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Tel-Instrument Electronics Corp. Reports Financial Results for Second Quarter 2018 and Completes $3 Million Financing

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Tel-Instrument Electronics Corp. ("Tel", "Tel-Instrument" or the
"Company") (NYSE:TIK), a leading designer and manufacturer of
avionics test and measurement solutions, today reported a net loss of
$2.9 million on revenues of $1.8 million for the second quarter of
fiscal year 2018. This loss included a $2.1 million accrual for punitive
damages in the Aeroflex litigation. The Company also announced the
completion of a $3 million preferred stock financing that closed on
November 13, 2017.

Subsequent Events

  • In October, the judge in the Aeroflex litigation rejected our motions
    to decrease the $2.8 million damage award and instead granted an
    additional $2.1 million of punitive damages. Our lawyers have
    contested both decisions and have requested that the damages be
    corrected or that a new trial be ordered. A hearing on these new
    motions will be held in Kansas later this month. Once a final damages
    judgement is entered, the Company will again have the opportunity to
    request a new trial or appeal the decision.
  • On November 13, the company completed a $3 million preferred stock
    issuance with an existing investor. This preferred stock will include
    an 8% dividend rate and will be convertible into shares of common
    stock at a price of $3.00 per share. The Company also has an option to
    repurchase these preferred shares in three years.

Quarter Ended September 30, 2017 as Compared to September 30, 2016

For the quarter ended September 30, 2017, total net sales decreased
$3,288,864 (64.8%) to $1,787,165, as compared to $5,076,029 for the
quarter ended September 30, 2016. Avionics government sales decreased
$3,310,071 (76.3%) to $1,028,693 for the quarter ended September 30,
2017, as compared to $4,338,764 for the quarter ended September 30,
2016. The decrease in sales is mostly attributed to the decrease in
shipment of the U.S. Army TS-4530A Kits and Sets, and the CRAFT and
ITATS units associated with the U.S. Navy programs, which contracts have
now been completed. Commercial sales increased $21,207 (2.9%) to
$758,472 for the quarter ended September 30, 2017 as compared to
$737,265 for the quarter ended September 30, 2016. This increase is
attributed to the increased sales of the TR-220 partially offset by a
decrease in sales of the T-30D and lower part sales.

For the quarter ended September 30, 2017, total gross margin decreased
$1,425,718 (78.1) to $399,870 as compared to $1,825,588 for the quarter
ended September 30, 2016, primarily as a result of the much lower volume
levels as well as labor and overhead variances as a result of the lower
volume. The gross margin percentage for the three months ended September
30, 2017 was 22.4%, as compared to 36.0% for the three months ended
September 30, 2016.

Selling, general and administrative expenses decreased $60,618 (8.9%) to
$626,395 for the quarter ended September 30, 2017, as compared to
$687,013 for the quarter ended September 30, 2016. This decrease was
primarily attributed to lower salaries and related expenses, lower
accrued profit sharing and commission expenses offset partially by
higher professional fees.

Litigation expenses for the quarter ended September 30, 2017 decreased
to $43,333 as compared to $188,125 for the quarter ended September 30,
2016 as a result of less activity as the Company was awaiting the
decision by the court.

The Company recorded $2.1 million in additional legal damages for the
quarter ended September 30, 2017 as a result of the court's decision
regarding punitive damages.

Engineering, research and development expenses decreased $54,104 (9.3%)
to $529,667 for quarter ended September 30, 2017 as compared to $583,771
for the quarter ended September 30, 2016. The Company continues to
invest in new products by taking advantage of our CRAFT and TS-4530A
technology to develop smaller hand-held products, which will broaden our
product line for both commercial and military applications. The Company
is also developing its T-47/M5 Mode 5 test set, which will begin
shipping to customers in the third quarter of this fiscal year.

The Company recorded losses from operations of $2,899,525 for the
quarter ended September 30, 2017, as compared to income from operations
of $366,679 for the quarter ended September 30, 2016.

Commenting on the results, Mr. Jeffrey O'Hara, President and CEO of Tel,
stated, "We knew fiscal year 2018 was going to be a choppy year from a
revenue standpoint due to the completion of our last large military
contract in the first quarter of the year and potential timing issues
with the receipt of new volume orders. What we did not anticipate was
the extended duration of the sales process for international Mode 5
markets or the imposition of additional damages in the Aeroflex
litigation. These combined for an extremely disappointing second quarter
from both a revenue and profitability standpoint. We continue to
actively target the international Mode 5 market and our recent
"Drive-to-Mode 5" marketing incentive plan for our international Mode 5
customers is generating added market activity in several key target
markets. This includes several large pending international opportunities
that we expect to close in the next few months. We are committed to
aggressively pursuing this business and I am out of the country this
week meeting with customers. Therefore, we will not be have the
conference call this quarter. Our new T-47/M5 test set has received
great reviews from international customers and we plan to start shipping
units in volume to three international customers starting this quarter.
We are also seeing continued steady sales or our TS-4530A test set. We
are also releasing a new Remote Client software application for all of
our Mode 5 products that will generate increased revenues and help
improve our gross margins. Finally, the Company continues to see strong
market activity on our TR-220 air traffic control ("ATC") test set and
we expect the commercial portion of our business to continue to grow as
a result of the 2020 FAA ADS-B mandate.

"Aside from our core Mode 5 IFF market, the Company's future growth and
expansion is based largely on our new hand-held product which is less
than half the size and weight of competitive products and will allow us
to substantially increase our market presence in both the commercial
avionics test market and the secure digital radio test set market. The
mechanical design of the new test set is substantially complete and we
are in the process of finalizing the software and user interface
functions. The initial commercial avionics product is expected to be
introduced in the first quarter of CY 2018 and the plan is to add
additional test capabilities to this unit every three to six months. The
Company's goal is to become the market leader in world-wide commercial
avionics by the end of the 2018 calendar year. We are also actively
discussing marketing teaming arrangements with other companies in the
secure communication and digital radio testing market, which is much
larger than our existing avionics market.

"After a sharp drop in second quarter revenues, the Company anticipates
improved results in the third quarter and a return to profitability in
the fourth quarter of the current fiscal year. This is based on existing
back-log as well as business currently in the sales pipeline with a high
probability of closing. Moreover, we are forecasting increasing revenues
and solid profitability in fiscal year 2019 when the international and
F-35 Mode 5 sales are expected in volume as well as increasing sales
from our new hand-held products."

Concerning the current litigation, Mr. O'Hara commented, "We are very
disappointed in the court's decision to deny our motions to reduce the
Jury award and assess $2.1 million in punitive damages. No judgement has
yet been entered by the court, and we have filed a motion with the court
that these damages are duplicative and are not supported by Kansas Law.
A hearing on this motion will take place later this month. Once a final
judgement has been entered, the Company has approximately 30 days to
file an appeal or request a new trial. If the Company files an appeal,
it will be required to post a bond in the amount of $1.975 to $2.1
million. The Company believes that it has excellent legal grounds to
appeal this verdict. The appeal process would be expected to take two to
three years to complete."

Given the unexpected adverse legal decisions, the Company did an
excellent job in securing $3 million of preferred stock financing with
an existing shareholder with very low transaction costs. It also allows
the Company the option to repurchase these preferred shares in three
years. This transaction demonstrates confidence in the Company from a
sophisticated investor and just as importantly ensures that we will have
the sufficient capital to appeal the Aeroflex judgment. This was a good
deal for our existing investors as it will allow us to accelerate our
growth plans and should support a return to profitable operation next
year. We look forward to seeing your at our Annual Meeting on January
17, 2017 and our next earnings call."

The Company encourages investors to read its full results of operations
as contained in our Quarterly Report on Form 10-Q filed on November 14,
2017 at www.sec.gov.

About Tel-Instrument Electronics Corp.

Tel-Instrument 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.
Tel-Instrument provides instruments to test, measure, calibrate, and
repair a wide range of airborne navigation and communication equipment.
For further information please visit our website at www.telinstrument.com.

This press release includes statements that are not historical in
nature and may be characterized as "forward-looking statements,"
including those related to future financial and operating results,
benefits, and synergies of the combined companies, 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, 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 which 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 previous filings
with the U.S. Securities and Exchange Commission. The Company disclaims
any intention or obligation to update any forward-looking statements as
a result of developments occurring after the date of this press release.
The safe harbor for forward-looking statements contained in the
Securities Litigation Reform Act of 1995 (the "Act") protects companies
from liability for their forward-looking statements if they comply with
the requirements of the Act.

 

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

   
June 30,

2017

March 31,

2017

(unaudited)
ASSETS
 
Current assets:
Cash and cash equivalents $ 234,804 $ 287,873
Accounts receivable, net 1,221,456 1,556,382
Inventories, net 4,165,330 4,208,179
Prepaid expenses and other current assets   77,997   188,578
Total current assets 5,699,587 6,241,012
 
Equipment and leasehold improvements, net 161,411 161,427
Other long-term assets   33,509   33,509
Total assets   5,894,507   6,435,948
 
LIABILITIES & STOCKHOLDERS' (DEFICIT) EQUITY
 
Current liabilities:
Current portion of long-term debt 186,252 291,991
Line of credit 400,000 200,000
Capital lease obligations – current portion 6,414 6,268
Accounts payable and accrued liabilities 1,875,577 2,072,955
Federal and state taxes payable 4,105 4,105
Deferred revenues – current portion 63,165 123,720
Accrued legal damages 2,800,000 2,800,000
Accrued payroll, vacation pay and payroll taxes   501,030   527,413
Total current liabilities 5,836,543 6,026,452
 
Capital lease obligations – long-term 12,100 13,760
Long-term debt 534 2,124
Deferred revenues – long-term 377,603 352,973
Warrant liability   -   95,000
Total liabilities   6,226,780   6,490,309
 
Commitments
 
Stockholders' (deficit) equity:
Common stock, 4,000,000 shares authorized, par value $0.10 per share,

3,255,887 shares issued and outstanding, respectively

325,586 325,586
Additional paid-in capital 8,115,548 8,107,369
Accumulated deficit   (8,773,407 )   (8,487,316 )
Total stockholders' (deficit) equity   (332,273 )   (54,361 )
Total liabilities and stockholders' (deficit) equity $ 5,894,507 $ 6,435,948
 

TEL-INSTRUMENT ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

Three Months Ended
June 30, 2017   June 30, 2016
 
Net sales $ 3,542,077 $ 5,342,369
Cost of sales   2,300,787   3,465,716
 
Gross margin 1,241,290 1,876,653
 
Operating expenses:
Selling, general and administrative 706,286 768,230
Litigation costs 382,512 143,514
Engineering, research and development   615,273   584,877
Total operating expenses   1,704,071   1,496,621
 
(Loss) income from operations (462,781 ) 380,032
 
Other income (expense):
Proceeds from life insurance 92,678 -
Amortization of deferred financing costs (1,357 ) (1,356 )
Change in fair value of common stock warrants 95,000 217,203
Interest expense   (9,631 )   (17,826 )
Total other income (expense)   176,690   198,021
 
(Loss) income before income taxes (286,091 ) 578,053
 
Income tax provision   -   167,744
 
Net (loss) income $ (286,091 ) $ 410,309
 
Net (loss) income per share:
Basic (loss) income per common share $ (0.09 ) $ 0.13
Diluted (loss) income per common share $ (0.12 ) $ 0.10
 
Weighted average shares outstanding:
Basic 3,255,887 3,255,887
Diluted 3,266,540 3,274,829
 

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