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.
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.
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.
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
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.
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.
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.
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.