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 26, 2020.
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 26, 2020 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 26, 2020 as filed with the SEC.
Results of Operations
Three Months ended June 26, 2021 compared to Three Months ended June 27, 2020
Net Revenue
Net revenue for the quarter ended June 26, 2021 was $426,000, compared to
$599,000 for the quarter ended June 27, 2020, a decrease of 29%. Revenue for the
third quarter of fiscal 2021 was entirely from domestic sources as compared to
the same period in fiscal 2020, during which revenue consisted of $513,000, or
86%, from domestic sources and $86,000, or 14%, from international customers.
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There were no foreign sales during the quarter ended June 26, 2021 and foreign
sales consisted of shipments to one country during the quarter ended June 27,
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 third
quarters of fiscal 2021 and 2020:
2021 2020
Saudi Arabia $ - $ 86,000
$ - $ 86,000For the three months ended June 26, 2021, revenue was derived primarily from
sales of our engineering services amounting to $410,000.
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. The Company also had sales of engineering services
amounting to $47,000 during the period.
Gross Profit
Gross profit for the third quarter of fiscal 2021 was $99,000, compared to gross
profit of $355,000 for the same period of fiscal 2020, a decrease of 72%. Gross
profit expressed as a percentage of total net revenue was 23% and 59% for the
third quarters of fiscal 2021 and fiscal 2020, respectively. The decrease in the
percentage of gross profit was primarily attributed to the decrease in equipment
sales in fiscal 2021.
Operating Costs and Expenses
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the third quarter of fiscal
2021 were $478,000, compared to $505,000 for the same quarter in fiscal 2020.
This decrease of $27,000, or 5%, was attributable to increases in general and
administrative expenses of $4,000 and offset by decreases in selling and
marketing expenses of $31,000 during the three months ended June 26, 2021.
The increase in general and administrative expenses for the three months ended
June 26, 2021 was primarily attributable to an increase in insurance costs of
$14,000 during the quarter. This increase was offset by decreases in payroll and
payroll-related expenses of $6,000 and legal fees of $8,000.
The decrease in selling and marketing expenses for the three months ended June
26, 2021 was primarily attributable to decreases in outside commissions and
third party marketing agreements of $23,000 and internal commissions of $13,000.
These decreases were offset by increases in product evaluation costs of $7,000
for the period.
Product Development Costs
Product development costs for the quarter ended June 26, 2021 were $108,000,
compared to $332,000 for the quarter ended June 27, 2020. This decrease of
$224,000, or 67%, was attributable to an increase in billable engineering
services contracts during the third quarter of fiscal 2021 that resulted in
decreased product development costs of $190,000 and a decrease in payroll and
payroll-related expenses of $47,000. These decreased costs were partially offset
by increases in consulting costs of $7,000 and project costs of $4,000 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
engineering services revenue generated during the third quarter of fiscal 2021
of $410,000 and $47,000 generated during the third quarter of fiscal 2020.
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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 $490,000 for the third quarter of fiscal
2021, compared to a net loss of $482,000 for the same period of fiscal 2020.
This increase in net loss is primarily attributable to a decrease in gross
profit of $256,000, partially offset by a decrease in operating expenses of
$251,000 during the third quarter of fiscal 2021.
Nine Months ended June 26, 2021 compared to Nine Months ended June 27, 2020
Net Revenue
Net revenue for the nine months ended June 26, 2021 was $1,209,000, compared to
$1,987,000 for the nine months ended June 27, 2020, a decrease of 39%. Revenue
for the first nine months of fiscal 2021 consisted of $973,000, or 80%, from
domestic sources and $236,000, or 20%, from international customers, compared to
the same period in fiscal 2020, during which revenue consisted of $1,500,000, or
76%, from domestic sources and $487,000, or 24%, from international customers.
Foreign sales consisted of a shipment to four countries during the nine months
ended June 26, 2021 and two countries during the nine months ended June 27,
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
nine months of fiscal 2021 and 2020:
2021 2020
Morocco $ 148,000
Egypt 58,000 -
Philippines 11,000 -
Saudi Arabia 19,000 $ 484,000
Bahrain - 3,000
$ 236,000 $ 487,000For 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.
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.
Gross Profit
Gross profit for the first nine months of fiscal 2021 was $486,000, compared to
gross profit of $973,000 for the same period of fiscal 2020, a decrease of 50%.
Gross profit expressed as a percentage of total net revenue was 40% for the
first nine months of fiscal 2021 compared to 49% for the same period in fiscal
2020. The decrease in the percentage of gross profit was primarily attributed to
the decrease in 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
2021 were $1,420,000, compared to $1,602,000 for the same period in fiscal 2020.
This decrease of $182,000, or 11%, was attributable to decreases in general and
administrative expenses of $93,000 and decreases in selling and marketing
expenses of $89,000 during the nine months ended June 26, 2021.
The decrease in general and administrative expenses for the nine months ended
June 26, 2021 was primarily attributable to decreases in payroll and
payroll-related expenses of $67,000, director fees of $8,000 and audit costs of
$7,000.
The decrease in selling and marketing expenses for the nine months ended June
26, 2021 was primarily attributable to decreases in outside commissions of
$58,000, internal commission costs of $13,000 and in payroll and payroll-related
expenses of $13,000.
Product Development Costs
Product development costs for the nine months ended June 26, 2021 were $695,000,
compared to $694,000 for the nine months ended June 27, 2020. This slight
increase was attributable to a decrease in billable engineering services
contracts during the first nine months of fiscal 2021 that resulted in increased
product development costs of $161,000 and an increase in project costs of
$62,000. These increased costs were partially offset by decreases in payroll and
payroll-related expenses of $204,000 and consulting costs of $20,000 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 $652,000
of engineering services revenue generated during the first nine months of fiscal
2021 and $913,000 generated during the first nine months of fiscal 2020.
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 $1,161,000 for the first nine months of
fiscal 2021, compared to a net loss of $1,324,000 for the same period of fiscal
2020. This decrease in net loss of $163,000 is primarily attributable to grant
income associated with the forgiveness of a Small Business Administration loan
of $474,000 and a decrease in operating expenses of $182,000 during the first
nine months of fiscal 2021, which was partially offset by a decrease in gross
profit of $486,000.
Liquidity and Capital Resources
Our cash and cash equivalents at June 26, 2021 totaled $221,000 and we had a
long-term SBA note payable in the amount of $150,000. The Company also has
borrowed $474,405 from bankHometown under the SBA's Paycheck Protection Program
as authorized under the Economic Aid to Hard-Hit Small Businesses, Nonprofits,
and Venues Act (the "Economic Aid Act"). All or a portion of the loan is
expected to be forgiven under the provisions of the Economic Aid Act. In
addition, the Company's President and CEO, Carl H. Guild, Jr, loaned the Company
$451,000 under a line of credit arrangement with funds available of up to $1
million.
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Liquidity and Ability to Continue as a Going Concern
For the nine months ended June 26, 2021, the Company generated a net loss of
$1,161,000. 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 and had an accumulated deficit of $4,226,000 at June 26,
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.
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.
Also during the second quarter, the Company ended its furlough plan instituted
in December 2020 and all employees returned to work on a full time basis on
March 15, 2021 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 September 2021. 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 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, including the
line of credit extended by the Company's CEO and President during the third
quarter of the Company's 2021 fiscal year. During the second quarter of fiscal
2021, the Company received a loan from bankHometown under the PPP as authorized
under the Economic Aid Act. The loan on February 1, 2021, evidenced by a
promissory note, is in the principal amount of $474,405 and all or a portion of
the loan is expected to be forgiven under the provisions of 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 10 months after the end of the covered period
for the borrower's loan forgiveness (between 8 and 24 weeks). This loan is
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 a
24 week period following the loan date.
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 following a recent
change in the loan program. Also in fiscal year 2020, the Company received an
initial $474,400 PPP loan under the Coronavirus Aid, Relief and Economic
Security Act (the "CARES Act"). The entire amount of this original PPP loan was
forgiven by the SBA on January 11, 2021.
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 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.
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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.
Sources and Uses of Cash
The following table presents our abbreviated cash flows for the nine month
periods ended (unaudited):
June 26, June 27,
2021 2020
Net loss $ (1,161,000 ) $ (1,324,000 )
Changes not affecting cash 53,000 59,000
Changes in assets and liabilities (1,110,000 ) 159,000
Cash used in operating activities (2,218,000 ) (1,106,000 )
Cash provided by financing activities 925,000 474,000
Net change in cash and cash equivalents (1,293,000 ) (632,000 )
Cash and cash equivalents - beginning of period 1,514,000 1,593,000
Cash and cash equivalents - end of period $ 221,000 $ 961,000
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 in 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 February 2021, the Company exercised its option to extend the
term of the lease through March 2024. The lease expense for each of the nine
month periods ended June 26, 2021 and June 27, 2020 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 expects to
use the entire loan amount for qualifying expenses and that the SBA will forgive
the loan in its entirety.
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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 June 26, 2021 was $451,000, plus accrued interest of $6,167.
Backlog
Backlog at June 26, 2021 and September 26, 2020 amounted to $1,701,000 and
$701,000, respectively. The orders in backlog at June 26, 2021 are expected to
ship and/or services are expected to be performed over the next twelve 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 26, 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 nine month periods ended June 26, 2021 and June 27, 2020 the Company
spent $695,000 and $694,000, respectively, on internal product development. The
Company also spent $405,000 on billable development efforts during the first
nine months of fiscal 2021 and $563,000 during the first nine months of fiscal
2020. The Company's total product development costs during the first nine months
of fiscal 2021 were 12% lower than the same period in fiscal 2020 but in line
with its budgeted spending on 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.
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 2021.
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. This guidance is effective for annual reporting
periods beginning after December 15, 2020 (including interim periods within that
reporting period) and is not expected to 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 2021 fiscal year but such pronouncements are not believed by
management to have a material impact on the Company's present or future
financial statements.
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Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
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