Forward-Looking Statements
Certain statements contained herein or as may otherwise be incorporated by
reference herein that are not purely historical constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements include but are not limited to statements
regarding anticipated operating results, future earnings, and the Company's
ability to achieve growth and profitability. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors, including but
not limited to the impact of the COVID-19 pandemic (including its duration and
severity) and governmental actions in response thereto; the effect of foreign
political unrest; domestic and foreign government policies and economic
conditions; future changes in export laws or regulations; changes in technology;
the ability to hire, retain and motivate technical, management and sales
personnel; the risks associated with the technical feasibility and market
acceptance of new products; changes in telecommunications protocols; the effects
of changing costs, exchange rates and interest rates; and the Company's ability
to secure adequate capital resources. Such risks, uncertainties and other
factors could cause the actual results, performance or achievements of the
Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. For a more detailed discussion of the risks facing
the Company, see the Company's filings with the SEC, including its Annual Report
on Form 10-K for the fiscal year ended September 25, 2021.
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 25, 2021 and we have
not adopted any accounting policies that have had or will have a material impact
on our consolidated financial statements. For further discussion of our
accounting policies see Note 2, Summary of Significant Accounting Policies and
Significant Judgments and Estimates in the Notes to Unaudited Consolidated
Financial Statements in this Quarterly Report on Form 10-Q and the Notes to
Consolidated Financial Statements in our Annual Report on Form 10-K for the
fiscal year ended September 25, 2021 as filed with the SEC.
Results of Operations
Three Months ended December 25, 2021 compared to Three Months ended December 26,
2020
Net Revenue
Net revenue for the quarters ended December 25, 2021 and December 26, 2020 was
$423,000 and $167,000, respectively, an increase of $256,000 or 153%. Revenue
for the first fiscal quarter of 2022 consisted of $343,000, or 81%, from
domestic sources and $80,000, or 19%, from international customers as compared
to the same period in fiscal 2020, in which revenue consisted of 100% from
international customers. International revenues continued to be impacted by the
effects of the Covid-19 pandemic.
Page 12
--------------------------------------------------------------------------------
Foreign sales consisted of a shipment to one country during the quarter ended
December 25, 2021 and two countries during the quarter ended December 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 sales by country during the first
quarters of fiscal 2022 and 2021:
2022 2021
Morocco $ - $ 148,000
Saudi Arabia 80,000 19,000
$ 80,000 $ 167,000
For the three months ended December 25, 2021, revenue was derived from sales of
our engineering services amounting to $343,000 and shipments of our internet
protocol data encryptors amounting to $80,000.
For the three months ended December 26, 2020, revenue was derived from sales of
our DSP9000 radio ciphering equipment amounting to $148,000 and shipments of our
internet protocol data encryptors amounting to $19,000.
Gross Profit
Gross profit for the first quarter of fiscal 2022 was $67,000, compared to gross
profit of $123,000 for the same period of fiscal 2021, a decrease of 46%. Gross
profit expressed as a percentage of total net revenue was 16% for the first
quarter of fiscal 2022 compared to 74% for the same period in fiscal 2021. 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 2021.
Operating Costs and Expenses
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first quarter of fiscal
2022 were $562,000, compared to $545,000 for the same quarter in fiscal 2021.
This increase of $17,000, or 3%, was attributable to increases in general and
administrative expenses of $3,000 and increases in selling and marketing
expenses of $14,000 during the three months ended December 25, 2021.
The increase in general and administrative expenses for the three months ended
December 25, 2021 was primarily attributable to an increases in payroll and
payroll related expenses of $10,000, audit and director fees of $7,000 and
$8,000 respectively. These increases were partially offset by a decrease in
shareholder costs of $8,000, legal fees of $5,000 and a decrease in insurance
costs of $5,000 during the quarter.
The increase in selling and marketing expenses for the three months ended
December 25, 2021 was primarily attributable to increases in bid and proposal
efforts of $17,000, product demonstration costs of $19,000, increases in payroll
and payroll related expenses of $4,000 and third party sales support and outside
commissions of $6,000. These decreases were offset by decreases in engineering
support of sales efforts of $33,000, for the period.
Product Development Costs
Product development costs for the quarter ended December 25, 2021 were $101,000,
compared to $392,000 for the quarter ended December 26, 2020. This decrease of
$291,000, or 74%, was attributable to an increase in billable engineering
services contracts during the first quarter of fiscal 2022 that resulted in
decreased product development costs of $264,000 and a decrease in payroll and
payroll-related expenses of $28,000 during the period.
The Company actively sells its engineering services in support of funded
research and development. The receipt of these orders is sporadic, although such
programs can span over several months. In addition to these programs, the
Company also invests in research and development to enhance its existing
products or to develop new products, as it deems appropriate. There was $343,000
of engineering services revenue generated during the first quarter of fiscal
2022 and no engineering services revenue generated during the first quarter of
fiscal 2021.
Page 13
--------------------------------------------------------------------------------
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 $613,000 for the first quarter of fiscal
2022, compared to a net loss of $342,000 for the same period of fiscal 2021.
This increase in net loss is primarily attributable to a 46% decrease in gross
profit and a decrease in grant income associated with the forgiveness of a Small
Business Administration loan of $474,000, which was partially offset by a 29%
decrease in operating expense during the first quarter of fiscal 2022.
Liquidity and Capital Resources
Our cash and cash equivalents at December 25, 2021 totaled $57,000.
Liquidity and Ability to Continue as a Going Concern
For the quarter ended December 25, 2021, the Company generated a net loss of
$613,000 and for the fiscal years ended September 25, 2021 and September 26,
2020, the Company generated net losses of $1,088,000 and $911,000, respectively.
Although the company generated $631,000 of net income in the fiscal year ended
September 28, 2019, the Company suffered recurring losses from operations during
the prior seven year period from fiscal 2012 to fiscal 2018 and had an
accumulated deficit of $4,767,000 at December 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 secured 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 December 25, 2021 was
$1,150,000, plus accrued interest of $29,000.
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 secured 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.
Page 14
--------------------------------------------------------------------------------
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 considering raising capital through equity or debt arrangements
in addition to the funding received from the SBA, although we cannot provide
assurances we will be able to secure such new funding, especially in light of
the tightening of the credit markets and volatility of the capital markets as a
result of the coronavirus. Moreover, the Company's common stock was delisted
from the NASDAQ Capital Market effective January 25, 2021; while TCC expects its
common stock to be quoted on the OTC Bulletin Board, the change in listing may
have a negative impact on the liquidity of the stock and the Company's ability
to raise capital through offerings of its equity securities.
Should the Company be unsuccessful in these efforts, it would be forced to
implement headcount reductions, additional employee furloughs and/or reduced
hours for certain employees, or cease operations completely.
Sources and Uses of Cash
The following table presents our abbreviated cash flows for the three month
periods ended (unaudited):
December December
25, 2021 26, 2020
Net loss $ (613,000 ) $ (342,000 )
Changes not affecting cash 13,000 18,000
Changes in assets and liabilities 209,000 (524,000 )
Cash used in operating activities (391,000 ) (848,000 )
Cash provided by financing activities 150,000
Net change in cash and cash equivalents (241,000 ) (848,000 )
Cash and cash equivalents - beginning of period 298,000 1,514,000
Cash and cash equivalents - end of period $ 57,000 $ 666,000
Company Facilities
On April 1, 2014, the Company entered into a lease for its current facilities.
This lease is for 22,800 square feet located at 100 Domino Drive, 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. In March 2021, the Company exercised
the second option and the new term will run until March 30, 2024. The lease
expense for each of the three month periods ended December 25, 2021 and December
26, 2020 was $43,000.
Page 15
--------------------------------------------------------------------------------
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 November 18, 2021, the Company entered into an amended and restated Line of
Credit in favor of Carl H. Guild, Jr. on a demand basis and with no expiration
date. This line amends an existing financing and increases the amount of funds
available to $2 million. Advances under the original line bear interest at 6%
per annum. Future advances under this new financing will bear interest at an
interest rate of 7.5% per annum. Mr. Guild, the Company's Chief Executive
Officer, President and Chairman of the Board, loaned the money to the Company to
provide working capital. The outstanding balance at December 25, 2021 was
$1,150,000, plus accrued interest of $29,261.
Backlog
Backlog at December 25, 2021 and September 25, 2021 amounted to $660,000 and
$1,090,000, respectively. The orders in backlog at December 25, 2021 are
expected to ship and/or services are expected to be performed over the next nine
months depending on customer requirements and product availability.
Performance guaranties
Certain foreign customers require the Company to guarantee bid bonds and
performance of products sold. These guaranties typically take the form of
standby letters of credit. Guaranties are generally required in amounts of 5% to
10% of the purchase price and last in duration from three months to one year. At
December 25, 2021 and September 25, 2021, 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 three month periods ended December 25, 2021 and December 26, 2020 the
Company spent $101,000 and $392,000, respectively, on internal product
development. The Company also spent $219,000 on billable development efforts
during the first three months of fiscal 2021. The Company's total product
development costs during the first three months of fiscal 2022 were consistent
with the same period in fiscal 2021 and 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.
Page 16
--------------------------------------------------------------------------------
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 2022.
New Accounting Pronouncements
ASU No. 2019-12, Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued guidance under ASU No. 2019-12, Simplifying
the Accounting for Income Taxes, with respect to leases. The decisions reflected
in this ASU update specific areas of ASC 740, Income Taxes, to reduce complexity
while maintaining or improving the usefulness of the information provided to
users of financial statements. The Company adopted this guidance during its
fiscal year quarter ended December 25, 2021, and it did not have a material
impact on the Company's financial statements.
Other recent accounting pronouncements were issued by the FASB (including its
Emerging Issues Task Force) and the SEC during the first three months of the
Company's 2022 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.
© Edgar Online, source Glimpses