Attached files
| file | filename |
|---|---|
| EX-32.1 - EXHIBIT 32.1 - TECHNICAL COMMUNICATIONS CORP | exh_321.htm |
| EX-31.2 - EXHIBIT 31.2 - TECHNICAL COMMUNICATIONS CORP | exh_312.htm |
| EX-31.1 - EXHIBIT 31.1 - TECHNICAL COMMUNICATIONS CORP | exh_311.htm |
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 31, 2018 |
| ☐ | 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) |
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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. (Check one):
| 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. 1,849,025 shares of Common Stock, $0.10 par value, outstanding as of May 4, 2018.
INDEX
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
| March 31, 2018 | September 30, 2017 | |||||||
| Assets | (unaudited) | |||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 1,428,905 | $ | 1,283,673 | ||||
| Restricted cash | 11,730 | 12,930 | ||||||
| Marketable securities - held to maturity | 102,483 | 360,253 | ||||||
| Accounts receivable - trade | 316,099 | 730,177 | ||||||
| Inventories, net | 1,474,705 | 1,358,344 | ||||||
| Other current assets | 139,653 | 135,693 | ||||||
| Total current assets | 3,473,575 | 3,881,070 | ||||||
| Equipment and leasehold improvements | 4,573,018 | 4,534,839 | ||||||
| Less: accumulated depreciation and amortization | (4,509,667 | ) | (4,481,085 | ) | ||||
| Equipment and leasehold improvements, net | 63,351 | 53,754 | ||||||
| Total Assets | $ | 3,536,926 | $ | 3,934,824 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 79,818 | $ | 109,224 | ||||
| Accrued liabilities: | ||||||||
| Accrued compensation and related expenses | 226,071 | 215,984 | ||||||
| Customer deposits | 49,106 | 53,886 | ||||||
| Other current liabilities | 70,313 | 55,376 | ||||||
| Total current liabilities | 425,308 | 434,470 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Equity: | ||||||||
| Common stock, par value $0.10 per share; 7,000,000 shares authorized; 1,849,025 shares issued and outstanding at March 31, 2018 and 1,839,877 shares issued and outstanding at September 30, 2017 | 184,903 | 183,988 | ||||||
| Additional paid-in capital | 4,114,597 | 4,139,002 | ||||||
| Accumulated deficit | (1,187,882 | ) | (822,636 | ) | ||||
| Total stockholders’ equity | 3,111,618 | 3,500,354 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 3,536,926 | $ | 3,934,824 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| Page 1 |
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
| Three Months Ended | ||||||||
| March 31, 2018 | April 1, 2017 | |||||||
| Net sales | $ | 929,612 | $ | 1,385,086 | ||||
| Cost of sales | 578,529 | 238,290 | ||||||
| Gross profit | 351,083 | 1,146,796 | ||||||
| Operating expenses: | ||||||||
| Selling, general and administrative | 530,981 | 544,896 | ||||||
| Product development | 135,083 | 476,507 | ||||||
| Total operating expenses | 666,064 | 1,021,403 | ||||||
| Operating (loss) income | (314,981 | ) | 125,393 | |||||
| Other income: | ||||||||
| Interest income | 1,701 | 2,257 | ||||||
| Net (loss) income | $ | (313,280 | ) | $ | 127,650 | |||
| Net (loss) income per common share: | ||||||||
| Basic | $ | (0.17 | ) | $ | 0.07 | |||
| Diluted | $ | (0.17 | ) | $ | 0.07 | |||
| Weighted average shares: | ||||||||
| Basic | 1,848,215 | 1,839,877 | ||||||
| Diluted | 1,848,215 | 1,839,877 | ||||||
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 31, 2018 | April 1, 2017 | |||||||
| Net sales | $ | 2,046,205 | $ | 2,016,707 | ||||
| Cost of sales | 1,123,387 | 426,887 | ||||||
| Gross profit | 922,818 | 1,589,820 | ||||||
| Operating expenses: | ||||||||
| Selling, general and administrative | 990,955 | 1,190,639 | ||||||
| Product development | 300,592 | 970,783 | ||||||
| Total operating expenses | 1,291,547 | 2,161,422 | ||||||
| Operating loss | (368,729 | ) | (571,602 | ) | ||||
| Other income: | ||||||||
| Interest income | 3,483 | 4,664 | ||||||
| Net loss | $ | (365,246 | ) | $ | (566,938 | ) | ||
| Net loss per common share: | ||||||||
| Basic | $ | (0.20 | ) | $ | (0.31 | ) | ||
| Diluted | $ | (0.20 | ) | $ | (0.31 | ) | ||
| Weighted average shares: | ||||||||
| Basic | 1,844,046 | 1,839,877 | ||||||
| Diluted | 1,844,046 | 1,839,877 | ||||||
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 31, 2018 | April, 1, 2017 | |||||||
| Operating Activities: | ||||||||
| Net loss | $ | (365,246 | ) | $ | (566,938 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 28,582 | 66,608 | ||||||
| Stock-based compensation | 10,380 | 6,640 | ||||||
| Amortization of premium on held to maturity securities | 7,770 | 13,236 | ||||||
| Exercise of stock options – cashless to pay taxes | (33,870 | ) | - | |||||
| Changes in certain operating assets and liabilities: | ||||||||
| Accounts receivable | 414,078 | (784,125 | ) | |||||
| Inventories | (116,361 | ) | (190,089 | ) | ||||
| Other current assets | (3,960 | ) | (41,328 | ) | ||||
| Customer deposits | (4,780 | ) | (107,515 | ) | ||||
| Accounts payable and other accrued liabilities | (4,382 | ) | (44,269 | ) | ||||
| Net cash used in operating activities | (67,789 | ) | (1,647,780 | ) | ||||
| Investing Activities: | ||||||||
| Proceeds from sale of cost method investment | - | 75,817 | ||||||
| Additions to equipment and leasehold improvements | (38,179 | ) | (3,575 | ) | ||||
| Proceeds from maturities of marketable securities | 250,000 | 100,000 | ||||||
| Decrease in restricted cash | 1,200 | 14,662 | ||||||
| Net cash provided by investing activities | 213,021 | 186,904 | ||||||
| Net increase (decrease) in cash and cash equivalents | 145,232 | (1,460,876 | ) | |||||
| Cash and cash equivalents at beginning of the period | 1,283,673 | 2,589,036 | ||||||
| Cash and cash equivalents at end of the period | $ | 1,428,905 | $ | 1,128,160 | ||||
| Non-cash financing activities: | ||||||||
| Exercise of stock options – cashless | $ | 915 | - | |||||
| Supplemental Disclosures: | ||||||||
| Income taxes paid | $ | 856 | $ | 856 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| Page 4 |
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Interim Financial Statements
The accompanying unaudited consolidated financial statements of Technical Communications Corporation and its wholly-owned subsidiary (collectively the “Company” or “TCC”) include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented and in order to make the financial statements not misleading. All such adjustments are of a normal recurring nature. Interim results are not necessarily indicative of the results to be expected for the fiscal year ending September 29, 2018.
Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as allowed by Securities and Exchange Commission (“SEC”) rules and regulations. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and the notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017 as filed with the SEC.
We follow accounting standards set by the Financial Accounting Standards Board, commonly referred to as the FASB. The FASB sets generally accepted accounting principles (“GAAP”) that we follow to ensure we consistently report our financial condition, results of operations, and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards CodificationTM - sometimes referred to as the Codification or ASC.
Liquidity and Ability to Continue as a Going Concern
The Company has suffered recurring losses from operations and had an accumulated deficit of $1,188,000 at March 31, 2018. These factors raise substantial doubt about the Company's ability to continue as a going concern within one year from the issuance date of the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. Such unaudited consolidated financial statements do not include any adjustments to reflect the uncertainty about the Company’s ability to continue as a going concern.
We anticipate that our principal sources of liquidity will only be sufficient to fund our activities through March 31, 2019. In order to have sufficient cash to fund our operations beyond March 31, 2019, we will need to secure new customer contracts, raise additional equity or debt capital or reduce expenses, including payroll and payroll-related expenses.
In order to have sufficient capital resources to fund operations, the Company has been working diligently to secure several large orders with new and existing customers. In addition, we are pursuing raising capital through equity or debt arrangements. Although we believe our ability to secure such new business and raise new capital is likely, we cannot provide assurances we will be able to do so.
Should we be unsuccessful in these efforts, we would then be forced to implement headcount reductions, employee furloughs and/or reduced hours for certain employees.
NOTE 1. Summary of Significant Accounting Policies and Significant Judgments and Estimates
Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
The discussion and analysis of our financial condition and results of operations are based on our unaudited consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these unaudited consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods.
| Page 5 |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
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.
The accounting policies that management believes are most critical to aid in fully understanding and evaluating our reported financial results include the following:
Revenue Recognition
Product revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product and passage of title to the customer has occurred and we have determined that collection of the fee is probable. Title to the product generally passes upon shipment of the product, as the products are shipped freight on board shipping point, except for certain foreign shipments for which title passes upon entry of the product into the first port in the buyer’s country. If the product requires installation to be performed by TCC, or other acceptance criteria exist, all revenue related to the product is deferred and recognized upon completion of the installation or satisfaction of the customer acceptance criteria. We provide for a warranty reserve at the time the product revenue is recognized.
We perform funded research and development and technology development for commercial companies and government agencies under both cost reimbursement and fixed-price contracts. Cost reimbursement contracts provide for the reimbursement of allowable costs and, in some situations, the payment of a fee. These contracts may contain incentive clauses providing for increases or decreases in the fee depending on how actual costs compare with a budget. Revenue from cost reimbursement contracts is recognized as services are performed. On fixed-price contracts that are expected to exceed one year in duration, revenue is recognized pursuant to the proportional performance method based upon the proportion of actual costs incurred to date to the total estimated costs for the contract. In each type of contract, we receive periodic progress payments or payments upon reaching interim milestones, and we retain the rights to the intellectual property developed in government contracts. All payments to TCC for work performed on contracts with agencies of the U.S. government are subject to audit and adjustment by the Defense Contract Audit Agency, the U.S. Government Accountability Office and other agencies. Adjustments are recognized in the period made. There have been no government audits in recent years and the Company believes the result of such audits, should they occur, would not have a material adverse effect on its financial position or results of operations. When current estimates of total contract revenue and contract costs for a product development contract indicate a loss, a provision for the entire loss on the contract is recorded. Any losses incurred in performing funded research and development projects are recognized as funded research and development expenses.
Cost of product revenue includes material, labor and overhead. Costs incurred in connection with funded research and development are included in cost of sales. Product development costs are charged to billable engineering services, bid and proposal efforts or business development activities, as appropriate. Product development costs charged to billable projects are recorded as cost of sales; engineering costs charged to bid and proposal efforts are recorded as selling expenses; and product development costs charged to business development activities are recorded as marketing expenses. Product development costs consist primarily of costs associated with personnel, outside contractor and engineering services, supplies and materials.
| Page 6 |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Inventories
We value our inventory at the lower of cost (based on the first-in, first-out method) to purchase and/or manufacture and net realizable value (based on the estimated selling prices, less reasonably predictable costs of completion, disposal, and transportation) of the inventory. We periodically review inventory quantities on hand and record a provision for excess and/or obsolete inventory based primarily on our estimated forecast of product demand, as well as historical usage. The Company evaluates the carrying value of inventory on a quarterly basis to determine whether the carrying value is in excess of net realizable value. To the extent that net realizable value is less than the associated carrying values, inventory carrying values are written down. In addition, the Company makes judgments as to future demand requirements and compares those with the current or committed inventory levels. Reserves are established for inventory levels that exceed expected future demand. It is possible that additional reserves above those already established may be required in the future if market conditions for our products should deteriorate.
Accounts Receivable
Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on a specific analysis of accounts in the receivable portfolio and historical write-off experience. While management believes no allowance is currently needed, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required, which would reduce our net income. In addition, if the Company becomes aware of a customer’s inability to meet its financial obligations, a specific write-off is recorded in that amount.
Accounting for Income Taxes
The preparation of our unaudited consolidated financial statements requires us to estimate our income taxes in each of the jurisdictions in which we operate, including those outside the United States, which may subject the Company to certain risks that ordinarily would not be expected in the United States. The income tax accounting process involves estimating our actual current exposure together with assessing temporary differences resulting from differing treatments of items, such as inventory obsolescence and stock-based compensation, for tax and accounting purposes. These differences result in the recognition of deferred tax assets and liabilities. We must then record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized.
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against deferred tax assets. At March 31, 2018 and September 30, 2017, we recorded a full valuation allowance against our net deferred tax assets of approximately $4.7 million due to uncertainties related to our ability to realize these assets. The valuation allowance is based on our estimates of taxable income by jurisdiction and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust our valuation allowance, which could materially impact our financial position and results of operations.
The Company follows FASB ASC 740-10, Income Taxes, relative to uncertain tax positions. This standard provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements. Uncertain tax positions must meet a recognition threshold of more-likely-than-not in order for those tax positions to be recognized in the financial statements.
Due to the nature of our current operations in foreign countries (selling products into these countries with the assistance of local representatives), the Company has not been subject to any foreign taxes in recent years, and it is not anticipated that we will be subject to foreign taxes in the near future.
| Page 7 |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Fair Value Measurements
In determining fair value measurements, the Company follows the provisions of FASB ASC 820, Fair Value Measurements and Disclosures. FASB ASC 820 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. The topic provides a consistent definition of fair value that focuses on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The topic also prioritizes, within the measurement of fair value, the use of market-based information over entity-specific information and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date. At March 31, 2018 and September 30, 2017, the carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, marketable securities, other current assets, accounts payable and accrued liabilities approximate fair value because of their short-term nature.
The three-level hierarchy is as follows:
| Level 1 - | Pricing inputs are quoted prices available in active markets for identical assets or liabilities as of the measurement date. |
| Level 2 - | Pricing inputs are quoted prices for similar assets or liabilities, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data. |
| Level 3 - | Pricing inputs are unobservable for the assets or liabilities, that is, inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability. |
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.
The Company’s held to maturity securities are comprised of investments in municipal bonds. These securities represent ownership in individual bonds issued by municipalities within the United States. The value of these securities is disclosed in Note 6. The Company’s available for sale securities consist of mutual funds held in money market mutual funds in a brokerage account, which are classified as cash equivalents and measured at fair value.
The Company assesses the levels of the investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer in accordance with the Company’s accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. During the six month period ended March 31, 2018 and the year ended September 30, 2017, there were no transfers between levels.
The following table sets forth by level, within the fair value hierarchy, the assets measured at fair value on a recurring basis as of March 31, 2018 and September 30, 2017, in accordance with the fair value hierarchy as defined above. As of March 31, 2018 and September 30, 2017, the Company did not hold any assets classified as Level 2 or Level 3.
| Page 8 |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
| Quoted Prices in | ||||||||||||
| Active Markets for | Significant Other | |||||||||||
| Identical Assets | Observable Inputs | |||||||||||
| Total | (Level 1) | (Level 2) | ||||||||||
| March 31, 2018 | ||||||||||||
| Cash Equivalents | ||||||||||||
| Mutual funds: | ||||||||||||
| Money market funds | $ | 911,745 | $ | 911,745 | $ | - | ||||||
| Total mutual funds | 911,745 | 911,745 | - | |||||||||
| Total assets | $ | 911,745 | $ | 911,745 | $ | - | ||||||
| September 30, 2017 | ||||||||||||
| Cash Equivalents | ||||||||||||
| Mutual funds: | ||||||||||||
| Money market funds | $ | 851,195 | $ | 851,195 | $ | - | ||||||
| Total mutual funds | 851,195 | 851,195 | - | |||||||||
| Total assets | $ | 851,195 | $ | 851,195 | $ | - | ||||||
There were no assets or liabilities measured at fair value on a nonrecurring basis at March 31, 2018 or September 30, 2017.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the calculated fair value of the award. The expense is recognized over the participant’s requisite service period, generally the vesting period of the award. The related excess tax benefit received upon the exercise of stock options, if any, is reflected in the Company’s statement of cash flows as a financing activity. There were no excess tax benefits recorded during either of the six month periods ended March 31, 2018 and April 1, 2017.
The Company uses the Black-Scholes option pricing model as the method for determining the estimated fair value of its stock awards. The Black-Scholes method of valuation requires several assumptions: (1) the expected term of the stock award, (2) the expected future stock price volatility over the expected term, (3) a risk-free interest rate and (4) the expected dividend rate.
The expected term represents the expected period of time the Company believes the options will be outstanding based on historical information. Estimates of expected future stock price volatility are based on the historic volatility of the Company’s common stock, and the risk free interest rate is based on the U.S. Treasury Note rate. The Company utilizes a forfeiture rate based on an analysis of its actual experience. The forfeiture rate is not material to the calculation of share-based compensation. There were 14,000 options granted during each of the six month periods ended March 31, 2018 and April 1, 2017.
The following table summarizes stock-based compensation costs included in the Company’s consolidated statements of operations for the three and six month periods ended March 31, 2018 and April 1, 2017:
| March 31, 2018 | April 1, 2017 | |||||||||||||||
| 3 months | 6 months | 3 months | 6 months | |||||||||||||
| Selling, general and administrative expenses | $ | 5,851 | 9,756 | $ | 3,361 | $ | 6,100 | |||||||||
| Product development expenses | 352 | 624 | 268 | 540 | ||||||||||||
| Total share-based compensation expense before taxes | $ | 6,203 | $ | 10,380 | $ | 3,629 | $ | 6,640 | ||||||||
| Page 9 |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
As of March 31, 2018 and April 1, 2017, there was $119,543 and $62,636, respectively, of unrecognized compensation expense related to options outstanding. The unrecognized compensation expense will be recognized over the remaining requisite service period. As of March 31, 2018 and April 1, 2017, the weighted average period over which the compensation expense is expected to be recognized is 4.3 and 4.1 years, respectively.
The Technical Communications Corporation 2005 Non-Statutory Stock Option Plan and 2010 Equity Incentive Plan were outstanding at March 31, 2018. There are an aggregate of 600,000 shares authorized for issuance under these plans, of which options to purchase 228,837 shares were outstanding at March 31, 2018. Vesting periods are at the discretion of the Board of Directors and typically range between zero and five years. Options under these plans are granted with an exercise price equal to fair market value at time of grant and have a term of ten years from the date of grant.
As of March 31, 2018, there were 230,563 shares available for grant under the 2010 Equity Incentive Plan. The 2005 Non-Statutory Stock Option Plan has expired and options are no longer available for grant under such plan.
The following table summarizes stock option activity during the first six months of fiscal 2018:
| Options Outstanding | ||||||||||||||||||||
| Weighted Average | ||||||||||||||||||||
| Number of Shares | Weighted Average | Contractual Life | ||||||||||||||||||
| Unvested | Vested | Total | Exercise Price | (years) | ||||||||||||||||
| Outstanding, September 30, 2017 | 34,200 | 212,081 | 246,281 | $ | 8.36 | 3.95 | ||||||||||||||
| Grants | 500 | - | 500 | 4.85 | ||||||||||||||||
| Vested | - | - | - | |||||||||||||||||
| Exercises | - | - | - | |||||||||||||||||
| Cancellations/forfeitures | - | - | - | |||||||||||||||||
| Outstanding, December 30, 2017 | 34,700 | 212,081 | 246,781 | $ | 8.35 | 3.72 | ||||||||||||||
| Grants | 14,000 | - | 14,000 | 7.25 | ||||||||||||||||
| Vested | (5,600 | ) | 5,600 | - | 2.70 | |||||||||||||||
| Exercises | - | (24,100 | ) | (24,100 | ) | 6.12 | ||||||||||||||
| Cancellations/forfeitures | - | (7,844 | ) | (7,844 | ) | 9.68 | ||||||||||||||
| Outstanding, March 31, 2018 | 43,100 | 185,737 | 228,837 | $ | 8.48 | 4.17 | ||||||||||||||
Information related to the stock options vested and expected to vest as of March 31, 2018 is as follows:
| Weighted-Average | Exercisable | |||||||||||||||||||||
| Remaining | Weighted | Exercisable | Weighted- | |||||||||||||||||||
| Range of | Number of | Contractual | Average | Number of | Average | |||||||||||||||||
| Exercise Prices | Shares | Life (years) | Exercise Price | Shares | Exercise Price | |||||||||||||||||
| $2.01 | - | $3.00 | 27,300 | 8.38 | $ | 2.70 | 7,700 | $ | 2.75 | |||||||||||||
| $4.01 | - | $5.00 | 36,100 | 4.30 | 4.53 | 27,200 | 4.68 | |||||||||||||||
| $5.01 | - | $10.00 | 51,000 | 5.56 | 7.80 | 36,400 | 8.04 | |||||||||||||||
| $10.01 | - | $15.00 | 114,437 | 2.51 | 11.40 | 114,437 | 11.40 | |||||||||||||||
| 228,837 | 4.17 | 8.48 | 185,737 | 9.40 | ||||||||||||||||||
The aggregate intrinsic value of the Company’s “in-the-money” outstanding and exercisable options as of March 31, 2018 and April 1, 2017 was $34,795 and $0, respectively. Nonvested stock options are subject to the risk of forfeiture until the fulfillment of specified conditions.
| Page 10 |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
NOTE 2. Inventories
Inventories consisted of the following:
| March 31, 2018 | September 30, 2017 | |||||||
| Finished goods | $ | 23,034 | $ | 20,759 | ||||
| Work in process | 341,492 | 383,216 | ||||||
| Raw materials | 1,110,179 | 954,369 | ||||||
| $ | 1,474,705 | $ | 1,358,344 | |||||
NOTE 3. Income Taxes
The Company has not recorded an income tax benefit on its net loss for the three and six month periods ended March 31, 2018 and April 1, 2017 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.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law by the President of the United States. The Tax Act includes a number of changes, including the lowering of the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018. The Company has determined and completed the accounting for certain income tax effects of the Tax Act in applying FASB ASC 740 to the current reporting period. Because the Company records a valuation allowance for its entire deferred income tax asset, there was no impact on the reported amounts in the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q as a result of the Tax Act.
NOTE 4. 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: 228,837 shares at March 31, 2018 and 252,114 shares at April 1, 2017.
NOTE 5. Major Customers and Export Sales
During the three month periods ended March 31, 2018 and April 1, 2017, the Company had one customer that represented 98% and 90%, respectively of net sales. During each of the six month periods ended March 31, 2018 and April 1, 2017, the Company had one customer that represented 88% of net sales.
A breakdown of foreign and domestic net sales for the three and six month periods ended March 31, 2018 and April 1, 2017 is as follows:
| March 31, 2018 | April 1, 2017 | |||||||||||||||
| 3 months | 6 months | 3 months | 6 months | |||||||||||||
| Domestic | $ | 929,612 | $ | 1,917,147 | $ | 1,251,933 | $ | 1,783,722 | ||||||||
| Foreign | - | 129,058 | 133,153 | 232,985 | ||||||||||||
| Total sales | $ | 929,612 | $ | 2,046,205 | $ | 1,385,086 | $ | 2,016,707 | ||||||||
The Company did not sell any products into foreign countries during the three month period ended March 31, 2018 and sold products into three foreign countries during the three month period ended April 1, 2017. The Company sold products into four foreign countries during each of the six month periods ended March 31, 2018 and April 1, 2017. A sale is attributed to a foreign country based on the location of the contracting party. Domestic revenue may include the sale of products shipped through domestic resellers or manufacturers to international destinations. The table below summarizes our foreign revenues by country as a percentage of total foreign revenue.
| Page 11 |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
| March 31, 2018 | April 1, 2017 | |||||||||||||||
| 3 months | 6 months | 3 months | 6 months | |||||||||||||
| Philippines | - | 54 | % | 7 | % | 4 | % | |||||||||
| Saudi Arabia | - | 27 | % | 72 | % | 43 | % | |||||||||
| Jordan | - | 10 | % | 21 | % | 46 | % | |||||||||
| Egypt | - | 9 | % | - | - | |||||||||||
| Other | - | - | - | 7 | % | |||||||||||
A summary of foreign revenue, as a percentage of total foreign revenue by geographic area, is as follows:
| March 31, 2018 | April 1, 2017 | |||||||||||||||
| 3 months | 6 months | 3 months | 6 months | |||||||||||||
| Mid-East and Africa | - | 46 | % | 92 | % | 89 | % | |||||||||
| Far East | - | 54 | % | 8 | % | 11 | % | |||||||||
NOTE 6. Cash Equivalents and Marketable Securities
The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. Cash equivalents are invested in money market mutual funds. Money market mutual funds held in a brokerage account are considered available for sale. The Company accounts for marketable securities in accordance with FASB ASC 320, Investments—Debt and Equity Securities. All marketable securities must be classified as one of the following: held to maturity, available for sale, or trading. The Company classifies its marketable securities as either available for sale or held to maturity.
Available for sale securities are carried at fair value, with unrealized holding gains and losses reported in stockholders’ equity as a separate component of accumulated other comprehensive income (loss). Held to maturity securities are carried at amortized cost. The cost of securities sold is determined based on the specific identification method. Realized gains and losses, and declines in value judged to be other than temporary, are included in investment income.
As of March 31, 2018, available for sale securities consisted of the following:
| Gross Unrealized | Estimated | |||||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||
| Money market mutual funds | $ | 911,745 | $ | - | $ | - | $ | 911,745 | ||||||||
As of March 31, 2018, held to maturity securities consisted of the following:
| Accrued | Amortization | Amortized | Unrealized | Estimated | ||||||||||||||||||||
| Cost | Interest | Bond Premium | Cost | Losses | Fair Value | |||||||||||||||||||
| Municipal bonds | $ | 115,775 | $ | 2,472 | $ | 15,764 | $ | 102,483 | $ | (11 | ) | $ | 102,472 | |||||||||||
As of September 30, 2017, available for sale securities consisted of the following:
| Accrued | Gross Unrealized | Estimated | ||||||||||||||||||
| Cost | Interest | Gains | Losses | Fair Value | ||||||||||||||||
| Money market mutual funds | $ | 851,195 | $ | - | $ | - | $ | - | $ | 851,195 | ||||||||||
| Page 12 |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
As of September 30, 2017, held to maturity securities consisted of the following:
| Accrued | Amortization | Amortized | Unrealized | Estimated | ||||||||||||||||||||
| Cost | Interest | Bond Premium | Cost | Gains | Fair Value | |||||||||||||||||||
| Municipal bonds | $ | 412,366 | $ | 6,986 | $ | 59,099 | $ | 360,253 | $ | 216 | $ | 360,469 | ||||||||||||
The contractual maturities of held to maturity securities as of March 31, 2018 were all within one year.
The Company’s available for sale securities were included in the cash and cash equivalents caption in the consolidated balance sheets.
NOTE 7. Cost Method Investment
On October 30, 2014, the Company made an investment of $275,000 to purchase 11,000 shares of common stock of PulsedLight, Inc., an early stage start-up company located in Bend, Oregon. The investment represented a 10.8% ownership stake in the company at the time of purchase and was accounted for utilizing the cost method of accounting. On January 12, 2016, the Company entered into an agreement to sell its shares in PulsedLight. The net proceeds to the Company after closing costs and certain liabilities amounted to $737,283, of which the Company received $661,466 at closing and of which $75,817 was deposited in an escrow account in accordance with the terms of the sale that required 10% of the proceeds to be held in escrow for one year. The escrow balance as of December 31, 2016 is included in other current assets within the accompanying consolidated balance sheet. The escrow balance was received by the Company in January 2017.
| Page 13 |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements contained herein or as may otherwise be incorporated by reference herein that are not purely historical constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include but are not limited to statements regarding anticipated operating results, future earnings, and the Company’s ability to achieve growth and profitability. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, including but not limited to the effect of foreign political unrest; domestic and foreign government policies and economic conditions; future changes in export laws or regulations; changes in technology; the ability to hire, retain and motivate technical, management and sales personnel; the risks associated with the technical feasibility and market acceptance of new products; changes in telecommunications protocols; the effects of changing costs, exchange rates and interest rates; and the Company's ability to secure adequate capital resources. Such risks, uncertainties and other factors could cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. For a more detailed discussion of the risks facing the Company, see the Company’s filings with the SEC, including its Annual Report on Form 10-K for the fiscal year ended September 30, 2017.
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 30, 2017, nor have we adopted any accounting policy that has or will have a material impact on our consolidated financial statements. For further discussion of our accounting policies see Note 1, Summary of Significant Accounting Policies and Significant Judgments and Estimates in the Notes to Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q and the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017 as filed with the SEC.
| Page 14 |
Results of Operations
Three Months ended March 31, 2018 compared to Three Months ended April 1, 2017
Net Sales
Net sales for the quarter ended March 31, 2018 were $930,000, compared to $1,385,000 for the quarter ended April 1, 2017, a decrease of 33%. Sales for the second quarter of fiscal 2018 were all from domestic sources as compared to the same period in fiscal 2017, during which sales consisted of $1,252,000, or 90%, from domestic sources and $133,000, or 10%, from international customers.
Foreign sales consisted of shipments to three countries during the quarter ended April 1, 2017; there were no sales into foreign countries by the Company during the quarter ended March 31, 2018. 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 quarter of fiscal 2018 and 2017:
| 2018 | 2017 | |||||||
| Saudi Arabia | $ | - | $ | 95,000 | ||||
| Jordan | - | 28,000 | ||||||
| Philippines | - | 10,000 | ||||||
| $ | - | $ | 133,000 | |||||
For the three months ended March 31, 2018, revenue was derived primarily from sales of our engineering services amounting to $900,000.
For the three months ended April 1, 2017, product sales revenue was derived primarily from shipments of our narrowband radio encryptors to a domestic customer for deployment into Afghanistan amounting to $1,250,000. We sold our internet protocol encryptor to a customer in Saudi Arabia amounting to $95,000 and also made shipments of our secure telephone and fax encryptor to an international customer in Jordan amounting to $28,000 during the quarter.
Gross Profit
Gross profit for the second quarter of fiscal 2018 was $351,000, compared to gross profit of $1,147,000 for the same period of fiscal 2017, a decrease of 69%. Gross profit expressed as a percentage of sales was 38% for the second quarter of fiscal 2018 compared to 83% for the same period in fiscal 2017, which decrease was due to the lower margin engineering services sales in fiscal 2018.
Operating Costs and Expenses
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the second quarter of fiscal 2018 were $531,000, compared to $545,000 for the same quarter in fiscal 2017. This decrease of $14,000, or 3%, was attributable to a decrease in selling and marketing expenses of $87,000, which was offset by an increase in general and administrative expenses of $73,000 during the three months ended March 31, 2018.
The decrease in selling and marketing expenses for the three months ended March 31, 2018 was attributable to decreases in product evaluation costs of $42,000, bid and proposal costs of $30,000, outside sales commissions of $19,000 and product demonstration costs of $11,000. These decreases were partially offset by an increase in personnel-related costs of $14,000.
The increase in general and administrative expenses for the three months ended March 31, 2018 was primarily attributable to increases in audit fees and other public company costs of $71,000.
| Page 15 |
Product Development Costs
Product development costs for the quarter ended March 31, 2018 were $135,000, compared to $477,000 for the quarter ended April 1, 2017. This decrease of $341,000, or 72%, was attributable to an increase in billable engineering services contracts during the second quarter of fiscal 2018 that resulted in decreased product development costs of $381,000 and reduced personnel related costs of $40,000. These decreased costs were partially offset by an increase in engineering project costs of $81,000 during the period.
Product development costs are charged to billable engineering services, bid and proposal efforts or business development activities, as appropriate. Product development costs charged to billable projects are recorded as cost of sales; engineering costs charged to bid and proposal efforts are recorded as selling expenses; and product development costs charged to business development activities are recorded as marketing expenses.
The Company actively sells its engineering services in support of funded research and development. The receipt of these orders is sporadic, although such programs can span over several months. In addition to these programs, the Company also invests in research and development to enhance its existing products or to develop new products, as it deems appropriate. There was approximately $900,000 of billable engineering services revenue generated during the second quarter of fiscal 2018 and none in the second quarter of fiscal 2017.
Net Loss
The Company incurred a net loss of $313,000 for the second quarter of fiscal 2018, compared to net income of $128,000 for the same period of fiscal 2017. This net loss is primarily attributable to a 69% decrease in gross profit, which was partially offset by a decrease in operating expenses of 35% during the second quarter of fiscal 2018.
Six Months ended March 31, 2018 compared to Six Months ended April 1, 2017
Net Sales
Net sales for the six months ended March 31, 2018 were $2,046,000, compared to $2,017,000 for the six months ended April 1, 2017, an increase of 1%. Sales for the first six months of fiscal 2018 consisted of $1,917,000, or 94%, from domestic sources and $129,000, or 6%, from international customers as compared to the same period in fiscal 2017, during which sales consisted of $1,784,000, or 88%, from domestic sources and $233,000, or 12%, from international customers.
Foreign sales consisted of shipments to four countries during each of the six month periods ended March 31, 2018 and April 1, 2017. 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 2018 and 2017:
| 2018 | 2017 | |||||||
| Philippines | $ | 70,000 | $ | 10,000 | ||||
| Saudi Arabia | 34,000 | 101,000 | ||||||
| Jordan | 13,000 | 106,000 | ||||||
| Egypt | 12,000 | 16,000 | ||||||
| $ | 129,000 | $ | 233,000 | |||||
For the six months ended March 31, 2018, revenue was derived primarily from sales of our engineering services amounting to $1,800,000 and shipments of our narrowband radio encryptors to a customer in the Far East amounting to $70,000 and to a domestic customer for deployment into Afghanistan amounting to $57,000.
| Page 16 |
For the six months ended April 1, 2017, product sales revenue was derived primarily from shipments of our narrowband radio encryptors to a domestic customer for deployment into Afghanistan amounting to $1,781,000. The Company made shipments of our secure telephone and fax encryptor to an international customer in Jordan amounting to $106,000 during the period. We also sold our internet protocol encryptor to a customer in Saudi Arabia amounting to $95,000.
Gross Profit
Gross profit for the first six months of fiscal 2018 was $923,000, compared to gross profit of $1,590,000 for the same period of fiscal 2017, a decrease of 42%. Gross profit expressed as a percentage of sales was 45% for the first six months of fiscal 2018 compared to 79% for the same period in fiscal 2017, which decrease was due to the lower margin engineering services sales in fiscal 2018.
Operating Costs and Expenses
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first six months of fiscal 2018 were $991,000, compared to $1,191,000 for the same period in fiscal 2017. This decrease of $200,000, or 17%, was attributable to a decrease in selling and marketing expenses of $239,000, which was partially offset by an increase in general and administrative expenses of $39,000, during the six months ended March 31, 2018.
The decrease in selling and marketing expenses for the six months ended March 31, 2018 was attributable to decreases in product evaluation costs of $60,000, bid and proposal costs of $43,000 and product demonstration costs of $135,000. These decreases were partially offset by an increase in personnel-related costs of $21,000.
The increase in general and administrative expenses for the six months ended March 31, 2018 was primarily attributable to increases in audit fees and other public company costs of $75,000. These increases were partially offset by a decrease in personnel-related costs of $30,000 during the period.
Product Development Costs
Product development costs for the six months ended March 31, 2018 were $301,000, compared to $971,000 for the six months ended April 1, 2017. This decrease of $670,000, or 69%, was attributable to an increase in billable engineering services contracts during the first six months of fiscal 2018 that resulted in decreased product development costs of $673,000 and reduced personnel related costs of $85,000. These decreased costs were partially offset by an increase in engineering project costs of $94,000 during the period.
Product development costs are charged to billable engineering services, bid and proposal efforts or business development activities, as appropriate. Product development costs charged to billable projects are recorded as cost of sales; engineering costs charged to bid and proposal efforts are recorded as selling expenses; and product development costs charged to business development activities are recorded as marketing expenses.
The Company actively sells its engineering services in support of funded research and development. The receipt of these orders is sporadic, although such programs can span over several months. In addition to these programs, the Company also invests in research and development to enhance its existing products or to develop new products, as it deems appropriate. There was approximately $1,800,000 of billable engineering services revenue generated during the first six months of fiscal 2018 and none in the first six months of fiscal 2017.
Net Loss
The Company incurred a net loss of $365,000 for the first six months of fiscal 2018, compared to a net loss of $567,000 for the same period of fiscal 2017. This decrease in net loss is primarily attributable to a 40% decrease in operating expenses and partially offset by a 42% decrease in gross profit during the first six months of fiscal 2018.
| Page 17 |
The effects of inflation and changing costs have not had a significant impact on sales or earnings in recent years. As of March 31, 2018, none of the Company’s monetary assets or liabilities was subject to foreign exchange risks. The Company usually includes an inflation factor in its pricing when negotiating multi-year contracts with customers.
Liquidity and Capital Resources
Our cash, cash equivalents and marketable securities (excluding restricted cash) at March 31, 2018 totaled $1,531,000 and we continue to have no debt.
Liquidity and Ability to Continue as a Going Concern
The Company has suffered recurring losses from operations and had an accumulated deficit of $1,188,000 at March 31, 2018. These factors raise substantial doubt about the Company's ability to continue as a going concern within one year from the issuance date of the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. The unaudited consolidated financial statements included herein do not include any adjustments to reflect the uncertainty about the Company’s ability to continue as a going concern.
We anticipate that our principal sources of liquidity will only be sufficient to fund our activities through March 31, 2019. In order to have sufficient cash to fund our operations beyond March 31, 2019, we will need to secure new customer contracts, raise additional equity or debt capital, and reduce expenses, including payroll and payroll-related expenses.
In order to have sufficient capital resources to fund operations, the Company has been working diligently to secure several large orders with new and existing customers. In addition, we are pursuing raising capital through equity or debt arrangements. Although we believe our ability to secure such new business and raise new capital is likely, we cannot provide assurances we will be able to do so.
Should we be unsuccessful in these efforts, we would then be forced to implement headcount reductions, employee furloughs and/or reduced hours for certain employees.
Sources and Uses of Cash
The following table presents our abbreviated cash flows for the six month periods ended (unaudited):
| March 31, | April 1, | |||||||
| 2018 | 2017 | |||||||
| Net loss | $ | (365,000 | ) | $ | (567,000 | ) | ||
| Changes not affecting cash | 13,000 | 86,000 | ||||||
| Changes in assets and liabilities | 284,000 | (1,167,000 | ) | |||||
| Cash used in operating activities | (68,000 | ) | (1,648,000 | ) | ||||
| Cash provided by investing activities | 213,000 | 187,000 | ||||||
| Net change in cash and cash equivalents | 145,000 | (1,461,000 | ) | |||||
| Cash and cash equivalents - beginning of period | 1,284,000 | 2,589,000 | ||||||
| Cash and cash equivalents - end of period | $ | 1,429,000 | $ | 1,128,000 | ||||
Operating Activities
The Company used approximately $1,580,000 less cash for operating activities in the first six months of fiscal 2018 compared to the same period in fiscal 2017. This decrease was primarily attributable to a decrease in accounts receivable during the six month period ended March 31, 2018.
| Page 18 |
Investing Activities
Cash provided by investing activities during the first six months of fiscal 2018 increased by approximately $26,000 compared to the same period in fiscal 2017. This change is primarily attributable to the maturity of short-term investments in marketable securities of $150,000 and partially offset by a decrease in proceeds from the sale of cost method investment of $76,000 and an increase in additions equipment and leasehold improvements of $35,000, during the first six months of 2018.
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, Concord, MA. The Company has been a tenant in this space since 1983. This is the Company’s only facility and houses all manufacturing, research and development, and corporate operations. The initial term of the lease is for five years through March 31, 2019 at an annual rate of $171,000. In addition, the lease contains options to extend the lease for two and one half years through September 30, 2021 and another two and one half years through March 31, 2024 at an annual rate of $171,000. Rent expense for each of the six month periods ended March 31, 2018 and April 1, 2017 was $85,000.
Backlog
Backlog at March 31, 2018 and September 30, 2017 amounted to $2,157,000 and $1,975,000, respectively. The orders in backlog at March 31, 2018 are expected to ship and/or services are expected to be performed over the next six months depending on customer requirements and product availability.
Performance guaranties
Certain foreign customers require the Company to guarantee bid bonds and performance of products sold. These guaranties typically take the form of standby letters of credit. Guaranties are generally required in amounts of 5% to 10% of the purchase price and last in duration from three months to one year. At March 31, 2018, the Company had one outstanding letter of credit in the amount of $12,000 and at September 30, 2017 the Company had two outstanding letters of credit in the amounts of $12,000 and $1,000. These collateralized bank accounts represent cash which has restrictions on its use.
Research and development
Research and development efforts are undertaken by the Company primarily on its own initiative. In order to compete successfully, the Company must 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 months ended March 31, 2018 and April 1, 2017, the Company spent $301,000 and $971,000, respectively, on internal product development. The Company also spent $869,000 on billable development efforts during the first six months of fiscal 2018. There were no billable development efforts during the first six months of fiscal 2017. The Company’s total product development costs during the first six months of fiscal 2018 were 20% higher than the same period in fiscal 2017 but in line with its planned commitment to research and development, and reflected the costs of custom development, product capability enhancements and production readiness. It is expected that development expenses for fiscal 2018 will be consistent with fiscal 2017 levels.
It is anticipated that cash from operations will fund our near-term research and development and marketing activities through at least the end of calendar year 2018. 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.
| Page 19 |
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 2018.
New Accounting Pronouncements
ASU 2014-09, Revenue from Contracts with Customers, amended by ASU 2015-14 (Topic 606), ASU 2016-10, ASU 2016-11 and ASU 2016-12
In May 2014, the FASB and the International Accounting Standards Board issued guidance on the principles for recognizing revenue and developing a common revenue standard for U.S. GAAP and International Financial Reporting Standards that would: (1) remove inconsistencies and weaknesses in revenue requirements, (2) provide a more robust framework for addressing revenue issues, (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, (4) provide more useful information to users of financial statements through improved disclosure requirements, and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. This guidance is effective prospectively for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is not permitted. The Company is currently evaluating the impact of this guidance and is still considering whether it will have a material effect on the Company’s consolidated financial statements. This guidance will become effective for TCC as of the beginning of our 2019 fiscal year.
ASU 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
In August 2014, the FASB updated U.S. GAAP to eliminate a critical gap in existing standards regarding disclosure of uncertainties about an entity’s ability to continue as a going concern. The new guidance clarifies the disclosures management must make in the organization’s financial statement footnotes when management has substantial doubt about its ability to continue as a “going concern.” The Company adopted this standard for its fiscal year ended September 30, 2017. The adoption of this standard requires the Company to evaluate its ability to meet its obligations as they become due for a period of one year from the date that the financial statements are issued. As a result of this requirement, management has determined that substantial doubt exists about our ability to continue as a going concern. See further discussion in the footnotes to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.
ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory
In July 2015, the FASB issued guidance with respect to inventory measurement. This ASU requires inventory to be measured at the lower of cost and net realizable value. The provisions of this ASU became effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendment is required to be applied prospectively, and early adoption is permitted. This guidance was adopted by the Company in the first quarter of fiscal 2018; the adoption of this standard did not have a material impact on our financial statements.
ASU No. 2016-02, Leases
In February 2016, the FASB issued guidance with respect to leases. This ASU requires entities to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. We are currently evaluating the potential impact this standard will have on our financial statements and related disclosure.
| Page 20 |
ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting,
In March 2016, the FASB issued guidance that simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. This guidance was adopted by the Company in the first quarter of fiscal 2018; the adoption of this standard did not have a material impact on our financial statements.
Other recent accounting pronouncements were issued by the FASB (including its Emerging Issues Task Force), the AICPA and the SEC during the first six months of our 2018 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. Based on that review and evaluation, the chief executive officer and chief financial officer have concluded that the Company’s current disclosure controls and procedures, as designed and implemented, are effective to ensure that such officers are provided with information relating to the Company required to be disclosed in the reports the Company files or submits under the Exchange Act and that such information is recorded, processed, summarized and reported within the specified time periods.
Changes in internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| Page 21 |
| Item 1. | Legal Proceedings |
There were no legal proceedings pending against or involving the Company or its subsidiary 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 |
On February 12, 2018, the Company held its 2018 annual meeting of shareholders (the “Meeting”) at its executive offices in Concord, MA. Set forth below are the matters voted upon at the Meeting and the voting results:
Proposal 1 - The Company’s shareholders voted to elect two Class III Directors to serve on the Board of Directors for a term of three years expiring at the 2021 Annual Meeting of Stockholders. The votes cast were as follows:
| Nominee | Votes for | Votes withheld | ||||||
| Carl H. Guild, Jr. | 576,725 | 27,856 | ||||||
| Thomas E. Peoples | 571,023 | 33,558 | ||||||
There were 1,115,848 broker non-votes with respect to Proposal 1.
Proposal 2 - The Company's shareholders approved on an advisory, non-binding basis, the compensation of the Company's named executive officers as disclosed in the proxy statement for the Meeting, with 563,824 shares voting for and 28,302 shares voting against the proposal. There were 12,455 shares abstaining and 1,115,848 broker non-votes on this proposal.
Proposal 3 - The Company's shareholders voted to ratify the appointment of Moody, Famiglietti & Andronico, LLP as the Company's independent registered public accounting firm for the fiscal year ending September 29, 2018 with 1,655,160 shares voting for, 60,994 shares voting against, and 4,275 shares abstaining with respect to this proposal.
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| Item 6. | Exhibits |
| 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 | |
| 32.1 | 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 23 |
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 15, 2018 | By: | /s/ Carl H. Guild, Jr. | |
| Date | Carl H. Guild, Jr., President and Chief | ||
| Executive Officer | |||
| May 15, 2018 | By: | /s/ Michael P. Malone | |
| Date | Michael P. Malone, Chief Financial Officer | ||
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