Attached files
| file | filename |
|---|---|
| EX-32 - EXHIBIT 32 - TECHNICAL COMMUNICATIONS CORP | exh_32.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 |
| EX-10.10 - EXHIBIT 10.10 - TECHNICAL COMMUNICATIONS CORP | exh_1010.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
| X | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the quarterly period ended June 27, 2020 | ||
| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||
| For the transition period from ________________ to ________________ |
Commission File Number: 001-34816
TECHNICAL COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
| Massachusetts | 04-2295040 | |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
| incorporation or organization) | ||
| 100 Domino Drive, Concord, MA | 01742-2892 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (978) 287-5100
| N/A | ||
| (Former name, former address and former fiscal year, if changed since last report) | ||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common | TCCO | NASDAQ Capital Market |
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 X No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No _____
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | Emerging growth company | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No X
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. 1,850,403 shares of Common Stock, $0.10 par value, outstanding as of August 7, 2020.
INDEX
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
| June 27, 2020 | September 28, 2019 | |||||||
| Assets | (Unaudited) | |||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 960,549 | $ | 1,593,395 | ||||
| Accounts receivable - trade | 49,619 | 125,923 | ||||||
| Inventories, net | 1,136,695 | 1,042,212 | ||||||
| Other current assets | 148,424 | 118,250 | ||||||
| Total current assets | 2,295,287 | 2,879,780 | ||||||
| Equipment and leasehold improvements | 4,591,756 | 4,591,756 | ||||||
| Less: accumulated depreciation and amortization | (4,570,610 | ) | (4,554,275 | ) | ||||
| Equipment and leasehold improvements, net | 21,146 | 37,481 | ||||||
| Operating lease right-of-use asset | 595,946 | - | ||||||
| Total Assets | $ | 2,912,379 | $ | 2,917,261 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities: | ||||||||
| Current operating lease liabilities | $ | 150,829 | $ | - | ||||
| Accounts payable | 90,196 | 355,158 | ||||||
| Customer deposits | 561,609 | 2,046 | ||||||
| Deferred income | 474,400 | - | ||||||
| Accrued liabilities: | ||||||||
| Accrued compensation and related expenses | 205,303 | 238,171 | ||||||
| Accrued commissions | 32,462 | 84,804 | ||||||
| Other current liabilities | 15,455 | 17,533 | ||||||
| Total current liabilities | 1,530,254 | 697,712 | ||||||
| Long-term operating lease liabilities | 445,117 | - | ||||||
| Total liabilities | 1,975,371 | 697,712 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Equity: | ||||||||
| Common stock, par value $0.10 per share; 7,000,000 shares authorized; 1,850,403 shares issued and outstanding at June 27, 2020 and September 28, 2019 | 185,041 | 185,041 | ||||||
| Additional paid-in capital | 4,231,116 | 4,189,439 | ||||||
| Accumulated deficit | (3,479,149 | ) | (2,154,931 | ) | ||||
| Total stockholders’ equity | 937,008 | 2,219,549 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 2,912,379 | $ | 2,917,261 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 1 |
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
| Three Months Ended | ||||||||
| June 27, 2020 | June 29, 2019 | |||||||
| Net revenue | $ | 598,730 | $ | 1,234,662 | ||||
| Cost of revenue | 243,766 | 789,350 | ||||||
| Gross profit | 354,964 | 445,312 | ||||||
| Operating expenses: | ||||||||
| Selling, general and administrative | 505,358 | 731,728 | ||||||
| Product development | 332,167 | 43,092 | ||||||
| Total operating expenses | 837,525 | 774,820 | ||||||
| Operating loss | (482,561 | ) | (329,508 | ) | ||||
| Other income: | ||||||||
| Interest income | 83 | 3,543 | ||||||
| Net loss | $ | (482,478 | ) | $ | (325,965 | ) | ||
| Net loss per common share: | ||||||||
| Basic | $ | (0.26 | ) | $ | (0.18 | ) | ||
| Diluted | $ | (0.26 | ) | $ | (0.18 | ) | ||
| Weighted average shares: | ||||||||
| Basic | 1,850,403 | 1,850,403 | ||||||
| Diluted | 1,850,403 | 1,850,403 | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 2 |
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
| Nine Months Ended | ||||||||
| June 27, 2020 | June 29, 2019 | |||||||
| Net revenue | $ | 1,987,406 | $ | 4,275,475 | ||||
| Cost of revenue | 1,014,798 | 2,631,507 | ||||||
| Gross profit | 972,608 | 1,643,968 | ||||||
| Operating expenses: | ||||||||
| Selling, general and administrative | 1,602,729 | 1,871,659 | ||||||
| Product development | 694,552 | 186,785 | ||||||
| Total operating expenses | 2,297,281 | 2,058,444 | ||||||
| Operating loss | (1,324,673 | ) | (414,476 | ) | ||||
| Other income: | ||||||||
| Interest income | 455 | 13,528 | ||||||
| Net loss | $ | (1,324,218 | ) | $ | (400,948 | ) | ||
| Net loss per common share: | ||||||||
| Basic | $ | (0.72 | ) | $ | (0.22 | ) | ||
| Diluted | $ | (0.72 | ) | $ | (0.22 | ) | ||
| Weighted average shares: | ||||||||
| Basic | 1,850,403 | 1,850,403 | ||||||
| Diluted | 1,850,403 | 1,850,403 | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 3 |
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
| Nine Months Ended | ||||||||
| June 27, 2020 | June 29, 2019 | |||||||
| Operating Activities: | ||||||||
| Net loss | $ | (1,324,218 | ) | $ | (400,948 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 16,335 | 21,498 | ||||||
| Stock-based compensation | 41,677 | 43,080 | ||||||
| Changes in certain operating assets and liabilities: | ||||||||
| Accounts receivable | 76,304 | 515,135 | ||||||
| Inventories | (94,483 | ) | 286,358 | |||||
| Other current assets | (30,174 | ) | 19,465 | |||||
| Customer deposits | 559,563 | (14,546 | ) | |||||
| Deferred revenue | - | (1,768,575 | ) | |||||
| Accounts payable and other accrued liabilities | (352,250 | ) | 97,106 | |||||
| Net cash used in operating activities | (1,107,246 | ) | (1,201,427 | ) | ||||
| Investing Activities: | ||||||||
| Additions to equipment and leasehold improvements | - | (16,221 | ) | |||||
| Net cash used in investing activities | - | (16,221 | ) | |||||
| Financing Activities: | ||||||||
| Proceeds from debt | 474,400 | - | ||||||
| Net cash provided by financing activities | 474,400 | - | ||||||
| Net decrease in cash and cash equivalents | (632,846 | ) | (1,217,648 | ) | ||||
| Cash and cash equivalents at beginning of the period | 1,593,395 | 1,982,434 | ||||||
| Cash and cash equivalents at end of the period | $ | 960,549 | $ | 764,786 | ||||
| Supplemental Disclosures: | ||||||||
| Income taxes paid | $ | 912 | $ | 856 | ||||
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
| 4 |
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | |||||||||||||
| Shares of common stock: | ||||||||||||||||
| Beginning balance | 1,850,403 | 1,850,403 | 1,850,403 | 1,850,403 | ||||||||||||
| Ending balance | 1,850,403 | 1,850,403 | 1,850,403 | 1,850,403 | ||||||||||||
| Common stock at par value: | ||||||||||||||||
| Beginning balance | $ | 185,041 | $ | 185,041 | $ | 185,041 | $ | 185,041 | ||||||||
| Ending balance | $ | 185,041 | $ | 185,041 | $ | 185,041 | $ | 185,041 | ||||||||
| Additional paid-in capital: | ||||||||||||||||
| Beginning balance | $ | 4,216,190 | $ | 4,151,955 | $ | 4,189,439 | $ | 4,134,371 | ||||||||
| Stock-based compensation | 14,926 | 25,496 | 41,677 | 43,080 | ||||||||||||
| Ending balance | $ | 4,231,116 | $ | 4,177,451 | $ | 4,231,116 | $ | 4,177,451 | ||||||||
| Accumulated deficit: | ||||||||||||||||
| Beginning balance | $ | (2,996,671 | ) | $ | (2,861,339 | ) | $ | (2,154,931 | ) | $ | (2,786,356 | ) | ||||
| Net income (loss) | (482,478 | ) | (325,965 | ) | (1,324,218 | ) | (400,948 | ) | ||||||||
| Ending balance | $ | (3,479,149 | ) | $ | (3,187,304 | ) | $ | (3,479,149 | ) | $ | (3,187,304 | ) | ||||
| Total stockholders’ equity | $ | 937,008 | $ | 1,175,188 | $ | 937,008 | $ | 1,175,188 | ||||||||
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
| 5 |
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 1. | Description of the Business and Basis of Presentation |
Company Operations
Technical Communications Corporation (“TCC”) was incorporated in Massachusetts in 1961; its wholly-owned subsidiary, TCC Investment Corp., was organized in that jurisdiction in 1982. Technical Communications Corporation and TCC Investment Corp. are sometimes collectively referred to herein as the “Company”. The Company’s business consists of only one industry segment, which is the design, development, manufacture, distribution, marketing and sale of communications security devices, systems and services. The secure communications solutions provided by TCC protect vital information transmitted over a wide range of data, video, fax and voice networks. TCC’s products have been sold into over 115 countries and are in service with governments, military agencies, telecommunications carriers, financial institutions and multinational corporations.
Interim Financial Statements
The accompanying unaudited consolidated financial statements of Technical Communications Corporation and its wholly-owned subsidiary include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented and in order to make the financial statements not misleading. All such adjustments are of a normal recurring nature. Interim results are not necessarily indicative of the results to be expected for the fiscal year ending September 26, 2020.
The September 28, 2019 consolidated balance sheet contained herein was derived from the Company’s September 28, 2019 audited consolidated balance sheet as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 28, 2019 as filed with the U.S. Securities and Exchange Commission (“SEC”). Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as allowed by SEC rules and regulations. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the fiscal year ended September 28, 2019 included in its Annual Report on Form 10-K as filed with the SEC (the “2019 Annual Report”).
The Company follows accounting standards set by the Financial Accounting Standards Board, commonly referred to as the FASB. The FASB sets generally accepted accounting principles (“GAAP”) that the Company follows to ensure it consistently reports its financial condition, results of operations, and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards CodificationTM - sometimes referred to as the Codification or ASC.
Liquidity and Ability to Continue as a Going Concern
The Company has suffered recurring losses from operations and had an accumulated deficit of $3,479,000 at June 27, 2020. 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. The unaudited consolidated financial statements do not include any adjustments to reflect the substantial doubt about the Company’s ability to continue as a going concern.
The Company anticipates that its principal sources of liquidity will only be sufficient to fund activities to December 2020. In order to have sufficient cash to fund operations beyond that point, the Company will need to secure new customer contracts, raise additional equity or debt capital and/or reduce expenses, including payroll and payroll-related expenses.
| 6 |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
On April 17, 2020, the Company entered into a loan agreement with the U.S. Small Business Administration under its Paycheck Protection Program as authorized under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The loan is in the amount of $474,400 and the Company expects the loan to be forgiven under provisions of the CARES Act. The unforgiven portion of the loan, if any, will be paid back over two years at an interest rate of 1% beginning six months from the date of the loan. This loan was 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 an eight week period following the loan date. The eight week period has been expanded to now include a twenty four week period.
In order to have sufficient capital resources to fund operations beyond the temporary relief provided by the CARES Act loan, the Company has been working diligently to secure several large orders with new and existing customers. The receipt of orders is difficult to predict due to the impact of the COVID-19 pandemic on our customers, as many have had to delay orders as a result of their operations being reduced or shut down. TCC closed its facility due to health and safety concerns but was able to maintain operations with employees working remotely. In June 2020 the Company reopened its facility with the majority of employees returning to working on-site. Nonetheless, any sustained period of disruption in either our customers’ operations or those of the Company would have a material adverse impact on sales activity and revenue.
The Company is also pursuing raising debt or equity capital but cannot provide assurances it will be able to do so on terms acceptable to the Company or at all, especially in light of the tightening of the credit markets and volatility of the capital markets as a result of the coronavirus.
Should the Company be unsuccessful in these efforts, it would be forced to implement headcount reductions, employee furloughs and/or reduced hours for certain employees or cease operations completely.
Reporting Period
The Company’s by-laws call for its fiscal year to end on the Saturday closest to the last day of September, unless otherwise decided by its Board of Directors.
Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of TCC and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
The discussion and analysis of the Company’s financial condition and results of operations are based on the unaudited consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these unaudited consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods.
On an ongoing basis, management evaluates its estimates and judgments, including but not limited to those related to revenue recognition, inventory reserves, receivable reserves, marketable securities, impairment of long-lived assets, income taxes, fair value of financial instruments and stock-based compensation. Management bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from these estimates under different assumptions or conditions.
| 7 |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
| NOTE 2. | Summary of Significant Accounting Policies and Significant Judgments and Estimates |
The Company’s significant accounting policies are described in “Note 2. Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in its 2019 Annual Report and are supplemented by the notes included in this Quarterly Report on Form 10-Q. The financial statements and related notes included in this Quarterly Report should be read in conjunction with the Company’s 2019 Annual Report.
Recently Adopted Accounting Standards
Leases
Effective September 29, 2019, the Company adopted ASU No. 2016-02, Leases (Topic 842) (“ASC 842”), using the modified retrospective approach and did not have a cumulative-effect adjustment in retained earnings as a result of the adoption. ASC 842 requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. 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. The adoption of this standard required the Company to recognize a right-of-use asset and a corresponding lease liability associated with the operating lease on its facilities at 100 Domino Drive, Concord, MA in the amount of $767,712 at September 29, 2019. The adoption of ASC 842 did not materially change the Company’s consolidated statements of operations or consolidated statements of cash flows. See “Note 6. Leases” below for further discussion.
SBA Payroll Protection Program loan
During the quarter ended June 26, 2020 the Company adopted IAS 20 - Accounting for Government Grants and Disclosure of Government Assistance (“IAS 20”) to account for the receipt of the loan under the SBA’s Payroll Protection Program. IAS 20 requires the loan to be recognized as deferred income. Derecognition of the liability for any portion of the loan that is forgivable or has been forgiven will occur only when there is a reasonable assurance any conditions attached to the assistance will be met. The income statement effect for the portion of the loan that is forgivable or has been forgiven will consist of either (1) a credit in the income statement, either separately or under a general heading such as “other income,” or (2) a reduction of the related expenses, as the entity recognizes the related cost to which the loan relates.
| NOTE 3. | Stock-Based Compensation |
The following table summarizes stock-based compensation costs included in the Company’s consolidated statements of operations for the third quarter and first nine months of each of fiscal 2020 and 2019:
| June 27, 2020 | June 29, 2019 | |||||||||||||||
| 3 months | 9 months | 3 months | 9 months | |||||||||||||
| Selling, general and administrative expenses | $ | 11,243 | 32,486 | $ | 24,461 | 39,644 | ||||||||||
| Product development expenses | 3,683 | 9,191 | 1,035 | 3,436 | ||||||||||||
| Total share-based compensation expense before taxes | $ | 14,926 | $ | 41,677 | $ | 25,496 | $ | 43,080 | ||||||||
As of June 27, 2020, there was $166,333 of unrecognized compensation expense related to options outstanding. The unrecognized compensation expense will be recognized over the remaining requisite service period. As of June 27, 2020, the weighted average period over which the compensation expense is expected to be recognized is 3.34 years.
| 8 |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
As of June 27, 2020, there were 176,830 shares available for grant under the Technical Communications Corporation 2010 Equity Incentive Plan. The 2010 Plan is set to expire on July 29, 2020 and no new grants will be permitted after that date. TCC’s 2005 Non-Statutory Stock Option Plan has expired and options are no longer available for grant under such plan, although vested, unexercised options remain outstanding under the 2005 Plan.
The following table summarizes stock option activity during the first nine months of fiscal 2020:
| Options Outstanding | ||||||||||||||||||||
| Number of Shares | Weighted Average | Weighted Average Contractual Life | ||||||||||||||||||
| Unvested | Vested | Total | Exercise Price | (in years) | ||||||||||||||||
| Outstanding, September 28, 2019 | 59,400 | 171,937 | 231,337 | $ | 8.36 | 3.95 | ||||||||||||||
| Grants | 20,000 | – | 20,000 | 1.87 | 9.94 | |||||||||||||||
| Vested | – | – | – | |||||||||||||||||
| Cancellations/forfeitures | – | (13,837 | ) | (13,837 | ) | 11.51 | ||||||||||||||
| Outstanding, December 28, 2019 | 79,400 | 158,100 | 237,500 | $ | 7.28 | 4.45 | ||||||||||||||
| Grants | – | – | – | – | – | |||||||||||||||
| Vested | (6,300 | ) | 6,300 | – | 4.22 | |||||||||||||||
| Cancellations/forfeitures | – | (7,000 | ) | (7,000 | ) | 7.02 | ||||||||||||||
| Outstanding, March 28, 2020 | 73,100 | 157,400 | 230,500 | $ | 7.28 | 4.33 | ||||||||||||||
| Grants | 14,000 | – | 14,000 | 2.48 | – | |||||||||||||||
| Vested | (14,200 | ) | 14,200 | – | 3.17 | |||||||||||||||
| Cancellations/forfeitures | – | (3,130 | ) | (3,130 | ) | 11.51 | ||||||||||||||
| Outstanding, June 27, 2020 | 72,900 | 168,470 | 241,370 | $ | 6.95 | 4.47 | ||||||||||||||
Information related to the stock options vested and expected to vest as of June 27, 2020 is as follows:
| Range of Exercise Prices |
Number of Shares |
Weighted-Average Remaining Contractual Life (years) |
Weighted Average Exercise Price |
Exercisable Number of Shares |
Exercisable Weighted- Average Exercise Price | |||||||||||||||||
| $1.01 | - | $2.00 | 20,000 | 9.44 | $ | 1.87 | 4,000 | $ | 1.87 | |||||||||||||
| $2.01 | - | $3.00 | 34,300 | 7.66 | 2.61 | 14,000 | 2.72 | |||||||||||||||
| $3.01 | - | $4.00 | 46,500 | 8.78 | 3.61 | 16,500 | 3.61 | |||||||||||||||
| $4.01 | - | $5.00 | 16,600 | 3.99 | 4.34 | 16,300 | 4.33 | |||||||||||||||
| $5.01 | - | $10.00 | 30,000 | 4.35 | 7.92 | 23,700 | 8.10 | |||||||||||||||
| $10.01 | - | $15.00 | 93,970 | 0.24 | 11.43 | 93,970 | 11.43 | |||||||||||||||
| 241,370 | 4.47 | $ | 6.95 | 168,470 | $ | 8.55 | ||||||||||||||||
The aggregate intrinsic value of the Company’s “in-the-money” outstanding and exercisable options as of June 27, 2020 and June 29, 2019 was $10,960 and $15,390, respectively. Unvested stock options are subject to the risk of forfeiture until the fulfillment of specified conditions.
| NOTE 4. | Revenue |
The following table presents the Company’s revenues disaggregated by revenue type for the three and nine month periods ended June 27, 2020 and June 29, 2019.
| 9 |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Revenue type:
| June 27, 2020 | June 29, 2019 | |||||||||||||||
| 3 months | 9 months | 3 months | 9 months | |||||||||||||
| Engineering services | $ | 46,804 | $ | 913,446 | $ | 952,602 | $ | 2,819,676 | ||||||||
| Equipment sales | 551,926 | 1,073,960 | 282,060 | 1,455,799 | ||||||||||||
| Total | $ | 598,730 | $ | 1,987,406 | $ | 1,234,662 | $ | 4,275,475 | ||||||||
Engineering services revenue consists of funded research and development and technology development for commercial companies and government agencies primarily under fixed-price contracts. The Company also derives revenue from developing and designing custom cryptographic solutions for customers’ unique secure voice, data and video communications requirements and integrating such solutions into existing systems. These contracts can vary but typically call for fixed monthly payments or payments due upon meeting certain milestones. Customers are billed monthly or upon achieving the milestone, and payments are due on a net basis after the billing date.
Equipment sales revenue consists of sales of communications security equipment for voice, data, facsimile and video networks for military, government and corporate/industrial applications. Equipment sales are billed to the customer upon shipment with typical payment terms requiring a down payment at the time of order with the balance due prior to shipment. For government and certain long term customers, we may grant net payment terms.
| NOTE 5. | Inventories |
Inventories consisted of the following:
| June 27, 2020 | September 28, 2019 | |||||||
| Finished goods | $ | 75,289 | $ | 120,726 | ||||
| Work in process | 391,630 | 182,863 | ||||||
| Raw materials | 669,776 | 738,623 | ||||||
| Total inventory, net | $ | 1,136,695 | $ | 1,042,212 | ||||
| NOTE 6. | Leases |
The Company leases space from a third party for all manufacturing, research and development, and corporate operations. The initial term of the lease was for five years through March 31, 2019 at an annual rate of $171,000. In addition, the lease contains options to extend the lease for two and one-half years through September 30, 2021 and another two and one-half years through March 31, 2024 at an annual rate of $171,000. In September 2018, the Company exercised its option to extend the term of the lease through September 2021. The Company believes that it will exercise the remaining option to extend the lease, notice of which must be given by March 1, 2021. As such, the Company uses the extended lease term in its calculation of the lease liability and right-of-use asset. The Company classifies this lease as an operating lease with the costs recognized as a selling, general and administrative expense in its consolidated statements of operations. The lease expense for each of the three and nine month periods ended June 27, 2020 and June 29, 2019 was $43,000 and $128,000, respectively.
The table below presents the maturity of the Company’s operating lease liability as of June 27, 2020:
| July - September 2020 | $ | 42,650 | ||
| 2021 | 170,603 | |||
| 2022 | 170,603 | |||
| 2023 | 170,603 | |||
| 2024 | 85,301 | |||
| Total lease payments | 639,760 | |||
| Less: Imputed interest | (43,814 | ) | ||
| Total lease liability | $ | 595,946 |
| 10 |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
| NOTE 7. | Debt |
On April 17, 2020, the Company was granted a loan (the “Loan”) from bankHometown in the principal amount of $474,400, pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act. The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses.
The Loan, which was in the form of a Note dated April 17, 2020, is payable over eighteen months at an interest rate of 1% monthly commencing on October 17, 2020 to the extent not forgiven. Any unforgiven amount of the Loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Funds from the Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations incurred before February 15, 2020. The Company believes it used the entire Loan amount for qualifying expenses and expects the Loan to be forgiven in its entirety.
| NOTE 8. | Income Taxes |
The Company has not recorded an income tax benefit on its net loss for the nine month periods ended June 27, 2020 and June 29, 2019 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.
| NOTE 9. | Loss Per Share |
Outstanding potentially dilutive stock options, which were not included in the net loss per share amounts as their effect would have been anti-dilutive, were as follows: 241,370 shares at June 27, 2020 and 231,337 shares at June 29, 2019.
| NOTE 10. | Major Customers and Export Sales |
During the three months ended June 27, 2020, the Company had three customers that represented 92% (53%, 25% and 14%, respectively) of net revenue as compared to the three months ended June 29, 2019, during which two customers represented 99% (77% and 22%, respectively) of net revenue. During the nine month period ended June 27, 2020, the Company had two customers that represented 68% (46% and 22%, respectively) of net revenue as compared to the nine month period ended June 29, 2019, during which two customers represented 88% (66% and 22%, respectively) of net revenue.
A breakdown of foreign and domestic net revenue for the first three and nine months of fiscal 2020 and 2019 is as follows:
| June 27, 2020 | June 29, 2019 | |||||||||||||||
| 3 months | 9 months | 3 months | 9 months | |||||||||||||
| Domestic | $ | 512,455 | $ | 1,500,502 | $ | 1,232,187 | $ | 4,076,652 | ||||||||
| Foreign | 86,275 | 486,904 | 2,475 | 198,823 | ||||||||||||
| Total net revenue | $ | 598,730 | $ | 1,987,406 | $ | 1,234,662 | $ | 4,275,475 | ||||||||
The Company sold products into one country during each of the three month periods ended June 27, 2020 and June 29, 2019. The Company sold products into two countries during the nine month period ended June 27, 2020 and four countries during the nine month period ended June 29, 2019. 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.
| 11 |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
The table below summarizes foreign revenues by country as a percentage of total foreign revenue.
| June 27, 2020 | June 29, 2019 | |||||||||||||||
| 3 months | 9 months | 3 months | 9 months | |||||||||||||
| Saudi Arabia | 100 | % | 99 | % | – | 57 | % | |||||||||
| Egypt | – | – | – | 37 | % | |||||||||||
| Philippines | – | – | – | 5 | % | |||||||||||
| Other | – | 1 | % | 100 | % | 1 | % | |||||||||
A summary of foreign revenue, as a percentage of total foreign revenue by geographic area, is as follows:
| June 27, 2020 | June 29, 2019 | |||||||||||||||
| 3 months | 9 months | 3 months | 9 months | |||||||||||||
| Mid-East and Africa | 100 | % | 100 | % | 100 | % | 95 | % | ||||||||
| Far East | – | – | – | 5 | % | |||||||||||
| NOTE 11. | Cash Equivalents |
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.
| NOTE 12. | Impact of COVID-19 Coronavirus |
As a result of the current economic slowdown due to the COVID-19 pandemic, there has been a noticeable delay in the receipt of customer orders. While we remain in contact with our customers and their requirements have not changed, the operations of certain of our customers have been slowed or shut down entirely. Our suppliers thus far have been able to timely deliver components and parts necessary for the manufacture and production of the Company’s products to fulfill orders, although we cannot be sure this trend will continue. To date, while the Company did initially close its facilities due to health and safety concerns, it was able to reopen with the majority of employees returning to working onsite in June 2020. The Company has been able to maintain its operations via remote working and now with its fully active facility, and believes it will be in a strong position to respond to our customers’ needs as restrictions ease and operations return to normal. Nonetheless, it is uncertain how long our and our customers’ operations will be impacted, and those of our suppliers, and our ability to respond to customer requirements and supplier issues will become more challenging during a period of sustained disruption. Any period of sustained disruption would have a material adverse effect on the Company’s financial condition and results of operations.
| 12 |
| 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 domestic and foreign political unrest; domestic and foreign government policies and economic conditions; 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 2019 Annual Report and Item 1A in Part II of the Company’s Quarterly Report on Form 10-Q for the period ended March 28, 2020 as filed with the SEC for a supplemental risk factor relating to COVID-19.
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.
Impact of COVID-19 Coronavirus
As a result of the current economic slowdown due to the COVID-19 pandemic, there has been a noticeable delay in the receipt of customer orders. While we remain in contact with our customers and their requirements have not changed, the operations of certain of our customers have been slowed or shut down entirely. Our suppliers thus far have been able to timely deliver components and parts necessary for the manufacture and production of the Company’s products to fulfill orders, although we cannot be sure this trend will continue. To date, while the Company did initially close its facilities due to health and safety concerns, it was able to reopen with the majority of employees returning to working onsite in June 2020. The Company has been able to maintain its operations via remote working and now with its fully active facility, and believes it will be in a strong position to respond to our customers’ needs as restrictions ease and operations return to normal. Nonetheless, it is uncertain how long our and our customers’ operations will be impacted, and those of our suppliers, and our ability to respond to customer requirements and supplier issues will become more challenging during a period of sustained disruption. Any period of sustained disruption would have a material adverse effect on the Company’s financial condition and results of operations.
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 28, 2019 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 2019 Annual Report as filed with the SEC.
| 13 |
Results of Operations
Three Months ended June 27, 2020 compared to Three Months ended June 29, 2019
Net Revenue
Total net revenue for the quarter ended June 27, 2020 was $599,000, compared to $1,235,000 for the quarter ended June 29, 2019, a decrease of 52%. Revenue for the third quarter of fiscal 2020 consisted of $513,000, or 86%, from domestic sources and $86,000, or 14%, from international customers, compared to the same period in fiscal 2019, during which revenue consisted of $1,232,000, or 99%, from domestic sources and $2,000, or 1%, from international customers.
Foreign sales consisted of shipments to one country during each of the quarters ended June 27, 2020 and June 29, 2019. 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 third quarters of fiscal 2020 and 2019:
| 2020 | 2019 | |||||||
| Saudi Arabia | $ | 86,000 | $ | – | ||||
| Other | – | 2,000 | ||||||
| $ | 86,000 | $ | 2,000 | |||||
For the three months ended June 27, 2020, revenue was derived primarily from sales of our narrowband radio encryptors and various accessories to a domestic customer for deployment into a Middle Eastern country amounting to $316,000. We also shipped our narrowband radio encryptors to a domestic customer for deployment into a North African country amounting to $149,000 and shipped our internet protocol data encryptors to a customer in a Middle Eastern country amounting to $86,000.
For the three months ended June 29, 2019, revenue was derived primarily from sales of our engineering services amounting to $953,000 and shipments of our narrowband radio encryptors to a domestic customer for deployment into a Middle Eastern country amounting to $280,000.
Gross Profit
Gross profit for the third quarter of fiscal 2020 was $355,000, compared to gross profit of $445,000 for the same period of fiscal 2019, a decrease of 20%. Gross profit expressed as a percentage of total net revenue was 59% for the third quarter of fiscal 2020 compared to 36% for the same period in fiscal 2019. This increase in gross profit expressed as a percentage of total net revenue was primarily due to the higher sales volume of higher margin equipment sales in fiscal 2020.
Operating Costs and Expenses
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the third quarter of fiscal 2020 were $505,000, compared to $732,000 for the same quarter in fiscal 2019. This decrease of $226,000, or 31%, was attributable to decreases in general and administrative expenses of $249,000, which were partially offset by increases in selling and marketing expenses of $23,000 during the three months ended June 27, 2020.
| 14 |
The decrease in general and administrative expenses for the three months ended June 27, 2020 was primarily attributable to decreases in audit and legal fees of $252,000, which were unusually high in fiscal 2019 as a result of the restatement of financial statements during such year.
The increase in selling and marketing expenses for the three months ended June 27, 2020 was primarily attributable to increases in commission expenses of $31,000 and bid and proposal costs of $22,000. These increases were offset by decreases in product evaluation costs of $10,000, product demonstration costs of $7,000 and consulting expenses of $3,000 for the period.
Product Development Costs
Product development costs for the quarter ended June 27, 2020 were $332,000, compared to $43,000 for the quarter ended June 29, 2019. This increase of $289,000, or 671%, was attributable to a decrease in billable engineering services contracts during the third quarter of fiscal 2020 that resulted in increased product development costs of $561,000. These increased costs were partially offset by decreases in consulting costs of $170,000 and payroll and payroll-related expenses of $93,000 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 approximately $47,000 of billable engineering services revenue generated during the third quarter of fiscal 2020 and $953,000 in the third quarter of fiscal 2019.
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 $482,000 for the third quarter of fiscal 2020, compared to a net loss of $326,000 for the same period of fiscal 2019. This increase in net loss is primarily attributable to a 20% decrease in gross profit and an increase in operating expenses of 8% during the third quarter of fiscal 2020.
Nine Months ended June 27, 2020 compared to Nine Months ended June 29, 2019
Net Revenue
Total net revenue for the nine months ended June 27, 2020 was $1,987,000, compared to $4,275,000 for the nine months ended June 29, 2019, a decrease of 54%. Revenue for the first nine months of fiscal 2020 consisted of $1,501,000, or 76%, from domestic sources and $487,000, or 24%, from international customers as compared to the same period in fiscal 2019, during which revenue consisted of $4,076,000, or 95%, from domestic sources and $199,000, or 5%, from international customers.
Foreign sales consisted of shipments to two countries during the nine months ended June 27, 2020 and four countries during the nine months ended June 29, 2019. 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 nine months of fiscal 2020 and 2019:
| 2020 | 2019 | |||||||
| Saudi Arabia | $ | 484,000 | $ | 112,000 | ||||
| Egypt | – | 73,000 | ||||||
| Philippines | – | 11,000 | ||||||
| Other | 3,000 | 3,000 | ||||||
| $ | 487,000 | $ | 199,000 | |||||
| 15 |
For the nine months ended June 27, 2020, revenue was derived primarily from sales of our engineering services amounting to $913,000 and shipments of our internet protocol data encryptors to four customers in a Middle Eastern country amounting to $488,000. We also shipped our narrowband radio encryptors and various accessories to two domestic customers for deployment into a Middle Eastern country amounting to $434,000 and for deployment into a North African country amounting to $149,000.
For the nine months ended June 29, 2019, revenue was derived primarily from sales of our engineering services amounting to $2,820,000, shipments of our narrowband radio encryptors to a domestic customer for deployment into a North African country amounting to $936,000, and shipments of our narrowband radio encryptors to a domestic customer for deployment into a Middle Eastern country amounting to $280,000.
Gross Profit
Gross profit for the first nine months of fiscal 2020 was $973,000, compared to gross profit of $1,644,000 for the same period of fiscal 2019, a decrease of 41%. Gross profit expressed as a percentage of total net revenue was 49% for the first nine months of fiscal 2020 compared to 38% for the same period in fiscal 2019. This increase in gross profit expressed as a percentage of total net revenue was primarily due to the higher sales volume of higher margin equipment sales in fiscal 2020.
Operating Costs and Expenses
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first nine months of fiscal 2020 were $1,603,000, compared to $1,872,000 for the same period in fiscal 2019. This decrease of $269,000, or 14%, was attributable to decreases in general and administrative expenses of $336,000, offset by increases in selling and marketing expenses of $67,000 during the nine months ended June 27, 2020.
The decrease in general and administrative expenses for the nine months ended June 27, 2020 was primarily attributable to a decrease in audit and legal fees of $352,000, which were unusually high during fiscal year 2019 as a result of the restatement of financial statements during such year, partially offset by an increase in director fees of $18,000.
The increase in selling and marketing expenses for the nine months ended June 27, 2020 was primarily attributable to increases in payroll and payroll-related expenses of $48,000, sales commissions of $54,000 and product demonstration costs of $46,000. These increases were offset by decreases in outside sales and marketing agreements of $16,000, outside consulting costs of $26,000 and product evaluation costs of $30,000 for the period.
Product Development Costs
Product development costs for the nine months ended June 27, 2020 were $695,000, compared to $187,000 for the nine months ended June 29, 2019. This increase of $508,000, or 272%, was attributable to a decrease in billable engineering services contracts during the first nine months of fiscal 2020 that resulted in increased product development costs of $1,333,000, which was partially offset by decreases in engineering project costs of $547,000 and payroll and payroll-related expenses of $266,000 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 approximately $913,000 of billable engineering services revenue generated during the first nine months of fiscal 2020 and $2,820,000 in the first nine months of fiscal 2019.
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.
| 16 |
Net Loss
The Company generated a net loss of $1,324,000 for the first nine months of fiscal 2020, compared to a net loss of $401,000 for the same period of fiscal 2019. This increase in net loss is primarily attributable to a 41% decrease in gross profit and an increase in operating expenses of 12% during the first nine months of fiscal 2020.
Liquidity and Capital Resources
Our cash and cash equivalents at June 27, 2020 totaled $961,000. In April 2020, we received $474,400 from the U.S. Small Business Administration under the Paycheck Protection Program as authorized under the CARES Act. The Company expects the entire loan to be forgiven; in the event that any amount is not forgiven, that amount will be paid back over two years at an interest rate of 1% beginning six months from the date of the loan.
Liquidity and Ability to Continue as a Going Concern
The Company has suffered recurring losses from operations and had an accumulated deficit of $3,479,000 at June 27, 2020. 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. The unaudited consolidated financial statements do not include any adjustments to reflect the substantial doubt 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 to December 2020. 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/or reduce expenses, including payroll and payroll-related expenses.
In order to have sufficient capital resources to fund operations beyond the temporary relief provided by the CARES Act loan, the Company has been working diligently to secure several large orders with new and existing customers. The receipt of orders is difficult to predict due to the impact of the COVID-19 pandemic on our customers, as many have had to delay orders as a result of their operations being reduced or shut down. While TCC closed its facility due to health and safety concerns, it reopened in June 2020 with a majority of employees returning to work onsite. Nonetheless, any sustained period of disruption in either our customers’ operations or those of the Company would have a material adverse impact on sales activity and revenue.
We are also pursuing raising debt or equity capital, although we cannot provide assurances we will be able to do so on acceptable terms or at all, especially in light of the tightening of the credit markets and volatility of the capital markets as a result of the coronavirus.
Should we be unsuccessful in these efforts, we would be forced to implement headcount reductions, 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 nine month periods ended (unaudited):
| June 27, 2020 | June 29, 2019 | |||||||
| Net loss | $ | (1,324,000 | ) | $ | (401,000 | ) | ||
| Changes not affecting cash | 59,000 | 65,000 | ||||||
| Changes in assets and liabilities | 159,000 | (867,000 | ||||||
| Cash used in operating activities | (1,106,000 | ) | (1,202,000 | ) | ||||
| Cash used in investing activities | (16,000 | |||||||
| Cash provided by financing activities | 474,000 | – | ||||||
| Net change in cash and cash equivalents | (632,000 | ) | (1,218,000 | ) | ||||
| Cash and cash equivalents - beginning of period | 1,593,000 | 1,982,000 | ||||||
| Cash and cash equivalents - end of period | $ | 961,000 | $ | 764,000 | ||||
| 17 |
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 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 nine month periods ended June 27, 2020 and June 29, 2019 was $128,000.
Backlog
Backlog at June 27, 2020 and September 28, 2019 amounted to $2,514,000 and $1,154,000, respectively. The orders in backlog at June 27, 2020 are expected to ship and/or services are expected to be performed over the 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 June 27, 2020 and September 28, 2019, 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 nine month periods ended June 27, 2020 and June 29, 2019, the Company spent $695,000 and $187,000, respectively, on internal product development. The Company also spent $563,000 and $1,994,000, respectively, on billable development efforts during the first nine months of fiscal 2020 and 2019, respectively. The Company’s total product development costs during the first nine months of fiscal 2020 were 42% lower than the same period in fiscal 2019 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 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, particularly in light of the impact of the COVID-19 pandemic on business and the economy in general.
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 2020.
| 18 |
New Accounting Pronouncements
ASU No. 2016-02, Leases
In February 2016, the FASB issued guidance under ASU No. 2016-02, Leases, with respect to leases. This ASU requires an entity 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. The new guidance was effective for the Company beginning September 29, 2019. The adoption of this standard required the Company to recognize a right-of-use asset and a corresponding lease liability associated with the operating lease on its facilities at 100 Domino Drive, Concord, MA in the amount of $767,712 at September 29, 2019.
Other recent accounting pronouncements were issued by the FASB (including its Emerging Issues Task Force) and the SEC during the first nine months of the Company’s 2020 fiscal year but such pronouncements are not believed by management to have a material impact on the Company’s present or future financial statements.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable.
| Item 4. | Controls and Procedures |
Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that review and evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of June 27, 2020 as a result of the material weaknesses in our internal control over financial reporting discussed below.
As previously disclosed under Item 9A, Controls and Procedures in our Annual Report on Form 10-K for the fiscal year ended September 28, 2019, as well as prior fiscal years, management had concluded that the Company did not maintain effective internal control over financial reporting due to material weaknesses in such internal control related to the misapplication of generally accepted accounting principles associated with revenue recognition, inventory reserves, accruals and the preparation of the consolidated financial statements, as well as the classification and disclosure of financial information, all caused by a lack of adequate skills and experience within the accounting department. In addition, management also previously identified a material weakness due to a lack of sufficient staff to segregate accounting duties. During fiscal year 2018, the Company also identified a lack of an adequately trained accounting department and an independent review of financial reporting, as well as a material weakness in internal control over significant non-routine transactions.
Nonetheless, management believes that our consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with generally accepted accounting principles. Our Chief Executive Officer and Chief Financial Officer have certified that, based on such officer’s knowledge, the financial statements and other financial information included in this Quarterly Report on Form 10-Q fairly present in all material respects the financial condition and results of operations of the Company as of, and for, the periods presented in this report. In addition, we initiated a remediation plan for the material weaknesses, described below.
| 19 |
Our management, with oversight from the Audit Committee, is actively engaged in remediating the identified material weaknesses. As part of these remediation efforts management has undertaken education and training for TCC’s accounting staff and management to address certain core competencies that resulted in the lack of operational effectiveness. Management will continue to assess the design of controls to determine if enhancements are needed to increase effectiveness of our internal control over financial reporting. Management has retained a subject matter expert in the area of income tax accounting and is assessing the need to retain additional subject matter experts to ensure compliance with generally accepted accounting principles and SEC rules and regulations. Both management and the Audit Committee have increased their oversight of non-routine transactions. This includes oversight of large revenue contracts as well as judgement areas, including inventory reserves and accruals. This oversight will contribute to the assessment of the need to retain additional subject matter experts.
The Company continues to make significant progress in improving its internal control over financial reporting but these remediation efforts are ongoing; the Company’s goal is to have all material weaknesses remediated by the end of its 2020 fiscal year.
Changes in internal control over financial reporting. The changes in the aforementioned internal control over financial reporting and the remediation efforts undertaken as of year-end and undertaken in the third quarter of TCC’s fiscal 2020 have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. No other changes in the Company’s internal control over financial reporting occurred during the third quarter of its 2020 fiscal year.
| 20 |
| 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 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Not applicable.
| Item 3. | Defaults Upon Senior Securities |
Not applicable.
| Item 4. | Mine Safety Disclosures |
Not applicable.
| Item 5. | Other Information |
Not applicable.
| Item 6. | Exhibits |
| 10.10 | Purchase Order from ADS, Inc. dated May 19, 2020 (Confidential portions of this exhibit have been omitted). | ||
| 31.1 | Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 31.2 | Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 32 | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| 101.INS | XBRL Report Instance Document | ||
| 101.SCH | XBRL Taxonomy Extension Schema Document | ||
| 101.CAL | XBRL Taxonomy Calculation Linkbase Document | ||
| 101.LAB | XBRL Taxonomy Label Linkbase Document | ||
| 101.PRE | XBRL Presentation Linkbase Document | ||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| 21 |
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) | |||
| August 11, 2020 | By: | /s/ Carl H. Guild, Jr. | |
| Date | Carl H. Guild, Jr., President and Chief | ||
| Executive Officer | |||
| August 11, 2020 | By: | /s/ Michael P. Malone | |
| Date | Michael P. Malone, Chief Financial Officer | ||
22