UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark One)

 

  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
    For the quarterly period ended March 27, 2021
     
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
    For the transition period from ________________ to ________________

 

Commission File Number: 001-34816

 

TECHNICAL COMMUNICATIONS CORPORATION

(Exact name of registrant as specified in its charter)

 

Massachusetts   04-2295040
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    
     
100 Domino Drive, Concord, MA   01742-2892
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (978) 287-5100

 

  N/A  
  (Former name, former address and former fiscal year, if changed since last report)  

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No ☐

 

Indicate by check mark 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.

 

Large accelerated filer Accelerated filer Emerging growth company
Non-accelerated filer Smaller reporting company   

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. 1,850,403 shares of Common Stock, $0.10 par value, outstanding as of May 3, 2021.

 

 

 

 

INDEX

 

    Page
     
PART I Financial Information  
     
Item 1. Financial Statements:  
     
  Consolidated Balance Sheets as of March 27, 2021 (unaudited) and September 26, 2020 1
     
  Consolidated Statements of Operations for the Three Months ended March 27, 2021 and March 28, 2020 (unaudited) 2
     
  Consolidated Statements of Operations for the Six Months ended March 27, 2021 and March 28, 2020 (unaudited) 3
     
  Consolidated Statements of Cash Flows for the Six Months ended March 27, 2021 and March 28, 2020 (unaudited) 4
     
  Consolidated Statements of Changes in Stockholders' Equity for the Six Months ended March 27, 2021 and March 28, 2020 (unaudited) 5
     
  Notes to Unaudited Consolidated Financial Statements 6
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
     
Item 4. Controls and Procedures 21
     
PART II Other Information  
     
Item 1. Legal Proceedings 22
     
Item 1A. Risk Factors 22
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
     
Item 3. Defaults Upon Senior Securities 22
     
Item 4. Mine Safety Disclosures 22
     
Item 5. Other Information 22
     
Item 6. Exhibits 22
     
  Signatures 23

 

 

 

 

 

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY

Consolidated Balance Sheets

 

   

March 27,

2021

 

September 26,

2020

    (Unaudited)          
Assets                
Current Assets:                
Cash and cash equivalents   $ 566,056     $ 1,513,852  
Accounts receivable - trade     189,332       134,412  
Inventories, net     1,122,126       902,051  
Other current assets     154,684       153,483  
Total current assets     2,032,198       2,703,798  
                 
Equipment and leasehold improvements     4,595,152       4,595,152  
Less: accumulated depreciation and amortization     (4,587,125 )     (4,576,423 )
Equipment and leasehold improvements, net     8,027       18,729  
                 
Operating lease right-of-use asset     483,355       558,767  
                 
Total Assets   $ 2,523,580     $ 3,281,294  
                 
Liabilities and Stockholders’ Equity                
Current Liabilities:                
Current operating lease liabilities   $ 155,125     $ 152,248  
Accounts payable     194,667       66,154  
Customer deposits     94,458       161,953  
Deferred income     474,405       474,400  
Accrued liabilities:                
Accrued compensation and related expenses     375,929       250,750  
Accrued commissions     12,720       229,314  
Other current liabilities     17,149       25,531  
Total current liabilities     1,324,453       1,360,350  
                 
Long-term operating lease liability     328,230       406,519  
Note payable – long-term (Note 7)     150,000       150,000  
                 
Total Liabilities     1,802,683       1,916,869  
                 
Commitments and contingencies                
                 
Stockholders’ Equity:                
Common stock, par value $0.10 per share; 7,000,000 shares authorized; 1,850,403 shares issued and outstanding at March 27, 2021 and September 26, 2020     185,041       185,041  
Additional paid-in capital     4,272,228       4,244,965  
Accumulated deficit     (3,736,372 )     (3,065,581 )
Total stockholders’ equity     720,897       1,364,425  
                 
Total Liabilities and Stockholders’ Equity   $ 2,523,580     $ 3,281,294  

 

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

 

 

 

 

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations

(Unaudited)

 

    Three Months Ended
   

March 27,

2021

 

March 28,

2020

         
Net revenue   $ 616,554     $ 722,751  
Cost of revenue     352,892       413,958  
Gross profit     263,662       308,793  
                 
Operating expenses:                
Selling, general and administrative     396,468       513,221  
Product development     194,333       156,991  
Total operating expenses     590,801       670,212  
                 
Operating loss     (327,139 )     (361,419 )
                 
Other income (expense):                
Interest income     -       153  
Interest expense     (1,541 )     -  
Total other income (expense)     (1,541 )     153  
                 
                 
Net loss   $ (328,680 )   $ (361,266 )
                 
Net loss per common share:                
Basic   $ (0.18 )   $ (0.20 )
Diluted   $ (0.18 )   $ (0.20 )
                 
Weighted average shares:                
Basic     1,850,403       1,850,403  
Diluted     1,850,403       1,850,403  

 

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

 

 

 

  Page 2  

 

 

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations

(Unaudited)

 

    Six Months Ended
   

March 27,

2021

 

March 28,

2020

         
Net revenue   $ 783,479     $ 1,388,676  
Cost of revenue     396,519       771,032  
Gross profit     386,960       617,644  
                 
Operating expenses:                
Selling, general and administrative     941,689       1,096,569  
Product development     586,760       362,385  
Total operating expenses     1,528,449       1,458,954  
                 
Operating loss     (1,141,489 )     (841,310 )
                 
Other income (expense):                
Grant income     474,400       -  
Interest income     -       372  
Interest expense     (3,702 )     (802 )
Total other income (expense)     470,698       (430 )
                 
                 
Net loss   $ (670,791 )   $ (841,740 )
                 
Net loss per common share:                
Basic   $ (0.36 )   $ (0.46 )
Diluted   $ (0.36 )   $ (0.46 )
                 
Weighted average shares:                
Basic     1,850,403       1,850,403  
Diluted     1,850,403       1,850,403  

 

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

 

 

 

  Page 3  

 

 

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

 

    Six Months Ended
    March 27,
2021
  March 28,
2020
         
Operating Activities:                
Net loss     (670,791 )     (841,740 )
                 
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     10,702       11,088  
Stock-based compensation     27,263       26,751  
                 
Changes in certain operating assets and liabilities:                
Accounts receivable     (54,920 )     (101,774 )
Inventories     (220,075 )     10,728  
Other current assets     (1,201 )     9,889  
Customer deposits     (67,495 )     305,819  
Deferred income     (474,400 )     -  
Accounts payable and other accrued liabilities     28,716       (407,000 )
                 
Net cash used in operating activities     (1,422,201 )     (986,239 )
                 
Financing Activities:                
Proceeds from debt     474,405       -  
                 
Net cash provided by financing activities     474,405       -  
                 
Net decrease in cash and cash equivalents     (947,796 )     (986,239 )
                 
Cash and cash equivalents at beginning of the period     1,513,852       1,593,395  
                 
Cash and cash equivalents at end of the period   $ 566,056     $ 607,156  
                 
Supplemental Disclosures:                
                 
Income taxes paid   $ 912     $ 912  

 

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

 

  Page 4  

 

 

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders' Equity

(Unaudited)

 

    Three Months Ended   Six Months Ended
   

March 27,

2021

 

March 28,

2020

 

March 27,

2021

 

March 28,

2020

                 
Shares of common stock:                                
Beginning balance     1,850,403       1,850,403       1,850,403       1,850,403  
                                 
Ending balance     1,850,403       1,850,403       1,850,403       1,850,403  
                                 
Common stock at par value:                                
Beginning balance   $ 185,041     $ 185,041     $ 185,041     $ 185,041  
                                 
Ending balance   $ 185,041     $ 185,041     $ 185,041     $ 185,041  
                                 
Additional paid-in capital:                                
Beginning balance   $ 4,258,828     $ 4,202,214     $ 4,244,965     $ 4,189,439  
Stock-based compensation     13,400       13,976       27,263       26,751  
                                 
Ending balance   $ 4,272,228     $ 4,216,190     $ 4,272,228     $ 4,216,190  
                                 
Accumulated deficit:                                
Beginning balance   $ (3,407,692 )   $ (2,635,405 )   $ (3,065,581 )   $ (2,154,931 )
Net loss     (328,680 )     (361,266 )     (670,791 )     (841,740 )
                                 
Ending balance   $ (3,736,372 )   $ (2,996,671 )   $ (3,736,372 )   $ (2,996,671 )
                                 
Total stockholders’ equity   $ 720,897     $ 1,404,560     $ 720,897     $ 1,404,560  

 

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

 

  Page 5  

 

 

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1.   Description of the Business and Basis of Presentation

 

Company Operations

 

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 sometimes collectively referred to herein 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.

 

Interim Financial Statements

 

The accompanying unaudited consolidated financial statements of Technical Communications Corporation and its wholly-owned subsidiary include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented and in order to make the financial statements not misleading. All such adjustments are of a normal recurring nature. Interim results are not necessarily indicative of the results to be expected for the fiscal year ending September 25, 2021.

 

The September 26, 2020 consolidated balance sheet contained herein was derived from the Company’s audited consolidated balance sheet at September 26, 2020 as contained in the Company’s Annual Report on Form 10-K for the fiscal year then ended as filed with the U.S. Securities and Exchange Commission (“SEC”). Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as allowed by SEC rules and regulations. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the fiscal year ended September 26, 2020 included in its Annual Report on Form 10-K as filed with the SEC (the “2020 Annual Report”).

  

The Company follows accounting standards set by the Financial Accounting Standards Board, commonly referred to as the FASB. The FASB sets generally accepted accounting principles (“GAAP”) that the Company follows to ensure it consistently reports its financial condition, results of operations, and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards CodificationTM - sometimes referred to as the Codification or ASC.

 

Liquidity and Ability to Continue as a Going Concern

 

For the six months ended March 27, 2021, the Company generated a net loss of $671,000. For the fiscal year ended September 26, 2020, the Company generated a net loss of $911,000 and, although the company generated $631,000 of net income in the fiscal year ended September 28, 2019, the Company suffered recurring losses from operations during the prior seven year period from fiscal 2012 to fiscal 2018 and had an accumulated deficit of $3,736,000 at March 27, 2021. These factors continue to raise substantial doubt about the Company's ability to continue as a going concern. Such consolidated financial statements do not include any adjustments to reflect the substantial doubt about the Company’s ability to continue as a going concern.

 

On March 15, 2021, the Company ended its furlough plan instituted in December 2020 and all employees returned to work on a full time basis. During the furlough, the Company had reduced the workweek for the majority of salaried employees to 24 hours and reduced salaries commensurately.

 

  Page 6  

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

 

On May 7, 2021, the Company obtained a Line of Credit in favor of Carl H. Guild, Jr. on a demand basis and with no expiration date, for up to $1 million. Mr. Guild, the Company’s Chief Executive Officer, President and Chairman of the Board, loaned the money to the Company to provide working capital. This note will bear interest at a rate of 6%.

 

We anticipate that our principal sources of liquidity, including the recent line of credit agreement will be sufficient to fund our activities to September 2021. In order to have sufficient cash to fund our operations beyond that point, we will need to secure new customer contracts, raise additional equity or debt capital, and reduce expenses, including payroll and payroll-related expenses through another furlough and/or employee separations.

 

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. The receipt of these orders has been significantly delayed and will continue to be difficult to predict due to the impact of the COVID-19 pandemic on our customers, as a result of their operations being reduced or shut down. TCC has been able to maintain its operations during this sustained period of disruption, but a continuation of the disruption in either our customers’ operations or those of the Company will continue to have a material adverse impact on sales activity and revenue.

 

Since the start of the pandemic, the Company has been able to secure capital in the form of debt financing to assist with funding its operations. On February 1, 2021, the Company received a loan from bankHometown under the U.S. Small Business Administration's (the “SBA”) Paycheck Protection Program (the “PPP”) as authorized under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”). The loan, evidenced by a promissory note, is in the principal amount of $474,405 and all or a portion of the loan is expected to be forgiven under the provisions of the Economic Aid Act. Any amounts not forgiven will be paid back over five years at an interest rate of 1% per year. This loan is designed to provide assistance in covering the Company’s payroll-related expenses and a portion of certain other costs, such as rent and utilities, for a 24 week period following the loan date.

 

During fiscal year 2020, the Company was granted a loan from the SBA in the principal amount of $150,000 pursuant to the Economic Injury Disaster Loan program. This loan is payable monthly over 30 years at an annual interest rate of 3.75% commencing two years from the date of issuance. Also in fiscal year 2020 the Company received a $474,400 PPP loan under the Coronavirus Aid, Relief and Economic Security Act. The entire original PPP loan amount was forgiven by the SBA on January 11, 2021.

 

The Company is considering raising capital through equity or debt arrangements in addition to the funding received from the SBA, although we cannot provide assurances we will be able to secure such new funding, especially in light of the tightening of the credit markets and volatility of the capital markets as a result of the coronavirus. Moreover, the Company’s common stock was delisted from the NASDAQ Capital Market effective January 25, 2021; while our common stock is quoted on the OTC Bulletin Board, the change in listing may have a negative impact on the liquidity of the stock and the Company’s ability to raise capital through offerings of its equity securities.

 

Should the Company be unsuccessful in these efforts, it would be forced to implement headcount reductions, additional employee furloughs and/or reduced hours for certain employees, or cease operations completely.

 

Reporting Period

 

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.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements include the accounts of TCC and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

  Page 7  

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

 

The discussion and analysis of the Company’s financial condition and results of operations are based on the unaudited consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these unaudited consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods.

 

On an ongoing basis, management evaluates its estimates and judgments, including but not limited to those related to revenue recognition, inventory reserves, receivable reserves, marketable securities, impairment of long-lived assets, income taxes, fair value of financial instruments and stock-based compensation. Management bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from these estimates under different assumptions or conditions.

 

NOTE 2.   Summary of Significant Accounting Policies and Significant Judgments and Estimates

 

The Company’s significant accounting policies are described in “Note 2. Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in its 2020 Annual Report and are supplemented by the notes included in this Quarterly Report on Form 10-Q. The financial statements and related notes included in this Quarterly Report should be read in conjunction with the Company’s 2020 Annual Report.

 

NOTE 3.  

Stock-Based Compensation

 

The following table summarizes stock-based compensation costs included in the Company’s consolidated statements of operations for each of the three and six month periods of fiscal 2021 and 2020:

 

    March 27, 2021   March 28, 2020
    3 months   6 months   3 months   6 months
                 
Selling, general and administrative expenses   $ 10,910       22,282     $ 10,161       21,243  
Product development expenses     2,490       4,981       3,815       5,508  
Total share-based compensation expense before taxes   $ 13,400     $ 27,263     $ 13,976     $ 26,751  

 

As of March 27, 2021, there was $125,034 of unrecognized compensation expense related to options outstanding. The unrecognized compensation expense will be recognized over the remaining requisite service period. As of March 27, 2021, the weighted average period over which the compensation expense is expected to be recognized is 2.73 years.

 

The Technical Communications Corporation 2005 Non-Statutory Stock Option Plan and 2010 Equity Incentive Plan have expired and options are no longer available for grant thereunder, although vested, unexercised options under such plans remain outstanding. There were an aggregate of 600,000 shares authorized for issuance under these plans, of which options to purchase 154,400 shares were outstanding at March 27, 2021. Vesting periods were at the discretion of the Board of Directors and typically ranged between zero and five years. Options under these plans were 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.

 

  Page 8  

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

 

The following table summarizes stock option activity during the first six months of fiscal 2021:

 

    Options Outstanding
    Number of Shares   Weighted Average   Weighted Average
Contractual Life
    Unvested   Vested   Total   Exercise Price   (in years)
                     
Outstanding, September 26, 2020     71,600       86,300       157,900     $ 4.54       6.54  
Grants     -       -       -       -          
Vested     -       -       -       -          
Cancellations/forfeitures     -       (3,500 )     (3,500 )     11.84          
                                         
Outstanding, December 26, 2020     71,600       82,800       154,400     $ 4.38       6.43  
Grants     -       -       -       -          
Vested     (6,300 )     6,300       -       4.22          
Cancellations/forfeitures     -       -       -       -          
                                         
Outstanding, March 27, 2021     65,300       89,100       154,400     $ 4.38       6.18  

 

Information related to the stock options vested and expected to vest as of March 27, 2021 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
                     
$1.01 - $2.00     20,000       8.70     $ 1.87       4,000     $ 1.87  
$2.01 - $3.00     34,300       6.91       2.61       18,200       2.72  
$3.01 - $4.00     46,500       8.04       3.61       17,700       3.63  
$4.01 - $5.00     16,600       3.24       4.34       16,400       4.33  
$5.01 - $10.00     30,000       3.61       7.92       25,800       8.03  
$10.01 - $15.00     7,000       1.10       10.20       7,000       10.20  
      154,400       6.18     $ 4.38       89,100     $ 5.28  

 

The aggregate intrinsic value of the Company’s “in-the-money” outstanding and exercisable options as of March 27, 2021 and March 28, 2020 was $15,250 and $0, respectively. Nonvested stock options are subject to the risk of forfeiture until the fulfillment of specified conditions.

 

NOTE 4.   Revenue

 

The following table presents the Company’s revenues disaggregated by revenue type for the first three and six months of fiscal 2021 and 2020.

 

Revenue type:

    2021   2020    
                 
    March 27, 2021   March 28, 2020
    3 months   6 months   3 months   6 months
                 
Engineering services   $ 242,754     $ 242,754     $ 457,818     $ 866,642  
Equipment sales     373,800       540,725       264,933       522,034  
Total   $ 616,554     $ 783,479     $ 722,751     $ 1,388,676  

 

 

 

  Page 9  

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

 

Engineering services revenue consists of funded research and development and technology development for commercial companies and government agencies primarily under fixed-price contracts. The Company also derives revenue from developing and designing custom cryptographic solutions for customers’ unique secure voice, data and video communications requirements and integrating such solutions into existing systems. These contracts can vary but typically call for fixed monthly payments or payments due upon meeting certain milestones. Customers are billed monthly or upon achieving the milestone and payments are due on a net basis after the billing date.

 

Equipment sales revenue consists of sales of communications security equipment for voice, data, facsimile and video networks for military, government and corporate/industrial applications. Equipment sales are billed to the customer upon shipment with typical payment terms requiring a down payment at the time of order with the balance due prior to shipment. For government and certain long term customers, we may grant net payment terms.

 

NOTE 5.   Inventories

 

Inventories consisted of the following:

 

    March 27,
2021
  September 26,
2020
         
Finished goods   $ 40,018     $ 75,289  
Work in process     380,593       176,980  
Raw materials     701,515       649,782  
Total inventory, net   $ 1,122,126     $ 902,051  

 

NOTE 6.   Leases

 

The Company leases space from a third party for all manufacturing, research and development, and corporate operations. The initial term of the lease was 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. In September 2018, the Company exercised its option to extend the term of the lease through September 2021. In February 2021, the Company exercised the remaining option to extend the lease through March 2024. As such, the Company uses the extended lease term in its calculation of the lease liability and right-of-use asset. The Company classifies this lease as an operating lease with the costs recognized as a selling, general and administrative expense in its consolidated statements of operations. The lease expense for each of the six month periods ended March 27, 2021 and March 28, 2020 was $85,000.

 

The table below presents the maturity of the Company’s operating lease liability as of March 27, 2021:

 

April - September 2021   $ 85,302  
2022     170,604  
2023     170,604  
2024     85,302  
Total lease payments     511,812  
Less: Imputed interest     (28,457 )
Total lease liability   $ 483,355  

 

NOTE 7.   Debt

 

On April 17, 2020, the Company was granted an initial PPP loan from bankHometown in the principal amount of $474,400 under the Coronavirus Aid, Relief and Economic Security Act (the “ CARES Act”). The loan, which was evidenced by a Note dated April 17, 2020, was payable over 18 months at an annual interest rate of 1% commencing on October 17, 2020 to the extent not forgiven. The Company used the entire loan amount for qualifying expenses and the loan was forgiven in its entirety on January 11, 2021. The AICPA and the SEC Office of the Chief Accountant have indicated that a borrower may elect to account for a PPP loan as a government grant in substance by applying the guidance in IAS 20, Accounting for Government Grants and Disclosure of Government Assistance by analogy if it is probable that it will meet both (a) the eligibility criteria for a PPP loan, and (b) the loan forgiveness criteria for all or substantially all of the PPP loan. The Company has elected to adopt this method of accounting for this PPP loan under IAS 20, and has recognized the loan forgiveness as grant income for the full amount of the loan.

 

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

 

On August 10, 2020, the Company also was granted a loan (the “SBA Loan”) from the SBA in the principal amount of $150,000 pursuant to the Economic Injury Disaster Loan program. The SBA Loan, which is evidenced by a Promissory Note dated August 10, 2020, is payable in monthly installments of $731, including principal and interest, over 30 years at an interest rate of 3.75% . The SBA Loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The proceeds from this loan must be used solely as working capital to alleviate economic injury caused by the Covid-19 pandemic . Although originally repayable commencing one year after grant, on March 12, 2021 the SBA announced that payments on the SBA Loan would be deferred an additional year. Payments on the loan will now commence on August 10, 2022.

 

As part of the SBA Loan, the Company granted the SBA a continuing security interest in and to any and all “Collateral” to secure payment and performance of all debts, liabilities and obligations of the Company to the SBA under the SBA Loan. The Collateral includes all tangible and intangible personal property that the Company owns or acquires or creates immediately upon the acquisition or creation thereof, including, but not limited to: (a) inventory, (b) equipment, (c) instruments, including promissory notes, (d) chattel paper, including tangible chattel paper and electronic chattel paper, (e) documents, (f) letter of credit rights, (g) accounts, including health-care insurance receivables and credit card receivables, (h) deposit accounts, (i) commercial tort claims, (j) general intangibles, including payment intangibles and software, and (k) as-extracted collateral, in each case as such terms may from time to time be defined in the Uniform Commercial Code.

 

The aggregate amounts of principal maturities of long-term debt for the following fiscal years are:

 

2022   $ 494  
2023     3,032  
2024     3,148  
2025     3,268  
2026     3,392  
Thereafter     136,666  
    $ 150,000  

 

On February 1, 2021, the Company received a second PPP loan from bankHometown as authorized under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”). The loan, evidenced by a promissory note, is in the principal amount of $474,405 and all or a portion of the loan is expected to be forgiven under the provisions of the Economic Aid Act. Any amount of the loan not forgiven will be paid back over five years at an interest rate of 1% per year. Program rules provide that loan payments will be deferred for borrowers who apply for loan forgiveness until the SBA remits the borrower's loan forgiveness amount to the lender. If a borrower does not apply for loan forgiveness, payments are deferred for 10 months following the end of the covered period for the borrower’s loan forgiveness (between 8 and 24 weeks).

 

NOTE 8.   Income Taxes

 

The Company has not recorded an income tax benefit on its net loss for the six month periods ended March 27, 2021 and March 28, 2020 due to its uncertain realizability. During previous fiscal years, the Company recorded a valuation allowance for the full amount of its net deferred tax assets since it could not predict the realization of these assets.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

 

NOTE 9.   Loss Per Share

 

Outstanding potentially dilutive stock options, which were not included in the net loss per share amounts as their effect would have been anti-dilutive, were as follows: 154,400 shares at March 27, 2021 and 230,500 shares at March 28, 2020.

 

NOTE 10.   Major Customers and Export Sales

 

During the three months ended March 27, 2021, the Company had four customers that represented 84% (40%, 16%, 16% and 12%, respectively) of net revenue as compared to the three months ended March 28, 2020, during which two customers represented 87% (63% and 24%, respectively) of net revenue. During the six month period ended March 27, 2021, the Company had four customers that represented 75% (31%, 19%, 13% and 12%, respectively) of net revenue as compared to the six month period ended March 28, 2020, during which two customers represented 75% (63% and 12%, respectively) of net revenue.

 

A breakdown of foreign and domestic net revenue for the first three and six months of fiscal 2021 and 2020 is as follows:

 

    March 27, 2021   March 28, 2020
    3 months   6 months   3 months   6 months
                 
Domestic   $ 546,924     $ 546,924     $ 495,838     $ 988,047  
Foreign     69,630       236,555       226,913       400,629  
Total net revenue   $ 616,554     $ 783,479     $ 722,751     $ 1,388,676  

 

The Company sold products into two countries during each of the three month periods ended March 27, 2021 and March 28, 2020. The Company sold products into four countries during the six month period ended March 27, 2021 and two countries during the six month period ended March 28, 2020. 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 foreign revenues by country as a percentage of total foreign revenue.

 

    March 27, 2021   March 28, 2020
    3 months   6 months   3 months   6 months
                 
Egypt     83 %     24 %     -       -  
Philippines     17 %     5 %     -       -  
Morocco     -       63 %     -       -  
Saudi Arabia     -       8 %     99 %     99 %
Bahrain     -       -       1 %     1 %

 

A summary of foreign revenue, as a percentage of total foreign revenue by geographic area, is as follows:

 

    March 27, 2021   March 28, 2020
    3 months   6 months   3 months   6 months
                 
Mid-East and Africa     83 %     95 %     100 %     100 %
Far East     17 %     5 %     -       -  

 

NOTE 11.   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.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

 

NOTE 12.   Subsequent Event

 

On May 6, 2021, the Company issued a Line of Credit in favor of Carl H. Guild, Jr. on a demand basis and with no expiration date, for up to $1 million. Mr. Guild, the Company’s Chief Executive Officer, President and Chairman of the Board, loaned the money to the Company to provide working capital. This note will bear interest at a rate of 6%.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

Certain statements contained herein or as may otherwise be incorporated by reference herein that are not purely historical constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include but are not limited to statements regarding anticipated operating results, future earnings, and the Company’s ability to achieve growth and profitability. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, including but not limited to the impact of the COVID-19 pandemic (including its duration and severity) and governmental actions in response thereto; the effect of foreign political unrest; domestic and foreign government policies and economic conditions; future changes in export laws or regulations; changes in technology; the ability to hire, retain and motivate technical, management and sales personnel; the risks associated with the technical feasibility and market acceptance of new products; changes in telecommunications protocols; the effects of changing costs, exchange rates and interest rates; and the Company's ability to secure adequate capital resources. Such risks, uncertainties and other factors could cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. For a more detailed discussion of the risks facing the Company, see the Company’s filings with the SEC, including its Annual Report on Form 10-K for the fiscal year ended September 26, 2020.

 

Overview

 

The Company designs, manufactures, markets and sells communications security equipment that utilizes various methods of encryption to protect the information being transmitted. Encryption is a technique for rendering information unintelligible, which information can then be reconstituted if the recipient possesses the right decryption “key”. The Company manufactures several standard secure communications products and also provides custom-designed, special-purpose secure communications products for both domestic and international customers. The Company’s products consist primarily of voice, data and facsimile encryptors. Revenue is generated principally from the sale of these products, which have traditionally been to foreign governments either through direct sale, pursuant to a U.S. government contract, or made as a sub-contractor to domestic corporations under contract with the U.S. government. We also sell these products to commercial entities and U.S. government agencies. We generate additional revenues from contract engineering services performed for certain government agencies, both domestic and foreign, and commercial entities.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

There have been no material changes in the Company’s critical accounting policies or critical accounting estimates since September 26, 2020 and we have not adopted any accounting policies that have had or will have a material impact on our consolidated financial statements. For further discussion of our accounting policies see Note 2, Summary of Significant Accounting Policies and Significant Judgments and Estimates in the Notes to Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q and the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended September 26, 2020 as filed with the SEC.

 

Results of Operations

 

Three Months ended March 27, 2021 compared to Three Months ended March 28, 2020

 

Net Revenue

 

Total net revenue for the quarter ended March 27, 2021 was $617,000, compared to $723,000 for the quarter ended March 28, 2020, a decrease of 15%. Revenue for the second quarter of fiscal 2021 consisted of $547,000, or 89% from domestic sources and $70,000, or 11%, from international customers as compared to the same period in fiscal 2020, during which revenue consisted of $496,000, or 69%, from domestic sources and $227,000, or 31%, from international customers.

 

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Foreign sales consisted of shipments to two countries during each of the quarters ended March 27, 2021 and March 28, 2020. A sale is attributed to a foreign country based on the location of the contracting party. Domestic revenue may include the sale of products shipped through domestic resellers or manufacturers to international destinations. The table below summarizes our principal foreign sales by country during the second quarters of fiscal 2021 and 2020:

 

    2021   2020
         
Egypt   $ 58,000       -  
Philippines     12,000       -  
Saudi Arabia     -       224,000  
Bahrain     -       3,000  
    $ 70,000     $ 227,000  

 

For the three months ended March 27, 2021, revenue was derived primarily from sales of our engineering services amounting to $243,000 and shipments of our narrowband radio encryptors and various accessories to three domestic customers for deployment into a Middle Eastern country amounting to $98,000, for deployment into a North African country amounting to $98,000 and for deployment into Afghanistan amounting to $77,000.

 

For the three months ended March 28, 2020, revenue was derived primarily from sales of our engineering services amounting to $458,000 and shipments of our internet protocol data encryptors to two customers in a Middle Eastern country amounting to $224,000.

 

Gross Profit

 

Gross profit for the second quarter of fiscal 2021 was $264,000, compared to gross profit of $309,000 for the same period of fiscal 2020, a decrease of 15%. Gross profit expressed as a percentage of total net revenue was 43% for the second quarters of both of fiscal 2021 and fiscal 2020.

 

Operating Costs and Expenses

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the second quarter of fiscal 2021 were $396,000, compared to $513,000 for the same quarter in fiscal 2020. This decrease of $117,000, or 23%, was attributable to decreases in general and administrative expenses of $61,000 and decreases in selling and marketing expenses of $56,000 during the three months ended March 27, 2021.

 

The decrease in general and administrative expenses for the three months ended March 27, 2021 was primarily attributable to decreases in payroll and payroll-related expenses of $60,000, director fees of $6,000 and insurance costs of $7,000. These decreases were partially offset by an increase in legal fees of $9,000 and shareholder service fees of $5,000 during the quarter.

 

The decrease in selling and marketing expenses for the three months ended March 27, 2021 was primarily attributable to decreases in product demonstration costs of $35,000, payroll and payroll-related expenses of $15,000, outside commissions of $10,000 and bid and proposal costs of $10,000. These decreases were offset by increases in internal commissions of $5,000 and engineering support of sales efforts of $3,000 for the period.

 

Product Development Costs

 

Product development costs for the quarter ended March 27, 2021 were $194,000, compared to $157,000 for the quarter ended March 28, 2020. This increase of $37,000, or 24%, was attributable to a decrease in billable engineering services contracts during the second quarter of fiscal 2021 that resulted in increased product development costs of $134,000 and an increase in project costs of $43,000. These increased costs were partially offset by a decrease in payroll and payroll-related expenses of $110,000, consulting costs of $29,000 during the period.

 

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The Company actively sells its engineering services in support of funded research and development. The receipt of these orders is sporadic, although such programs can span over several months. In addition to these programs, the Company also invests in research and development to enhance its existing products or to develop new products, as it deems appropriate. There was engineering services revenue generated during the second quarter of fiscal 2021 of $243,000 and $458,000 generated during the second quarter of fiscal 2020.

 

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 revenue; 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.

 

Net Loss

 

The Company generated a net loss of $329,000 for the second quarter of fiscal 2021, compared to a net loss of $361,000 for the same period of fiscal 2020. This decrease in net loss is primarily attributable to a decrease in operating expenses of $79,000 partially offset by a decrease in gross profit of $45,000 during the second quarter of fiscal 2021.

 

Six Months ended March 27, 2021 compared to Six Months ended March 28, 2020

 

Net Revenue

 

Total net revenue for the six months ended March 27, 2021 was $783,000, compared to $1,389,000 for the six months ended March 28, 2020, a decrease of 44%. Revenue for the first six months of fiscal 2021 consisted of $547,000, or 70%, from domestic sources and $236,000, or 30%, from international customers, compared to the same period in fiscal 2020, during which revenue consisted of $988,000, or 71%, from domestic sources and $401,000, or 29%, from international customers.

 

Foreign sales consisted of a shipment to four countries during the six months ended March 27, 2021 and two countries during the six months ended March 28, 2020. A sale is attributed to a foreign country based on the location of the contracting party. Domestic revenue may include the sale of products shipped through domestic resellers or manufacturers to international destinations. The table below summarizes our principal foreign sales by country during the first six months of fiscal 2021 and 2020:

 

    2021   2020
         
Morocco   $ 148,000       -  
Egypt     58,000       -  
Philippines     11,000       -  
Saudi Arabia     19,000     $ 398,000  
Bahrain     -       3,000  
    $ 236,000     $ 401,000  

 

For the six months ended March 27, 2021, revenue was derived from sales of our engineering services amounting to $243,000 and shipments of our narrowband radio encryptors and various accessories to three domestic customers for deployment into a Middle Eastern country amounting to $98,000, for deployment into a North African country amounting to $246,000 and for deployment into Afghanistan amounting to $77,000, and shipments of our internet protocol data encryptors amounting to $19,000.

 

For the six months ended March 28, 2020, revenue was derived primarily from sales of our engineering services amounting to $867,000, shipments of our internet protocol data encryptors to three customers in a Middle Eastern country amounting to $398,000 and shipments of our narrowband radio encryptors to a domestic customer for deployment into a North African country amounting to $117,000.

 

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Gross Profit

 

Gross profit for the first six months of fiscal 2021 was $387,000, compared to gross profit of $618,000 for the same period of fiscal 2020, a decrease of 37%. Gross profit expressed as a percentage of total net revenue was 49% for the first six months of fiscal 2021 compared to 44% for the same period in fiscal 2020.

 

Operating Costs and Expenses

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the first six months of fiscal 2021 were $942,000, compared to $1,097,000 for the same period in fiscal 2020. This decrease of $155,000, or 14%, was attributable to decreases in general and administrative expenses of $98,000 and decreases in selling and marketing expenses of $58,000 during the six months ended March 27, 2021.

 

The decrease in general and administrative expenses for the six months ended March 27, 2021 was primarily attributable to decreases in payroll and payroll-related expenses of $73,000, director fees of $16,000 and insurance costs of $14,000. These decreases were partially offset by an increase in shareholder service fees of $5,000 during the period.

 

The decrease in selling and marketing expenses for the six months ended March 27, 2021 was primarily attributable to decreases in outside commissions of $41,000, product demonstration costs of $54,000 and in payroll and payroll-related expenses of $17,000. These decreases were offset by an increase in engineering support of sales efforts of $51,000 for the period.

 

Product Development Costs

 

Product development costs for the six months ended March 27, 2021 were $587,000, compared to $362,000 for the six months ended March 28, 2020. This increase of $225,000, or 62%, was attributable to a decrease in billable engineering services contracts during the first six months of fiscal 2021 that resulted in increased product development costs of $351,000 and an increase in project costs of $58,000. These increased costs were partially offset by decreases in payroll and payroll-related expenses of $156,000 and consulting costs of $28,000 during the period.

 

The Company actively sells its engineering services in support of funded research and development. The receipt of these orders is sporadic, although such programs can span over several months. In addition to these programs, the Company also invests in research and development to enhance its existing products or to develop new products, as it deems appropriate. There was $243,000 of engineering services revenue generated during the first six months of fiscal 2021 and $866,000 generated during the first six months of fiscal 2020.

 

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 revenue; 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.

 

Net Loss

 

The Company generated a net loss of $671,000 for the first six months of fiscal 2021, compared to a net loss of $842,000 for the same period of fiscal 2020. This decrease in net loss of $171,000 is primarily attributable to grant income associated with the forgiveness of a Small Business Administration loan of $474,000 during the first six months of fiscal 2021, which is partially offset by a decrease in gross profit of $230,000.

 

Liquidity and Capital Resources

 

Our cash and cash equivalents at March 27, 2021 totaled $566,000 and we had a SBA note payable in the amount of $150,000. The Company also has borrowed $474,405 from bankHometown under the SBA’s Paycheck Protection Program as authorized under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”). All or a portion of the loan is expected to be forgiven under the provisions of the Economic Aid Act

 

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Liquidity and Ability to Continue as a Going Concern

 

For the six ended March 27, 2021, the Company generated a net loss of $671,000. For the fiscal year ended September 26, 2020, the Company generated a net loss of $911,000 and, although the Company generated $631,000 of net income in the fiscal year ended September 28, 2019, it suffered recurring losses from operations during the prior seven year period from fiscal 2012 to fiscal 2018 and had an accumulated deficit of $3,736,000 at March 27, 2021. These factors continue to raise substantial doubt about the Company's ability to continue as a going concern. Such consolidated financial statements do not include any adjustments to reflect the substantial doubt about the Company’s ability to continue as a going concern.

 

On March 15, 2021, the Company ended its furlough plan instituted in December 2020 and all employees returned to work on a full time basis. During the furlough, the Company had reduced the workweek for the majority of salaried employees to 24 hours and reduced salaries commensurately.

 

On May 7, 2021, the Company obtained a Line of Credit in favor of Carl H. Guild, Jr. on a demand basis and with no expiration date, for up to $1 million. Mr. Guild, the Company’s Chief Executive Officer, President and Chairman of the Board, loaned the money to the Company to provide working capital. This note will bear interest at a rate of 4%.

 

We anticipate that our principal sources of liquidity, including the recent line of credit will be sufficient to fund our activities to September 2021. In order to have sufficient cash to fund our operations beyond that point, we will need to secure new customer contracts, raise additional equity or debt capital, and reduce expenses, including payroll and payroll-related expenses through another furlough and/or employee separations.

 

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. The receipt of these orders has been significantly delayed and will continue to be difficult to predict due to the impact of the COVID-19 pandemic on our customers, as a result of their operations being reduced or shut down. TCC has been able to maintain operations during this sustained period of disruption, but a continuation of the disruption in either our customers’ operations or those of the Company will continue to have a material adverse impact on sales activity and revenue.

 

Since the start of the pandemic, the Company has been able to secure capital in the form of debt financing to assist with funding its operations. Most recently, on February 1, 2021 the Company received a loan from bankHometown under the PPP as authorized under the Economic Aid Act. The loan, evidenced by a promissory note, is in the principal amount of $474,405 and all or a portion of the loan is expected to be forgiven under the provisions of the Economic Aid Act. Any amounts not forgiven will be paid back over five years at an interest rate of 1% per year. Program rules provide that loan payments will be deferred for borrowers who apply for loan forgiveness until the SBA remits the borrower's loan forgiveness amount to the lender. If a borrower does not apply for loan forgiveness, payments are deferred 10 months after the end of the covered period for the borrower’s loan forgiveness (between 8 and 24 weeks). This loan is designed to provide assistance in covering the Company’s payroll-related expenses and a portion of certain other costs, such as rent and utilities, for a 24 week period following the loan date.

 

During fiscal year 2020, the Company was granted a loan from the SBA in the principal amount of $150,000 pursuant to the Economic Injury Disaster Loan program. This loan is payable monthly over 30 years at an annual interest rate of 3.75% commencing two years from the date of issuance following a recent change in the loan program. Also in fiscal year 2020, the Company received an initial $474,400 PPP loan under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The entire amount of this original PPP loan was forgiven by the SBA on January 11, 2021.

 

The Company is considering raising capital through equity or debt arrangements in addition to the funding received from the SBA, although we cannot provide assurances we will be able to secure such new funding, especially in light of the tightening of the credit markets and volatility of the capital markets as a result of the coronavirus. Moreover, the Company’s common stock was delisted from the NASDAQ Capital Market effective January 25, 2021; while our common stock is quoted on the OTC Bulletin Board, the change in listing may have a negative impact on the liquidity of the stock and the Company’s ability to raise capital through offerings of its equity securities.

 

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Should the Company be unsuccessful in these efforts, it would be forced to implement headcount reductions, additional employee furloughs and/or reduced hours for certain employees, or cease operations completely. 

 

Sources and Uses of Cash

 

The following table presents our abbreviated cash flows for the six month periods ended (unaudited):

 

    March 27,
2021
  March 28,
2020
         
Net loss   $ (671,000 )   $ (842,000 )
Changes not affecting cash     38,000          
Changes in assets and liabilities     (789,000 )     (182,000 )
                 
Cash used in operating activities     (1,422,000 )     (986,000 )
                 
Cash provided by financing activities     474,000          
                 
Net change in cash and cash equivalents     (948,000 )     (986,000 )
Cash and cash equivalents - beginning of period     1,514,000          
                 
Cash and cash equivalents - end of period   $ 566,000     $ 607,000  

 

Company Facilities

 

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 in 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 was 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. In September 2018, the Company exercised its option to extend the term of the lease through September 2021. The lease expense for each of the six month periods ended March 27, 2021 and March 28, 2020 was $85,000.

 

Debt Instruments

 

On April 17, 2020, the Company was granted a loan from bankHometown in the principal amount of $474,400 pursuant to the PPP under the CARES Act. The loan, which was evidenced by a Note dated April 17, 2020, was payable over 18 months at an annual interest rate of 1% commencing on October 17, 2020 to the extent not forgiven. The Company used the entire original PPP loan amount for qualifying expenses and the SBA forgave the loan in its entirety on January 11, 2021.

 

The Company also was granted a loan by the SBA in August 2020. This loan is evidenced by a promissory note dated August 10, 2020 in the principal amount of $150,000 and was made under the Economic Injury Disaster Loan program of the SBA. This note is payable monthly over 30 years at an annual interest rate of 3.75% commencing two years from the date of issuance following a recent change in the loan program.

 

On February 1, 2021, the Company also was granted a second PPP loan from bankHometown in the principal amount of $474,405 under theEconomic Aid Act. Any amounts not forgiven will be paid back over five years at an interest rate of 1% per year. Program rules provide that loan payments will be deferred for borrowers who apply for loan forgiveness until the SBA remits the borrower's loan forgiveness amount to the lender. If a borrower does not apply for loan forgiveness, payments are deferred for 10 months following the end of the covered period for the borrower’s loan forgiveness (between 8 and 24 weeks). The Company expects to use the entire loan amount for qualifying expenses and that the SBA will forgive the loan in its entirety.

 

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Backlog

 

Backlog at March 27, 2021 and September 26, 2020 amounted to $2,129,000 and $701,000, respectively. The orders in backlog at March 27, 2021 are expected to ship and/or services are expected to be performed over the next nine months depending on customer requirements and product availability.

 

Performance guaranties

 

Certain foreign customers require the Company to guarantee bid bonds and performance of products sold. These guaranties typically take the form of standby letters of credit. Guaranties are generally required in amounts of 5% to 10% of the purchase price and last in duration from three months to one year. At March 27, 2021 and September 26, 2020, the Company had no outstanding letters of credit.

 

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 six month periods ended March 27, 2021 and March 28, 2020 the Company spent $587,000 and $362,000, respectively, on internal product development. The Company also spent $147,000 on billable development efforts during the first six months of fiscal 2021 and $532,000 during the first six months of fiscal 2020. The Company’s total product development costs during the first six months of fiscal 2021 were 18% lower than the same period in fiscal 2020 but in line with its budgeted spending on research and development, and reflected the costs of custom development, product capability enhancements and production readiness. It is expected that total product development expenses will remain lower until we secure a new billable research and development contract.

 

It is anticipated that cash from operations will fund our near-term research and development and marketing activities. We also believe that, in the long term, based on current billable activities, cash from operations will be sufficient to meet the development goals of the Company, although we can give no assurances. Any increase in development activities - either billable or new product related - will require additional resources, which we may not be able to fund through cash from operations. In circumstances where resources will be insufficient, the Company will look to other sources of financing, including debt and/or equity investments; however, we can provide no guarantees that we will be successful in securing such additional financing.

 

Other than those stated above, there are no plans for significant internal product development or material commitments for capital expenditures during the remainder of fiscal 2021.

 

New Accounting Pronouncements

 

ASU No. 2019-12, Simplifying the Accounting for Income Taxes

 

In December 2019, the FASB issued guidance under ASU No. 2019-12, Simplifying the Accounting for Income Taxes , with respect to leases. The decisions reflected in this ASU update specific areas of ASC 740, Income Taxes, to reduce complexity while maintaining or improving the usefulness of the information provided to users of financial statements. This guidance is effective for annual reporting periods beginning after December 15, 2020 (including interim periods within that reporting period) and is not expected to have a material impact on the Company’s financial statements.

 

  Page 20  

 

 

Other recent accounting pronouncements were issued by the FASB (including its Emerging Issues Task Force) and the SEC during the first three months of the Company’s 2021 fiscal year but such pronouncements are not believed by management to have a material impact on the Company’s present or future financial statements.

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that review and evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of March 27, 2021 as a result of the material weaknesses in our internal control over financial reporting discussed below.

 

As previously disclosed under Item 9A, Controls and Procedures in our Annual Report on Form 10-K for the fiscal year ended September 26, 2020, as well as prior fiscal years, management had concluded that the Company did not maintain effective internal control over financial reporting due to material weaknesses in such internal control related to the misapplication of generally accepted accounting principles associated with revenue recognition, inventory reserves, accruals and the preparation of the consolidated financial statements, as well as the classification and disclosure of financial information, caused by an error in judgment by, or a lack of adequate skills and experience within, the accounting department. In addition, management also previously identified a material weakness due to a lack of sufficient staff to segregate accounting duties.

 

Nonetheless, management believes that our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with generally accepted accounting principles. Our Chief Executive Officer and Chief Financial Officer have certified that, based on such officer’s knowledge, the financial statements and other financial information included in this Quarterly Report on Form 10-Q fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report. In addition, we initiated a remediation plan for the material weaknesses, described below.

 

Our management, with oversight from the Audit Committee, is actively engaged in remediating the identified material weaknesses. As part of these remediation efforts management has undertaken education and training for TCC’s accounting staff and management to address certain core competencies that resulted in the lack of operational effectiveness. Management will continue to assess the design of controls to determine if enhancements are needed to increase effectiveness of our internal control over financial reporting. Management has retained a subject matter expert in the area of income tax accounting and is assessing the need to retain additional subject matter experts to ensure compliance with generally accepted accounting principles and SEC rules and regulations. Both management and the Audit Committee have increased their oversight of non-routine transactions. This includes oversight of large revenue contracts as well as judgement areas, including inventory reserves and accruals. This oversight will contribute to the assessment of the need to retain additional subject matter experts.

 

The Company continues to make significant progress in improving its internal control over financial reporting but remediation efforts are ongoing; the Company’s goal is to have all material weaknesses remediated by the end of its 2021 fiscal year.

 

Changes in internal control over financial reporting. The changes in the aforementioned internal control over financial reporting and the remediation efforts undertaken as of the end of fiscal 2020 and undertaken in the first six months of TCC’s fiscal 2021 have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. No other changes in the Company’s internal control over financial reporting occurred during the first six months of its 2021 fiscal year.

 

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PART II. Other Information

 

Item 1. Legal Proceedings

 

There were no material pending legal proceedings to which the Company or its subsidiary was a party or which any of their property was subject during the period covered by this quarterly report.

 

Item 1A. Risk Factors

 

Not applicable.

 

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

 

Not applicable.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not applicable.

 

Item 6. Exhibits

 

  10.1 Demand Promissory Note with Carl H. Guild, Jr. dated May 6, 2021

 

  31.1 Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

  31.2 Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

  32 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

  101.INS XBRL Report Instance Document

 

  101.SCH XBRL Taxonomy Extension Schema Document

 

  101.CAL XBRL Taxonomy Calculation Linkbase Document

 

  101.LAB XBRL Taxonomy Label Linkbase Document

 

  101.PRE XBRL Presentation Linkbase Document

 

  101.DEF XBRL Taxonomy Extension Definition Linkbase Document

 

 

  Page 22  

 

 

SIGNATURES

 

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

 

    TECHNICAL COMMUNICATIONS CORPORATION  
    (Registrant)  
           
May 11, 2021     By:  /s/ Carl H. Guild, Jr.  
Date       Carl H. Guild, Jr., President and Chief  
        Executive Officer  
           
           
May 11, 2021     By:  /s/ Michael P. Malone  
Date       Michael P. Malone, Chief Financial Officer  

 

 

 

 

 

Page 23

 

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