UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark One)

 

☒		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended March 27, 2021
		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the transition period from ________________ to ________________

 

Commission File Number: 001-34816

 

TECHNICAL COMMUNICATIONS CORPORATION

(Exact name of registrant as specified in its charter)

 

Massachusetts		04-2295040
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
100 Domino Drive, Concord, MA		01742-2892
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code: (978) 287-5100

 

	N/A
	(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐	Emerging growth company	☐
Non-accelerated filer	☒	Smaller reporting company	☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. 1,850,403 shares of Common Stock, $0.10 par value, outstanding as of May 3, 2021.

 

 

INDEX

 

		Page
PART I	Financial Information
Item 1.	Financial Statements:
	Consolidated Balance Sheets as of March 27, 2021 (unaudited) and September 26, 2020	1
	Consolidated Statements of Operations for the Three Months ended March 27, 2021 and March 28, 2020 (unaudited)	2
	Consolidated Statements of Operations for the Six Months ended March 27, 2021 and March 28, 2020 (unaudited)	3
	Consolidated Statements of Cash Flows for the Six Months ended March 27, 2021 and March 28, 2020 (unaudited)	4
	Consolidated Statements of Changes in Stockholders' Equity for the Six Months ended March 27, 2021 and March 28, 2020 (unaudited)	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	21
PART II	Other Information
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	22
Item 4.	Mine Safety Disclosures	22
Item 5.	Other Information	22
Item 6.	Exhibits	22
	Signatures	23

 

 

 

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY

Consolidated Balance Sheets

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations

(Unaudited)

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

 

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations

(Unaudited)

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

 

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders' Equity

(Unaudited)

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

 

 

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

Certain statements contained herein or as may otherwise be incorporated by reference herein that are not purely historical constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include but are not limited to statements regarding anticipated operating results, future earnings, and the Company’s ability to achieve growth and profitability. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, including but not limited to the impact of the COVID-19 pandemic (including its duration and severity) and governmental actions in response thereto; the effect of 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 March 27, 2021 compared to Three Months ended March 28, 2020

 

Net Revenue

 

Total net revenue for the quarter ended March 27, 2021 was $617,000, compared to $723,000 for the quarter ended March 28, 2020, a decrease of 15%. Revenue for the second quarter of fiscal 2021 consisted of $547,000, or 89% from domestic sources and $70,000, or 11%, from international customers as compared to the same period in fiscal 2020, during which revenue consisted of $496,000, or 69%, from domestic sources and $227,000, or 31%, from international customers.

 

 

Foreign sales consisted of shipments to two countries during each of the quarters ended March 27, 2021 and March 28, 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 second quarters of fiscal 2021 and 2020:

 

		2021				2020
Egypt		$	58,000				-
Philippines			12,000				-
Saudi Arabia			-				224,000
Bahrain			-				3,000
		$	70,000			$	227,000

 

For the three months ended March 27, 2021, revenue was derived primarily from sales of our engineering services amounting to $243,000 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 $98,000 and for deployment into Afghanistan amounting to $77,000.

 

For the three months ended March 28, 2020, revenue was derived primarily from sales of our engineering services amounting to $458,000 and shipments of our internet protocol data encryptors to two customers in a Middle Eastern country amounting to $224,000.

 

Gross Profit

 

Gross profit for the second quarter of fiscal 2021 was $264,000, compared to gross profit of $309,000 for the same period of fiscal 2020, a decrease of 15%. Gross profit expressed as a percentage of total net revenue was 43% for the second quarters of both of fiscal 2021 and fiscal 2020.

 

Operating Costs and Expenses

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the second quarter of fiscal 2021 were $396,000, compared to $513,000 for the same quarter in fiscal 2020. This decrease of $117,000, or 23%, was attributable to decreases in general and administrative expenses of $61,000 and decreases in selling and marketing expenses of $56,000 during the three months ended March 27, 2021.

 

The decrease in general and administrative expenses for the three months ended March 27, 2021 was primarily attributable to decreases in payroll and payroll-related expenses of $60,000, director fees of $6,000 and insurance costs of $7,000. These decreases were partially offset by an increase in legal fees of $9,000 and shareholder service fees of $5,000 during the quarter.

 

The decrease in selling and marketing expenses for the three months ended March 27, 2021 was primarily attributable to decreases in product demonstration costs of $35,000, payroll and payroll-related expenses of $15,000, outside commissions of $10,000 and bid and proposal costs of $10,000. These decreases were offset by increases in internal commissions of $5,000 and engineering support of sales efforts of $3,000 for the period.

 

Product Development Costs

 

Product development costs for the quarter ended March 27, 2021 were $194,000, compared to $157,000 for the quarter ended March 28, 2020. This increase of $37,000, or 24%, was attributable to a decrease in billable engineering services contracts during the second quarter of fiscal 2021 that resulted in increased product development costs of $134,000 and an increase in project costs of $43,000. These increased costs were partially offset by a decrease in payroll and payroll-related expenses of $110,000, consulting costs of $29,000 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 second quarter of fiscal 2021 of $243,000 and $458,000 generated during the second quarter 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 $329,000 for the second quarter of fiscal 2021, compared to a net loss of $361,000 for the same period of fiscal 2020. This decrease in net loss is primarily attributable to a decrease in operating expenses of $79,000 partially offset by a decrease in gross profit of $45,000 during the second quarter of fiscal 2021.

 

Six Months ended March 27, 2021 compared to Six Months ended March 28, 2020

 

Net Revenue

 

Total net revenue for the six months ended March 27, 2021 was $783,000, compared to $1,389,000 for the six months ended March 28, 2020, a decrease of 44%. Revenue for the first six months of fiscal 2021 consisted of $547,000, or 70%, from domestic sources and $236,000, or 30%, from international customers, compared to the same period in fiscal 2020, during which revenue consisted of $988,000, or 71%, from domestic sources and $401,000, or 29%, from international customers.

 

Foreign sales consisted of a shipment to four countries during the six months ended March 27, 2021 and two countries during the six months ended March 28, 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 six months of fiscal 2021 and 2020:

 

		2021				2020
Morocco		$	148,000				-
Egypt			58,000				-
Philippines			11,000				-
Saudi Arabia			19,000			$	398,000
Bahrain			-				3,000
		$	236,000			$	401,000

 

For the six months ended March 27, 2021, revenue was derived from sales of our engineering services amounting to $243,000 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 six months ended March 28, 2020, revenue was derived primarily from sales of our engineering services amounting to $867,000, shipments of our internet protocol data encryptors to three customers in a Middle Eastern country amounting to $398,000 and shipments of our narrowband radio encryptors to a domestic customer for deployment into a North African country amounting to $117,000.

 

 

Gross Profit

 

Gross profit for the first six months of fiscal 2021 was $387,000, compared to gross profit of $618,000 for the same period of fiscal 2020, a decrease of 37%. Gross profit expressed as a percentage of total net revenue was 49% for the first six months of fiscal 2021 compared to 44% for the same period in fiscal 2020.

 

Operating Costs and Expenses

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the first six months of fiscal 2021 were $942,000, compared to $1,097,000 for the same period in fiscal 2020. This decrease of $155,000, or 14%, was attributable to decreases in general and administrative expenses of $98,000 and decreases in selling and marketing expenses of $58,000 during the six months ended March 27, 2021.

 

The decrease in general and administrative expenses for the six months ended March 27, 2021 was primarily attributable to decreases in payroll and payroll-related expenses of $73,000, director fees of $16,000 and insurance costs of $14,000. These decreases were partially offset by an increase in shareholder service fees of $5,000 during the period.

 

The decrease in selling and marketing expenses for the six months ended March 27, 2021 was primarily attributable to decreases in outside commissions of $41,000, product demonstration costs of $54,000 and in payroll and payroll-related expenses of $17,000. These decreases were offset by an increase in engineering support of sales efforts of $51,000 for the period.

 

Product Development Costs

 

Product development costs for the six months ended March 27, 2021 were $587,000, compared to $362,000 for the six months ended March 28, 2020. This increase of $225,000, or 62%, was attributable to a decrease in billable engineering services contracts during the first six months of fiscal 2021 that resulted in increased product development costs of $351,000 and an increase in project costs of $58,000. These increased costs were partially offset by decreases in payroll and payroll-related expenses of $156,000 and consulting costs 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 $243,000 of engineering services revenue generated during the first six months of fiscal 2021 and $866,000 generated during the first six 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 $671,000 for the first six months of fiscal 2021, compared to a net loss of $842,000 for the same period of fiscal 2020. This decrease in net loss of $171,000 is primarily attributable to grant income associated with the forgiveness of a Small Business Administration loan of $474,000 during the first six months of fiscal 2021, which is partially offset by a decrease in gross profit of $230,000.

 

Liquidity and Capital Resources

 

Our cash and cash equivalents at March 27, 2021 totaled $566,000 and we had a 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

 

 

Liquidity and Ability to Continue as a Going Concern

 

For the six ended March 27, 2021, the Company generated a net loss of $671,000. 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, it suffered recurring losses from operations during the prior seven year period from fiscal 2012 to fiscal 2018 and had an accumulated deficit of $3,736,000 at March 27, 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 March 15, 2021, the Company ended its furlough plan instituted in December 2020 and all employees returned to work on a full time basis. During the furlough, the Company had reduced the workweek for the majority of salaried employees to 24 hours and reduced salaries commensurately.

 

On May 7, 2021, the Company obtained a Line of Credit in favor of Carl H. Guild, Jr. on a demand basis and with no expiration date, for up to $1 million. Mr. Guild, the Company’s Chief Executive Officer, President and Chairman of the Board, loaned the money to the Company to provide working capital. This note will bear interest at a rate of 4%.

 

We anticipate that our principal sources of liquidity, including the recent line of credit will be sufficient to fund our activities to 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 furlough and/or employee 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. Most recently, on February 1, 2021 the Company received a loan from bankHometown under the PPP as authorized under the Economic Aid Act. The loan, 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 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 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. 

 

Sources and Uses of Cash

 

The following table presents our abbreviated cash flows for the six month periods ended (unaudited):

 

		March 27, 2021				March 28, 2020
Net loss		$	(671,000	)		$	(842,000	)
Changes not affecting cash			38,000
Changes in assets and liabilities			(789,000	)			(182,000	)
Cash used in operating activities			(1,422,000	)			(986,000	)
Cash provided by financing activities			474,000
Net change in cash and cash equivalents			(948,000	)			(986,000	)
Cash and cash equivalents - beginning of period			1,514,000
Cash and cash equivalents - end of period		$	566,000			$	607,000

 

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 September 2018, the Company exercised its option to extend the term of the lease through September 2021. The lease expense for each of the six month periods ended March 27, 2021 and March 28, 2020 was $85,000.

 

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% commencing on October 17, 2020 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 following a recent change in the loan program.

 

On February 1, 2021, the Company also was granted a second PPP loan from bankHometown in the principal amount of $474,405 under theEconomic 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.

 

 

Backlog

 

Backlog at March 27, 2021 and September 26, 2020 amounted to $2,129,000 and $701,000, respectively. The orders in backlog at March 27, 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 March 27, 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 six month periods ended March 27, 2021 and March 28, 2020 the Company spent $587,000 and $362,000, respectively, on internal product development. The Company also spent $147,000 on billable development efforts during the first six months of fiscal 2021 and $532,000 during the first six months of fiscal 2020. The Company’s total product development costs during the first six months of fiscal 2021 were 18% 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 three 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.

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that review and evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of March 27, 2021 as a result of the material weaknesses in our internal control over financial reporting discussed below.

 

As previously disclosed under Item 9A, Controls and Procedures in our Annual Report on Form 10-K for the fiscal year ended September 26, 2020, as well as prior fiscal years, management had concluded that the Company did not maintain effective internal control over financial reporting due to material weaknesses in such internal control related to the misapplication of generally accepted accounting principles associated with revenue recognition, inventory reserves, accruals and the preparation of the consolidated financial statements, as well as the classification and disclosure of financial information, caused by an error in judgment by, or a lack of adequate skills and experience within, the accounting department. In addition, management also previously identified a material weakness due to a lack of sufficient staff to segregate accounting duties.

 

Nonetheless, management believes that our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with generally accepted accounting principles. Our Chief Executive Officer and Chief Financial Officer have certified that, based on such officer’s knowledge, the financial statements and other financial information included in this Quarterly Report on Form 10-Q fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report. In addition, we initiated a remediation plan for the material weaknesses, described below.

 

Our management, with oversight from the Audit Committee, is actively engaged in remediating the identified material weaknesses. As part of these remediation efforts management has undertaken education and training for TCC’s accounting staff and management to address certain core competencies that resulted in the lack of operational effectiveness. Management will continue to assess the design of controls to determine if enhancements are needed to increase effectiveness of our internal control over financial reporting. Management has retained a subject matter expert in the area of income tax accounting and is assessing the need to retain additional subject matter experts to ensure compliance with generally accepted accounting principles and SEC rules and regulations. Both management and the Audit Committee have increased their oversight of non-routine transactions. This includes oversight of large revenue contracts as well as judgement areas, including inventory reserves and accruals. This oversight will contribute to the assessment of the need to retain additional subject matter experts.

 

The Company continues to make significant progress in improving its internal control over financial reporting but remediation efforts are ongoing; the Company’s goal is to have all material weaknesses remediated by the end of its 2021 fiscal year.

 

Changes in internal control over financial reporting. The changes in the aforementioned internal control over financial reporting and the remediation efforts undertaken as of the end of fiscal 2020 and undertaken in the first six months of TCC’s fiscal 2021 have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. No other changes in the Company’s internal control over financial reporting occurred during the first six months of its 2021 fiscal year.

 

 

PART II. Other Information

 

Item 1. Legal Proceedings

 

There were no material pending legal proceedings to which the Company or its subsidiary was a party or which any of their property was subject during the period covered by this quarterly report.

 

Item 1A. Risk Factors

 

Not applicable.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Not applicable.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not applicable.

 

Item 6. Exhibits

 

10.1

Demand Promissory Note with Carl H. Guild, Jr. dated May 6, 2021

 

31.1

Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2

Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101.INS

XBRL Report Instance Document

 

101.SCH

XBRL Taxonomy Extension Schema Document

 

101.CAL

XBRL Taxonomy Calculation Linkbase Document

 

101.LAB

XBRL Taxonomy Label Linkbase Document

 

101.PRE

XBRL Presentation Linkbase Document

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

		TECHNICAL COMMUNICATIONS CORPORATION
		(Registrant)
May 11, 2021			By:	/s/ Carl H. Guild, Jr.
Date				Carl H. Guild, Jr., President and Chief
				Executive Officer
May 11, 2021			By:	/s/ Michael P. Malone
Date				Michael P. Malone, Chief Financial Officer

 

 

 

 

 

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