-average common shares outstanding


2,615,625



2,478,761Incremental shares attributable to the assumed exercise of

outstanding stock options


-



-Total adjusted weighted-average shares


2,615,625



2,478,761Diluted net loss per share attributable to common stockholders

$
(0.11
)

$
(0.16
)










TEL-INSTRUMENT ELECTRONICS CORP.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


(Unaudited)








Note 6                       Stock Options





The Company adopted the FASB ASC 718, utilizing the modified prospective method. FASB ASC 718 requires the measurement of stock-based compensation based on the fair value of the award on the date of grant.. Under the modified prospective method, the provisions of ASC 718 apply to all awards granted after the date of adoption. The Company recognizes compensation cost on awards on a straight-line basis over the vesting period, typically four years. As a result of adopting ASC 718, operations was charged $23,665 and $17,705 for three months ended June 30, 2010 and 2009, respectively. The Company estimates the fair value of each option using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield of 0.0%, risk-free interest rate of 1.98% to 2.31%, volatility at 40.74% to 40.76%, and an expected life of 5 years for the three months ended June 30, 2010;  expected dividend yield of 0.0%, risk-free interest rate of 2.09% to 2.74%, volatility at 42.09% to 43.06%, and an expected life of 5 years for the three months ended June 30, 2009.  The Company estimates forfeiture rate based on historical data. Based on an analysis of historical information, the Company has applied a forfeiture rate of 8%.







Note 7                      Segment Information





In accordance with FASB ASC 280, “Disclosures about Segments of an Enterprise and related information”, the Company determined it has three reportable segments - avionics government, avionics commercial and marine systems.  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. The marine systems segment consists of sales to hydrographic, oceanographic, researchers, engineers, geophysicists, and surveyors, which terminated operations in fiscal year 2010.





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.


















TEL-INSTRUMENT ELECTRONICS CORP.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


(Unaudited)





Note 7                      Segment Information (continued)





The table below presents information about reportable segments within the avionics business for the periods ending June 30, 2010 and 2009:





Three Months Ended

June 30, 2010
Avionics

Gov’t
Avionics

Comm’l.
Avionics

Total
Marine

Systems
Corporate

Items
TotalNet sales
$  1,848,473
$  606,807
$ 2,455,280
-
-
$ 2,455,280Cost of Sales
_940,672
_432,228
1,372,900
-
-
1,372,900Gross Margin
907,801
174,579
1,082,380
-
-
1,082,380Engineering, research, and

Development


757,346
-
-
757,346Selling, general, and admin.


348,095
-
$    409,949
758,044Gain on sale of asset


-
-
(3,600)
(3,600)Interest (income) expense,net




29,227
29,227Total expenses


1,105,441
-
435,576
1,541,017Income (loss) before income

Taxes


$     (23,061)
-
$  (435,576)
$  (458,637)





Three Months Ended

June 30, 2009
Avionics

Gov’t
Avionics

Comm’l.
Avionics

Total
Marine

Systems
Corporate

Items
TotalNet sales
$  1,891,240
$  434,515
$ 2,325,755
$ 16,444
-
$ 2,342,199Cost of Sales
_974,225
_283,441
1,257,666
6,071
-
1,263,737Gross Margin
917,015
151,074
1,068,089
10,373
-
1,078,462Engineering, research, and

development


932,872
11,740
-
944,612Selling, general, and admin.


308,854
150
$    498,393
807,397Interest (income) expense,net


7,102
-
-
7,102Total expenses


1,248,828
11,890
498,393
1,759,111Income (loss) before income

taxes


$   (180,739)
$ (1,517)
$  (498,393)
$  (680,649)








Note 8                      Income Taxes





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





The tax effect of temporary differences, primarily net operating loss carryforwards, asset reserves and accrued liabilities, gave rise to the Company's deferred tax asset in the accompanying June 30, 2010 and March 31, 2010 consolidated balance sheets. Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reverse.



















TEL-INSTRUMENT ELECTRONICS CORP.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


(Unaudited)





Note 9           Fair Value Measurements





On September 2006, the FASB isssed FASB ASC 820-10, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 were effective April 1, 2008. The FASB has also issued Staff Position (FSP) SFAS 157-2 (FSP No. 157-2), which delayed the effective date of SFAS 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008.





As defined in SFAS 157, 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. SFAS 157 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 SFAS 157 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.





Cash, accounts receivable, accounts payable, and accrued expenses reflected in the consolidated balance sheets are a reasonable estimate of their fair value due to the shot-term nature of these instruments. The carrying value of the Company’s short-term 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. As of June 30, 2010 and March 31, 2010, the Company did not have any financial assets and liabilities measured at fair value on a recurring basis that would be subject to the disclosure provisions of SFAS 157.

















TEL-INSTRUMENT ELECTRONICS CORP.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


(Unaudited)








Note 10           Reclassifications




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







Note 11           Litigation




On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court, Sedgwick County, Kansas, Case No. 09 CV 1141 (the “Aeroflex Action”), alleging that the Company and its two employees misappropriated Aeroflex’s proprietary technology in connection with the Company winning a substantial contract from the U.S. Army (the “Award”), to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5. Aeroflex’s petition alleges that in connection with the award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortuously interfered with its business relationship; conspired to harm Aeroflex and tortuously interfered with its contract and seeks injunctive relief and damages. The gravamen of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology in winning the Award.




In February 2009, subsequent to the Award to the Company, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the Army Contracts Attorney and the 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 court dismissed the Aeroflex civil suit against the Company. While this decision was based on jurisdictional issues, the ruling did note that Aeroflex, after discovery proceedings, did not provide any evidence that Tel or its employees misappropriated Aeroflex trade secrets. The Kansas ruling also referenced the Army’s findings, in its response to the General Accountability Office (“GAO”), which rejected Aeroflex’s claims and determined that Tel used its own proprietary technology on this program. Aeroflex has elected to appeal this Kansas decision and has agreed to stay any action against the two former employees until a decision is reached. Tel remains confident as to the outcome of this appeal and any potential follow-on litigation.





Note 12           New Accounting Pronouncements





In October 2009, the FASB issued Accounting Standards Update 2009-13, “Revenue Recognition (Topic 605)”. This Update provides amendments to the criteria in Subtopic 605-24 for separating consideration in multiple-deliverable revenue arrangements. It establishes a hierarchy of selling prices to determine the selling price of each specific deliverable which includes vendor-specific objective evidence (if available), third-party evidence (if vendor-specific evidence is not available), or estimated selling price if neither of the first two are available. This Update also eliminates the residual method for allocating revenue between the elements of an arrangement and requires that arrangement consideration be allocated at the inception of the arrangement. Finally, this Update expands the disclosure requirements regarding a vendor’s multiple-deliverable revenue arrangements. This Update is effective for fiscal years beginning on or after June 15, 2010. We do not anticipate any material impact from this Update.













TEL-INSTRUMENT ELECTRONICS CORP.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


(Unaudited)





Note 12           New Accounting Pronouncements (continued)





In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (the “Update”), which provides amendments to Accounting Standards Codification 820-10 (Fair Value Measurements and Disclosures – Overall Subtopic) of the Codification.  The Update requires improved disclosures about fair value measurements.  Separate disclosures need to be made of the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements along with a description of the reasons for the transfers.  Also, disclosure of activity in Level 3 fair value measurements needs to be made on a gross basis rather than as one net number.  The Update also requires: (1) fair value measurement disclosures for each class of assets and liabilities, and (2) disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements, which are required for fair value measurements that fall in either Level 2 or Level 3.  The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the Level 3 activity disclosures, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The enhanced disclosure requirements have not had a material impact on the Company’s financial reporting.





In April, 2010, the FASB issued ASU 2010-17, “Revenue Recognition – Milestone Method.” ASU 2010-17 amends ASC 605 “Revenue Recognition” to provide guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. The amendments in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted.  The Company does not expect the adoption of ASU 2010-17 to have an effect on the Company’s financial statements.





Note 13        Subsequent Event




On or about July 22, 2010, three directors entered into agreements with the Company providing that, inter alia, if the Company needed additional capital at any time until September 30, 2010, the directors would purchase shares of common stock at the average closing price of the stock on the NYSE-Amex for the three days preceding the date the Company requested the capital. These agreements are limited as to the amount of capital the Company can request from the directors.





On July 26, the Company requested capital under this agreement and sold 7,462 shares of its Common Stock at the average closing price of $6.90 per share to a director pursuant to this agreement. The shares sold were restricted against transfer and were sold pursuant to the exemption from registration provided by Section 4 of the Securities Act of 1933.











Item 2.                    MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE


RESULTS OF OPERATIONS AND FINANCIAL CONDITION





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 1995.





Forward-looking statements include, among others, statements concerning the Company’s outlook, pricing trends and forces within the industry, the completion dates of capital projects, expected sales growth, cost reduction strategies and their results, long-term goals of the Company and other statements of expectations, beliefs, including statements regarding litigation, 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 cost and availability of its raw materials; the actions of its 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 Securities and Exchange Commission.




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 Financial Statements included in our Form 10-K.  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 customer provided title and risk of loss is transferred to the customer.  Provisions, when appropriate, are made where the right to return exists.




Revenues on repairs and calibrations are recognized at the time the repaired or calibrated unit is shipped, as it is at the time that the work is completed.




Due to the unique nature of the ITATS program wherein a significant portion of this contract will not be delivered for over a year, revenues under this contract are recognized on a percentage-of-completion basis, which recognizes sales and profit as they are earned, rather than at the time of shipment.  Revenues and profits are estimated using the cost-to-cost method of accounting where revenues are recognized and profits recorded based upon the ratio of costs incurred to date to our estimate of total costs at completion. The ratio of costs incurred to our estimate of total costs at completion is applied to the contract value to determine the revenues and profits. When adjustments in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized by recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods. The Company also receives progress billings on this program, which is a funding mechanism by the government to assist contractors on long-term contracts prior to delivery.




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




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















Item 2.                      MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE


RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)




Critical Accounting Policies (continued)







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 estimates have historically been within our expectation and the provision established, the Company cannot guarantee that its estimates will continue to be within the provision established.





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. While such credit losses have historically been within our expectation and the provision established, the Company cannot guarantee that its estimates will continue to be within the provision established.





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 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.





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 taxable 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 is 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 recorded 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.

















Item 2.                    MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE


RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)





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 Management’s Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended March 31, 2010.





Overview





Sales in the first quarter increased by approximately $113,000 over the same period in the prior fiscal year. Further sales increases for this quarter were held back by production delays and the timing of the receipt of export licenses. However, the units not shipped in the first quarter are expected to be shipped in the balance of this fiscal year in addition to the units originally scheduled for shipment during the year.





As predicted, operating expenses in the first quarter declined by approximately $240,000, or 14%, over the same period in the prior year primarily as a result of lower engineering costs due to two of the three key Company products nearing the completion of development. Both of these key new products are currently undergoing evaluation by the U.S. Navy. The Company believes that both products will be successfully evaluated and that upon successful completion of the evaluation, the Navy will exercise the remaining production options for the CRAFT AN/USM-708, and will allow the Company to begin production of the order for 102 units of the ITATS AN/ARM-206 already ready received.





The Company has also received $17 million of delivery orders from the U.S. Army for the TS-4530A program, and the Company expects to begin shipping the qualification units by the end of the calendar year, which the Army will use for testing and evaluation.





Also in July 2010, the Company received an additional order for 160 AN/USM-708 pilot production units with a contract value of $3.6 million. These units are scheduled to begin to ship in September 2010.





As a result of the foregoing, as well as projected sales of other products, the Company anticipates a substantial increase in revenues and solid profits in this fiscal year ending March 31, 2011.





At June 30, 2010 the Company’s backlog was approximately $25.4 million as compared to approximately $14.7 million at June 30, 2009. The backlog at June 30, 2010 includes only the amount of currently exercised delivery orders on open IDIQ contracts, and the Company’s backlog is expected to materially increase when the large volume production orders for the AN/USM-708; AN/USM-719; and AN/ARM-206 units are received.





The Company also has a line of credit from a bank, which expires October 30, 2010.  The agreement includes a borrowing base calculation tied to accounts receivable and inventories with a maximum availability of $1,000,000. At June 30, 2010 the Company had borrowed $750,000 against this line. As of June 30, 2010, the Company had no remaining availability under this line based upon receivables and inventories at June 30, 2010. However, the Company did have $250,000 of remaining availability at July 31, 2010 as a result of higher accounts receivable from the increased shipments in July. In August 2010 the Company borrowed an additional $150,000 against this line resulting in remaining availability of $100,000.




















Item 2.                    MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE


RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)








On June 24, 2010, the Company entered into a non-binding term sheet with a private lender, providing that the Company and the Lender would negotiate an agreement for a five year loan to the Company for $2.5 million at an interest rate of 14% per year. The nonbinding term sheet provides for additional terms to be included in the agreement, usual to these kinds of agreements, including a provision for warrants to the lender to purchase common shares at an exercise price equal to the closing price of the common shares on the NYSE-Amex at the date of the closing of the loan agreement. In the event of certain major corporate events, the lender would have the right to require the Company to purchase the warrant or warrant shares at prices related to the market price of the shares or related to the Company’s operating income.





The final agreement is currently being negotiated by the parties. Although no assurance can be given, the Company is reasonably confident that an acceptable agreement can be concluded by the end of August 2010.





In December 2009, the Kansas court dismissed the Aeroflex civil suit against the Company. While this decision was based on jurisdictional issues, the ruling did note that Aeroflex, after discovery proceedings, did not provide any evidence that Tel or its employees misappropriated Aeroflex trade secrets. The Kansas ruling also referenced the Army’s findings, in its response to the General Accountability Office (“GAO”), which rejected Aeroflex’s claims and determined that Tel used its own proprietary technology on this program. Aeroflex has elected to appeal this Kansas decision and has agreed to stay any action against the two former employees until a decision is reached. Tel remains confident as to the outcome of this appeal.





Sales





For the first quarter ended June 30, 2010, total sales increased $113,081 (4.8%) to $2,455,280 as compared to $2,342,199 for the same quarter in the prior year. Avionics Government sales decreased $42,767 (2.3%) to $1,848,473 for the period as compared to $1,891,240 for the same period last year. The decrease in Avionics Government sales is primarily attributed to decreases in shipments of the TR-420, T-30CM, AN/APM-480 units and upgrades and the revenues associated with ITATS offset mostly by revenue increases associated with the US/USM-719 (CRAFT), US/USM-708 (CRAFT) and TS-4530A program.  Government sales have been impacted by delays in the receipt of several expected large orders as well as production delays and the receipt of export licenses for international shipment.Commercial sales increased $172,292 (39.7%) to $606,807 for the three months ended June 30, 2010 as compared to $434,415 in the same period in the prior year. This increase is due to the timing of orders and shipments related to the T-36C and the TR-220.  The Company continues to experience weakness in the commercial market and does not expect this growth in the commercial segment to continue.




Gross Margin





Gross margin increased $3,918 (0.4%) to $1,082,380 for the three months ended June 30, 2010 as compared to $1,078,462 for the same three months in the prior fiscal year.  The gross margin percentage for the three months ended June 30, 2010 was 44.1% as compared to 46.0% for the three months ended June 30, 2009. This change in gross margin dollars and gross margin percentage is a result of a change in mix of products sold.

















Item 2.                    MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE


RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)





Results of Operations (continued)





Operating Expenses





Selling, general and administrative expenses decreased $49,353 (6.1%) to $758,044 for the three months ended June 30, 2010, as compared to $807,397 for the three months ended June 30, 2009. This decrease is attributed mainly to a decrease in legal fees associated with the litigation offset partly by an increase in outside commissions.





Engineering, research and development expenses decreased $187,266 (19.8%) to $757,346 for three months ended June 30, 2010 as compared to $944,612 for the three months ended June 30, 2009, primarily as a result of reduced outside contractor expenses associated with the near completion of major programs. Engineering, research and development expenses are mostly attributed to efforts related to the TS-4530 and CRAFT programs.





Other Income (Expense), net





Interest expense increased as a result of increased cumulative borrowings on the line of credit, increased interest expenses associated with the officers’ subordinated notes, and higher interest rate associated with the line of credit. Amortization of debt discount is in connection with the stock options issued in conjunction with the officers’ subordinated notes.





Loss before Income Taxes





As a result of the above, the Company recorded a loss before income taxes of $458,637 for the quarter ended June 30, 2010 as compared to a loss before income taxes of $680,649 for the quarter ended June 30, 2009.





Income Taxes





An income tax benefit of $183,225 was recorded for the three months ended June 30, 2010 as compared to $271,918 for the quarter ended June 30, 2009. The change is due to the lower loss before taxes for the quarter ended June 30, 2010. These amounts represent the effective federal and state tax rate of approximately 40% on the Company’s net income or loss before taxes.





Net Loss





As a result of the above, the Company recorded a net loss of $275,412 for the quarter ended June 30, 2010 as compared to a net loss of $408,731 for the quarter ended June 30, 2009.





Liquidity and Capital Resources





At June 30, 2010, the Company had working capital of $2,006,893 as compared to $2,319,588 at March 31, 2010. For the three months ended June 30, 2010, the Company used $91,408 in cash for operations as compared to using $274,228 in cash for operations for the three months ended June 30, 2009. This is primarily attributed to the increase in progress billings, the lower loss from operations, and the lower increase in accrued expenses and accrued government receivables offset by an increase in inventories and the decrease in accounts payable.

















Item 2.                    MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE
 RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)


Liquidity and Capital Resources (continued)





Net cash used in investing activities was $83,201 for the three months ended June 30, 2010 from $11,313 for the three months ended June 30, 2009 due to the increase in purchases of equipment.





Net cash provided by financing activities for the three months ended June 30, 2010 was $156,075 as compared to $150,000 for the three months ended June 30, 2009. The Company borrowed $150,000 from the line of credit in both periods.





At June 30, 2010 the Company’s backlog was approximately $25.4 million as compared to approximately $14.7 million at June 30, 2009. The backlog at June 30, 2010 includes only the amount of currently exercised delivery orders on open IDIQ (indefinite delivery/indefinite quantity) contracts, and the Company’s backlog is expected to materially increase when the large volume production orders for the AN/USM-708; AN/USM-719; and AN/ARM-206 units are received.





The Company also has a line of credit from a bank, which expires October 30, 2010.  The agreement includes a borrowing base calculation tied to accounts receivable and inventories with a maximum availability of $1,000,000. At June 30, 2010 the Company had outstanding balances of $750,000. As of June 30, 2010, the Company had no remaining availability under this line based upon receivables and inventories at June 30, 2010. However, the Company does have remaining availability at July 31, 2010 as a result of higher accounts receivable from the increased shipments in July. In August 2010 the Company borrowed an additional $150,000 against this line.





On June 24, 2010, the Company entered into a non-binding term sheet with a private lender, providing that the Company and the Lender would negotiate an agreement for a five year loan to the Company for $2.5 million at an interest rate of 14% per year. The nonbinding term sheet provides for additional terms to be included in the agreement, usual to these kinds of agreements, including a provision for warrants to the lender to purchase common shares at an exercise price equal to the closing price of the common shares on the NYSE-Amex at the date of the closing of the loan agreement. In the event of certain major corporate events, the lender would have the right to require the Company to purchase the warrant or warrant shares at prices related to the market price of the shares or related to the Company’s operating income.





The final agreement is currently being negotiated by the parties. Although no assurance can be given, the Company is reasonably confident that an acceptable agreement can be concluded by the end of August 2010.





On certain government contracts the Company has been granted progress payments from the government, which allows the Company to bill and collect a portion of its incurred costs on long-term programs before shipment of units, thus helping to fund the costs of these programs.





There was no significant impact on the Company’s operations as a result of inflation for the three months ended June 30, 2010.  These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended March 31, 2010.


















Item 4 (T).           Controls and Procedures





As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)).  Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.





There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.





Part II.               Other Information





Item 1.                Legal Proceedings











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





On or about July 22, 2010, three directors entered into agreements with the Company providing that, inter alia, if the Company needed additional capital at any time        until September 30,2010, the directors would purchase shares of common stock at the average closing price of the stock on the NYSE-Amex for the three days preceding the date the Company requested the capital. These agreements are limited as to the amount of capital the Company can request from the directors.





On July 26, the Company requested capital under this agreement and sold 7,462 shares of its Common Stock at the average closing price of $6.90 per share to a director pursuant to this agreement. The shares sold were restricted against transfer and were sold pursuant to the exemption from registration provided by Section 4 of the Securities Act of 1933.





Item 6.                Exhibits




Exhibits




31.1  Certification by CEO pursuant to Rule 15d-14 under the Securities Exchange Act.


31.2  Certification by CFO pursuant to Rule 15d-14 under the Securities Exchange Act.


32.1  Certification by CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted


pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.









SIGNATURES





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





TEL-INSTRUMENT ELECTRONICS CORP.





Date:           August 23, 2010                                                                                        By:   /s/  Harold K. Fletcher


Harold K. Fletcher


CEO





Date:   August 23, 2010                                                                                                By:  /s/   Joseph P. Macaluso


Joseph P. Macaluso


Principal Accounting Officer