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 June 25, 2022 compared to Three Months ended June 26, 2021
Net Revenue
Net revenue for the quarters ended June 25, 2022 and June 26, 2021 was $146,000
and $426,000, respectively, a decrease of $280,000 or 66%. Revenue for the third
fiscal quarter of 2022 consisted of $124,000, or 85%, from domestic sources and
$22,000, or 15%, from international customers as compared to the same period in
fiscal 2021, in which revenue was entirely from domestic sources. International
revenues continued to be impacted by the effects of the Covid-19 pandemic.
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Foreign sales consisted of a shipment to one country during the quarter ended
June 25, 2022 and there were no foreign sales during the quarter ended June 26,
2021. 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 2022 and 2021:
2022 2021
Philippines $ 22,000 $ -
For the three months ended June 25, 2022, revenue was derived from sales of our
engineering services amounting to $124,000 and a shipment of our narrowband
radio encryptors amounting to $22,000.
For the three months ended June 26, 2021, revenue was derived primarily from
sales of our engineering services amounting to $410,000.
Gross Profit (Loss)
Gross loss for the third quarter of fiscal 2022 was $(36,000), compared to gross
profit of $99,000 for the same period of fiscal 2021, a decrease of 136%. Gross
profit (loss) expressed as a percentage of total net revenue was (25%) for the
second quarter of fiscal 2022 compared to 23% for the same period in fiscal
2021. This decrease in gross profit expressed as a percentage of total net
revenue was primarily due to the lower sales volume in fiscal 2022.
Operating Costs and Expenses
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the third quarter of fiscal
2022 were $451,000, compared to $478,000 for the same quarter in fiscal 2021.
This decrease of $27,000, or 6%, was attributable to decreases in general and
administrative expenses of $5,000 and selling and marketing expenses of $22,000
during the three months ended June 25, 2022.
The decrease in general and administrative expenses for the three months ended
June 25, 2022 was primarily attributable to a decreases in director fees of
$8,000, shareholder related expenses of $9,000 and insurance costs of $5,000.
These decreases were partially offset by an increase in legal fees of $10,000,
and increases in outside consulting costs of $4,000 and payroll and payroll
related expenses of $3,000 during the quarter.
The decrease in selling and marketing expenses for the three months ended June
25, 2022 was primarily attributable to decreases in bid and proposal efforts of
$14,000, outside consulting costs of $10,000, product evaluation costs of $3,000
and product demonstration costs of $3,000. Also an increase in sales support
activities has led to a decrease in selling and marketing expenses of $9,000,
during the period. Partially offsetting these decreases were increases to
payroll and payroll related expenses of $21,000.
Product Development Costs
Product development costs for the quarter ended June 25, 2022 were $319,000,
compared to $108,000 for the quarter ended June 26, 2021. This increase of
$211,000, or 195%, was attributable to a decrease in billable engineering
services contracts during the third quarter of fiscal 2022 that resulted in
increased product development costs of $171,000. There was also an increase in
project consulting and material costs of $40,000.
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 $124,000
of engineering services revenue generated during the third quarter of fiscal
2022 and $410,000 of engineering services revenue generated during the third
quarter of fiscal 2021.
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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 $842,000 for the third quarter of fiscal
2022, compared to a net loss of $490,000 for the same period of fiscal 2021.
This increase in net loss is primarily attributable to a 136% decrease in gross
profit and a 195% increase in product development.
Nine Months ended June 25, 2022 compared to Nine Months ended June 26, 2021
Net Revenue
Net revenue for the nine months ended June 25, 2022 and June 26, 2021 was
$1,135,000 and $1,209,000, respectively, a decrease of $74,000 or 6%. Revenue
for the first nine months of 2022 consisted of $981,000, or 86%, from domestic
sources and $154,000, or 14%, from international customers as compared to the
same period in fiscal 2021, in which revenue consisted of $973,000, or 80% from
domestic sources and $236,000, or 20%, from international customers.
International revenues continued to be impacted by the effects of the Covid-19
pandemic.
Foreign sales consisted of shipments to two countries during the nine months
ended June 25, 2022 and four countries during the nine months ended June 26,
2021. A sale is attributed to a foreign country based on the location of the
contracting party. Domestic revenue may include the sale of products shipped
through domestic resellers or manufacturers to international destinations. The
table below summarizes our principal foreign sales by country during the second
quarters of fiscal 2022 and 2021:
2022 2021
Saudi Arabia $ 80,000 $ 19,000
Philippines 74,000 11,000
Morocco - 148,000
Egypt - 58,000
$ 154,000 $ 236,000For the nine months ended June 25, 2022, revenue was derived from sales of our
engineering services amounting to $981,000 a shipment of our internet protocol
data encryptors amounting to $80,000 and two shipments of our narrowband radio
encryptors amounting to $74,000.
For the nine months ended June 26, 2021, revenue was derived from sales of our
engineering services amounting to $652,000 and shipments of our narrowband radio
encryptors and various accessories to three domestic customers for deployment
into a Middle Eastern country amounting to $98,000, for deployment into a North
African country amounting to $246,000 and for deployment into Afghanistan
amounting to $77,000, and shipments of our internet protocol data encryptors
amounting to $19,000.
Gross Profit
Gross profit for the first nine months of fiscal 2022 was $105,000, compared to
gross profit of $486,000 for the same period of fiscal 2021, a decrease of 78%.
Gross profit expressed as a percentage of total net revenue was 9% for the first
nine months of fiscal 2022 compared to 40% for the same period in fiscal 2021.
This decrease 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.
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Operating Costs and Expenses
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first nine months of fiscal
2022 were $1,498,000, compared to $1,420,000 for the same period in fiscal 2021.
This increase of $78,000, or 6%, was attributable to increases in general and
administrative expenses of $50,000 and increases in selling and marketing
expenses of $28,000 during the nine months ended June 25, 2022.
The increase in general and administrative expenses for the nine months ended
June 25, 2022 was primarily attributable to an increases in payroll and payroll
related expenses of $79,000, director fees of $8,000 and outside consulting
costs of $8,000 after a return to normal operations in the current period
compared to the previous period where a temporary furlough was in place. These
increases were partially offset by a decrease in shareholder related costs of
$28,000, legal fees of $5,000 and a decrease in insurance costs of $15,000
during the quarter.
The increase in selling and marketing expenses for the nine months ended June
25, 2022 was primarily attributable to increases in payroll and payroll related
expenses of $51,000 after a return to normal operations in the current quarter
compared to the previous period where a temporary furlough was in place. Also
contributing to the increase were increases in bid and proposal efforts of
$18,000, travel expenses of $17,000 and product demonstration costs of $24,000.
Partially offsetting these increases were decreases to outside consulting costs
of $20,000, commissions of $10,000 and product evaluation costs of $5,000. Also
an increase in sales support activities has led to a decrease in selling and
marketing expenses of $43,000, during the period.
Product Development Costs
Product development costs for the nine months ended June 25, 2022 were $504,000,
compared to $695,000 for the nine months ended June 26, 2021. This decrease of
$191,000, or 27%, was attributable to an increase in billable engineering
services contracts during the first nine months of fiscal 2022 that resulted in
decreased product development costs of $298,000. This decrease was partially
offset by an increase in payroll and payroll-related expenses of $41,000 and an
increase in project consulting and material costs of $65,000 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 $981,000
of engineering services revenue generated during the first nine months of fiscal
2022 and $652,000 of engineering services revenue generated during the first
nine months of fiscal 2021.
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 $1,978,000 for the first nine months of
fiscal 2022, compared to a net loss of $1,161,000 for the same period of fiscal
2021. This increase in net loss is primarily attributable to a decrease in grant
income associated with the forgiveness of a Small Business Administration loan
of $474,000 in fiscal 2021 and a 78% decrease in gross profit.
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Liquidity and Capital Resources
Our cash and cash equivalents at June 25, 2022 totaled $37,000.
Liquidity and Ability to Continue as a Going Concern
For the nine months ended June 25, 2022, the Company generated a net loss of
$1,977,995 and for the fiscal years ended September 25, 2021 and September 26,
2020, the Company generated net losses of $1,088,387 and $910,650, respectively.
Although the Company generated $631,426 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 $6,131,962 at June 25, 2022. 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. On April 7, 2022 the line was amended and restated again to increase
the amount to $3 million. Advances beyond the initial $1 million bear interest
at a rate of 7.5% per annum. The outstanding principal balance at June 25, 2022
was $2,350,000, plus accrued interest of $59,538. An interest payment of $30,433
was made in January of 2022.
We anticipate that our principal sources of liquidity, including the recent line
of credit, will be sufficient to fund our activities through December 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.
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. The Company's common stock trades on the OTC Market.
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 nine month
periods ended (unaudited):
June 25, June 26,
2022 2021
Net loss $ (1,978,000 ) $ (1,161,000 )
Changes not affecting cash 42,000 53,000
Changes in assets and liabilities 325,000 (1,110,000 )
Cash used in operating activities (1,611,000 ) (2,218,000 )
Cash provided by financing activities 1,350,000 925,000
Net change in cash and cash equivalents (261,000 ) (1,293,000 )
Cash and cash equivalents - beginning of period 298,000 1,514,000
Cash and cash equivalents - end of period $ 37,000 $ 221,000
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 nine month periods ended June 25, 2022 and June 26, 2021
was $128,000.
Debt Instruments
On April 17, 2020, the Company was granted a loan from bankHometown in the
principal amount of $474,400 pursuant to the PPP under the CARES Act. The loan,
which was evidenced by a Note dated April 17, 2020, was payable over 18 months
at an annual interest rate of 1% 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.
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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. On April 7, 2022, the Company issued an amended and
restated Line of Credit in favor of Carl H. Guild, Jr. on a demand basis and
with no expiration date. This agreement further amends the existing agreement
and increases the amount of funds available to $3 million. Advances under this
new agreement 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. Advances
under the original line bear interest at 6% 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 June 25,
2022 was $2,350,000, plus accrued interest of $60,000. An interest payment of
$30,000 was made in January 2022.
Backlog
Backlog at June 25, 2022 and September 25, 2021 amounted to $80,000 and
$2,129,000, respectively. The orders in backlog at June 25, 2022 are expected to
ship and/or services are expected to be performed over the next six months
depending on customer requirements and product availability.
Performance guaranties
Certain foreign customers require the Company to guarantee bid bonds and
performance of products sold. These guaranties typically take the form of
standby letters of credit. Guaranties are generally required in amounts of 5% to
10% of the purchase price and last in duration from three months to one year. At
June 25, 2022 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 nine month periods ended June 25, 2022 and June 26, 2021 the Company
spent $504,000 and $695,000, respectively, on internal product development. The
Company also spent $626,000 and $405,000 on billable development efforts during
the first nine months of fiscal 2022 and 2021, respectively. The Company's total
product development costs during the first nine months of fiscal 2022 were
similar to total product development costs during the same period in fiscal
2021. It is expected that total product development expenses will remain lower
until we secure a new billable research and development contract.
It is anticipated that cash from operations will fund our near-term research and
development and marketing activities. We also believe that, in the long term,
based on current billable activities, cash from operations will be sufficient to
meet the development goals of the Company, although we can give no assurances.
Any increase in development activities - either billable or new product related
- will require additional resources, which we may not be able to fund through
cash from operations. In circumstances where resources will be insufficient, the
Company will look to other sources of financing, including debt and/or equity
investments; however, we can provide no guarantees that we will be successful in
securing such additional financing.
Other than those stated above, there are no plans for significant internal
product development or material commitments for capital expenditures during the
remainder of fiscal 2022.
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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 nine 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.
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