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if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
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whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Based on the closing
price as of March 31, 2017, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant
was $3,767,922.
The number of shares
of the registrant’s common stock, par value $0.10 per share, outstanding as of December 22, 2017 was 1,839,877.
Portions of the Company’s
Definitive Proxy Statement to be delivered to shareholders in connection with the Company’s 2018 Annual Meeting of Shareholders
to be held February 12, 2018 are incorporated by reference into Part III of this Form 10-K.
This annual report on Form 10-K contains
or incorporates by reference not only historical information, but also forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject
to the safe harbors created by those sections. We refer you to the information under the heading “Forward-Looking Statements."
As used in this annual report on Form 10-K, references to the "Company," “TCC,” "we," "our"
or "us," unless the context otherwise requires, refer to Technical Communications Corporation and our subsidiary. All
trademarks or trade names referred to in this report are the property of their respective owners.
PART I
Technical Communications
Corporation was organized in 1961 as a Massachusetts corporation to engage primarily in consulting activities. Since the late 1960s,
the business has consisted entirely of the design, development, manufacture, distribution, marketing and sale of communications
security devices, systems and services. The secure communications solutions provided by TCC protect vital information transmitted
over a wide range of data, video, fax and voice networks. TCC’s products have been sold into over 115 countries to governments,
military agencies, telecommunications carriers, financial institutions and multinational corporations. The Company’s business
consists of one industry segment, which is the design, development, manufacture, distribution, marketing and sale of communications
security devices, systems and services.
Overview
The Company’s
products consist of sophisticated electronic devices that enable users to transmit information in an encrypted format and permit
recipients to reconstitute the information in a deciphered format if the recipient possesses the right decryption “key”.
The Company’s products can be used to protect confidentiality in communications between radios, landline telephones, mobile
phones, facsimile machines and data network equipment over wires, fiber optic cables, radio waves, and microwave and satellite
links. The principal markets for the Company’s products are foreign and domestic governmental agencies, law enforcement and
military agencies, financial institutions, and multinational companies requiring protection of mission-critical information.
TCC historically and
presently designs and develops its own equipment and software to meet the requirements of general secure communications applications,
as well as the custom-tailored requirements of specific users. A customer may order equipment that is specially programmed to encrypt
transmissions in accordance with a code to which only the customer has access. Management believes the coordinated development
of cryptographic software and associated hardware allows TCC to provide high-strength encryption security products with efficient
processing and transmission. Both criteria, the Company believes, are essential to customer satisfaction.
TCC manufactures most
of its products using third-party vendors for the supply of components and selected processing. Final assembly, software loading,
testing and quality assurance are performed by TCC at its factory. This manufacturing approach allows TCC to competitively procure
the components from multiple suppliers while maintaining control of the manufacture and performance of the final product.
TCC’s products
are sold worldwide through a variety of channels depending on the country and the customer. Generally, TCC does not use stocking
distributors because the Company’s products are required to be sold under an applicable U.S. government license, which generally
requires end-user information. Rather, the Company sells directly to customers, original equipment manufacturers (“OEMs”)
and value-added resellers using its in-house sales force as well as domestic and international representatives, consultants and
distributors. The marketing and selling approach varies with each country and often involves extensive test and demonstration activity
prior to the consummation of a sale. TCC has a network of in-country representatives and consultants who conduct performance demonstrations,
market the products and close the sale, and who handle on behalf of TCC many of the ancillary requirements pertaining to importation
duties, taxes, registration fees, and product receipt and acceptance. After-sale, in-country support by the representatives maintains
customer satisfaction and provides a liaison for the Company’s customer support services.
Providing secure communications
systems and services for government and military markets worldwide remains a principal focus for TCC, as the Company believes continued
concerns over security will sustain demand for increased protection of both voice and data networks. Our focus in the government
market also now includes law enforcement special operations customers. Additionally, we see increased interest for secure communications
in the corporate industrial sector. The Company is pursuing selected, evolutionary upgrades and product derivatives of our government/military
products both to provide entry into these new markets and meet new requirements of our existing customers. We believe the ability
of TCC to custom-tailor cryptographic functions and control systems to satisfy unique customer requirements will meet a growing
demand as customers become more sophisticated in defining their communications security needs.
2017 Highlights and Recent Events
In fiscal 2017, TCC
completed delivery of several foreign and domestic contracts for its DSP 9000 radio encryption product family and provided engineering
services under contracts received in the first quarter of fiscal 2017. In early fiscal 2017, the Company received an order valued
at approximately $2,373,000 from Datron World Communications, Inc. for our military-grade DSP 9000 radio encryption equipment.
Deliveries under this contract were completed in fiscal 2017. Follow-on orders are expected as part of Datron’s five-year,
$495 million Foreign Military Sales Indefinite Delivery Indefinite Quantity contract from the U.S. Army Communications Electronic
Command.
Revenue in fiscal 2017
was $4,209,000 with a net loss of $(1,429,000) or $(0.78) per share. Major domestic and international contracts did not materialize
during the fiscal year as expected due to long government procurement cycles. TCC’s backlog at the end of fiscal 2017 was
$1,975,000, as compared to $313,000 at the end of fiscal 2016.
Offering high-end custom
cryptographic services and solutions is an established market niche for the Company and we believe an important competitive differentiator.
In fiscal 2017, custom TCC equipment and services continued to provide recurring revenue opportunities within the Company’s
established government systems product line, primarily the DSP 9000 radio encryption product family and engineering services. The
Company also has several significant opportunities it is pursuing for foreign government custom network security systems.
The market for high-end
communications security systems is competitive and subject to long government procurement cycles, unpredictable order fulfillment
lead times and fluctuating market conditions. While TCC has a pipeline of potential contracts and initiatives in development, the
timing and outcome of these potential contracts is unknown. As such, in fiscal 2017, TCC continued to closely monitor operating
expenses and reduce as appropriate, while strategically investing in business development efforts.
Technical work continued
to focus on three principal areas: development of solutions that meet the needs of OEMs; product enhancements that include expanded
features, planned capability and applications growth; and custom solutions that tailor our products and services to meet the unique
needs of our customers. Going forward, the Company expects to continue technical efforts in these areas while also increasing our
systems design and integration capabilities and services offering portfolio. The following are highlights of our product development
efforts in fiscal 2017:
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Completion of the development of the NASP (National Algorithm Support Program) capability for the
DSD 72B-SP fiber optic network encryption family of products and the Cipher X 7211 internet protocol (“IP”) encryptor.
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Initiation of the development of the next generation IP encryptors, the Cipher X 7220 and 7210.
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Development of the aircraft-compatible HSE 6000 radio encryption product variants.
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Custom engineering services.
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Advanced algorithm development for voice applications.
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Escalating and continued
turmoil around the world presents both significant opportunities and challenges for TCC. The threat of terrorism and political
unrest increase the demand for security products that provide both strategic and tactical benefits, and are readily available.
At the same time, political disruptions can cause unpredictable and erratic delays in the processing of procurements, delivery
of products and receipt of payments. The combined effects present a situation that challenges both our sales capture teams and
our production capabilities. The Company believes these market conditions will provide opportunities to build a successful future
through its efforts to enlarge and enhance its product line and expand its customer base by both identifying new customers for
existing and new products and offering such products to current customers.
2017 Products and Services
Described below is
TCC’s portfolio of communications security solutions for mission-critical voice, data and video networks for military, government
and corporate/industrial applications.
The Government Systems
product line has traditionally been the Company’s core product base and typically generates the majority of the Company’s
revenue. During fiscal 2017, 67% of the Company’s revenue was generated by our Government Systems product line and 29% of
the Company’s revenue was generated by our engineering services. Although we expect engineering services to remain strong,
we also expect that sales of our Government Systems products will constitute the majority of our revenue in the future. These products,
such as the CSD 3324 SE telephone/fax encryptor, and the DSP 9000 radio encryption system, have proven to be highly durable, which
has led to significant repeat business from our government customers. The Company believes that these products and their derivatives
will continue to be the Company’s most significant source of near-term future revenues.
The Government Systems
products also include our DSD 72A-SP military bulk encryptor. Due to diminished demand in recent years, this product is no longer
being marketed. However, we will continue to support a large installed base of this equipment still in use with our customers,
as there remains a demand for spare parts and small network upgrades.
With the availability
of our next-generation IP encryptors and the ability to integrate customer-specific national algorithms, the Company believes that
its Network Security Systems are competitive for a growing niche of mission-critical government and industrial/corporate network
applications worldwide. TCC is hopeful that future derivatives of its IP encryptor and KEYNET IP Manager system will expand the
market opportunity for these products.
The Company’s
Secure Office Systems product line had primarily consisted of products that were originally acquired through an asset and rights
purchase from a subsidiary of AT&T in 1995. These products are no longer being marketed. While one of these products, the CSD4100
secure executive telephone, is still available and remains profitable, demand for it has diminished in recent years. We will continue
to offer this product from existing inventory, which we anticipate will be sufficient for several more years.
TCC has been offering
CipherTalk
®
secure mobile phone communication solutions since 2005
.
In fiscal 2016, the Company introduced its next-generation CipherTalk 8500, a secure mobile IP-based phone. The market for high-end
secure wireless mobile phones is competitive and product demand
has
not developed as expected. We will continue to market this product with reduced expectations.
The Company also provides
customized tools, products and training upon a customer’s request, as well as design solutions for OEM requirements. In addition,
the Company actively sells its engineering services in support of funded research and development. These services are typically
billed to a customer on a time and materials basis and can run for several months to several years depending on the scope of the
project.
Government Systems
The Company’s
DSD 72A-SP Military Bulk Ciphering System is a rugged military system that provides a high level of cryptographic security for
military data networks operating at up to 34 million bits per second. The product supports a wide variety of interfaces and is
designed to integrate into existing networks.
The Company’s
DSP 9000 Radio Security family of products offers strategic-level security for voice and data communications sent over HF, VHF
and UHF channels. Designed for military environments, the Company believes these products provide high voice quality over poor
line connections, making them an attractive security solution for military aircraft, naval, base station and man-pack radio applications.
These products provide automated key distribution for security and ease of use. They are also radio independent because software
programmable interfaces allow radio interface levels to be changed without configuring the hardware. Base station, handset and
embedded board configurations are available options. All versions interoperate with TCC’s HSE 6000 Squad Radio Headset and
Telephone Encryptor for cross-network secure voice conferencing. The DSP 9000 base station model also interoperates with the Company’s
CSD 3324 SE secure telephone system to enable “office-to-field” communications.
TCC’s HSE 6000
Squad Radio Headset and Telephone Encryptor is designed for public safety special operations land mobile radio applications, as
well as military applications. With the optional Telephone Interconnect Kit, the HSE 6000 connects to corded handset telephones
for secure voice communications and radio-to-telephone conferencing over Voice over IP, digital, and analog telephone networks.
It is also interoperable with the DSP 9000 radio security product family, enabling secure voice communications and cross-network
conferencing across and between air, land, sea and office.
The Company’s
CSD 3324 SE Secure Telephone, Fax and Data system provides strategic-level communications security for voice, fax and data encryption
in a telephone package designed for government applications needing high reliability. The product has a fallback mode, which was
originally developed for poor HF channels. As a result, secure communications are possible even over poor line conditions. TCC's
high-level encryption and automated key distribution system protect sensitive information, and internal storage of 800 keys provides
hands-off security.
The Company’s
CSD 3324 SP telephone and fax system provides integrated secure voice and fax security in a telephone package designed for government
and corporate applications. The CSD 3324 SPV secure telephone secures voice communications over the public switched telephone network
and interoperates with the CSD 3324 SP system. TCC’s CSD 3324 SPF fax encryptor attaches to fax machines to secure fax transmissions
and is also compatible with the CSD 3324 SP.
Network Security
Systems
TCC offers network
encryption systems with KEYNET centralized key and device management for IP, SONET/SDH and frame relay networks to secure data
in transit from local area network to local area network and across wide area networks. During 2014 the Company introduced KEYNET
Lite, a version of KEYNET for small networks. The Company supports the industry standard Advanced Encryption Standard (“AES”)
256-bit cryptographic algorithm and can integrate customer-specific national algorithms to meet customer-specific needs. All of
TCC’s encryption systems are designed to seamlessly overlay onto existing networks without requiring infrastructure changes.
Network performance impact is negligible and we believe the systems are easy to deploy, monitor and manage. Additionally, the Cipher
X family offers scalable performance to higher speeds without changing hardware. This minimizes the entry cost of deploying a security
solution and provides a cost-effective path to meet evolving business needs. Upgrades are licensed and made available on-demand
via the KEYNET management system. All performance levels interoperate and are designed to have identical functionality.
Cipher X 7211 IP Encryption
with KEYNET IP Manager provides strategic-level secure communications for large IP networks for point-to-point and multicast applications
such as video conferencing. It offers a unique combination of flexibility, scalable 1 gigabit per second performance and KEYNET
IP Manager for ease of use. The Cipher X 7211 is a hardware-based, FIPS 140-2 Level 3 designed encryption device.
Secure Office Systems
The
CipherTalk 8500 secure mobile phone is designed to provide military-grade encrypted voice and text communications anywhere in the
world over GSM and Wi-Fi networks. Introduced in fiscal 2016,
the CipherTalk 8500 IP-based secure wireless phone is built
on a hardened Android
TM
smartphone platform for security and ease of use. TCC also offers a server-based, network management
system that provides the customer with total control of network connectivity.
The Company’s
CSD 4100 Executive Secure Telephone offers strategic-level voice and data security in an executive telephone package. Exceptional
voice quality can be achieved with three different voice-coding algorithms. The product provides ease-of-use security features
such as automated key management, authentication, certification and access control. Due to diminished demand in recent years, this
product is no longer being marketed. The product line provides support to existing customers who have installed equipment bases
requiring expansion or modification.
Competition
The market for communications
security devices and systems is highly competitive and characterized by rapid technological change. The Company has several competitors,
including foreign-based companies, in the communications security device field. The Company believes its principal competitors
include Crypto AG, Thales Group, Motorola Solutions, Inc., General Dynamics Corporation, Omnisec AG, Certes Networks, Inc., Gemalto
N.V., Harris Corporation and Silent Circle, Inc.
The Company competes
based on its service, the operational and technical features of its products, its customization abilities, its sales expertise,
and pricing. Many of TCC’s competitors have substantially greater financial, technical, sales and marketing, distribution
and other resources, greater name recognition and longer standing relationships with customers. Competitors with greater financial
resources can be more aggressive in marketing campaigns, can survive sustained price reductions in order to gain market share and
can devote greater resources to support existing products and develop new competing products.
Our competitive position
also depends on our ability to attract and retain qualified personnel, obtain and maintain intellectual property protection or
otherwise develop proprietary products or processes, and secure sufficient capital resources for product, research and development
efforts.
Sales and Backlog
In fiscal 2017, the
Company had two customers representing 91% of total net sales. These sales consisted primarily of our engineering services representing
29% of net sales and shipments of our narrowband radio encryptors to a domestic customer for deployment into Afghanistan representing
61% of net sales. In fiscal 2016, the Company had three customers representing 90% of total net sales. These sales consisted primarily
of our engineering services representing 60% of net sales and shipments of our narrowband radio encryptors to a domestic customer
for deployment into Afghanistan representing 18% of net sales and additional sales of our narrowband radio encryptors to a domestic
customer for deployment into North Africa representing 10% of net sales.
The Company sells directly
to customers, original equipment manufacturers and value-added resellers using its in-house sales force as well as domestic and
international representatives, consultants and distributors. International sales are made primarily through our main office. We
seldom have long-term contractual relationships with our customers and, therefore, generally have no assurance of a continuing
relationship within a given market.
Orders for our products
are usually placed by customers on an as-needed basis and we typically ship products within 30 to 180 days of receipt of a customer's
firm purchase order. Our backlog consists of all orders received where the anticipated shipping date is within 12 months of the
order date. Because of the possibility of customer changes in delivery schedules or the cancellation of orders, our backlog as
of any particular date may not be indicative of sales in any future period. Our backlog as of September 30, 2017 and October 1,
2016 was approximately $1,975,000 and $313,000, respectively.
The Company expects
that sales to a relatively small number of customers will continue to account for a high percentage of the Company’s revenues
for the foreseeable future. A reduction in orders from any such customer, or the cancellation of any significant order and failure
to replace such order with orders from other customers, would have a material adverse effect on the Company’s financial condition
and results of operations.
Regulatory Matters
As a party to a number
of contracts with the U.S. government and its agencies, the Company must comply with extensive regulations with respect to bid
proposals and billing practices. Should the U.S. government or its agencies conclude that the Company has not adhered to federal
regulations, any contracts to which the Company is a party could be canceled and the Company could be prohibited from bidding on
or participating in future contracts. Such a prohibition would have a material adverse effect on the Company.
All payments to the
Company for work performed on contracts with agencies of the U.S. government are subject to adjustment upon audit by the U.S. Defense
Contract Audit Agency, the U.S. Government Accountability Office, and other agencies. The Company could be required to return any
payments received from U.S. government agencies if it is found to have violated federal regulations. 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. In addition, U.S. government contracts may be canceled at any time by
the government with limited or no notice or penalty. Contract awards are also subject to funding approval from the U.S. government,
which involves political, budgetary and other considerations over which the Company has no control.
The Company’s
security products are subject to export restrictions administered by the U.S. Department of Commerce and U.S. Department of State,
which license the export of encryption products, subject to certain technical restrictions. In addition, U.S. export laws prohibit
the export of encryption products to a number of hostile countries. Although to date the Company has been able to secure necessary
U.S. government export licenses, there can be no assurance that the Company will continue to be able to secure such licenses in
a timely manner in the future, or at all.
The U.S. government
controls, through a licensing process, the distribution of encryption technology and the sale of encryption products. The procedure
for obtaining the applicable license from either the Department of Commerce or the Department of State (depending on the U.S. government’s
determination of jurisdiction) is well documented. The Company submits a license request application, which contains information
pertaining to:
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the type of equipment being sold;
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detailed technical description (if required);
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The appropriate departments
of the U.S. government review the application and a licensing decision is provided to the Company. Pursuant to the receipt of the
license, the Company may ship the product.
Many of TCC’s
products can be sold under existing “blanket” licenses which have been obtained through a variant of the licensing
process that approves products for sale to certain classes of customers (e.g. financial institutions, civilian government entities
and commercial users). The Company has obtained “blanket” licenses for its secure telephone and office system products
and its family of network encryptors. Licenses for sales of certain other products and/or to certain end users must be submitted
for specific approval as described above. Although the U.S. government retains the right and ability to restrict product exports,
the Company does not believe that U.S. government licensing will become more restrictive or an impediment to its business. The
trend has been for the U.S. government to reduce the restrictions on the foreign sale of cryptographic equipment. TCC believes
this trend is driven by the government’s recognition of the technology available from foreign sources and the need to allow
domestic corporations to compete in foreign markets. However, should the regulations become more restrictive, it would have a negative
impact on the Company’s international business, the impact of which could be material.
The costs and effects
of compliance by the Company with applicable environmental laws during fiscal 2017 were, and historically have been, immaterial.
In 2003 the European Union adopted the “Restriction of Hazardous Substances Directive 2002/95/EC”. In the event the
Company’s sales to Europe increase, the Company may have to incur additional costs to provide for the disposal of its products
in compliance with that directive.
Manufacturing
TCC has several manufacturing
subcontractors and suppliers that provide outside processing of electronic circuit boards, fabrication of metal components, and
supply of electronic components. For the majority of purchased materials and services, TCC has multiple suppliers that are able
to deliver materials and services under short-term delivery purchase orders. Payment is typically made after delivery, based upon
standard credit arrangements. For a small minority of parts, there are limited sources of supply. In such cases, TCC monitors source
availability and usually stocks for anticipated long-term requirements to assure manufacturing continuity. Notwithstanding the
Company’s efforts to maintain material supplies, shortages can and do develop, resulting in delays in production, significant
engineering development effort to find alternative solutions and, if production cannot be maintained, the discontinuation of the
affected product design.
The Company’s
internal manufacturing process consists primarily of adding critical components, final assembly, quality control, testing and system
burn-in. Delivery times vary depending on the products and options ordered.
Technological Expertise
TCC’s technological
expertise and experience, including certain proprietary rights which it has developed and maintains as trade secrets, are crucial
to the conduct of the Company’s business. TCC has been designing and producing secure, cryptography-based communications
systems for over 50 years, during which time the Company has developed many technological techniques and practices. This expertise
and experience is in the areas of cryptographic algorithm design and implementation, key distribution and management systems, cryptographic
processors, voice and fax encryption, and electronic hardware design. TCC relies on its internal technical expertise and experience,
which TCC considers to be proprietary. These proprietary technologies are owned by TCC, are under TCC’s control, and have
been documented consistent with standard engineering practices. It is estimated that the majority of sales during the past two
years and during the next two years will be of products that are based upon TCC-proprietary designs.
Such technological
experience and expertise are important as they enable an efficient design and development process. Loss of this experience and
expertise would have an adverse impact on the Company. However, TCC’s practices governing the internal documentation of design
data mitigate some of the risk associated with the loss of personnel who are skilled in the core competencies described above.
TCC’s intellectual
property portfolio also includes certain patents and trademarks. Eight patents have been issued to the Company, although management
is of the opinion that, while patent protection is desirable with respect to certain of its products, none of the Company's patents
are material to the conduct of its business. The Company also has a number of registered and unregistered trademarks for various
products, none of which are material to the conduct of TCC’s business.
TCC has an on-going
technology license for communications protocol software used in the CipherONE family of Network Security System products. The license
is royalty-based and runs without a specified termination date. The cost of this license is immaterial.
With the exception
of the technology license referred to above, TCC has no material third party rights upon which the Company relies. Sales of the
products associated with this license have not been and are not anticipated to be significant to the Company’s revenues.
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 improve
existing products and develop new products as well as attract and retain qualified personnel. 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 fiscal years
ended September 30, 2017 and October 1, 2016, the Company spent $1,584,000 and $828,000, respectively, on internal product development.
The Company also spent $437,000 and $1,178,000 on billable development efforts during fiscal 2017 and 2016, respectively. In fiscal
2017, the Company’s total product development costs were in line with fiscal 2016 and its planned commitment to research
and development, and reflected the costs of custom development, product capability enhancements and production readiness. It is
expected that product development expenses in fiscal 2018 will be consistent with fiscal 2017 levels.
Technical work continued
to focus on three principal areas: development of solutions that meet the needs of OEMs; product enhancements that include expanded
features, planned capability and applications growth; and custom solutions that tailor our products and services to meet the unique
needs of our customers. Going forward, the Company expects to continue technical efforts in these areas while also increasing our
systems design and integration capabilities and services offering portfolio. The following are highlights of our product development
efforts in fiscal 2017:
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·
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Completion of the development of the NASP capability for the DSD 72B-SP fiber optic network encryption
family of products and the Cipher X 7211 internet protocol (“IP”) encryptor.
|
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Initiation of the development of the next generation IP encryptors, the Cipher X 7220 and 7210
|
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Development of the aircraft-compatible HSE 6000 radio encryption product variants.
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Custom engineering services.
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Advanced algorithm development for voice applications.
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Foreign Operations
The Company’s
results of operations are dependent upon its foreign sales, including domestic sales shipped to foreign end-users. Although foreign
sales were more profitable than domestic sales during fiscal years 2017 and 2016 because the mix of products sold abroad included
a greater number of products with higher profit margins, this does not represent a predictable trend. Sales to foreign markets
have been and will continue to be affected by, among other things, the stability of foreign governments, foreign and domestic economic
conditions, export and other governmental regulations, and changes in technology. The Company attempts to minimize the financial
risks normally associated with foreign sales by utilizing letters of credit confirmed by U.S. and foreign banks. Foreign sales
contracts are usually denominated in U.S. dollars.
The Company utilizes
the services of sales representatives, consultants and distributors in connection with foreign sales. Typically, representatives
are paid commissions and consultants are paid fixed amounts on a stipulated schedule in return for services rendered. Distributors
are granted discounted pricing.
The export from the
United States of many of the Company’s products may require the issuance of a license by the U.S. Department of State under
the Arms Export Control Act of 1976, as amended, or by the U.S. Department of Commerce under the Export Administration Act as kept
in force by the International Emergency Economic Powers Act of 1977, as amended. The licensing process is discussed in more detail
under the “Regulatory Matters” section above.
In fiscal years 2017
and 2016, sales directly to international customers accounted for approximately 8.6% and 8.4%, respectively, of our net sales.
During those periods a significant portion of domestic sales (66% and 20%, respectively) were made to a domestic radio manufacturer
that shipped our radio encryption products overseas for use in Afghanistan. Based on our historical results we expect that international
sales, including sales to domestic customers that ship to foreign end-users, will continue to account for a significant portion
of our revenues for the foreseeable future. As a result, we are subject to the risks of doing business internationally, including:
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changes in regulatory requirements,
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domestic and foreign government policies, including requirements to expend a portion of program
funds locally and governmental industrial cooperation requirements,
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fluctuations in foreign currency exchange rates,
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delays in placing orders,
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the complexity and necessity of using foreign representatives, consultants and distributors,
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the uncertainty of the ability of foreign customers to finance purchases,
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uncertainties and restrictions concerning the availability of funding credit or guarantees,
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imposition of tariffs or embargoes, export controls and other trade restrictions,
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the difficulty of managing and operating an enterprise spanning several countries,
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compliance with a variety of foreign laws, as well as U.S. laws affecting the activities of U.S.
companies abroad, and
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economic and geopolitical developments and conditions, including international hostilities, acts
of terrorism and governmental reactions, inflation, trade relationships and military and political alliances.
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While these factors
and their impact are difficult to predict, any one or more of these factors could adversely affect our operations in the future.
We also may not be
successful in obtaining the necessary licenses to conduct operations abroad, and the U.S. government may prevent proposed sales
to foreign governments or other end-users.
Employees
As of September 30,
2017, the Company employed 23 full-time employees and two part-time employees, as well as several part-time consultants. The Company
believes that its relationship with its employees is good.
You should carefully consider the following
risk factors that affect our business. Such risks could cause our actual results to differ materially from those that are expressed
or implied by forward-looking statements contained herein. The risks and uncertainties described below are not the only ones facing
us. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important
factors that affect us. If any of the following risks occur, our business, financial condition or results of operations could be
materially and adversely affected. You should also consider the other information included in this Annual Report on Form 10-K
for the fiscal year ended September 30, 2017 and subsequent quarterly reports filed with the U.S. Securities and Exchange Commission
(the “SEC”).
We have suffered recurring operating
losses from operations and there is doubt about our ability to continue as a going concern.
The Company has suffered
recurring losses from operations and had an accumulated deficit of $823,000 at September 30, 2017. In addition, we continue to
experience negative cash flows from operations.
Due to the losses we have incurred and our
current limited financial resources, our independent registered public accounting firm has noted in its report on our financial
statements that these conditions raise substantial doubt as to our ability to continue as a going concern within one year of the
issuance date of the financial statements included in this Annual Report on Form 10-K. Such financial statements do not include
any adjustments to reflect the uncertainty about the Company’s ability to continue as a going concern. Moreover, the going
concern explanatory paragraph may make obtaining financing more difficult or costly, which financing may be required should our
efforts to raise capital resources from operations prove unsuccessful.
Our quarterly operating results typically
fluctuate and our future revenues and profitability are uncertain.
We have experienced
significant fluctuations in our quarterly operating results during the last five years and anticipate continued substantial fluctuations
in our future operating results. A number of factors have contributed to these quarterly fluctuations including, but not limited
to:
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foreign political unrest;
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budgeting cycles of customers, including the U.S. government;
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introduction and market acceptance of new products and
product enhancements by us and our competitors;
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timing and execution of individual contracts;
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competitive conditions in the communications security industry;
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changes in general economic conditions; and
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shortfalls of revenues in relation to expectations that formed the basis for the calculation of fixed expenses.
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Our international operations expose
us to additional risks.
The Company is dependent
upon its foreign sales (including domestic sales shipped to foreign end-users) and we expect that sales to foreign end-users will
continue to account for a significant portion of our revenues for the foreseeable future. As a result, we are subject to the risks
of doing business internationally, including imposition of tariffs or embargoes, export controls, trade barriers and trade disputes,
regulations related to customs and export/import matters, fluctuations in foreign economies and currency exchange rates, longer
payment cycles and difficulties in collecting accounts receivable, the complexity and necessity of using foreign representatives,
consultants and distributors, tax uncertainties and unanticipated tax costs due to foreign taxing regimes, the difficulty of managing
and operating an enterprise spanning several countries, the uncertainty of protection for intellectual property rights and differing
legal systems generally, compliance with a variety of laws, and economic and geopolitical developments and conditions, including
international hostilities, armed conflicts, acts of terrorism and governmental reactions, inflation, trade relationships, and military
and political alliances.
We also may not be
successful in obtaining the necessary licenses to conduct operations abroad, including the export of many of the Company’s
products, and the U.S. government may prevent proposed sales to foreign governments or certain international end-users. Export
restrictions, compliance with which imposes additional burdens on the Company, may further provide a competitive advantage to foreign
competitors facing less stringent controls on their products and services.
We continue to focus
our efforts in emerging markets, including South America and Southwest Asia. In many of these emerging markets, we may be faced
with risks that are more significant than if we were to do business in developed countries, including undeveloped legal systems,
unstable governments and economies, and potential governmental actions affecting the flow of goods and currency.
We continue to face a number of risks
related to current global economic and political conditions that could unfavorably impact our business.
Global economic conditions
continue to be challenging for the secure communications markets, as many economies and financial markets remain in a recession
resulting from a number of factors, including adverse credit conditions, low economic growth rates, continuing high rates of unemployment,
and reduced corporate capital spending. Economic growth in the U.S. and many other countries has remained low and the length of
time these adverse economic conditions may persist is unknown. In addition, conflicts in the Middle East and elsewhere have created
many economic and political uncertainties that have impacted worldwide markets. These global economic and political conditions
have impacted and could continue to impact our business in a number of ways, including:
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Budgeting and forecasting are difficult:
It is difficult to estimate changes in various
parts of the U.S. and world economy, including the markets in which we participate. Components of our budgeting and forecasting
are dependent upon estimates of demand for our products, and the prevailing economic and political uncertainties make estimating
future income and expenditures difficult.
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Potential deferment or cancellation of purchases and orders by customers:
Uncertainty about
current and future global economic and political conditions may cause, and in some cases has caused, governments and businesses
to defer or cancel purchases. If future demand for our products declines due to deteriorating global economic and political conditions,
it will negatively impact our financial results.
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Customers' inability to obtain financing to make purchases:
Some of our customers require
substantial financing, including government financing, in order to fund their operations and make purchases from us. The inability
of these customers to obtain sufficient credit or other funds to finance purchases and/or meet their payment obligations could
have a negative impact on our financial results.
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Our future success will depend
on our ability to respond to rapid technological changes in the markets in which we compete.
The markets for TCC’s
products and services are characterized by rapid technological developments, changing customer technological requirements and preferences,
frequent new product introductions, enhancements and modifications, and evolving industry standards. Our success will depend in
large part on our ability to correctly identify emerging technological trends, enhance capabilities, and develop and manufacture
new technologies and products quickly, in a cost-effective manner, and at competitive prices. The development of new and enhanced
products is a complex and costly process. We may need to make substantial capital expenditures and incur significant research and
development costs to develop and introduce such new products and enhancements. Our choices for developing technologies may prove
incorrect if customers do not adopt the products we develop or if the technologies ultimately prove to be technically or commercially
unviable. Development schedules also may be adversely affected as the result of the discovery of performance problems. If we fail
to timely develop and introduce competitive new technologies, our business, financial condition and results of operations would
be adversely affected.
Existing or new competitors may
develop competing or superior technologies
.
The industry in which
the Company competes is highly competitive, and the Company has several domestic and foreign competitors. Many of these competitors
have substantially greater financial, technical, sales and marketing, distribution and other resources, greater name recognition
and longer standing relationships with customers. Competitors with greater financial resources can be more aggressive in marketing
campaigns, can survive sustained price reductions in order to gain market share, and can devote greater resources to support existing
products and develop new competing products. Any period of sustained price reductions for our products would have a material adverse
effect on the Company’s financial condition and results of operations. TCC may not be able to compete successfully in the
future and competitive pressures may result in price reductions, loss of market share or otherwise have a material adverse effect
on the Company’s financial condition and results of operations. It is also possible that competing products will emerge that
may be superior in quality and performance and/or less expensive than those of the Company, or that similar technologies may render
TCC’s products obsolete or uncompetitive and prevent the Company from achieving or sustaining profitable operations.
The operating performance of our
products is critical to our business and reputation.
The sale and use of
our products entail a risk of product failure, product liability or other claims. Occasionally, some of our products have quality
issues resulting from the design or manufacture of the product or the software used in the product. Often these issues are discovered
prior to shipment and may result in shipping delays or even cancellation of orders by customers. Other times problems are discovered
after the products have shipped, requiring us to resolve issues in a manner that is timely and least disruptive to our customers.
Such pre-shipment and post-shipment problems have ramifications for TCC, including cancellation of orders, product returns, increased
costs associated with product repair or replacement, and a negative impact on our goodwill and reputation.
Once our products are
in use, any product failure, including software or hardware failure, which causes a breach of security with respect to our customer’s
confidential communications could have a material adverse effect on TCC. There is no guarantee of product performance or that our
products are adequate to protect against all security breaches. While we attempt to mitigate such risks by maintaining insurance
and including warranty disclaimers and liability limitation clauses in our arrangements with customers, such mitigation measures
may not protect us against liability in all instances. If our products failed for any reason, our clients could experience data
loss, financial loss, personal and property losses, harm to reputation, and significant business interruption. Such events may
expose us to substantial liability, increased regulation and/or penalties, as well as loss of customer business and a diminished
reputation. Any product liability claims and related litigation would likely
be
time-consuming and expensive,
may not be adequately covered by insurance,
and
may delay or terminate research and development efforts, regulatory approvals and commercialization activities.
If our products and services do not
interoperate with our end-users’ products, orders could be delayed or cancelled, which could significantly reduce our revenues.
Our products are designed
to interface with our end-users’ existing products, each of which has different specifications and utilizes multiple protocol
standards. Many of our end-users’ systems contain multiple generations of products that have been added over time as these
systems have grown and evolved. Our products and services must interoperate with all of these products and services as well as
with future products and services that might be added to meet our end-users’ requirements. If our products do not interface
with those within our end-users’ products and systems, orders for our products could be delayed or cancelled, which could
significantly reduce our revenues.
Government regulation and legal
uncertainties could harm our business
.
As a party to a number
of contracts with the U.S. government and its agencies, the Company must comply with extensive regulations with respect to bid
proposals and billing practices. Should the U.S. government or its agencies conclude that the Company has not adhered to federal
regulations, any contracts to which the Company is a party could be canceled and the Company could be prohibited from bidding on
or participating in future contracts. Moreover, payments to the Company for work performed on contracts with agencies of the U.S.
government are subject to audit and adjustment. The Company could be required to return any payments received from U.S. government
agencies if it is found to have violated federal regulations. 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.
The Company’s
security products are subject to export restrictions administered by the U.S. Department of Commerce and Department of State, which
license the export of encryption products, subject to certain technical restrictions. In addition, U.S. export laws prohibit the
export of encryption products to a number of hostile countries and some end-users. Although to date the Company has been able to
secure necessary U.S. government export licenses, there can be no assurance that the Company will continue to be able to secure
such licenses in a timely manner in the future, or at all. Delays in obtaining necessary approvals could be costly in terms of
lost sales opportunities and compliance costs. Should export restrictions increase or regulations become more restrictive, or should
new laws be enacted, it could have a negative impact on the Company’s international business, which impact could be material.
Contracts with the U.S. government
may not be fully funded at inception and are subject to termination
.
A portion of our revenues
has historically been generated under agreements with the U.S. government. Any changes or delays in the budget of the U.S. government,
and in particular defense spending, could affect our business, and funding levels are difficult to predict with any certainty.
Moreover, certain multi-year contracts are conditioned on the continuing availability of appropriations. However, funds are typically
appropriated on a fiscal-year basis, even though contract performance may extend over many years, making future sales and revenues
under multi-year contracts uncertain. Changes in appropriations and budgets as well as economic conditions generally in subsequent
years may impact the funding for these contracts. In addition, changes in funding and other factors may lead to the termination
of such contracts. In addition, U.S. government contracts may be canceled at any time by the government with limited or no notice
or penalty. Adverse changes in funding and the termination of government contracts could have a material adverse impact on the
Company’s financial condition and results of operations.
If the protection of our intellectual
property is inadequate, our competitors may gain access to our technologies.
The Company’s
technological expertise and experience, including certain proprietary rights that it has developed and maintains as trade secrets,
are crucial to the conduct of the Company’s business and its ability to compete in the marketplace. Such technological expertise
and experience are important as they enable an efficient design and development process. Loss of this experience and expertise
would have an adverse impact on the Company. To protect our proprietary information, we rely primarily on a combination of internal
procedures, contractual provisions, and patent, copyright, trademark and trade secret laws. Such internal procedures and contractual
provisions may not prove sufficient to maintain the confidentiality and proprietary nature of such information and may not provide
meaningful protection in the event of any unauthorized use or disclosure. Trade secret and copyright laws afford only limited protection.
Current and potential patents and trademarks may not provide us with any competitive advantage and patents and trademarks must
be enforced and maintained in order to provide protection, which may prove costly and time-consuming.
Despite our efforts
to safeguard and maintain our proprietary rights, we may not be successful in doing so or the steps taken by us may be inadequate
to deter unauthorized parties from misappropriating our technologies or prevent them from obtaining and using our proprietary information,
products and technologies. Moreover, our competitors may independently develop similar technologies or design around patents issued
to us.
Other parties may have
patent rights relating to the same subject matter covered by our products or technologies, enabling them to prevent us from operating
without obtaining a license and paying royalties. Third parties also may challenge our patents or proprietary rights or claim we
are infringing on their rights. Any claims of infringement or misappropriation, with or without merit, would likely be time-consuming,
result in costly litigation and diversion of resources, and cause delays in the development and commercialization of our products.
We may be required to expend significant resources to develop non-infringing intellectual property, pay royalties, or obtain licenses
to the intellectual property that is the subject of such litigation. Royalties may be costly and licenses, if required, may not
be available on terms acceptable to us, the absence of which could seriously harm our business.
In addition, the laws
and enforcement mechanisms of some foreign countries with respect to intellectual property may not offer the same level of protection
as do the laws of the United States. Legal protections of our rights may be ineffective in such countries, and technologies developed
in such countries may not be protected in jurisdictions where protection is ordinarily available. Our inability to protect our
intellectual property both in the United States and abroad would have a material adverse effect on our financial condition and
results of operations.
The Company relies on a small number
of customers for a large percentage of its revenues.
We will be successful
only if a significant number of customers adopt our secure communications products. Historically the Company has had a small number
of customers representing a large percentage of its total sales. Although the Company endeavors to expand its customer base, we
expect that sales to a limited number of customers will continue to account for a high percentage of our revenues in any given
period for the foreseeable future. This reliance makes us particularly susceptible to factors affecting those customers. If such
customers’ business declines and as a result our sales to such customers decline without corresponding sales orders from
other customers, our financial condition and results of operations would be adversely affected. It is difficult to predict the
rate at which customers will use our products, even in the case of repeat customers, and we do not typically have long-term contractual
arrangements.
We may not be able to maintain
effective product distribution channels.
We rely on an in-house
sales force as well as domestic and international representatives, consultants and distributors for the sale and distribution of
our products. Our sales and marketing organization may be unable to successfully compete against more extensive and well-funded
operations of certain of our competitors. In addition, we must manage sales and marketing personnel in numerous countries around
the world with the concomitant difficulties in maintaining effective communications due to distance, language and cultural barriers.
Further, certain of our distributors may carry competing products lines, which may negatively impact our sales revenues.
Our management has determined that
the Company’s internal control over financial reporting is currently not effective.
Our management team,
under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an assessment
of the effectiveness of the Company’s internal control over financial reporting as of the end of the Company’s 2017
fiscal year. In the course of that assessment, management identified a control deficiency that was also identified in the course
of its assessments for fiscal years 2008 through 2016. Specifically, management determined that TCC lacked sufficient staff to
adequately segregate accounting duties, which could result in a misstatement of financial statement items that would not be detected.
Management concluded that such control deficiency constituted a material weakness and that our internal control over financial
reporting was not effective as of September 30, 2017.
Until we are able to
remediate the material weakness identified, such material weakness may materially and adversely affect our ability to report accurately
our financial condition and results of operations in the future in a timely and reliable manner. In addition, although we review
and evaluate our internal control systems to allow management to report on the sufficiency of our internal control over financial
reporting, we cannot assure you that we will not discover additional weaknesses in the future or that any corrective actions taken
to remediate issues identified during the course of an assessment will be effective. Any such additional weaknesses or failure
to remediate any existing weakness could materially adversely affect our financial condition or ability to comply with applicable
financial reporting requirements.
We rely on single or limited sources for the manufacture
and supply of certain product components.
For a small percentage
of parts, we rely upon a single or limited number of manufacturers and suppliers. Moreover, because we depend on third party manufacturers
and suppliers, we do not directly control product delivery schedules or component quality. In addition, we may not be able to maintain
satisfactory contractual relations with our manufacturers and suppliers. A significant delay in delivering products to our customers,
whether from unforeseen events such as natural disasters or otherwise, or unforeseen quality issues could have a material adverse
effect on our results of operations and financial condition. If we lose any of the manufacturers or suppliers of certain product
components, we expect that it would take from three to six months for a new manufacturer or supplier to begin full-scale production
of one of our products. The delay and expense associated with qualifying a new manufacturer or supplier and commencing production
could result in a material loss of revenue and reduced operating margins and harm our relationships with customers. While we have
not experienced any significant supply problems or problems with the quality of the manufacturing process of our suppliers and
there have been no materially late deliveries of components or parts to date, it is possible that in the future we may encounter
problems in the manufacturing process or shortages in parts, components or other elements vital to the manufacture, production
and sale of our products.
The loss of existing key management
and technical personnel and the inability to attract new hires could have a detrimental effect on the Company
.
Our success depends
on identifying, hiring, training, and retaining qualified professionals. Competition for qualified employees in our industry is
intense and made more difficult due to the tight labor market in Massachusetts. We expect these conditions to remain so for the
foreseeable future. If we were unable to attract and hire a sufficient number of employees, or if a significant number of our current
employees or any of our senior managers resign, we may be unable to complete or maintain existing projects or bid for new projects
of similar scope and revenue. The Company’s success is particularly dependent on the retention of existing management and
technical personnel, including Carl H. Guild, Jr., the Company’s President and Chief Executive Officer. Although the Company
has entered into an employment agreement with Mr. Guild, the loss or unavailability of his services could impede our ability to
effectively manage our operations.
We may need to expand our operations
and we may not effectively manage any future growth.
As of December 22,
2017, we employed 23 full-time and two part-time employees as well as several part-time consultants. In the event our products
and services obtain greater market acceptance, we may be required to expand our management team and hire and train additional technical
and skilled personnel. We may need to scale up our operations in order to service our customers, which may strain our resources,
and we may be unable to manage our growth effectively. If our systems, procedures, and controls are inadequate to support our operations,
growth could be delayed or halted, and we could lose our opportunity to gain significant market share. In order to achieve and
manage growth effectively, we must continue to improve and expand our operational and financial management capabilities. Any inability
to manage growth effectively could have a material adverse effect on our business, results of operations, and financial condition.
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Item 1B.
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UNRESOLVED STAFF COMMENTS
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Not applicable.
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
years ended September 30, 2017 and October 1, 2016 was $171,000.
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Item 3.
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LEGAL PROCEEDINGS
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There are no current
legal proceedings as to which TCC or its subsidiary is a party or as to which any of their property is subject.
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Item 4.
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MINE SAFETY DISCLOSURES
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Not applicable.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
Notes to Consolidated Financial Statements
Technical Communications Corporation
(“TCC”) was incorporated in Massachusetts in 1961; its wholly-owned subsidiary, TCC Investment Corp., was organized
in that jurisdiction in 1982. Technical Communications Corporation and TCC Investment Corp. are collectively referred to as the
“Company”. The Company’s business consists of only one industry segment, which is the design, development, manufacture,
distribution, marketing and sale of communications security devices, systems and services. The secure communications solutions
provided by TCC protect vital information transmitted over a wide range of data, video, fax and voice networks. TCC’s products
have been sold into over 115 countries and are in service with governments, military agencies, telecommunications carriers, financial
institutions and multinational corporations.
Liquidity
and Ability to Continue as a Going Concern
The
Company has suffered recurring losses from operations and had an accumulated deficit of $823,000 at September 30, 2017. In
addition, the Company continues to experience negative cash flows from operations. These factors raise substantial doubt
about the Company's ability to continue as a going concern within one year from the issuance date of the consolidated
financial statements. The consolidated financial statements do not include any adjustments to reflect the uncertainty about
the Company’s ability to continue as a going concern.
We
anticipate that our principal sources of liquidity will only be sufficient to fund our activities and debt obligations needs through
September 30, 2018. In order to have sufficient cash to fund our operations beyond September 30, 2018, we will need to secure
new customer contracts, raise additional equity or debt capital or reduce expenses including payroll and payroll-related expenses.
In
order to have sufficient capital resources to fund operations the Company has been working diligently to secure several large orders
with new and existing customers. In addition we are also pursuing raising capital through equity or debt arrangements. Although
we believe our ability to secure such new business or raise new capital is likely we cannot provide assurances we will be able
to do so.
Should
we be unsuccessful in these efforts, we would then be forced to implement headcount reductions, employee furloughs and/or
reduced hours for certain employees.
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(2)
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Summary of Significant Accounting Policies
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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.
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of TCC and its wholly-owned subsidiary, TCC Investment Corp., a Massachusetts corporation. All
significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements
in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant judgments and
estimates include those related to revenue recognition, receivable reserves, inventory reserves, impairment of long-lived assets,
income taxes, fair value and stock-based compensation. Actual results could differ from those estimates.
Notes to Consolidated Financial
Statements (continued)
Cash and Cash Equivalents
Cash and cash equivalents include
demand deposits at banks and other investments (including mutual funds) readily convertible into cash. Cash equivalents are stated
at cost, which approximates market value. At September 30, 2017 and October 1, 2016, the Company had restrictions on the use of
certain cash, which was used as collateral to secure outstanding letters of credit totaling $12,930 and $27,592, respectively.
Accounts Receivable
Accounts receivable
are reduced by an allowance for amounts that management believes 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. When the financial condition of our customers deteriorate, resulting in an impairment of their ability to make payments,
additional allowances are recorded.
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.
Inventories
The Company values its 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 estimated selling prices, less the cost to sell) of the inventory. The Company periodically reviews inventory quantities
on hand and records 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 exceed the Company’s
judgement of future demand. It is possible that additional reserves above those already established may be required in the future
if market conditions for the Company’s products should deteriorate.
Equipment and Leasehold Improvements
Equipment and leasehold improvements
are stated at cost. Depreciation and amortization are computed using the straight-line method over the lesser of the estimated
useful life of the asset or the applicable lease term. When assets are retired or otherwise disposed of, the cost and related accumulated
depreciation and amortization are removed from the accounts, and any resulting gain or loss is recognized in operations for the
period. The costs of maintenance and repairs are charged to operations as incurred; significant renewals and betterments are capitalized.
Long-lived Assets
The Company’s only long-lived assets
are equipment and leasehold improvements. Long-lived assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. These events include a significant decrease in the market
price of a long-lived asset, a significant adverse change in the extent or manner in which a long-lived asset is being used or
in its physical condition, a significant adverse change in legal factors or in the business climate that could affect the value
of a long-lived asset, including an adverse action or assessment by a regulator, an accumulation of costs significantly in excess
of the amount originally expected for the acquisition or construction of a long-lived asset, a current-period operating or cash
flow loss combined with a history of operating or cash flow losses, or a projection or forecast that demonstrates continuing losses
associated with the use of a long-lived asset, among other items. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by such
asset. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized
in the amount by which the carrying amount exceeds the fair value of the asset.
Notes to Consolidated Financial Statements
(continued)
Although an indicator
of impairment of our long-lived assets did exist at September 30, 2017 and October 1, 2016, we determined that no impairment charge
was required as an estimate of our future undiscounted cash flows was sufficient to recover the assets.
Revenue Recognition
The Company recognizes
product revenue 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 the Company has 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 where 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. The Company
provides for a warranty reserve at the time the product revenue is recognized.
The Company performs 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 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 the total estimated
costs for the contract. In each type of contract, the Company receives periodic progress payments or payments upon reaching interim
milestones. All payments to the Company for work performed on contracts with agencies of the U.S. government are subject to audit
and adjustment by the Defense Contract Audit Agency, the U.S. Government Accountability Office and other agencies. Adjustments
are recognized in the period made. There have been no 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. If the 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.
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 employee’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 rather than an operating
activity. There were no excess tax benefits for the fiscal years ended September 30, 2017 and October 1, 2016.
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. 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 stock-based
compensation.
Notes to Consolidated Financial Statements
(continued)
The fair value of options at date
of grant was estimated with the following assumptions:
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
Option life
|
|
|
6.5 years
|
|
|
|
6.5 years
|
|
Risk-free interest rate
|
|
|
2.0
|
%
|
|
|
1.4
|
%
|
Stock volatility
|
|
|
72
|
%
|
|
|
60
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
There were 14,000 options granted
during each of the years ended September 30, 2017 and October 1, 2016. The weighted average grant date fair value of options granted
during the years ended September 30, 2017 and October 1, 2016 was $1.66 and $1.67, respectively. The following table summarizes
stock-based compensation costs included in the Company’s consolidated statements of operations for the years ended September
30, 2017 and October 1, 2016:
|
|
2017
|
|
|
2016
|
|
Selling, general and administrative
|
|
$
|
13,910
|
|
|
$
|
11,549
|
|
Product development
|
|
|
1,086
|
|
|
|
2,361
|
|
Total stock-based compensation expense before taxes
|
|
$
|
14,996
|
|
|
$
|
13,910
|
|
A summary of the status of the Company’s
nonvested options as of September 30, 2017 and changes during the year ended September 30, 2017 is presented below:
|
|
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Nonvested options at October 1, 2016
|
|
|
26,700
|
|
|
$
|
2.02
|
|
Grants
|
|
|
14,000
|
|
|
|
1.66
|
|
Vested
|
|
|
(5,900
|
)
|
|
|
2.05
|
|
Cancellations/forfeitures
|
|
|
(600
|
)
|
|
|
2.98
|
|
Nonvested options at September 30, 2017
|
|
|
34,200
|
|
|
$
|
1.85
|
|
As of September 30, 2017, there was
$54,280 of unrecognized compensation cost related to options outstanding. The unrecognized compensation cost will be recognized
as the options vest. The weighted average period over which the stock-based compensation cost is expected to be recognized is 3.59
years.
The Technical Communications Corporation
2005 Non-Statutory Stock Option Plan and 2010 Equity Incentive Plan were outstanding at September 30, 2017. There are an aggregate
of 600,000 shares authorized for issuance under these plans, of which options to purchase 246,281 shares were outstanding at September
30, 2017. Vesting periods 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 value at time of grant and have a term of ten years from the
date of grant.
As of September 30, 2017, there were
240,719 shares available for grant under the 2010 Equity Incentive Plan. The 2005 Non-Statutory Stock Option Plan has expired and
options are no longer available for grant under such plan.
Notes to Consolidated Financial Statements
(continued)
The following tables summarize stock
option activity during fiscal years 2016 and 2017:
|
|
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
|
|
|
14,000
|
|
|
|
-
|
|
|
|
14,000
|
|
|
|
2.90
|
|
|
|
Vested
|
|
|
(4,640
|
)
|
|
|
4,640
|
|
|
|
-
|
|
|
|
5.89
|
|
|
|
Exercises
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Cancellations/forfeitures
|
|
|
(720
|
)
|
|
|
(24,580
|
)
|
|
|
(25,300
|
)
|
|
|
3.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, October 1, 2016
|
|
|
26,700
|
|
|
|
216,981
|
|
|
|
243,681
|
|
|
$
|
8.69
|
|
|
4.57 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
14,000
|
|
|
|
-
|
|
|
|
14,000
|
|
|
|
2.50
|
|
|
|
Vested
|
|
|
(5,900
|
)
|
|
|
5,900
|
|
|
|
-
|
|
|
|
3.61
|
|
|
|
Exercises
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Cancellations/forfeitures
|
|
|
(600
|
)
|
|
|
(10,800
|
)
|
|
|
(11,400
|
)
|
|
|
8.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2017
|
|
|
34,200
|
|
|
|
212,081
|
|
|
|
246,281
|
|
|
$
|
8.36
|
|
|
3.95 years
|
Information related to the stock options
vested or expected to vest as of September 30, 2017 is as follows:
Range of
Exercise Prices
|
|
Number of
Shares
|
|
|
Weighted-
Average
Remaining
Contractual
Life (years)
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Exercisable
Number of
Shares
|
|
|
Exercisable
Weighted-
Average
Exercise Price
|
|
$2.01 - $3.00
|
|
|
28,000
|
|
|
|
8.87
|
|
|
$
|
2.70
|
|
|
|
2,800
|
|
|
$
|
2.90
|
|
$3.01 - $5.00
|
|
|
40,500
|
|
|
|
4.88
|
|
|
|
4.52
|
|
|
|
32,100
|
|
|
|
4.65
|
|
$5.01 - $10.00
|
|
|
59,000
|
|
|
|
2.91
|
|
|
|
7.55
|
|
|
|
58,400
|
|
|
|
7.56
|
|
$10.01 - $15.00
|
|
|
118,781
|
|
|
|
3.00
|
|
|
|
11.40
|
|
|
|
118,781
|
|
|
|
11.40
|
|
|
|
|
246,281
|
|
|
|
3.95
|
|
|
$
|
8.36
|
|
|
|
212,081
|
|
|
$
|
9.21
|
|
The aggregate intrinsic value of
the Company’s “in-the-money” outstanding and exercisable options was $14,140 as of September 30, 2017 and $0
as of October 1, 2016. There were no stock options exercised during the years ended September 30, 2017 and October 1, 2016. Nonvested
common stock options are subject to the risk of forfeiture until the fulfillment of specified conditions.
Income Taxes
The Company accounts for income
taxes using the asset/liability method. Under the asset/liability method, deferred income taxes are recognized at current income
tax rates to reflect the tax effect of temporary differences between the consolidated financial reporting basis and tax basis of
assets and liabilities. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated
realizable value.
The
Company follows the appropriate guidance 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. There were no uncertain tax positions for fiscal years 2017 and 2016.
The Company’s policy is to record
estimated interest and penalties related to the underpayment of income taxes as a component of its income tax provision.
For the year ended October 1, 2016, the Company recorded $1,100 in interest and tax penalties.
Notes to Consolidated Financial Statements
(continued)
Warranty Costs
The Company provides for estimated
warranty costs at the time product revenue is recognized based in part upon historical experience.
Fair Value of Financial 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. 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 and
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 and 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 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 asset or liability.
The Company’s held to maturity
securities are comprised of investments in municipal bonds. These securities represent ownership in individual bonds in municipalities
within the United States. The Company’s available for sale securities consist of mutual funds held in money market mutual
funds in a brokerage account, which are classified as cash equivalents.
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 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 fiscal years ended September 30, 2017 and October 1, 2016,
there were no transfers between levels.
Notes to Consolidated Financial Statements
(continued)
The following table sets forth
by level, within the fair value hierarchy, the assets measured at fair value on a recurring basis as of September 30, 2017 and
October 1, 2016, in accordance with the fair value hierarchy as defined above. As of September 30, 2017 and October 1, 2016, the
Company did not hold any assets classified as Level 2 or Level 3.
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
851,195
|
|
|
$
|
851,195
|
|
|
|
-
|
|
Total mutual funds
|
|
|
851,195
|
|
|
|
851,195
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
851,195
|
|
|
$
|
851,195
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
978,746
|
|
|
$
|
978,746
|
|
|
|
-
|
|
Total mutual funds
|
|
|
978,746
|
|
|
|
978,746
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
978,746
|
|
|
$
|
978,746
|
|
|
$
|
-
|
|
There were no assets or liabilities
measured at fair value on a nonrecurring basis at September 30, 2017 and October 1, 2016.
Earnings per Share (EPS)
The Company presents both a “basic”
and a “diluted” EPS. Basic EPS is computed by dividing net loss by the weighted average number of shares of common
stock outstanding during the period. In computing diluted EPS, stock options that are dilutive (those that reduce earnings per
share) are included in the calculation of EPS using the treasury stock method. The exercise of outstanding stock options is not
included if the result would be antidilutive, such as when a net loss is reported for the period or the option exercise price is
greater than the average market price for the period presented.
Research and Development
Research and development costs are
included in product development expenses in our consolidated statements of operations. Expenditures for Company-sponsored research
and development projects are expensed as incurred, and were $1,584,210 and $827,987 in 2017 and 2016, respectively. Customer-sponsored
research and development projects performed under contracts are accounted for as contract costs as the work is performed and included
in cost of sales; such amounts were $437,000 and $1,177,734 in fiscal years 2017 and 2016, respectively.
Fiscal Year-End Policy
The Company’s by-laws call
for its fiscal year to end on the Saturday closest to the last day of September, unless otherwise decided by its Board of Directors.
The 2017 fiscal year ended on September 30, 2017 and included 52 weeks. The 2016 fiscal year ended on October 1, 2016 and included
52 weeks.
Notes to Consolidated Financial Statements
(continued)
New Accounting Pronouncements
ASU 2014-09, Revenue from Contracts
with Customers, amended by ASU 2015-14 (Topic 606), ASU 2016-10, ASU 2016-11 and ASU 2016-12
In May 2014,
the FASB and the International Accounting Standards Board issued guidance on the principles for recognizing revenue and developing
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.
ASU 2014-15,
Presentation
of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to
Continue as a Going Concern
In
August 2014, the FASB updated U.S. GAAP to eliminate a critical gap in existing standards regarding disclosure of
uncertainties about an entity’s ability to continue as a going concern. The new guidance clarifies the disclosures
management must make in the organization’s financial statement footnotes when management has substantial doubt about
its ability to continue as a “going concern.”
The Company adopted this standard for its fiscal year ended
September 30, 2017.
The adoption of this standard requires the Company to evaluate its
ability to meet its obligations as they become due for a period of one year from the date that the financial statements are
issued. As a result of this requirement, management has determined that substantial doubt exists about our ability to continue
as a going concern. See further discussion in Footnote 1 to the financial statements.
ASU
No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory
In
July 2015, the FASB issued guidance with respect to inventory measurement. This ASU requires inventory to be measured at the lower
of cost and net realizable value. The provisions of this ASU are effective for fiscal years beginning after December 15, 2016,
including interim periods within those fiscal years. The amendment is required to be applied prospectively, and early adoption
is permitted. This amendment is applicable for the Company beginning in the first quarter of our 2018 fiscal year, and the adoption
of this standard is not expected to have a material impact on our financial statements.
ASU
No. 2016-02, Leases
In
February 2016, the FASB issued guidance with respect to leases. This ASU requires entities
to recognize right-of-use assets
and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific
accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative
and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing
and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December
15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption
permitted. We are currently evaluating the potential impact this standard will have on our financial statements and related disclosure.
Notes to Consolidated Financial Statements
(continued)
ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting,
In March 2016,
the FASB issued guidance that simplifies several aspects of the accounting for employee share-based payment transactions for both
public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements,
as well as classification in the statement of cash flows. The new guidance is effective for annual periods beginning after December
15, 2016, including interim periods within those fiscal years.
This guidance is applicable
for the Company beginning in the first quarter of our 2018 fiscal year.
We are currently evaluating the method of adoption
and the potential impact this standard will have on our financial statements and related disclosure.
Other
recent accounting pronouncements were issued by the FASB (including its Emerging Issues Task Force), the AICPA and the SEC during
fiscal 2017 but such pronouncements are not believed by management to have a material impact on the Company’s present or
future financial statements
.
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 246,281
and 243,681 shares in fiscal years 2017 and 2016, respectively.
|
(4)
|
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. Substantially all 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.
As of September 30, 2017, available for sale securities consisted
of the following:
|
|
|
|
|
Accrued
|
|
|
Gross Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Interest
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
$
|
851,195
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
851,195
|
|
As of September 30, 2017, held to maturity securities consisted
of the following:
|
|
|
|
|
Accrued
|
|
|
Amortization
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Interest
|
|
|
Bond Premium
|
|
|
Cost
|
|
|
Gains
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
412,366
|
|
|
$
|
6,986
|
|
|
$
|
59,099
|
|
|
$
|
360,253
|
|
|
$
|
216
|
|
|
$
|
360,469
|
|
As of October 1, 2016, available for sale securities consisted of
the following:
|
|
|
|
|
Accrued
|
|
|
Gross Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Interest
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
$
|
978,746
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
978,746
|
|
Notes to Consolidated Financial Statements
(continued)
As of October 1, 2016, held to maturity securities consisted of
the following:
|
|
|
|
|
Accrued
|
|
|
Amortization
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Interest
|
|
|
Bond Premium
|
|
|
Cost
|
|
|
Gains
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
823,730
|
|
|
$
|
11,569
|
|
|
$
|
99,461
|
|
|
$
|
735,838
|
|
|
$
|
2,503
|
|
|
$
|
738,341
|
|
The contractual maturities of held to maturity
securities as of September 30, 2017 were all within one year.
The Company’s available for sale securities
were included in the cash and cash equivalents caption in the consolidated balance sheets.
Inventories consist of the following:
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
20,759
|
|
|
$
|
19,167
|
|
Work in process
|
|
|
383,216
|
|
|
|
360,738
|
|
Raw materials and supplies
|
|
|
954,369
|
|
|
|
1,264,017
|
|
Total inventories
|
|
$
|
1,358,344
|
|
|
$
|
1,643,922
|
|
As a result of changes in the market for certain
Company products and the resulting excess quantities, carrying amounts for those inventories were reduced by approximately $461,000
and $213,000 during the years ended September 30, 2017 and October 1, 2016, respectively. These inventory write-downs have been
reflected in cost of goods sold in the statement of operations. Management believes that these reductions properly reflect inventory
at lower of cost or market, and no additional losses will be incurred upon disposition of the excess quantities. While it is at
least reasonably possible that the estimate will change materially in the near term, no estimate can be made of the range of additional
loss that is at least possible.
|
(6)
|
Equipment and Leasehold Improvements
|
Equipment and leasehold improvements consist of the following:
|
|
September 30,
|
|
|
October 1,
|
|
|
Estimated
|
|
|
2017
|
|
|
2016
|
|
|
Useful Life
|
|
|
|
|
|
|
|
|
|
Engineering and manufacturing equipment
|
|
$
|
2,124,486
|
|
|
$
|
2,124,486
|
|
|
3-8 years
|
Demonstration equipment
|
|
|
845,541
|
|
|
|
841,966
|
|
|
3 years
|
Furniture and fixtures
|
|
|
1,020,862
|
|
|
|
1,020,862
|
|
|
3-8 years
|
Automobile
|
|
|
49,441
|
|
|
|
49,441
|
|
|
5 years
|
Leasehold improvements
|
|
|
494,509
|
|
|
|
494,509
|
|
|
Lesser of useful life
or term of lease
|
|
|
|
|
|
|
|
|
|
|
|
Total equipment and leasehold improvements
|
|
|
4,534,839
|
|
|
|
4,531,264
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(4,481,085
|
)
|
|
|
(4,382,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and leasehold improvements, net
|
|
$
|
53,754
|
|
|
$
|
148,929
|
|
|
|
Depreciation expense was $98,750 and $158,838
for the fiscal years ended September 30, 2017 and October 1, 2016, respectively.
Notes to Consolidated Financial Statements
(continued)
On April 1, 2014, the Company entered into
a 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. Future minimum lease payments under the remainder of this lease total $256,500 at September 30, 2017. 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 years ended September 30, 2017 and October
1, 2016 was $171,000.
Notes to Consolidated Financial Statements
(continued)
The Company's products generally carry a standard
15 month warranty. The Company sets aside a reserve based on anticipated warranty claims at the time product revenue is recognized.
Factors that affect the Company's product warranty liability include the number of installed units, the anticipated cost of warranty
repairs and historical and anticipated rates of warranty claims. The warranty reserve is included in other current liabilities
on the balance sheet.
The following table reflects changes
in the Company's accrued warranty account:
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
Beginning balance
|
|
$
|
6,600
|
|
|
$
|
30,483
|
|
Plus: accruals related to new sales
|
|
|
14,446
|
|
|
|
4,530
|
|
Less: payments and adjustments to prior period accruals
|
|
|
(5,135
|
)
|
|
|
(28,413
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
15,911
|
|
|
$
|
6,600
|
|
The benefit for income taxes consists of the following:
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
(44,376
|
)
|
State
|
|
|
-
|
|
|
|
912
|
|
Total current taxes
|
|
|
-
|
|
|
|
(43,464
|
)
|
|
|
|
|
|
|
|
|
|
Total benefit for income taxes
|
|
$
|
-
|
|
|
$
|
(43,464
|
)
|
The benefit for income taxes is different from
what would be obtained by applying the statutory federal income tax rate to loss before income taxes due to the following:
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit at U.S. statutory rate
|
|
$
|
(485,862
|
)
|
|
|
(34.0
|
)%
|
|
$
|
(855,356
|
)
|
|
|
(34.0
|
)%
|
State income tax provision, net of federal benefit
|
|
|
(81,630
|
)
|
|
|
(5.7
|
)%
|
|
|
(126,318
|
)
|
|
|
(5.0
|
)%
|
Change in state effective rate
|
|
|
563
|
|
|
|
-
|
|
|
|
(127,485
|
)
|
|
|
(5.0
|
)%
|
Prior year true-up
|
|
|
7,425
|
|
|
|
0.5
|
%
|
|
|
(3,737
|
)
|
|
|
(0.1
|
)%
|
Uncertain tax positions
|
|
|
-
|
|
|
|
-
|
|
|
|
(44,376
|
)
|
|
|
(1.8
|
)%
|
Other
|
|
|
(53,545
|
)
|
|
|
(3.7
|
)%
|
|
|
3,539
|
|
|
|
0.1
|
%
|
Valuation allowance
|
|
|
613,050
|
|
|
|
42.9
|
%
|
|
|
1,110,269
|
|
|
|
44.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefit for income taxes
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
(43,464
|
)
|
|
|
(1.7
|
)%
|
Notes to Consolidated Financial Statements
(continued)
Deferred income taxes consist of the following:
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
|
|
|
|
|
|
|
Inventory differences
|
|
$
|
1,668,529
|
|
|
$
|
1,497,123
|
|
Net operating losses
|
|
|
2,287,412
|
|
|
|
1,973,189
|
|
Stock based compensation
|
|
|
218,846
|
|
|
|
213,506
|
|
Tax credits
|
|
|
247,989
|
|
|
|
186,180
|
|
Other
|
|
|
300,630
|
|
|
|
240,359
|
|
Total
|
|
|
4,723,406
|
|
|
|
4,110,357
|
|
Less: valuation allowance
|
|
|
(4,723,406
|
)
|
|
|
(4,110,357
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
During fiscal year 2017 the change
in the valuation allowance was $613,050 and related primarily to the Company’s net operating loss and inventory differences.
During fiscal year 2014, the Company established a valuation allowance
against deferred tax
assets.
The valuation allowance is related to uncertainty with respect to the Company’s ability to realize its deferred
tax assets. Deferred tax assets consist of net operating loss carryforwards, tax credits, inventory differences and other temporary
differences. During fiscal year 2016 the change in the valuation allowance was $1,110,269 and related primarily to the net operating
loss and inventory differences.
Due to the nature of the Company’s 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. Also, it is not anticipated that the Company will be subject to foreign
taxes in the near future.
The Company files income tax returns in the U.S. federal jurisdiction
and in the states of Massachusetts and New Hampshire. For U.S. federal purposes, the tax years 2014 through 2016 and for state
purposes 2013 through 2016 remain open to examination. In addition, the amount of the Company’s federal and state net operating
loss carryforwards utilized in prior periods may be subject to examination and adjustment. The Company has federal research credits
of $175,577 available through fiscal year 2035 and net operating loss carryforwards of $5,991,999 available through fiscal year
2037. In addition, the Company has Massachusetts research credits of $109,717 available through fiscal year 2029 and net operating
loss carryforwards of $5,181,801 available through fiscal year 2037.
|
(10)
|
Employee Benefit Plans
|
The Company has a qualified, contributory,
profit sharing plan covering substantially all employees. The Company’s policy is to fund contributions as they are accrued.
The contributions are allocated based on the employee’s proportionate share of total compensation. The Company’s contributions
to the plan are determined by the Board of Directors and are subject to other specified limitations. There were no Company profit
sharing contributions during fiscal years 2017 or 2016. The Company's matching contributions were $74,130 and $76,821 in fiscal
years 2017 and 2016, respectively.
The Company has an Executive Incentive Bonus Plan for the benefit
of key management employees. The bonus pool is determined based on the Company’s performance as defined by the plan. Under
the plan, there were no bonuses earned, accrued or paid for executives at September 30, 2017 or October 1, 2016.
|
(11)
|
Commitments and contingencies
|
At September 30, 2017, the Company had two
outstanding letters of credit in the amounts of $11,730 and $1,200, which are secured by collateralized bank accounts totaling
$12,930. At October 1, 2016, the Company had three outstanding letters of credit in the amounts of $14,662, $11,730 and $1,200,
which are secured by collateralized bank accounts totaling $27,592.
The Company maintains its cash and cash equivalents in bank deposit accounts and money market mutual funds
that, at times, may exceed federally insured limits. The Company currently holds marketable securities consisting of municipal
bonds. The municipal bonds are considered investment grade but may be subject to the issuing entities’ default on interest
or principal repayments. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant
credit risk on its cash, cash equivalents or marketable securities.
Notes to Consolidated Financial Statements
(continued)
|
(12)
|
Major Customers and Export Sales
|
In fiscal year 2017, the Company had two customers
representing 91% (61% and 30%) of total net sales and at September 30, 2017 had two customers representing 98% (82% and 16%) of
accounts receivable. In fiscal year 2016, the Company three customers representing 90% (62%, 18% and 10%) of total net sales and
at October 1, 2016 had two customers representing 100% (99% and 1%) of accounts receivable.
A breakdown of net sales is as follows:
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
3,848,115
|
|
|
$
|
2,311,877
|
|
Foreign
|
|
|
361,012
|
|
|
|
211,057
|
|
|
|
|
|
|
|
|
|
|
Total Sales
|
|
$
|
4,209,127
|
|
|
$
|
2,522,934
|
|
A summary of foreign sales, as a percentage of total foreign
revenue, by geographic area, is as follows:
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
Europe
|
|
|
-
|
|
|
|
11.7
|
%
|
Mid-East and Africa
|
|
|
92.8
|
%
|
|
|
67.6
|
%
|
Far East
|
|
|
7.2
|
%
|
|
|
20.7
|
%
|
The
Company sold products to six countries during the year ended
September 30, 2017
and
four countries during the year ended October 1, 2016. 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.
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
|
|
|
|
|
|
|
Egypt
|
|
|
32.5
|
%
|
|
|
18.2
|
%
|
Jordan
|
|
|
29.3
|
%
|
|
|
-
|
|
Saudi Arabia
|
|
|
28.0
|
%
|
|
|
49.4
|
%
|
Philippines
|
|
|
2.8
|
%
|
|
|
20.7
|
%
|
Serbia
|
|
|
-
|
|
|
|
11.7
|
%
|
Other
|
|
|
7.4
|
%
|
|
|
-
|
|
|
(13)
|
Shareholder Rights Plan
|
On August 7, 2014, the Board of Directors of
the Company adopted a Stockholder Rights Plan to replace the Company's former plan, which had expired on August 5, 2014. The
new plan is substantially similar to the former plan, and was not adopted in response to any specific takeover threat. In
adopting the plan, the Board declared a dividend distribution of one common stock purchase right for each outstanding share
of common stock of the Company, payable to stockholders of record at the close of business on August 18, 2014. Until the rights
become exercisable, which occurs with certain exceptions when a person or affiliated group acquires 15% or more of TCC's common
stock, they will trade automatically with the common stock and separate rights certificates will not be issued. Each right, once
exercisable, will entitle the holder (other than rights owned by the acquiring person or group) to buy one share of the common
stock at a price of $25 per share, subject to certain adjustments. The rights can generally be redeemed by the Company at
$.001 per right at any time prior to the close of business on the 10th business day after there has been a public announcement
of the acquisition of beneficial ownership by any person or group of 15% or more of the company’s outstanding common stock,
subject to certain exceptions. The rights will expire on August 6, 2024 unless earlier redeemed.
Notes to Consolidated Financial Statements
(continued)
|
(14)
|
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.
The investment represented a 10.8% ownership stake in the company at the time of purchase 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. 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 October 1, 2016 is included in other current assets within the accompanying
consolidated balance sheet. The escrow balance was received by the Company in January 2017.