The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto appearing elsewhere herein.
Forward-Looking Statements
The following discussion may contain statements that are not purely historical.
Such statements contained herein or as may otherwise be incorporated by
reference herein 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 ability to achieve growth and profitability.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors, including but not limited to the impact of the COVID-19
pandemic (including its duration and severity) and governmental actions in
response thereto; the effect of foreign political unrest; domestic and foreign
government policies and economic conditions; future changes in export laws or
regulations; changes in technology; the ability to hire, retain and motivate
technical, management and sales personnel; the risks associated with the
technical feasibility and market acceptance of new products; changes in
telecommunications protocols; the effects of changing costs, exchange rates and
interest rates; and the Company's ability to secure adequate capital resources.
Such risks, uncertainties and other factors could cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. For a more detailed
discussion of the risks facing the Company, see the Company's filings with the
SEC, including this Form 10-K for the fiscal year ended September 25, 2021 and
the "Risk Factors" section included herein.
Impact of COVID-19 Coronavirus
As a result of the 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. It is
uncertain how long 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
The discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements requires management
to make estimates and assumptions 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 amounts of revenues and expenses
during the reporting periods. The Company's significant accounting policies are
more fully described in Note 2, "Summary of Significant Accounting Policies and
Basis of Presentation", to the Company's Consolidated Financial Statements
appearing elsewhere in this Annual Report on Form 10-K.
On an ongoing basis, management evaluates its estimates and judgments, including
those related to revenue recognition, inventory reserves, receivable reserves,
impairment of long-lived assets, income taxes, fair value 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 value 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 and such differences may be material.
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Results of Operations
Year ended September 25, 2021 compared to year ended September 26, 2020
Net Revenue
Net revenue for the years ended September 25, 2021 and September 26, 2020 was
$1,866,000 and $4,108,000, respectively, a decrease of $2,242,000 or 55%.
Revenue for fiscal 2021 consisted of $1,630,000, or 87%, from domestic sources
and $237,000, or 13%, from international customers as compared to fiscal 2020,
in which revenue consisted of $2,876,000, or 70%, from domestic sources and
$1,232,000, or 30%, from international customers. International revenues
continued to be impacted by the effects of the Covid-19 pandemic.
Foreign revenue consisted of shipments to four countries during the year ended
September 25, 2021 and two countries during the year ended September 26, 2020. A
sale is attributed to a foreign country based on the location of the contracting
party. Domestic revenue may include the sale of products shipped through
domestic resellers or manufacturers to international destinations. The table
below summarizes our principal foreign revenue by country:
2021 2020
Morocco $ 148,000 $ -
Egypt 58,000 -
Saudi Arabia 19,000 1,230,000
Philippines 12,000 -
Other - 2,000
$ 237,000 $ 1,232,000For the year ended September 25, 2021, revenue was derived from sales of our
engineering services amounting to $1,107,000 and shipments of our narrowband
radio encryptors and various accessories to one north African country amounting
to $148,000 and three domestic customers for deployment into a Middle Eastern
country amounting to $270,000, for deployment into a North African country
amounting to $98,000 and for deployment into Afghanistan amounting to $77,000,
and shipments of our internet protocol data encryptors amounting to $19,000.
For the year ended September 26, 2020, revenue was derived primarily from
shipments of our narrowband radio encryptors and various accessories to two
domestic customers for deployment into a Middle Eastern country amounting to
$1,809,000 and for deployment into a North African country amounting to
$149,000. In addition, we made shipments of our internet protocol data
encryptors to four customers in a Middle Eastern country amounting to
$1,228,000, including certain upgrades and training. We also had sales of our
engineering services amounting to $913,000.
Gross Profit
Gross profit for fiscal 2021 was $557,000, compared to gross profit of
$2,385,000 for fiscal 2020, a decrease of 77%. Gross profit expressed as a
percentage of revenue was 30% for fiscal 2021 compared to 58% for fiscal 2020,
which lower gross profit percentage for 2021 was due to the lower margin
engineering services revenue during such year. During fiscal 2020, there was a
higher concentration of revenue related to product sales, which historically
yield higher margins.
Operating Costs and Expenses
Selling, General and Administrative
Selling, general and administrative expenses for fiscal 2021 were $1,842,000,
compared to $2,226,000 for fiscal 2020. This decrease of $384,000, or 17%, was
attributable to a decrease in general and administrative expenses of $109,000
and a decrease in selling and marketing expenses of $275,000 during the 2021
fiscal year.
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The decrease in general and administrative expenses for the year ended September
25, 2021 was primarily attributable to decreases in payroll and payroll-related
expenses of $86,000, director fees of $12,000 and audit costs of $7,000.
The decrease in selling and marketing expenses for the year ended September 25,
2021 was attributable to decreases in outside commissions of $153,000, internal
commission costs of $112,000, product demonstration costs of $60,000 and in
payroll and payroll-related expenses of $13,000. These decreases were partially
offset by an increase in engineering sales support of $70,000.
Product Development Costs
Product development costs for fiscal years 2021 and 2020 were $732,000 and
$1,069,000, respectively. This decrease of $337,000, or 32%, was attributable to
a decrease in payroll and payroll-related expenses of $249,000 and an increase
in billable engineering services contracts during fiscal 2021 that resulted in
decreased product development costs of $165,000, which was partially offset by
increases in engineering project costs of $77,000 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 to several years. In addition to these
programs, the Company invests in research and development to enhance its
existing products or to develop new products, as it deems appropriate. There was
$1,107,000 of billable engineering services revenue generated during fiscal 2021
and $913,000 of billable engineering services revenue generated during fiscal
2020.
Net (Loss) Income
The Company generated a net loss of $1,088,000 for fiscal 2021, compared to a
net loss of $911,000 for fiscal 2020. This increase in net loss is primarily
attributable to a 77% decrease in gross profit during fiscal 2021, partially
offset by a 22% decrease in operating expenses and the forgiveness of two PPP
loans amounting to $949,000.
The effects of inflation and changing costs have not had a significant impact on
revenue or earnings in recent years. As of September 25, 2021, 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 and cash equivalents at September 25, 2021 totaled $298,000.
Liquidity and Ability to Continue as a Going Concern
For the year ended September 25, 2021, the Company generated a net loss of
$1,088,000. For the fiscal year ended September 26, 2020, the Company generated
a net loss of $911,000 and, although the company generated $631,000 of net
income in the fiscal year ended September 28, 2019, the Company suffered
recurring losses from operations during the prior seven year period from fiscal
2012 to fiscal 2018. The Company has an accumulated deficit of $4,154,000 at
September 25, 2021. These factors continue to raise substantial doubt about the
Company's ability to continue as a going concern. Such consolidated financial
statements do not include any adjustments to reflect the substantial doubt about
the Company's ability to continue as a going concern.
During the third quarter of fiscal 2021, the Company was able to secure funding
for operations in the form of a line of credit extended by Carl H. Guild, Jr.,
TCC's Chief Executive Officer, President and Chairman of the Board. Mr. Guild
agreed to loan up to $1 million to the Company pursuant to a demand promissory
note dated May 6, 2021 for working capital purposes. The note bears interest at
a rate of 6% per annum and has no specified term. On November 18, 2021 the line
of credit was amended and restated to increase the amount of the line to $2
million. Advances beyond the initial $1 million will bear interest at a rate of
7.5% per annum. The outstanding principal balance at September 25, 2021 was
$1,000,000, plus accrued interest of $13,195.
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Also during the second quarter, on March 15, 2021, the Company ended its
furlough plan instituted in December 2020 and all employees returned to work on
a full time basis following the Company's receipt of the proceeds of its second
PPP loan, described below. During the furlough, the Company had reduced the
workweek for the majority of salaried employees to 24 hours and reduced salaries
commensurately.
We anticipate that our principal sources of liquidity, including the recent line
of credit, will be sufficient to fund our activities through March 2022. In
order to have sufficient cash to fund our operations beyond that point, we will
need to secure new customer contracts, raise additional equity or debt capital,
and reduce expenses, including payroll and payroll-related expenses through
another employee furlough and/or separations.
In order to have sufficient capital resources to fund operations, the Company
has been working diligently to secure several large orders with new and existing
customers. The receipt of these orders has been significantly delayed and will
continue to be difficult to predict due to the impact of the COVID-19 pandemic
on our customers as a result of their operations being reduced or shut down. TCC
has been able to maintain its operations during this sustained period of
disruption, but a continuation of the disruption in either our customers'
operations or those of the Company will continue to have a material adverse
impact on sales activity and revenue.
Since the start of the pandemic, the Company has been able to secure capital in
the form of debt financing to assist with funding its operations. On April 17,
2020, the Company was granted a loan from bankHometown under the U.S. Small
Business Administration's, or SBA, Paycheck Protection Program, or PPP, in the
principal amount of $474,400. The loan, which was evidenced by a note dated
April 17, 2020, was payable over 18 months at an annual interest rate of 1% to
the extent not forgiven. The Company used the entire original PPP loan amount
for qualifying expenses and the SBA forgave the loan in its entirety on January
11, 2021.
On February 1, 2021, the Company received a second loan from bankHometown under
the PPP as authorized under the Economic Aid to Hard-Hit Small Businesses,
Nonprofits, and Venues Act, or the Economic Aid Act. The loan, evidenced by a
promissory note, was in the principal amount of $474,405. The Company used the
entire second PPP loan amount for qualifying expenses and the loan was forgiven
on August 10, 2021 under the provisions of the Economic Aid Act.
During fiscal year 2020, the Company was granted a loan from the SBA in the
principal amount of $150,000 pursuant to the Economic Injury Disaster Loan
program. This loan is payable monthly over 30 years at an annual interest rate
of 3.75% commencing two years from the date of issuance.
The Company is working diligently to secure additional capital through equity or
debt arrangements in addition to the recent funding received from the SBA and
Mr. Guild. The Company is actively working with equity investors as well as debt
investors, such as the SBA and Mr. Guild to secure additional funding, although
we cannot provide assurances we will be able to secure such new funding,
especially in light of the tightening of the credit markets and continuing
volatility of the capital markets as a result of the coronavirus. Moreover, the
Company's common stock was delisted from the Nasdaq Capital Market effective
January 25, 2021; while our common stock is quoted on the OTC Bulletin Board,
the change in listing may have a negative impact on the liquidity of the stock
and the Company's ability to raise capital through offerings of its equity
securities.
Should the Company be unsuccessful in these efforts, it would be forced to
implement headcount reductions, additional employee furloughs and/or reduced
hours for certain employees, or cease operations completely.
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Sources and Uses of Cash
The following table presents our abbreviated cash flows for the years ended
September 25, 2021 and September 26, 2020:
2021 2020
Net loss $ (1,088,000 ) $ (911,000 )
Changes not affecting cash (882,000 ) 78,000
Changes in current assets and current liabilities (736,000 ) 133,000
Cash used in operating activities (2,706,000 ) (700,000 )
Cash used in investing activities - (3,000 )
Cash provided by financing activities 1,490,000 624,000
Net decrease in cash and cash equivalents (1,216,000 ) (79,000 )
Cash and cash equivalents - beginning of year 1,514,000 1,593,000
Cash and cash equivalents - end of year $ 298,000 $ 1,514,000
Operating Activities
The Company used approximately $2 million more cash from operating activities in
fiscal 2021 compared to fiscal 2020. This increase was primarily attributable to
an increase in net loss of $178,000, a $949,000 forgiveness of PPP loans, the
proceeds of which are included in financing activities on the Company's
statement of cash flows, a net difference in the change in inventory of
$395,000, a $277,000 in the change in customer deposits and a net difference
change in accounts receivable of $138,000 in fiscal 2021 compared to fiscal
2020.
Investing Activities
Cash used in investing activities during fiscal 2021 decreased by approximately
$3,000, as the Company had no additions to equipment and leasehold improvements
in 2021.
Financing Activities
Cash provided by financing activities in fiscal 2021 and 2020 was a result of
proceeds from long-term debt, described below.
Debt Instruments
On April 17, 2020, the Company was granted a loan from bankHometown in the
principal amount of $474,400 pursuant to the PPP under the CARES Act. The loan,
which was evidenced by a Note dated April 17, 2020, was payable over 18 months
at an annual interest rate of 1% to the extent not forgiven. The Company used
the entire original PPP loan amount for qualifying expenses and the SBA forgave
the loan in its entirety on January 11, 2021.
The Company also was granted a loan by the SBA in August 2020. This loan is
evidenced by a promissory note dated August 10, 2020 in the principal amount of
$150,000 and was made under the Economic Injury Disaster Loan program of the
SBA. This note is payable monthly over 30 years at an annual interest rate of
3.75% commencing two years from the date of issuance.
On February 1, 2021, the Company was granted a second PPP loan from bankHometown
in the principal amount of $474,405 under the Economic Aid Act. Any amounts not
forgiven will be paid back over five years at an interest rate of 1% per year.
Program rules provide that loan payments will be deferred for borrowers who
apply for loan forgiveness until the SBA remits the borrower's loan forgiveness
amount to the lender. If a borrower does not apply for loan forgiveness,
payments are deferred for 10 months following the end of the covered period for
the borrower's loan forgiveness (between 8 and 24 weeks). The Company used the
entire original PPP loan amount for qualifying expenses and the SBA forgave the
loan in its entirety on August 10, 2021.
On May 6, 2021, the Company executed a Demand Promissory Note in favor of Carl
H. Guild, Jr. for up to $1 million. Mr. Guild, the Company's Chief Executive
Officer, President and Chairman of the Board, agreed to provide a line of credit
to the Company for working capital purposes. This note will bear interest at a
rate of 6% per annum and has no specified term. The outstanding principal
balance at September 25, 2021 was $1,000,000, plus accrued interest of $13,195.
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Backlog
Backlog at September 25, 2021 and September 26, 2020 amounted to $1,090,000 and
$701,000, respectively. The orders in backlog at September 25, 2021 are expected
to ship and/or services are expected to be performed over the next 12 months
depending on customer requirements and product availability.
Performance guarantees
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. Guarantees are generally required in amounts of 5% to
10% of the purchase price and last in duration from three months to one year. At
September 25, 2021 and September 26, 2020, the Company had no outstanding
letters of credit.
Research and Development
Research and development efforts are undertaken by the Company primarily on its
own initiative. In order to compete successfully, the Company must improve
existing products and develop new products as well as attract and retain
qualified personnel. No assurances can be given that the Company will be able to
hire and train such technical, management and sales personnel or successfully
improve and develop its products.
During the fiscal years ended September 25, 2021 and September 26, 2020, the
Company spent $732,000 and $1,069,000, respectively, on internal product
development. The Company also spent $711,000 and $563,000 on billable
development efforts during fiscal 2021 and 2020, respectively. In fiscal 2021,
the Company's total product development costs were $189,000 lower than fiscal
2020 levels and reflected the costs of custom development, product capability
enhancements and production readiness. It is expected that product development
expenses in fiscal 2022 will be consistent with fiscal 2021 levels.
Capital Expenditures
Other than those stated above, there are no plans for material commitments for
capital expenditures in fiscal 2022.
Material Trends and Uncertainties
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. However we cannot be sure this condition will continue and there
is emerging evidence that certain parts are becoming more difficult to obtain
and are adversely impacting delivery times. While the Company was able to reopen
its facility in June 2020 after a brief government-mandated shutdown, we believe
it is possible that new restrictions may be imposed in the near future. None the
less, the Company has been able to maintain its operations, and believes it will
be in a strong position to respond to our customers' needs as any such new
restrictions ease and operations return to normal, but can give no assurances.
It is uncertain how long our and our customers' operations will be impacted, and
those of our suppliers, especially in light of recent increases in COVID-19
infection rates worldwide, 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.
In order to have sufficient capital resources to fund operations, the Company
has been working diligently to secure several large orders with new and existing
customers. The receipt of these orders has been significantly delayed and will
continue to be difficult to predict due to the impact of the COVID-19 pandemic
on our customers as a result of their operations being reduced or shut down.
Without the near term receipt of these new orders the Company will have to
secure other sources of financing such as debt or equity capital.
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Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
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