TECHNICAL COMMUNICATIONS CORPORATION AND
SUBSIDIARY
Consolidated Balance Sheets
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|
April 2, 2016
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|
|
October 3, 2015
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|
|
|
(unaudited)
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|
|
|
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Assets
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,500,131
|
|
|
$
|
2,276,511
|
|
Restricted cash
|
|
|
348,194
|
|
|
|
363,358
|
|
Marketable securities - held to maturity
|
|
|
206,099
|
|
|
|
307,673
|
|
Accounts receivable - trade
|
|
|
170,966
|
|
|
|
1,790,856
|
|
Inventories, net
|
|
|
1,938,470
|
|
|
|
1,850,885
|
|
Other current assets
|
|
|
259,378
|
|
|
|
132,792
|
|
Total current assets
|
|
|
6,423,238
|
|
|
|
6,722,075
|
|
|
|
|
|
|
|
|
|
|
Marketable securities - held to maturity
|
|
|
645,071
|
|
|
|
761,842
|
|
|
|
|
|
|
|
|
|
|
Equipment and leasehold improvements
|
|
|
4,511,343
|
|
|
|
4,480,343
|
|
Less: accumulated depreciation and amortization
|
|
|
(4,305,725
|
)
|
|
|
(4,223,497
|
)
|
Equipment and leasehold improvements, net
|
|
|
205,618
|
|
|
|
256,846
|
|
|
|
|
|
|
|
|
|
|
Cost method investment
|
|
|
-
|
|
|
|
275,000
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
7,273,927
|
|
|
$
|
8,015,763
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
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|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
141,480
|
|
|
$
|
179,584
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Accrued compensation and related expenses
|
|
|
245,611
|
|
|
|
244,290
|
|
Customer deposits
|
|
|
60,199
|
|
|
|
41,220
|
|
Other current liabilities
|
|
|
84,783
|
|
|
|
136,810
|
|
Income taxes payable
|
|
|
43,261
|
|
|
|
41,117
|
|
Total current liabilities
|
|
|
575,334
|
|
|
|
643,021
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
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Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Common stock, par value $0.10 per share; 7,000,000 shares authorized; 1,839,877 shares issued and outstanding at April 2, 2016 and October 3, 2015
|
|
|
183,988
|
|
|
|
183,988
|
|
Additional paid-in capital
|
|
|
4,116,488
|
|
|
|
4,110,096
|
|
Retained earnings
|
|
|
2,398,117
|
|
|
|
3,078,658
|
|
Total stockholders’ equity
|
|
|
6,698,593
|
|
|
|
7,372,742
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
7,273,927
|
|
|
$
|
8,015,763
|
|
The accompanying notes are an integral
part of these unaudited consolidated financial statements.
TECHNICAL COMMUNICATIONS CORPORATION AND
SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
|
|
Three Months Ended
|
|
|
|
April 2, 2016
|
|
|
March 28, 2015
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
557,432
|
|
|
$
|
2,372,575
|
|
Cost of sales
|
|
|
358,379
|
|
|
|
649,334
|
|
Gross profit
|
|
|
199,053
|
|
|
|
1,723,241
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
724,643
|
|
|
|
765,398
|
|
Product development
|
|
|
202,228
|
|
|
|
752,979
|
|
Total operating expenses
|
|
|
926,871
|
|
|
|
1,518,377
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) profit
|
|
|
(727,818
|
)
|
|
|
204,864
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
Gain on sale of cost method investment
|
|
|
462,283
|
|
|
|
-
|
|
Interest income
|
|
|
2,788
|
|
|
|
5,121
|
|
Total other income
|
|
|
465,071
|
|
|
|
5,121
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before provision for income taxes
|
|
|
(262,747
|
)
|
|
|
209,985
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(262,747
|
)
|
|
$
|
209,985
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.14
|
)
|
|
$
|
0.11
|
|
Diluted
|
|
$
|
(0.14
|
)
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,839,877
|
|
|
|
1,838,921
|
|
Diluted
|
|
|
1,839,877
|
|
|
|
1,846,399
|
|
The accompanying notes are an integral
part of these unaudited consolidated financial statements.
TECHNICAL COMMUNICATIONS CORPORATION AND
SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
|
|
Six Months Ended
|
|
|
|
April 2, 2016
|
|
|
March 28, 2015
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,536,834
|
|
|
$
|
3,255,721
|
|
Cost of sales
|
|
|
770,956
|
|
|
|
920,365
|
|
Gross profit
|
|
|
765,878
|
|
|
|
2,335,356
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
1,409,094
|
|
|
|
1,521,424
|
|
Product development
|
|
|
505,808
|
|
|
|
1,342,544
|
|
Total operating expenses
|
|
|
1,914,902
|
|
|
|
2,863,968
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,149,024
|
)
|
|
|
(528,612
|
)
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
Gain on sale of cost method investment
|
|
|
462,283
|
|
|
|
-
|
|
Interest income
|
|
|
6,200
|
|
|
|
11,016
|
|
Total other income
|
|
|
468,483
|
|
|
|
11,016
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit from income taxes
|
|
|
(680,541
|
)
|
|
|
(517,596
|
)
|
|
|
|
|
|
|
|
|
|
Benefit from income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(680,541
|
)
|
|
$
|
(517,596
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.37
|
)
|
|
$
|
(0.28
|
)
|
Diluted
|
|
$
|
(0.37
|
)
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,839,877
|
|
|
|
1,838,921
|
|
Diluted
|
|
|
1,839,877
|
|
|
|
1,838,921
|
|
The accompanying notes are an integral
part of these unaudited consolidated financial statements.
TECHNICAL COMMUNICATIONS CORPORATION AND
SUBSIDIARY
Consolidated Statements of Comprehensive
(Loss) Income
(Unaudited)
|
|
Three Months Ended
|
|
|
|
April 2, 2016
|
|
|
March 28, 2015
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(262,747
|
)
|
|
$
|
209,985
|
|
Unrealized gain on available for sale securities, net of tax
|
|
|
-
|
|
|
|
935
|
|
Comprehensive loss (income)
|
|
$
|
(262,747
|
)
|
|
$
|
210,920
|
|
|
|
Six Months Ended
|
|
|
|
April 2, 2016
|
|
|
March 28, 2015
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(680,541
|
)
|
|
$
|
(517,596
|
)
|
Unrealized gain on available for sale securities, net of tax
|
|
|
-
|
|
|
|
2,916
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(680,541
|
)
|
|
$
|
(514,680
|
)
|
The accompanying notes are an integral
part of these unaudited consolidated financial statements.
TECHNICAL COMMUNICATIONS CORPORATION AND
SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Six Months Ended
|
|
|
|
April 2, 2016
|
|
|
March 28, 2015
|
|
|
|
|
|
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(680,541
|
)
|
|
$
|
(517,596
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
82,228
|
|
|
|
102,128
|
|
Stock-based compensation
|
|
|
6,392
|
|
|
|
74,306
|
|
Amortization of premium on held to maturity securities
|
|
|
18,345
|
|
|
|
24,555
|
|
Gain on sale of cost method investment
|
|
|
(462,283
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Changes in certain operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,619,890
|
|
|
|
(1,457,187
|
)
|
Inventories
|
|
|
(87,585
|
)
|
|
|
(83,113
|
)
|
Income taxes payable / receivable
|
|
|
-
|
|
|
|
(982
|
)
|
Other current assets
|
|
|
(50,769
|
)
|
|
|
20,355
|
|
Customer deposits
|
|
|
18,979
|
|
|
|
(108,456
|
)
|
Accounts payable and other accrued liabilities
|
|
|
(86,666
|
)
|
|
|
117,786
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
377,990
|
|
|
|
(1,828,204
|
)
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of cost method investment
|
|
|
661,466
|
|
|
|
-
|
|
Additions to equipment and leasehold improvements
|
|
|
(31,000
|
)
|
|
|
-
|
|
Purchase of cost method investment
|
|
|
-
|
|
|
|
(275,000
|
)
|
Decrease in restricted cash
|
|
|
15,164
|
|
|
|
-
|
|
Proceeds from maturities of marketable securities
|
|
|
200,000
|
|
|
|
497,000
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
845,630
|
|
|
|
222,000
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
1,223,620
|
|
|
|
(1,606,204
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of the period
|
|
|
2,276,511
|
|
|
|
3,210,237
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period
|
|
$
|
3,500,131
|
|
|
$
|
1,604,033
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
-
|
|
|
$
|
-
|
|
Income taxes paid
|
|
|
1,856
|
|
|
|
982
|
|
Escrow deposit held on sale of cost method investment
|
|
|
75,817
|
|
|
|
-
|
|
The accompanying notes are an integral
part of these unaudited consolidated financial statements.
TECHNICAL COMMUNICATIONS CORPORATION AND
SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Interim Financial Statements
The accompanying unaudited consolidated
financial statements of Technical Communications Corporation and its wholly-owned subsidiary (collectively the “Company”
or “TCC”) include all adjustments which are, in the opinion of management, necessary for a fair presentation of the
financial position and results of operations for the periods presented and in order to make the financial statements not misleading.
All such adjustments are of a normal recurring nature. Interim results are not necessarily indicative of the results to be expected
for the fiscal year ending October 1, 2016.
Certain footnote disclosures normally included
in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as
allowed by Securities and Exchange Commission (“SEC”) rules and regulations. The accompanying unaudited consolidated
financial statements should be read in conjunction with the Company’s consolidated financial statements and the notes thereto
in the Company’s Annual Report on Form 10-K for the fiscal year ended October 3, 2015 as filed with the SEC.
We follow accounting standards set by the
Financial Accounting Standards Board, commonly referred to as the FASB. The FASB sets generally accepted accounting principles
(“GAAP”) that we follow to ensure we consistently report our financial condition, results of operations, and cash flows.
References to GAAP issued by the FASB in these footnotes are to the
FASB Accounting Standards Codification
TM
-
sometimes referred to as the Codification or ASC.
It is anticipated that cash from operations
will fund our near-term research and development and marketing activities at least through the end of the second quarter of fiscal
2017. We also believe that in the long term, based on current billable activities, cash from operations will be sufficient to
meet the development goals of the Company, although we can give no assurances. Any increase in development activities - either
billable or new product related - will require additional resources, which we may not be able to fund through cash from operations.
We plan to continue to closely monitor operating expenses and will reduce them if necessary. In circumstances where resources
may be insufficient, the Company will look to other sources of financing, including debt and/or equity investments, although we
can give no assurances that the Company will be successful in obtaining such financing.
|
NOTE 1.
|
Summary of Significant Accounting Policies and Significant
Judgments and Estimates
|
Basis of Presentation
The accompanying unaudited consolidated
financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The discussion and analysis of our financial
condition and results of operations are based on our unaudited consolidated financial statements, which have been prepared in accordance
with GAAP. The preparation of these unaudited consolidated financial statements requires management to make estimates and judgments
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported revenues and expenses during the reporting periods.
On an ongoing basis, management evaluates
its estimates and judgments, including but not limited to those related to revenue recognition, inventory reserves, receivable
reserves, marketable securities, impairment of long-lived assets, income taxes, fair value of financial instruments and stock-based
compensation. Management bases its estimates on historical experience and on various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty.
Actual results may differ from these estimates under different assumptions or conditions.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Cont’d)
The accounting policies that management
believes are most critical to aid in fully understanding and evaluating our reported financial results include the following:
Revenue Recognition
Product revenue is recognized when there
is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product and passage of title to the
customer has occurred and we have determined that collection of the fee is probable. Title to the product generally passes upon
shipment of the product, as the products are shipped freight on board shipping point, except for certain foreign shipments for
which title passes upon entry of the product into the first port in the buyer’s country. If the product requires installation
to be performed by TCC, or other acceptance criteria exist, all revenue related to the product is deferred and recognized upon
completion of the installation or satisfaction of the customer acceptance criteria. We provide for a warranty reserve at the time
the product revenue is recognized.
We perform funded research and development
and technology development for commercial companies and government agencies under both cost reimbursement and fixed-price contracts.
Cost reimbursement contracts provide for the reimbursement of allowable costs and, in some situations, the payment of a fee. These
contracts may contain incentive clauses providing for increases or decreases in the fee depending on how actual costs compare with
a budget. Revenue from cost reimbursement contracts is recognized as services are performed. On fixed-price contracts that are
expected to exceed one year in duration, revenue is recognized pursuant to the proportional performance method based upon the proportion
of actual costs incurred to date to the total estimated costs for the contract. In each type of contract, we receive periodic progress
payments or payments upon reaching interim milestones, and we retain the rights to the intellectual property developed in government
contracts. All payments to TCC for work performed on contracts with agencies of the U.S. government are subject to audit and adjustment
by the Defense Contract Audit Agency. Adjustments are recognized in the period made. There have been no government audits in recent
years and the Company believes the result of such audits, should they occur, would not have a material adverse effect on its financial
position or results of operations. When current estimates of total contract revenue and contract costs for a product development
contract indicate a loss, a provision for the entire loss on the contract is recorded. Any losses incurred in performing funded
research and development projects are recognized as funded research and development expenses.
Cost of product revenue includes material,
labor and overhead. Costs incurred in connection with funded research and development are included in cost of sales.
Product development costs are charged to billable engineering services, bid and proposal efforts or business development activities,
as appropriate. Product development costs charged to billable projects are recorded as cost of sales; engineering costs charged
to bid and proposal efforts are recorded as selling expenses; and product development costs charged to business development activities
are recorded as marketing expenses. Product development costs consist primarily of costs associated with personnel, outside contractor
and engineering services, supplies and materials.
Inventories
We value our inventory at the lower of
actual cost (based on the first-in, first-out method) to purchase and/or manufacture or the current estimated market value (based
on the estimated selling prices, less the cost to sell) of the inventory. We periodically review inventory quantities on hand and
record a provision for excess and/or obsolete inventory based primarily on our estimated forecast of product demand, as well as
historical usage. The Company evaluates the carrying value of inventory on a quarterly basis to determine if the carrying value
is recoverable at estimated selling prices. To the extent that estimated selling prices are less than the associated carrying values,
inventory carrying values are written down. In addition, the Company makes judgments as to future demand requirements and compares
those with the current or committed inventory levels. Reserves are established for inventory levels that are expected to exceed
future demand. It is possible that additional reserves above those already established may be required in the future if market
conditions for our products were to deteriorate.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Cont’d)
Accounts Receivable
Accounts receivable are reduced by an allowance
for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on
a specific analysis of accounts in the receivable portfolio and historical write-off experience. While management believes the
allowance to be adequate, if the financial condition of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required, which would reduce net income.
In addition, if the Company becomes aware of a customer’s inability to meet its financial obligations to TCC, a specific
write-off is recorded in that amount.
Accounting for Income Taxes
The preparation of our unaudited consolidated
financial statements requires us to estimate our income taxes in each of the jurisdictions in which we operate, including those
outside the United States, which may subject the Company to certain risks that ordinarily would not be expected in the United States.
The income tax accounting process involves estimating our actual current exposure together with assessing temporary differences
resulting from differing treatments of items, such as inventory obsolescence and stock-based compensation, for tax and accounting
purposes. These differences result in the recognition of deferred tax assets and liabilities. We must then record a valuation allowance
to reduce our deferred tax assets to the amount that is more likely than not to be realized.
Significant management judgment is required
in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against
deferred tax assets. At April 2, 2016 and October 3, 2015, we recorded a full valuation allowance against our net deferred tax
assets of approximately $3.0 million due to uncertainties related to our ability to realize these assets. The valuation allowance
is based on our estimates of taxable income by jurisdiction and the period over which our deferred tax assets will be recoverable.
In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust
our valuation allowance, which could materially impact our financial position and results of operations.
The Company follows FASB ASC 740-10 relative
to uncertain tax positions. This standard provides detailed guidance for the financial statement recognition, measurement and disclosure
of uncertain tax positions recognized in the financial statements. Uncertain tax positions must meet a recognition threshold of
more-likely-than-not in order for those tax positions to be recognized in the financial statements. As of April 2, 2016 and October
3, 2015, the Company had uncertain tax positions relating to research credits taken on a prior year state tax return of $45,631.
Due to the nature of our current operations
in foreign countries (selling products into these countries with the assistance of local representatives), the Company has not
been subject to any foreign taxes in recent years, and it is not anticipated that we will be subject to foreign taxes in the near
future.
Fair Value Measurements
In determining fair value measurements,
the Company follows the provisions of FASB ASC 820,
Fair Value Measurements and Disclosures
. FASB ASC 820 defines fair value,
establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. The topic provides
a consistent definition of fair value which focuses on an exit price, which 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. The topic also prioritizes,
within the measurement of fair value, the use of market-based information over entity-specific information and establishes a three-level
hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement
date. At April 2, 2016 and October 3, 2015, the carrying amounts of cash and cash equivalents, restricted cash, accounts receivable,
inventory, other assets, accounts payable and accrued liabilities approximate fair value because of their short-term nature.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Cont’d)
The three-level hierarchy is as follows:
Level
1 - Pricing inputs are quoted prices available in active markets for identical assets or liabilities as of the measurement date.
Level
2 - Pricing inputs are quoted prices for similar assets or liabilities, or inputs that are observable, either directly or indirectly,
for substantially the full term through corroboration with observable market data.
Level 3 -
Pricing inputs are unobservable for the assets or liabilities, that is, inputs that reflect the reporting entity’s own assumptions
about the assumptions market participants would use in pricing the asset or liability.
In certain cases, the inputs used to measure
fair value may fall into different levels of the fair value hierarchy. In such cases, an asset’s or liability’s level
within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires
judgment, and considers factors specific to the investment.
The Company’s held to maturity securities
are comprised of investments in municipal bonds. These securities represent ownership in individual bonds issued by municipalities
within the United States. The value of these securities is disclosed in Note 6. The Company also holds money market mutual funds
in a brokerage account, which are classified as cash equivalents and measured at fair value. The fair value of these investments
is based on quoted prices from recognized pricing services (e.g. Standard & Poor’s, Bloomberg, etc.) or, in the case
of money market mutual funds, at their closing published net asset value.
The Company assesses the levels of the
investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change in
circumstances that caused the transfer in accordance with the Company’s accounting policy regarding the recognition of transfers
between levels of the fair value hierarchy. During the six month period ended April 2, 2016 and the year ended October 3, 2015,
there were no transfers between levels.
As of April 2, 2016 and October 3, 2015,
the Company did not hold any assets or liabilities measured at fair value on a recurring basis classified as Level 2 or Level 3.
At April 2, 2016 and October 3, 2015, the Level 1 assets measured at fair value consisted of money market funds valued at $859,278
and $1,385,201, respectively.
There were no assets or liabilities measured at fair value
on a nonrecurring basis at April 2, 2016 or October 3, 2015.
Stock-Based Compensation
Stock-based compensation cost is measured
at the grant date based on the calculated fair value of the award. The expense is recognized over the participant’s requisite
service period, generally the vesting period of the award. The related excess tax benefit received upon the exercise of stock options,
if any, is reflected in the Company’s statement of cash flows as a financing activity. There were no excess tax benefits
recorded during the six month periods ended April 2, 2016 and March 28, 2015.
The Company uses the Black-Scholes option
pricing model as the method for determining the estimated fair value of its stock awards. The Black-Scholes method of valuation
requires several assumptions: (1) the expected term of the stock award, (2) the expected future stock price volatility over the
expected term, (3) a risk-free interest rate and (4) the expected dividend rate. The expected term represents the expected period
of time the Company believes the options will be outstanding based on historical information.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Cont’d)
Estimates of expected future stock price
volatility are based on the historic volatility of the Company’s common stock, and the risk free interest rate is based on
the U.S. Treasury Note rate. The Company utilizes a forfeiture rate based on an analysis of its actual experience. The forfeiture
rate is not material to the calculation of share-based compensation.
There were 14,000 options granted during
the six month period ended April 2, 2016 and none during the six month period ended March 28, 2015.
The following table summarizes stock-based
compensation costs included in the Company’s consolidated statements of operations for the three and six month periods ended
April 2, 2016 and March 28, 2015:
|
|
April 2, 2016
|
|
|
March 28, 2015
|
|
|
|
3 months
|
|
|
6 months
|
|
|
3 months
|
|
|
6 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,801
|
|
|
$
|
7,850
|
|
Selling, general and administrative expenses
|
|
|
2,231
|
|
|
|
4,680
|
|
|
|
11,965
|
|
|
|
23,942
|
|
Product development expenses
|
|
|
343
|
|
|
|
1,712
|
|
|
|
21,245
|
|
|
|
42,514
|
|
Total share-based compensation expense before taxes
|
|
$
|
2,574
|
|
|
$
|
6,392
|
|
|
$
|
37,011
|
|
|
$
|
74,306
|
|
As of April 2, 2016 and March 28, 2015,
there was $55,165 and $66,368, respectively, of unrecognized compensation expense related to options outstanding. The unrecognized
compensation expense will be recognized over the remaining requisite service period. As of April 2, 2016, the weighted average
period
over which the compensation expense is expected to be recognized is 4.4 years.
The Company had stock options outstanding
under the following stock option plans as of April 2, 2016: the 2001 Stock Option Plan, the 2005 Non-Statutory Stock Option Plan
and the 2010 Equity Incentive Plan. There were options to purchase an aggregate 257,981 shares outstanding under such plans at
April 2, 2016. Vesting periods for options are at the discretion of the Board of Directors and typically range between zero and
five years. Options under these plans are granted with an exercise price equal to fair market value at time of grant and have a
term of ten years from the date of grant.
As of April 2, 2016, there were no shares
available for new option grants under the 2001 Stock Option Plan and the 2005 Non-Statutory Stock Option Plan; there were 46,019
shares available for grant under the 2010 Equity Incentive Plan.
The following table summarizes stock option
activity during the first six months of fiscal 2016:
|
|
Options Outstanding
|
|
|
Number of Shares
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
Unvested
|
|
|
Vested
|
|
|
Total
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, October 3, 2015
|
|
|
18,060
|
|
|
|
236,921
|
|
|
|
254,981
|
|
|
$
|
8.49
|
|
|
4.83 years
|
Grants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Vested
|
|
|
(740
|
)
|
|
|
740
|
|
|
|
-
|
|
|
|
11.61
|
|
|
|
Exercises
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Cancellations/forfeitures
|
|
|
(600
|
)
|
|
|
(10,400
|
)
|
|
|
(11,000
|
)
|
|
|
3.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 2, 2016
|
|
|
16,720
|
|
|
|
227,261
|
|
|
|
243,981
|
|
|
$
|
8.73
|
|
|
4.76 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
14,000
|
|
|
|
-
|
|
|
|
14,000
|
|
|
|
2.90
|
|
|
|
Vested
|
|
|
(300
|
)
|
|
|
300
|
|
|
|
-
|
|
|
|
4.88
|
|
|
|
Exercises
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, April 2, 2016
|
|
|
30,420
|
|
|
|
227,561
|
|
|
|
257,981
|
|
|
$
|
8.41
|
|
|
4.80 years
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Cont’d)
Information related to the stock options
vested and expected to vest as of April 2, 2016 is as follows:
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
Exercisable
|
|
|
Weighted-
|
|
Range of
|
|
|
Number of
|
|
|
Contractual
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
Exercise Prices
|
|
|
Shares
|
|
|
Life (years)
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.01
- $3.00
|
|
|
|
14,000
|
|
|
|
9.86
|
|
|
$
|
2.90
|
|
|
|
-
|
|
|
|
-
|
|
$
|
3.01
- $4.00
|
|
|
|
16,600
|
|
|
|
0.34
|
|
|
$
|
3.66
|
|
|
|
16,600
|
|
|
$
|
3.66
|
|
$
|
4.01 - $5.00
|
|
|
|
42,000
|
|
|
|
6.39
|
|
|
$
|
4.54
|
|
|
|
27,400
|
|
|
$
|
4.78
|
|
$
|
5.01
- $10.00
|
|
|
|
61,600
|
|
|
|
4.41
|
|
|
$
|
7.57
|
|
|
|
59,780
|
|
|
$
|
7.59
|
|
$
|
10.01
- $15.00
|
|
|
|
123,781
|
|
|
|
4.49
|
|
|
$
|
11.41
|
|
|
|
123,781
|
|
|
$
|
11.41
|
|
|
|
|
|
|
257,981
|
|
|
|
4.80
|
|
|
$
|
8.41
|
|
|
|
227,561
|
|
|
$
|
9.04
|
|
The aggregate intrinsic value of the Company’s
“in-the-money” outstanding and exercisable options as of April 2, 2016 and October 3, 2015 was $0. Nonvested stock
options are subject to the risk of forfeiture until the fulfillment of specified conditions.
Inventories consisted of the following:
|
|
April 2, 2016
|
|
|
October 3, 2015
|
|
Finished goods
|
|
$
|
18,624
|
|
|
$
|
8,015
|
|
Work in process
|
|
|
427,001
|
|
|
|
662,575
|
|
Raw materials
|
|
|
1,492,845
|
|
|
|
1,180,295
|
|
|
|
$
|
1,938,470
|
|
|
$
|
1,850,885
|
|
The Company has not recorded an income
tax benefit on its net loss for the three and six month periods ended April 2, 2016 and March 28, 2015 due to its uncertain realizability.
During previous fiscal years, the Company recorded a valuation allowance for the full amount of its net deferred tax assets since
it could not predict the realization of these assets.
In prior years, the Company recorded a
provision for uncertain tax positions. As of April 2, 2016 and October 3, 2015, the Company had uncertain tax positions relating
to research credits taken on a prior year state tax return of $45,631.
Outstanding potentially dilutive stock
options which were not included in the net loss per share amounts as their effect would have been anti-dilutive were as follows:
257,981 shares at April 2, 2016 and 268,612 shares at March 28, 2015.
|
NOTE 5.
|
Major Customers and Export Sales
|
During the three months ended April 2,
2016, the Company had one customer that represented 90% of net sales as compared to the three months ended March 28, 2015, during
which the Company had two customers that represented 94% (76% and 18%) of net sales. During the six months ended April 2, 2016,
the Company had two customers that represented 88% (58% and 30%, respectively) of net sales as compared to the six months ended
March 28, 2015, during which three customers represented 87% (57%, 17% and 13%, respectively) of net sales.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
A breakdown of foreign and domestic net
sales for the three and six month periods ended April 2, 2016 and March 28, 2015 is as follows:
|
|
April 2, 2016
|
|
|
March 28, 2015
|
|
|
|
3 months
|
|
|
6 months
|
|
|
3 months
|
|
|
6 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
537,236
|
|
|
$
|
1,434,101
|
|
|
$
|
515,842
|
|
|
$
|
1,280,588
|
|
Foreign
|
|
|
20,196
|
|
|
|
102,733
|
|
|
|
1,856,733
|
|
|
|
1,975,133
|
|
Total sales
|
|
$
|
557,432
|
|
|
$
|
1,536,834
|
|
|
$
|
2,372,575
|
|
|
$
|
3,255,721
|
|
The
Company sold products into one foreign country during the three month period ended April 2, 2016 and two foreign countries during
the three month period ended March 28, 2015. The Company sold products into three foreign countries during the six month period
ended April 2, 2016 and five foreign countries during the six month period ended March 28, 2015. A sale is attributed to a foreign
country based on the location of the contracting party. Domestic revenue may include the sale of products shipped through domestic
resellers or manufacturers to international destinations. The table below summarizes our foreign revenues by country as a percentage
of total foreign revenue.
|
|
April 2, 2016
|
|
|
March 28, 2015
|
|
|
|
3 months
|
|
|
6 months
|
|
|
3 months
|
|
|
6 months
|
|
Egypt
|
|
|
-
|
|
|
|
37
|
%
|
|
|
97
|
%
|
|
|
93
|
%
|
Philippines
|
|
|
100
|
%
|
|
|
20
|
%
|
|
|
-
|
|
|
|
-
|
|
Saudi Arabia
|
|
|
-
|
|
|
|
43
|
%
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
%
|
|
|
7
|
%
|
A summary of foreign revenue,
as a percentage of total
foreign revenue by geographic area, is as follows:
|
|
April 2, 2016
|
|
|
March 28, 2015
|
|
|
|
3 months
|
|
|
6 months
|
|
|
3 months
|
|
|
6 months
|
|
Mid-East and Africa
|
|
|
-
|
|
|
|
80
|
%
|
|
|
97
|
%
|
|
|
94
|
%
|
Far East
|
|
|
100
|
%
|
|
|
20
|
%
|
|
|
3
|
%
|
|
|
6
|
%
|
|
NOTE 6.
|
Cash Equivalents and Marketable Securities
|
The Company considers all highly liquid
instruments with an original maturity of three months or less to be cash equivalents. Cash equivalents are invested in money market
mutual funds. Money market mutual funds held in a brokerage account are considered available for sale. The Company accounts for
marketable securities in accordance with FASB ASC 320,
Investments—Debt and Equity Securities.
All marketable securities
must be classified as one of the following: held to maturity, available for sale, or trading. The Company classifies its marketable
securities as either available for sale or held to maturity.
Available for sale securities are carried
at fair value, with unrealized holding gains and losses reported in stockholders’ equity as a separate component of accumulated
other comprehensive income (loss). Held to maturity securities are carried at amortized cost. The cost of securities sold is determined
based on the specific identification method. Realized gains and losses, and declines in value judged to be other than temporary,
are included in investment income.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
As of April 2, 2016, available for sale securities consisted
of the following:
|
|
|
|
|
Gross Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
$
|
859,278
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
859,278
|
|
As of April 2, 2016, held to maturity securities consisted of
the following:
|
|
|
|
|
Accrued
|
|
|
Amortization
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Interest
|
|
|
Bond Premium
|
|
|
Cost
|
|
|
Gains
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
941,235
|
|
|
$
|
12,500
|
|
|
$
|
102,565
|
|
|
$
|
851,170
|
|
|
$
|
5,467
|
|
|
$
|
856,637
|
|
As of October 3, 2015, available for sale securities consisted
of the following:
|
|
|
|
|
Gross Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
$
|
1,385,201
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,385,201
|
|
As of October 3, 2015, held to maturity securities consisted
of the following:
|
|
|
|
|
Accrued
|
|
|
Amortization
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Interest
|
|
|
Bond Premium
|
|
|
Cost
|
|
|
Gains
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
1,166,857
|
|
|
$
|
14,367
|
|
|
$
|
111,709
|
|
|
$
|
1,069,515
|
|
|
$
|
9,210
|
|
|
$
|
1,078,725
|
|
The contractual maturities of held to maturity
investments as of April 2, 2016 were as follows:
|
|
Cost
|
|
|
Amortized Cost
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
234,865
|
|
|
$
|
206,099
|
|
After 1 year through 5 years
|
|
|
706,370
|
|
|
|
645,071
|
|
|
|
$
|
941,235
|
|
|
$
|
851,170
|
|
The Company’s available for sale
securities were included in cash and cash equivalents at April 2, 2016 and October 3, 2015.
|
NOTE 7
|
Cost Method Investment
|
On October 30, 2014, the Company made
an investment of $275,000 to purchase 11,000 shares of common stock of PulsedLight, Inc., an early stage start-up company located
in Bend, Oregon. Our investment represented a 10.8% ownership stake in PulsedLight, Inc. and was accounted for utilizing the cost
method of accounting. On January 12, 2016, the Company entered into an agreement to sell its shares in PulsedLight, Inc. The net
proceeds to the Company after closing costs and certain liabilities amounted to $737,283, of which the Company received $661,466
at closing and of which $75,817 was deposited in an escrow account in accordance with the terms of the sale that required 10%
of the proceeds to be held in escrow for one year. The escrow balance as of April 2, 2016 is included in other current assets
within the accompanying consolidated balance sheet.
Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements contained herein or
as may otherwise be incorporated by reference herein that are not purely historical constitute “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include but are not limited
to statements regarding anticipated operating results, future earnings, and the Company’s ability to achieve growth and profitability.
Such forward-looking statements involve known and unknown risks, uncertainties and other factors, including but not limited to
the effect of foreign political unrest; domestic and foreign government policies and economic conditions; future changes in export
laws or regulations; changes in technology; the ability to hire, retain and motivate technical, management and sales personnel;
the risks associated with the technical feasibility and market acceptance of new products; changes in telecommunications protocols;
the effects of changing costs, exchange rates and interest rates; and the Company's ability to secure adequate capital resources.
Such risks, uncertainties and other factors could cause the actual results, performance or achievements of the Company, or industry
results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking
statements. For a more detailed discussion of the risks facing the Company, see the Company’s filings with the SEC, including
its Annual Report on Form 10-K for the fiscal year ended October 3, 2015.
Overview
The Company designs, manufactures, markets
and sells communications security equipment that utilizes various methods of encryption to protect the information being transmitted.
Encryption is a technique for rendering information unintelligible, which information can then be reconstituted if the recipient
possesses the right decryption “key”. The Company manufactures several standard secure communications products and
also provides custom-designed, special-purpose secure communications products for both domestic and international customers. The
Company’s products consist primarily of voice, data and facsimile encryptors. Revenue is generated principally from the sale
of these products, which have traditionally been to foreign governments either through direct sale, pursuant to a U.S. government
contract, or made as a sub-contractor to domestic corporations under contract with the U.S. government. We also sell these products
to commercial entities and U.S. government agencies. We generate additional revenues from contract engineering services performed
for certain government agencies, both domestic and foreign, and commercial entities.
Critical Accounting Policies and Significant
Judgments and Estimates
There have been no material changes
in the Company’s critical accounting policies or critical accounting estimates since October 3, 2015, nor have we
adopted any accounting policy that has or will have a material impact on our consolidated financial statements. For further
discussion of our accounting policies see Note 1,
Summary of Significant Accounting Policies and Significant Judgments and Estimates
in the Notes to Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q and the Notes to Consolidated
Financial Statements in our Annual Report on Form 10-K for the fiscal year ended October 3, 2015 as filed with the SEC.
Results of Operations
Three Months ended April 2, 2016 as
compared to Three Months ended March 28, 2015
Net Sales
Net sales
for the quarter ended April 2, 2016
were $557,000, compared to $2,373,000 for the quarter
ended March 28, 2015, a decrease of 77%. Sales for the second
quarter of fiscal 2016 consisted
of $537,000, or 96%, from domestic sources and $20,000, or 4%, from international customers as compared to the same period in fiscal
2015, during which sales consisted of $516,000, or 22%, from domestic sources and $1,857,000, or 78%, from international customers.
Foreign sales
consisted of shipments to one country during the quarter ended April 2, 2016 and two countries during the quarter ended March 28,
2015. A sale is attributed to a foreign country based on the location of the contracting party. Domestic revenue may include the
sale of products shipped through domestic resellers or manufacturers to international destinations.
The
table below summarizes our principal foreign sales by country during the second quarters of fiscal 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Philippines
|
|
$
|
20,000
|
|
|
$
|
-
|
|
Egypt
|
|
|
-
|
|
|
|
1,808,000
|
|
Vietnam
|
|
|
-
|
|
|
|
49,000
|
|
|
|
$
|
20,000
|
|
|
$
|
1,857,000
|
|
For
the three months ended April 2, 2016, we recorded revenue under an engineering services contract amounting to $501,000. Product
sales revenue was derived primarily from shipments of
our
narrowband
radio encryptors to a foreign customer amounting to
$20,000 and our telephone
and fax encryptors to a domestic customer for use in a Middle Eastern country amounting to $25,000 during the quarter.
For
the three months ended March 28, 2015, product sales revenue was derived primarily from shipments of our DSD 72A-SP military bulk
encryption system to a customer in Egypt amounting to $1,808,000. We also sold
our link encryptor to a domestic contractor
for deployment into the Middle East amounting to
$432,000 during the quarter.
Gross Profit
Gross profit for the second quarter of
fiscal 2016 was $199,000, compared to gross profit of $1,723,000 for the same period of fiscal 2015. Gross profit expressed as
a percentage of sales was 36% for the second quarter of fiscal 2016 as compared to 73% for the same period in fiscal 2015, which
decrease was primarily due to the lower margin engineering services sales in fiscal 2016.
Operating Costs and Expenses
Selling, General and Administrative
Expenses
Selling, general and administrative expenses
for the second quarter of fiscal 2016 were $725,000, compared to $765,000 for the same quarter in fiscal 2015. This decrease of
$40,000, or 5%, was primarily attributable to decreases in general and administrative expenses of $64,000, which were partially
offset by an increase in selling and marketing expenses of $24,000 during the three months ended April 2, 2016.
The
decrease in general and administrative expenses for the three months ended April
2, 2016
was primarily attributable to decreases in personnel-related costs of $38,000 and charitable contributions of $30,000 for the
period.
The increase in selling and marketing expenses
for the three months ended April 2, 2016 was primarily attributable to increases in product evaluation costs of $60,000 and product
demonstration costs of $7,000. These increases were partially offset by decreases in outside consulting costs of $11,000 and engineering
support services of $31,000 during the period.
Product Development Costs
Product development
costs for the quarter ended April
2, 2016
were $202,000,
compared to $753,000 for the quarter ended March 28, 2015. This decrease of $551,000, or 73%, was primarily attributable to decreases
in personnel-related costs of $161,000 and outside contractor costs of $111,000. In addition, there were billable engineering services
contracts that resulted in decreased product development costs of $281,000 during the period.
Product
development costs are charged to product development, billable engineering services, bid and proposal efforts or business development
activities, as appropriate. Product development costs charged to billable projects are recorded as cost of sales; engineering
costs charged to bid and proposal efforts are recorded as selling expenses; and product development costs charged to business
development activities are recorded as marketing expenses.
The Company actively sells its engineering
services in support of funded research and development. The receipt of these orders is sporadic, although such programs can span
over several months. In addition to these programs, the Company also invests in research and development to enhance its existing
products or to develop new products, as it deems appropriate. There was approximately $501,000 of billable engineering services
revenue generated during the second quarter of fiscal 2016 and none in the second quarter of fiscal 2015.
Net Loss
The Company incurred a net loss of $263,000
for the second quarter of fiscal 2016, compared to net income of $210,000 for the same period of fiscal 2015. The net loss during
the period is primarily attributable to an 88% decrease in gross profit, which was partially offset by a 39% decrease in operating
expenses and a gain on the sale of an investment of $462,000 during the second quarter of fiscal 2016.
Six Months ended April 2, 2016 as compared
to Six Months ended March 28, 2015
Net Sales
Net sales
for the six months ended April 2, 2016
were $1,537,000, compared to $3,256,000 for the six
months ended March 28, 2015, a decrease of 53%. Sales for the first six months of fiscal 2016 consisted of $1,434,000, or 93%,
from domestic sources and $103,000, or 7%, from international customers as compared to the same period in fiscal 2015, during which
sales consisted of $1,281,000, or 39%, from domestic sources and $1,975,000, or 61%, from international customers.
Foreign sales
consisted of shipments to three countries during the six months ended April 2, 2016 and five countries during the six months ended
March 28, 2015. A sale is attributed to a foreign country based on the location of the contracting party. Domestic revenue may
include the sale of products shipped through domestic resellers or manufacturers to international destinations.
The
table below summarizes our principal foreign sales by country during the first six months of fiscal 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Egypt
|
|
$
|
39,000
|
|
|
$
|
1,844,000
|
|
Taiwan
|
|
|
-
|
|
|
|
76,000
|
|
Other
|
|
|
64,000
|
|
|
|
55,000
|
|
|
|
$
|
103,000
|
|
|
$
|
1,975,000
|
|
For
the six months ended April 2, 2016, we recorded revenue under an engineering services contract amounting to $891,000. Product sales
revenue was derived primarily from shipments of
our
narrowband
radio encryptors to a
domestic customer for deployment into Afghanistan
amounting to
$464,000 during the period.
For
the six months ended March 28, 2015, product sales revenue was derived primarily from shipments of our DSD 72A-SP military bulk
encryption system to a customer in Egypt amounting to $1,808,000 and shipments of our narrowband radio encryptors to a domestic
customer for deployment into Afghanistan amounting to $546,000. We also sold
our link encryptor to a domestic contractor
for deployment into the Middle East amounting to
$432,000. In addition,
the Company made shipments of our narrowband radio encryptors to supply the secure radio and telephone encryption solutions for
a domestic prime contractor supporting a government customer in North Africa amounting to $116,000 and sold our internet protocol
encryptor to a customer in Taiwan amounting to $76,000 during the period.
Gross Profit
Gross profit for the first six months of
fiscal 2016 was $766,000, compared to gross profit of $2,335,000 for the same period of fiscal 2015. Gross profit expressed as
a percentage of sales was 50% for the first six months of fiscal 2016 as compared to 72% for the first six months of fiscal 2015,
which decrease was primarily due to the lower margin engineering services sales in fiscal 2016. The 67% dollar value decrease in
gross profit during the six months ended April 2, 2016 was the result of lower sales volume during the period.
Operating Costs and Expenses
Selling, General and Administrative
Expenses
Selling, general and administrative expenses
for the first six months of fiscal 2016 were $1,409,000, compared to $1,521,000 for the same period in fiscal 2015. This decrease
of $112,000, or 7%, was primarily attributable to decreases in general and administrative expenses of $90,000 and selling and
marketing expenses of $22,000 during the six months ended April 2, 2016.
The decrease in general and administrative
costs during the first six months of 2016 was primarily attributable to a decrease in personnel-related costs of $60,000, a decrease
in professional and other public company fees of $15,000 and a decrease in charitable contributions of $10,000 for the period.
The decrease in selling and marketing expenses
for the first six months of 2016 was primarily attributable to decreases in outside consulting costs of $43,000, engineering support
of $37,000, marketing efforts of $4,000, product demonstration costs of $3,000 and travel costs of $2,000. These decreases were
offset by increases in product evaluation costs of $50,000, bid and proposal efforts of $17,000 and outside commission expense
of $6,000 during the period.
Product Development Costs
Product development costs for the six
months ended April 2, 2016 were $506,000, compared to $1,343,000 for the six months ended March 28, 2015. This decrease of $837,000,
or 62%, was primarily attributable to decreases in personnel-related costs of $289,000 and outside contractor costs of $124,000.
In addition, there were billable engineering services contracts that resulted in decreased product development costs of $420,000
during the period.
Product
development costs are charged to product development, billable engineering services, bid and proposal efforts or business development
activities, as appropriate. Product development costs charged to billable projects are recorded as cost of sales; product development
costs charged to bid and proposal efforts are recorded as selling expenses; and product development costs charged to business development
activities are recorded as marketing expenses.
The Company actively sells its engineering
services in support of funded research and development. The receipt of these orders is sporadic, although such programs can span
over several months. In addition to these programs, the Company also invests in research and development to enhance its existing
products or to develop new products, as it deems appropriate. There was approximately $891,000 of billable engineering services
revenue generated during the first six months of fiscal 2016 and none in the same period of fiscal 2015.
Net Loss
The Company generated a net loss of $681,000
for the first six months of fiscal 2016, compared to a net loss of $518,000 for the same period of fiscal 2015. This increase in
net loss is primarily attributable to a 67% decrease in gross profit, which was partially offset by a 33% decrease in operating
expenses and a gain on the sale of an investment of $462,000 during the first six months of fiscal 2016.
The effects of inflation and changing costs
have not had a significant impact on sales or earnings in recent years. As of April 2, 2016, none of the Company’s monetary
assets or liabilities was subject to foreign exchange risks. The Company usually includes an inflation factor in its pricing when
negotiating multi-year contracts with customers.
Liquidity and Capital Resources
We believe that our overall financial condition
remains strong. Our cash, cash equivalents and marketable securities at April 2, 2016 totaled $4,699,000 and we continue to have
no long-term debt. It is anticipated that our cash balances and cash generated from operations will be sufficient to fund our near-term
research and development and marketing activities.
Cash Requirements
We believe that the combination of existing
cash, cash equivalents, and highly liquid short-term investments, together with future cash to be generated by operations, will
be sufficient to meet our ongoing operating and capital expenditure requirements for the foreseeable future and at least through
the end of the second quarter of fiscal 2017. We also believe that, in the long term, an anticipated improvement of business prospects,
current billable activities and cash from operations will be sufficient to meet the Company’s investment in product development,
although we can give no assurances. Delays in the timing of significant sales transactions with foreign governments, U.S. government
agencies and other organizations may have a significant negative effect on the Company’s operations. Any increase in development
activities - either billable or new product related - will require additional resources, which we may not be able to fund through
cash from operations. The Company has some ability to mitigate this effect through cost-cutting measures. In circumstances where
resources will be insufficient, the Company will look to other sources of financing, including debt and/or equity investments
;
however, we can provide no guarantees that we will be successful in securing such additional financing.
Sources and Uses of Cash
The following table
presents our abbreviated cash flows for the six month periods ended (unaudited):
|
|
April 2,
|
|
|
March 28,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(681,000
|
)
|
|
$
|
(518,000
|
)
|
Changes not affecting cash
|
|
|
(355,000
|
)
|
|
|
201,000
|
|
Changes in assets and liabilities
|
|
|
1,414,000
|
|
|
|
(1,511,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities
|
|
|
378,000
|
|
|
|
(1,828,000
|
)
|
Cash provided by investing activities
|
|
|
845,000
|
|
|
|
222,000
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
1,223,000
|
|
|
|
(1,606,000
|
)
|
Cash and cash equivalents - beginning of period
|
|
|
2,277,000
|
|
|
|
3,210,000
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - end of period
|
|
$
|
3,500,000
|
|
|
$
|
1,604,000
|
|
Operating Activities
The Company generated approximately $2,206,000
more cash for operating activities in the first six months of fiscal 2016 compared to the same period in fiscal 2015. This increase
was primarily attributable to a decrease in accounts receivable during the six month period ended April 2, 2016 as compared to
the same period in fiscal 2015.
Investing Activities
Cash provided by investing activities during
the first six months of fiscal 2016 increased by approximately $623,000 compared to the same period in fiscal 2015. This change
is primarily attributable to the proceeds received on the sale of the Company’s cost method investment in fiscal 2016.
Company Facilities
On April 1, 2014,
the Company entered into a new lease for its current facilities. This lease is for 22,800 square feet located at 100 Domino Drive,
Concord, MA. The Company has been a tenant in this space since 1983. This is the Company’s only facility and houses all manufacturing,
research and development, and corporate operations. The initial term of the lease is for five years through March 31, 2019 at an
annual rate of $171,000. In addition the lease contains options to extend the lease for two and one half years through September
30, 2021 and another two and one half years through March 31, 2024 at an annual rate of $171,000. Rent expense for each of the
six month periods ended April 2, 2016 and March 28, 2015 was $85,000.
Backlog
Backlog at April 2, 2016 and October 3,
2015 amounted to $594,000 and $717,000, respectively. The orders in backlog at April 2, 2016 are expected to ship over the next
six months depending on customer requirements and product availability.
Performance guaranties
Certain foreign customers require the Company
to guarantee bid bonds and performance of products sold. These guaranties typically take the form of standby letters of credit.
Guaranties are generally required in amounts of 5% to 10% of the purchase price and last in duration from three months to one year.
At October 3, 2015, the Company had four outstanding letters of credit in the amounts of $329,000, $16,000, $14,000 and $4,000.
At April 2, 2016 the Company had four outstanding letters of credit in the amounts of $329,000, $15,000, $3,000 and $1,000, which
are secured by collateralized bank accounts totaling $348,000. These collateralized bank accounts represent cash which has restrictions
on its use.
Research and development
Research and development efforts are undertaken
by the Company primarily on its own initiative. In order to compete successfully, the Company must attract and retain qualified
personnel, improve existing products and develop new products. No assurances can be given that the Company will be able to hire
and train such technical management and sales personnel or successfully improve and develop its products.
During the six months ended April 2, 2016
and March 28, 2015, the Company spent $506,000 and $1,343,000, respectively, on internal product development. The Company also
spent $485,000 on billable development efforts during the first six months of fiscal 2016. In the first six months of fiscal 2016,
the Company’s total product development costs, including billable efforts, were 26% lower than the same period in fiscal
2015 but in line with its planned commitment to research and development, and reflected the costs of custom development, product
capability enhancements and production readiness. It is expected that development expenses for fiscal 2016 will be approximately
20-25% lower than fiscal 2015 levels.
It is anticipated
that cash from operations will fund our near-term research and development and marketing activities through at least the end of
the second quarter of fiscal 2017. We also believe that, in the long term, based on current billable activities, cash from operations
will be sufficient to meet the development goals of the Company, although we can give no assurances. Any increase in development
activities - either billable or new product related - will require additional resources, which we may not be able to fund through
cash from operations. In circumstances where resources will be insufficient, the Company will look to other sources of financing,
including debt and/or equity investments.
Other than those
stated above, there are no plans for significant internal product development or material commitments for capital expenditures
in fiscal 2016.
New Accounting Pronouncements
ASU 2014-09, Revenue From Contracts
With Customers, amended by ASU 2015-14 (Topic 606) and ASU 2016-10
In May 2014, the
FASB and the International Accounting Standards Board issued guidance on the principles for recognizing revenue and to develop
a common revenue standard for U.S. GAAP and International Financial Reporting Standards that would: (1) remove inconsistencies
and weaknesses in revenue requirements, (2) provide a more robust framework for addressing revenue issues, (3) improve comparability
of revenue recognition practices across entities, industries, jurisdictions, and capital markets, (4) provide more useful information
to users of financial statements through improved disclosure requirements, and (5) simplify the preparation of financial statements
by reducing the number of requirements to which an entity must refer. This guidance is effective prospectively for annual reporting
periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is not permitted.
The Company is currently evaluating the impact of this guidance and is still considering whether it will have a material effect
on the Company’s consolidated financial statements. This guidance will become effective for TCC as of the beginning of our
2019 fiscal year.