TCCO Technical Communications Corp

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.

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:

For 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.

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:

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.

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.

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.

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.

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. 

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.

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.

Off-Balance Sheet Arrangements

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