Part I - Item 2 – Management’s Discussion and Analysis of Financial
Condition and Results of Operations
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
|
|
December 30, 2017
|
|
September 30, 2017
|
|
|
(Unaudited,
As restated,
see
Note 2)
|
|
(As restated,
see Note 2)
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,671,597
|
|
|
$
|
1,283,673
|
|
Restricted cash
|
|
|
12,930
|
|
|
|
12,930
|
|
Marketable securities - held to maturity
|
|
|
204,681
|
|
|
|
360,253
|
|
Accounts receivable - trade
|
|
|
323,075
|
|
|
|
730,177
|
|
Inventories, net
|
|
|
1,402,488
|
|
|
|
1,358,344
|
|
Other current assets
|
|
|
111,915
|
|
|
|
135,693
|
|
Total current assets
|
|
|
3,726,686
|
|
|
|
3,881,070
|
|
|
|
|
|
|
|
|
|
|
Equipment and leasehold improvements
|
|
|
4,534,839
|
|
|
|
4,534,839
|
|
Less: accumulated depreciation and amortization
|
|
|
(4,493,879
|
)
|
|
|
(4,481,085
|
)
|
Equipment and leasehold improvements, net
|
|
|
40,960
|
|
|
|
53,754
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
3,767,646
|
|
|
$
|
3,934,824
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
75,560
|
|
|
$
|
109,224
|
|
Deferred revenue
|
|
|
764,185
|
|
|
|
484,121
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Accrued compensation and related expenses
|
|
|
179,323
|
|
|
|
215,984
|
|
Customer deposits
|
|
|
8,644
|
|
|
|
53,886
|
|
Other current liabilities
|
|
|
51,554
|
|
|
|
55,376
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,079,266
|
|
|
|
918,591
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Common stock, par value $0.10 per share; 7,000,000 shares
authorized; 1,839,877 shares issued and outstanding at December 30, 2017 and September 30, 2017
|
|
|
183,988
|
|
|
|
183,988
|
|
Additional paid-in capital
|
|
|
4,143,179
|
|
|
|
4,139,002
|
|
Accumulated deficit
|
|
|
(1,638,787
|
)
|
|
|
(1,306,757
|
)
|
Total stockholders’ equity
|
|
|
2,688,380
|
|
|
|
3,016,233
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
3,767,646
|
|
|
$
|
3,934,824
|
|
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
|
|
Three Months Ended
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
|
(As
restated,
see Note
2)
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
Engineering services
|
|
$
|
619,936
|
|
|
$
|
-
|
|
Equipment sales
|
|
|
216,593
|
|
|
|
631,621
|
|
Total net revenue
|
|
|
836,529
|
|
|
|
631,621
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
Engineering services
|
|
|
366,500
|
|
|
|
-
|
|
Equipment sales
|
|
|
178,358
|
|
|
|
188,597
|
|
Total cost of revenue
|
|
|
544,858
|
|
|
|
188,597
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
291,671
|
|
|
|
443,024
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
459,974
|
|
|
|
645,743
|
|
Product development
|
|
|
165,509
|
|
|
|
494,276
|
|
Total operating expenses
|
|
|
625,483
|
|
|
|
1,140,019
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(333,812
|
)
|
|
|
(696,995
|
)
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,782
|
|
|
|
2,407
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(332,030
|
)
|
|
$
|
(694,588
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.18
|
)
|
|
$
|
(0.38
|
)
|
Diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,839,877
|
|
|
|
1,839,877
|
|
Diluted
|
|
|
1,839,877
|
|
|
|
1,839,877
|
|
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Three Months Ended
|
|
|
December 30, 2017
|
|
December 31, 2016
|
|
|
(As restated,
see
Note 2)
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(332,030
|
)
|
|
$
|
(694,588
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
12,794
|
|
|
|
41,334
|
|
Stock-based compensation
|
|
|
4,177
|
|
|
|
3,012
|
|
Amortization of premium on held to maturity securities
|
|
|
5,572
|
|
|
|
6,549
|
|
|
|
|
|
|
|
|
|
|
Changes in certain operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
407,102
|
|
|
|
(417,098
|
)
|
Inventories
|
|
|
(44,144
|
)
|
|
|
(132,580
|
)
|
Other current assets
|
|
|
23,778
|
|
|
|
44,543
|
|
Deferred revenue
|
|
|
280,064
|
|
|
|
-
|
|
Customer deposits
|
|
|
(45,242
|
)
|
|
|
(72,660
|
)
|
Accounts payable and other accrued liabilities
|
|
|
(74,147
|
)
|
|
|
41,539
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
237,924
|
|
|
|
(1,179,949
|
)
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to equipment and leasehold improvements
|
|
|
-
|
|
|
|
(3,575
|
)
|
Proceeds from maturities of marketable securities
|
|
|
150,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
150,000
|
|
|
|
(3,575
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
387,924
|
|
|
|
(1,183,524
|
)
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash at beginning of the period
|
|
|
1,296,603
|
|
|
|
2,616,628
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash at end of the period
|
|
$
|
1,684,527
|
|
|
$
|
1,433,104
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
-
|
|
|
$
|
856
|
|
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
Description of the Business and Basis of Presentation
Company Operations
Technical Communications Corporation (“TCC”) was incorporated
in Massachusetts in 1961; its wholly-owned subsidiary, TCC Investment Corp., was organized in that jurisdiction in 1982. Technical
Communications Corporation and TCC Investment Corp. are collectively referred to as the “Company”. The Company’s
business consists of only one industry segment, which is the design, development, manufacture, distribution, marketing and sale
of communications security devices, systems and services. The secure communications solutions provided by TCC protect vital information
transmitted over a wide range of data, video, fax and voice networks. TCC’s products have been sold into a significant number
of countries and are in service with governments, military agencies, telecommunications carriers, financial institutions and multinational
corporations.
Interim Financial Statements
The accompanying unaudited consolidated financial statements of
Technical Communications Corporation and its wholly-owned subsidiary (collectively the “Company” or “TCC”)
include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and
results of operations for the periods presented and in order to make the financial statements not misleading. All such adjustments
are of a normal recurring nature. Interim results are not necessarily indicative of the results to be expected for the fiscal year
ended September 29, 2018.
The September 30, 2017 restated consolidated balance sheet was derived
from the September 30, 2017 audited restated consolidated financial statement. Certain footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as allowed
by Securities and Exchange Commission (“SEC”) rules and regulations. The accompanying unaudited consolidated financial
statements should be read in conjunction with the Company’s restated consolidated financial statements and the notes thereto
for the fiscal year ended September 30, 2017 on Form 10-K filed June 21, 2019.
The Company follows accounting standards set by the Financial Accounting
Standards Board, commonly referred to as the FASB. The FASB sets generally accepted accounting principles (“GAAP”)
that the Company follows to ensure it consistently reports its financial condition, results of operations, and cash flows. References
to GAAP issued by the FASB in these footnotes are to the
FASB Accounting Standards Codification
TM
- sometimes
referred to as the Codification or ASC.
Liquidity and Ability to Continue as
a Going Concern
The Company has suffered recurring losses
from operations and had an accumulated deficit of $1,639,000 at December 30, 2017. These factors raise substantial doubt about
the Company's ability to continue as a going concern within one year from the issuance date of the unaudited consolidated financial
statements. The unaudited consolidated financial statements do not include any adjustments to reflect substantial doubt about the
Company’s ability to continue as a going concern.
We
anticipate that the principal sources of liquidity will only be sufficient to fund activities to January 2020. In order
to have sufficient cash to fund operations beyond that point, the Company will need to secure new customer contracts, raise additional
equity or debt capital or reduce expenses, including payroll and payroll-related expenses.
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. In addition, the Company is also pursuing raising capital through equity or debt arrangements.
Although the Company believes its ability to secure such new business or raise new capital is likely, it cannot provide assurances
it will be able to do so.
Should
the Company be unsuccessful in these efforts, it would then be forced to implement headcount reductions, employee furloughs and/or
reduced hours for certain employees or cease operations completely.
Reporting Period
The Company’s by-laws call for its fiscal year to end on the
Saturday closest to the last day of September, unless otherwise decided by its Board of Directors.
Basis of Presentation
The accompanying unaudited consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated
in consolidation.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
The discussion and analysis of the financial condition and results
of operations are based on our unaudited consolidated financial statements, which have been prepared in accordance with GAAP.
The preparation of these unaudited consolidated financial statements requires management to make estimates and judgments that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported revenues and expenses during the reporting periods.
On an ongoing basis, management evaluates its estimates and judgments,
including but not limited to those related to revenue recognition, inventory reserves, receivable reserves, marketable securities,
impairment of long-lived assets, income taxes, fair value of financial instruments and stock-based compensation. Management bases
its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ
from these estimates under different assumptions or conditions.
NOTE 2.
Restatements
The Company has restated its unaudited
consolidated financial statements as of and for the three months ended December 30, 2017. The restatements reflect adjustments
to correct errors in the Company’s revenue recognition for a certain contract. The error was identified during the Company’s
normal closing process, in the course of the Company’s regularly scheduled audit for the year ended September 29, 2018 and
during the course of a subsequent review by management. The error resulted from the misinterpretation and misapplication of ASC
Topic,
605 Revenue Recognition
. The effects of the restatement on the Company’s consolidated financial statements
for the three months ended December 30, 2017 are described below.
Correction of error in the application of the Company’s revenue recognition
policy
|
|
As
reported
|
|
Adjustment
|
|
As
adjusted
|
|
|
As
of December 30, 2017
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
-
|
|
|
$
|
764,185
|
|
|
$
|
764,185
|
|
Accumulated deficit
|
|
|
(874,602
|
)
|
|
|
(764,185
|
)
|
|
|
(1,638,787
|
)
|
|
|
As of September 30, 2017
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
-
|
|
|
$
|
484,121
|
|
|
$
|
484,121
|
|
Accumulated deficit
|
|
|
(822,636
|
)
|
|
|
(484,121
|
)
|
|
|
(1,306,757
|
)
|
|
|
For the Three Months Ended December 30, 2017
|
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
1,116,593
|
|
|
$
|
(280,064
|
)
|
|
$
|
836,529
|
|
Gross profit
|
|
|
571,735
|
|
|
|
(280,064
|
)
|
|
|
291,671
|
|
Operating loss
|
|
|
(53,748
|
)
|
|
|
(280,064
|
)
|
|
|
(333,812
|
)
|
Net loss
|
|
|
(51,966
|
)
|
|
|
(280,064
|
)
|
|
|
(332,030
|
)
|
Net loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.03
|
)
|
|
|
(0.15
|
)
|
|
|
(0.18
|
)
|
Diluted
|
|
|
(0.03
|
)
|
|
|
(0.15
|
)
|
|
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of cash flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(51,966
|
)
|
|
$
|
(280,064
|
)
|
|
$
|
(332,030
|
)
|
Changes in current assets and current liabilities – Deferred revenue
|
|
|
-
|
|
|
|
280,064
|
|
|
|
280,064
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
NOTE 3.
Summary of Significant Accounting Policies and Significant
Judgments and Estimates
The accounting policies that management believes are most critical to aid in fully understanding and evaluating
the reported financial results include the following:
Revenue Recognition
The Company’s engineering services revenue is
derived from performing funded research and development and technology development for commercial companies and government
agencies primarily under fixed-price contracts. On fixed-price contracts that are expected to exceed one year in duration,
revenue is recognized pursuant to the proportional performance method based upon the proportion of actual costs incurred to
date to the total estimated costs for the contract. The Company receives periodic progress payments based on contract
terms.
Equipment sales is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable,
delivery of the product and passage of title to the customer has occurred and the Company has determined that collection of the
fee is probable. Title to the product generally passes upon shipment of the product, as the products are shipped freight on board
shipping point, except for certain foreign shipments for which title passes upon entry of the product into the first port in the
buyer’s country. If the product requires installation to be performed by TCC, or other acceptance criteria exist, all revenue
related to the product is deferred and recognized upon completion of the installation or satisfaction of the customer acceptance
criteria. The Company provides for a warranty reserve at the time the product revenue is recognized.
As of December 30, 2017, billings in excess of revenues of $764,000
were recorded as deferred revenue in relation to contracts based on proportional performance. Deferred revenue represents the cumulative
difference between the amounts billed and revenue recognized for services performed.
All payments to TCC for work performed on contracts with agencies
of the U.S. government are subject to audit and adjustment by the Defense Contract Audit Agency, the U.S. Government Accountability
Office and other agencies. Adjustments are recognized in the period made. There have been no government audits in recent years
and the Company believes the result of such audits, should they occur, would not have a material adverse effect on its financial
position or results of operations. If the current estimates of total contract revenue and contract costs for a product development
contract indicate a loss, a provision for the entire loss on the contract is recorded. Any losses incurred in performing funded
research and development projects are recognized as funded research and development expenses.
Costs incurred in connection with funded research and development
are included in cost of revenue. 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. Product development costs consist primarily of costs
associated with personnel, outside contractor and engineering services, supplies and materials. Cost of product revenue includes
material, labor and overhead.
Revenue for the three months ended December 30, 2017 consists of $620,000 from engineering services and $217,000
from equipment sales, compared to $632,000 from equipment sales and none from engineering services for the three months ended December
30, 2016.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Inventories
The Company values its inventory at the lower of cost (based on the first-in, first-out method) to purchase
and/or manufacture and net realizable value (based on the estimated selling prices, less reasonably predictable costs of completion,
disposal, and transportation) of the inventory. The Company periodically reviews inventory quantities on hand and records a provision
for excess and/or obsolete inventory based primarily on the estimated forecast of product demand, as well as historical usage.
The Company evaluates the carrying value of inventory on a quarterly basis to determine whether the carrying value is in excess
of net realizable value. To the extent that net realizable value is less than the associated carrying values, inventory carrying
values are written down. In addition, the Company makes judgments as to future demand requirements and compares those with the
current or committed inventory levels. Reserves are established for inventory levels that exceed future demand. It is possible
that additional reserves above those already established may be required in the future if market conditions for the Company’s
products should deteriorate.
Accounts Receivable
Accounts receivable are reduced by an allowance for amounts
that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on a
specific analysis of accounts in the receivable portfolio and historical write-off experience. While management believes no
allowance is currently needed, if the financial condition of the Company’s customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be required, which would reduce net income.
In
addition, if the Company becomes aware of a customer’s inability to meet its financial obligations, a specific
write-off is recorded in that amount.
Accounting for Income Taxes
The preparation of the Company’s unaudited consolidated financial
statements requires it to estimate income taxes in each of the jurisdictions in which the Company operates, including those outside
the United States, which may subject the Company to certain risks that ordinarily would not be expected in the United States.
The income tax accounting process involves estimating actual current exposure together with assessing temporary differences resulting
from differing treatments of items, such as inventory obsolescence and stock-based compensation, for tax and accounting purposes.
These differences result in the recognition of deferred tax assets and liabilities. The Company must then record a valuation allowance
to reduce it’s deferred tax assets to the amount that is more likely than not to be realized.
Significant management judgment is required in determining the provision for income taxes, deferred tax assets and
liabilities, and any valuation allowance recorded against deferred tax assets. At December 30, 2017 and September 30, 2017, the
Company recorded a full valuation allowance against its net deferred tax assets of approximately $4.9 million, due to uncertainties
related to the Company’s ability to realize these assets. The valuation allowance is based on estimates of taxable income
by jurisdiction and the period over which deferred tax assets will be recoverable. In the event that actual results differ from
these estimates or the Company adjusts these estimates in future periods, it may need to adjust its valuation allowance, which
could materially impact the Company’s financial position and results of operations.
The Company follows FASB ASC 740-10,
Income
Taxes
, relative to uncertain tax positions. This standard provides detailed guidance for the financial statement recognition,
measurement and disclosure of uncertain tax positions recognized in the financial statements. Uncertain tax positions must meet
a recognition threshold of more-likely-than-not in order for those tax positions to be recognized in the financial statements.
Due to the nature of the Company’s
current operations in foreign countries (selling products into these countries with the assistance of local representatives), the
Company has not been subject to any foreign taxes in recent years, and it is not anticipated that it will be subject to foreign
taxes in the near future.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Fair Value Measurements
In determining fair value measurements, the Company follows the
provisions of FASB ASC 820,
Fair Value Measurements and Disclosures
. FASB ASC 820 defines fair value, establishes a framework
for measuring fair value under GAAP and enhances disclosures about fair value measurements. The topic provides a consistent definition
of fair value that focuses on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. The topic also prioritizes, within the measurement
of fair value, the use of market-based information over entity-specific information and establishes a three-level hierarchy for
fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date.
At December 30, 2017 and September 30, 2017, the carrying amounts of cash and cash equivalents, restricted cash, accounts receivable,
marketable securities and accounts payable approximate fair value because of their short-term nature.
The three-level hierarchy is as follows:
Level 1 -
|
Pricing inputs are quoted prices available in active markets for identical assets or liabilities as of the measurement date.
|
Level 2 -
|
Pricing inputs are quoted prices for similar assets or liabilities, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data.
|
Level 3 -
|
Pricing inputs are unobservable for the assets or liabilities, that is, inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability.
|
In certain cases, the inputs used to measure fair value may fall
into different levels of the fair value hierarchy. In such cases, an asset’s or liability’s level within the fair value
hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment
of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors
specific to the investment.
The Company’s held to maturity securities are comprised of
investments in municipal bonds. These securities represent ownership in individual bonds issued by municipalities within the United
States. The value of these securities is disclosed in Note 8. The Company’s available for sale securities consist of mutual
funds held in money market mutual funds in a brokerage account, which are classified as cash equivalents and measured at fair value.
The Company assesses the levels of the investments at each measurement
date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer
in accordance with the Company’s accounting policy regarding the recognition of transfers between levels of the fair value
hierarchy. During the three month period ended December 30, 2017 and the year ended September 30, 2017, there were no transfers
between levels.
The following table sets forth by level, within the fair value hierarchy,
the assets measured at fair value on a recurring basis as of December 30, 2017 and September 30, 2017, in accordance with the fair
value hierarchy as defined above. As of December 30, 2017 and September 30, 2017, the Company did not hold any assets classified
as Level 2 or Level 3.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
|
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
December 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
$
|
1,007,294
|
|
|
$
|
1,007,294
|
|
|
$
|
-
|
|
Total mutual funds
|
|
|
1,007,294
|
|
|
|
1,007,294
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,007,294
|
|
|
$
|
1,007,294
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
$
|
851,195
|
|
|
$
|
851,195
|
|
|
$
|
-
|
|
Total mutual funds
|
|
|
851,195
|
|
|
|
851,195
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
851,195
|
|
|
$
|
851,195
|
|
|
$
|
-
|
|
There were no assets or liabilities measured at fair value on a
nonrecurring basis at December 30, 2017 or September 30, 2017.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based
on the calculated fair value of the award. The expense is recognized over the participant’s requisite service period, generally
the vesting period of the award. The related excess tax benefit received upon the exercise of stock options, if any, is reflected
in the Company’s statement of cash flows as a financing activity. There were no excess tax benefits recorded during the three
month periods ended December 30, 2017 and December 31, 2016.
The Company uses the Black-Scholes option pricing model as the method
for determining the estimated fair value of its stock awards. The Black-Scholes method of valuation requires several assumptions:
(1) the expected term of the stock award, (2) the expected future stock price volatility over the expected term, (3) a risk-free
interest rate and (4) the expected dividend rate.
The expected term represents the expected period of time the Company
believes the options will be outstanding based on historical information. Estimates of expected future stock price volatility are
based on the historic volatility of the Company’s common stock, and the risk free interest rate is based on the U.S. Treasury
Note rate. The Company utilizes a forfeiture rate based on an analysis of its actual experience. The forfeiture rate is not material
to the calculation of share-based compensation. There were 500 options granted during the three month period ended December 30,
2017 and none during the three month period ended December 31, 2016.
The following table summarizes stock-based compensation costs included
in the Company’s consolidated statements of operations for the three month periods ended December 30, 2017 and December 31,
2016:
|
|
2017
|
|
2016
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
3,905
|
|
|
$
|
2,740
|
|
Product development expenses
|
|
|
272
|
|
|
|
272
|
|
Total share-based compensation expense before taxes
|
|
$
|
4,177
|
|
|
$
|
3,012
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
As of December 30, 2017, there was $51,651 of unrecognized compensation expense related to options outstanding.
The unrecognized compensation expense will be recognized over the remaining requisite service period. As of December 30, 2017,
the weighted average period over which the compensation expense is expected to be recognized is 3.4 years.
The Technical Communications Corporation 2005 Non-Statutory Stock Option Plan and 2010 Equity Incentive Plan
were outstanding at December 30, 2017. There are an aggregate of 600,000 shares authorized for issuance under these plans, of which
options to purchase 246,781 shares were outstanding at December 30, 2017. Vesting periods are at the discretion of the Board of
Directors and typically range between zero and five years. Options under these plans are granted with an exercise price equal to
fair market value at time of grant and have a term of 10 years from the date of grant.
As of December 30, 2017, there were 240,219 shares available for
grant under the 2010 Equity Incentive Plan. The 2005 Non-Statutory Stock Option Plan has expired and options are no longer available
for grant under such plan.
The following table summarizes stock option activity during the
first three months of fiscal 2018:
|
|
Options Outstanding
|
|
|
Number of Shares
|
|
|
|
Weighted Average
|
|
|
Unvested
|
|
Vested
|
|
Total
|
|
Weighted Average
Exercise Price
|
|
Contractual Life
(years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2017
|
|
|
34,200
|
|
|
|
212,081
|
|
|
|
246,281
|
|
|
$
|
8.36
|
|
|
3.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
500
|
|
|
|
-
|
|
|
|
500
|
|
|
|
4.85
|
|
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Cancellations/forfeitures
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 30, 2017
|
|
|
34,700
|
|
|
|
212,081
|
|
|
|
246,781
|
|
|
$
|
8.35
|
|
|
3.72
|
Information related to the stock options vested and expected to
vest as of December 30, 2017 is as follows:
Range of
Exercise Prices
|
|
Number of
Shares
|
|
Weighted-Average
Remaining
Contractual
Life (years)
|
|
Weighted
Average
Exercise Price
|
|
Exercisable
Number of
Shares
|
|
Exercisable
Weighted-
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
$2.01
|
-
|
$3.00
|
|
|
28,000
|
|
|
|
8.62
|
|
|
$
|
2.70
|
|
|
|
2,800
|
|
|
$
|
2.90
|
|
$4.01
|
-
|
$5.00
|
|
|
41,000
|
|
|
|
4.70
|
|
|
|
4.53
|
|
|
|
32,100
|
|
|
|
4.65
|
|
$5.01
|
-
|
$10.00
|
|
|
59,000
|
|
|
|
2.66
|
|
|
|
7.55
|
|
|
|
58,400
|
|
|
|
7.56
|
|
$10.01
|
-
|
$15.00
|
|
|
118,781
|
|
|
|
2.75
|
|
|
|
11.40
|
|
|
|
118,781
|
|
|
|
11.40
|
|
|
|
|
246,781
|
|
|
|
3.72
|
|
|
$
|
8.35
|
|
|
|
212,081
|
|
|
$
|
9.21
|
|
The aggregate intrinsic value of the Company’s “in-the-money”
outstanding and exercisable options as of December 30, 2017 and December 31, 2016 was $482,282 and $0, respectively. Nonvested
stock options are subject to the risk of forfeiture until the fulfillment of specified conditions.
New Accounting Pronouncements
ASU 2014-09, Revenue from Contracts with Customers, amended by ASU 2015-14 (Topic
606), ASU 2016-10, ASU 2016-11 and ASU 2016-12
In May 2014, the FASB and the International Accounting Standards
Board issued guidance on the principles for recognizing revenue and developing a common revenue standard for U.S. GAAP and International
Financial Reporting Standards that would: (1) remove inconsistencies and weaknesses in revenue requirements, (2) provide a more
robust framework for addressing revenue issues, (3) improve comparability of revenue recognition practices across entities, industries,
jurisdictions, and capital markets, (4) provide more useful information to users of financial statements through improved disclosure
requirements, and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity
must refer. This guidance is effective prospectively for annual reporting periods beginning after December 15, 2017, including
interim periods within that reporting period. The impact of this guidance will not have a material effect on the Company’s
consolidated financial statements. This guidance will become effective for the Company as of the beginning of the 2019 fiscal
year.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
ASU 2014-15, Presentation of Financial Statements — Going Concern (Subtopic
205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
In August 2014, the FASB updated U.S. GAAP to eliminate a critical
gap in existing standards regarding disclosure of uncertainties about an entity’s ability to continue as a going concern.
The new guidance clarifies the disclosures management must make in the organization’s financial statement footnotes when
management has substantial doubt about its ability to continue as a “going concern.” The Company adopted this standard
for its fiscal year ended September 30, 2017. The adoption of this standard requires the Company to evaluate its ability to meet
its obligations as they become due for a period of one year from the date that the financial statements are issued. As a result
of this requirement, management has determined that substantial doubt exists about the Company’s ability to continue as
a going concern. See further discussion in Note 1 to the financial statements.
ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory
In July 2015, the FASB issued guidance with respect to inventory
measurement. This ASU requires inventory to be measured at the lower of cost and net realizable value. The provisions of this ASU
are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendment
is required to be applied prospectively, and early adoption is permitted.
This guidance was
adopted by the Company in the first quarter of its 2018 fiscal year; the adoption of this standard did not have a material impact
on the financial statements.
ASU No. 2016-02, Leases
In February 2016, the FASB issued guidance with respect to leases. This ASU requires entities to recognize
right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance
offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required
to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to
assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods
beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective
adoption, with early adoption permitted. The Company is currently evaluating the potential impact this standard will have on the
financial statements and related disclosure.
ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued guidance that simplifies several aspects of the accounting for employee share
based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and
statutory tax withholding requirements, as well as classification in the statement of cash flows. The new guidance is effective
for annual periods beginning after December 15, 2016, including interim periods within those fiscal years.
This
guidance was adopted by the Company in the first quarter of its 2018 fiscal year; the adoption of this standard did not have a
material impact on the financial statements.
ASU No. 2016-18, Restricted Cash Presentation on Statement of
Cash Flows
In November 2016, the FASB issued guidance
in regards to additional disclosure surrounding restricted cash activity. The amendments in this update require that a statement
of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted
cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents
should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown
on the statement of cash flows. The new guidance is effective for annual periods beginning after December 15, 2017, including interim
periods within those fiscal years. The Company has elected to early adopt effective October 1, 2017. Accordingly, restricted cash
has been grouped with cash and cash equivalents on the statements of cash flows and results for the three month period ended December
31, 2016 have been retrospectively reclassified.
Other recent accounting pronouncements were issued by the FASB (including
its Emerging Issues Task Force) and the SEC during fiscal 2017 but such pronouncements are not believed by management
to have a material impact on the Company’s present or future financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
NOTE 4.
Inventories
Inventories consisted of the following:
|
|
December 30, 2017
|
|
September 30, 2017
(As restated,
See Note 2)
|
|
|
|
|
|
Finished goods
|
|
$
|
8,015
|
|
|
$
|
20,759
|
|
Work in process
|
|
|
264,166
|
|
|
|
383,216
|
|
Raw materials
|
|
|
1,130,307
|
|
|
|
954,369
|
|
|
|
$
|
1,402,488
|
|
|
$
|
1,358,344
|
|
NOTE 5.
Income Taxes
The Company has not recorded an income tax benefit on its net loss
for the three month periods ended December 30, 2017 and December 31, 2016 due to its uncertain realizability. During previous fiscal
years, the Company recorded a valuation allowance for the full amount of its net deferred tax assets since it could not predict
the realization of these assets.
On December 22, 2017, the Tax Cuts and
Jobs Act (the “Act”) was signed into law by the President of the United States. The Act includes a number of changes,
including the lowering of the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018. The Company has determined and
completed the accounting for certain income tax effects of the Act in applying FASB ASC 740 to the current reporting period. As
the Company records a valuation allowance for its entire deferred income tax asset, there was no impact to the reported amounts
in these unaudited consolidated financial statements as a result of the Act.
NOTE 6.
Loss Per Share
Outstanding potentially dilutive stock options, which were not included
in the net loss per share amounts as their effect would have been anti-dilutive, were as follows: 246,781 shares at December 30,
2017 and 242,281 shares at December 31, 2016.
NOTE 7.
Major Customers and Export Revenue
During the three months ended December 30, 2017, the Company had
one customer that represented 74% of net revenue as compared to the three months ended December 31, 2016, during which two customers
represented 96% (84% and 12%, respectively) of net revenue.
A breakdown of foreign and domestic revenue for first quarters of fiscal 2018 and 2017 is as follows:
|
|
2018
|
|
2017
|
|
|
|
|
|
Domestic
|
|
$
|
707,471
|
|
|
$
|
531,789
|
|
Foreign
|
|
|
129,058
|
|
|
|
99,832
|
|
Total net revenue
|
|
$
|
836,529
|
|
|
$
|
631,621
|
|
The Company sold products into four countries during the three
month period ended December 30, 2017 and three countries during the three month period ended December 31, 2016. 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 the Conpany’s foreign
revenues by country as a percentage of total foreign revenue for the first quarters of fiscal 2018 and 2017.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
|
|
Fiscal Year
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Philippines
|
|
|
54
|
%
|
|
|
-
|
|
Jordan
|
|
|
10
|
%
|
|
|
78
|
%
|
Taiwan
|
|
|
-
|
|
|
|
16
|
%
|
Saudi Arabia
|
|
|
27
|
%
|
|
|
6
|
%
|
Egypt
|
|
|
9
|
%
|
|
|
-
|
|
A summary of foreign revenue, as a percentage of total foreign revenue by geographic
area, for the first quarters of fiscal 2018 and 2017 is as follows:
|
|
Fiscal Year
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Mid-East and Africa
|
|
|
46
|
%
|
|
|
84
|
%
|
Far East
|
|
|
54
|
%
|
|
|
16
|
%
|
NOTE 8.
Cash Equivalents and Marketable Securities
The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents. Cash equivalents are invested in money market mutual funds. Money market
mutual funds held in a brokerage account are considered available for sale. The Company accounts for marketable securities in accordance
with FASB ASC 320,
Investments—Debt and Equity Securities.
All marketable securities must be classified as one of
the following: held to maturity, available for sale, or trading. The Company classifies its marketable securities as either available
for sale or held to maturity.
Available for sale securities are carried at fair value, with unrealized
holding gains and losses reported in stockholders’ equity as a separate component of accumulated other comprehensive income
(loss). Held to maturity securities are carried at amortized cost. The cost of securities sold is determined based on the specific
identification method. Realized gains and losses, and declines in value judged to be other than temporary, are included in investment
income.
As of December 30, 2017, cash equivalents consisted of the following:
|
|
|
|
Gross Unrealized
|
|
Estimated
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
$
|
1,007,294
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,007,294
|
|
As of December 30, 2017, held to maturity securities consisted of the following:
|
|
Cost
|
|
Accrued
Interest
|
|
Amortization
Bond Premium
|
|
Amortized
Cost
|
|
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
234,273
|
|
|
$
|
3,694
|
|
|
$
|
33,286
|
|
|
$
|
204,681
|
|
|
$
|
(101
|
)
|
|
$
|
204,580
|
|
As of September 30, 2017, cash equivalents consisted of the following:
|
|
|
|
Accrued
|
|
Gross Unrealized
|
|
Estimated
|
|
|
Cost
|
|
Interest
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
$
|
851,195
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
851,195
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
As of September 30, 2017, held to maturity securities consisted of the following:
|
|
Cost
|
|
Accrued
Interest
|
|
Amortization
Bond Premium
|
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
412,366
|
|
|
$
|
6,986
|
|
|
$
|
59,099
|
|
|
$
|
360,253
|
|
|
$
|
216
|
|
|
$
|
360,469
|
|
NOTE 9.
Cost Method Investment
On October 30, 2014, the Company made an investment of $275,000
to purchase 11,000 shares of common stock of PulsedLight, Inc., an early stage start-up company located in Bend, Oregon. The investment
represented a 10.8% ownership stake in the company at the time of purchase and was accounted for utilizing the cost method of accounting.
On January 12, 2016, the Company entered into an agreement to sell its shares in PulsedLight. The net proceeds to the Company after
closing costs and certain liabilities amounted to $737,283, of which the Company received $661,466 at closing and of which $75,817
was deposited in an escrow account in accordance with the terms of the sale that required 10% of the proceeds to be held in escrow
for one year. The escrow balance as of December 31, 2016 is included in other current assets within the accompanying consolidated
balance sheet. The escrow balance was received by the Company in January 2017.
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 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 Annual Reports on Form 10-K as filed with the SEC.
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 30, 2017, nor have we adopted any accounting policy that has
or will have a material impact on our consolidated financial statements. For further discussion of our accounting policies
see Note 3,
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/A and the Notes to Consolidated Financial Statements in
our Annual Report on Form 10-K for the fiscal year ended September 30, 2017 (restated) as filed with the SEC.
Results of Operations
Three Months ended December 30, 2017 compared to Three Months ended December 31,
2016
Net Total Net Revenue
Total net revenue for the quarter ended December 30, 2017 was $837,000, compared to $632,000 for the quarter
ended December 31, 2016, an increase of 32%. Net revenue for the first quarter of fiscal 2018 consisted of $708,000, or 85%, from
domestic sources and $129,000, or 15%, from international customers as compared to the same period in fiscal 2017, during which
net revenue consisted of $532,000, or 84%, from domestic sources and $100,000, or 16%, from international customers.
Foreign sales consisted of shipments to four countries during the
quarter ended December 30, 2017 and three countries during the quarter ended December 31, 2016. A sale is attributed to a foreign
country based on the location of the contracting party. Domestic revenue may include the sale of products shipped through domestic
resellers or manufacturers to international destinations. The table below summarizes our principal foreign sales by country during
the first quarters of fiscal 2018 and 2017:
|
|
2018
|
|
2017
|
|
|
|
|
|
Philippines
|
|
$
|
70,000
|
|
|
$
|
-
|
|
Jordan
|
|
|
13,000
|
|
|
|
78,000
|
|
Taiwan
|
|
|
-
|
|
|
|
16,000
|
|
Saudi Arabia
|
|
|
34,000
|
|
|
|
6,000
|
|
Egypt
|
|
|
12,000
|
|
|
|
-
|
|
|
|
$
|
129,000
|
|
|
$
|
100,000
|
|
For the three months ended December 30, 2017, revenue was derived primarily from sales of our engineering
services amounting to $620,000 and shipments of our narrowband radio encryptors to a customer in the Far East amounting to $70,000
and to a domestic customer for deployment into Afghanistan amounting to $57,000. Other individually insignificant revenues totaled
$90,000 for the three months ended December 31, 2017.
For the three months ended December 31, 2016, product sales revenue
was derived primarily from shipments of our narrowband radio encryptors to a domestic customer for deployment into Afghanistan
amounting to $531,000. The Company made shipments of our secure telephone and fax encryptor to an international customer in Jordan
amounting to $78,000 during the quarter. We also sold our internet protocol encryptor to a customer in Taiwan amounting to $16,000.
Gross Profit
Gross profit for the first quarter of fiscal 2018 was $292,000,
compared to gross profit of $443,000 for the same period of fiscal 2017, a decrease of 34%. Gross profit expressed as a percentage
of total net revenue was 35% for the first quarter of fiscal 2018 compared to 70% for the same period in fiscal 2017, which was
due to the lower margin engineering services revenue in fiscal 2018.
Operating Costs and Expenses
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first quarter of fiscal 2018 were $460,000, compared to $646,000
for the same quarter in fiscal 2017. This decrease of $186,000, or 29%, was attributable to a decrease in general and administrative
expenses of $34,000 and a decrease in selling and marketing expenses of $152,000 during the three months ended December 30, 2017.
The decrease in general and administrative
expenses for the three months ended December 30, 2017 was primarily attributable to decreases in personnel-related costs of $28,000.
The decrease in selling and marketing expenses for the three months
ended December 30, 2017 was primarily attributable to decreases in product demonstration costs of $125,000, product evaluation
costs of $18,000 and bid and proposal costs of $14,000.
Product Development Costs
Product development costs for the quarter ended December 30, 2017
were $166,000, compared to $494,000 for the quarter ended December 31, 2016. This decrease of $328,000, or 66%, was attributable
to an increase in billable engineering services contracts during the first quarter of fiscal 2018 that resulted in decreased product
development costs of $292,000 and reduced personnel related costs of $45,000. These decreased costs were partially offset by an
increase in engineering project costs of $11,000 during the period.
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.
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 approximately $620,000 of billable engineering services revenue generated during
the first quarter of fiscal 2018 and none in the first quarter of fiscal 2017.
Net Loss
The Company incurred a net loss of $332,000 for the first quarter
of fiscal 2018, compared to a net loss of $695,000 for the same period of fiscal 2017. This decrease in net loss is primarily attributable
to a 45% decrease in operating expenses, which was partially offset by a 34% decrease in gross profit during the first quarter
of fiscal 2018.
The effects of inflation and changing costs have not had a significant impact on revenue or earnings in recent
years. As of December 30, 2017, none of the Company’s monetary assets or liabilities was subject to foreign exchange risks.
The Company usually includes an inflation factor in its pricing when negotiating multi-year contracts with customers.
Liquidity and Capital Resources
Our cash, cash equivalents and marketable
securities (excluding restricted cash) at December 30, 2017 totaled $1,876,000 and we continue to have no debt.
Liquidity and
Ability to Continue as a Going Concern
The Company has
suffered recurring losses from operations and had an accumulated deficit of $1,639,000 at December 30, 2017. These factors
raise substantial doubt about the Company's ability to continue as a going concern within one year from the issuance date of
the unaudited consolidated financial statements included in this Quarterly Report. The unaudited consolidated financial
statements included herein do not include any adjustments to reflect the substantial doubt about the Company’s ability
to continue as a going concern.
We
anticipate that our principal sources of liquidity will only be sufficient to fund our activities to January
2020. 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.
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. In addition, we are also pursuing raising capital through equity or debt arrangements.
Although we believe our ability to secure such new business or raise new capital is likely, we cannot provide assurances we will
be able to do so.
Should
we be unsuccessful in these efforts, we would then 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 three month periods ended (unaudited):
|
|
December 30,
2017
|
|
December 31,
2016
|
|
|
|
|
|
Net loss
|
|
$
|
(332,000
|
)
|
|
$
|
(695,000
|
)
|
Changes not affecting cash
|
|
|
23,000
|
|
|
|
51,000
|
|
Changes in assets and liabilities
|
|
|
547,000
|
|
|
|
(536,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities
|
|
|
238,000
|
|
|
|
(1,180,000
|
)
|
Cash provided by (used in) investing activities
|
|
|
150,000
|
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
388,000
|
|
|
|
(1,183,000
|
)
|
Cash, cash equivalents and restricted cash - beginning of period
|
|
|
1,284,000
|
|
|
|
2,589,000
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash - end of period
|
|
$
|
1,672,000
|
|
|
$
|
1,406,000
|
|
Operating Activities
The Company used approximately $1,418,000 less cash for operating
activities in the first three months of fiscal 2018 compared to the same period in fiscal 2017. This decrease was primarily attributable
to a decrease in net loss and a decrease in accounts receivable during the three month period ended December 30, 2017.
Investing Activities
Cash provided by investing activities during the first three months
of fiscal 2018 increased by approximately $153,000 compared to the same period in fiscal 2017. This change is primarily attributable
to the maturity of short-term investments in marketable securities during the first three months of 2018.
Company Facilities
On April 1, 2014,
the Company entered into a new lease for its current facilities. The leased property is located at 100 Domino Drive, Concord, MA.
The Company has been a tenant in this space since 1983. This is the Company’s only facility and houses all manufacturing,
research and development, and corporate operations. The initial term of the lease is 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. Rent expense for each of the
three month periods ended December 30, 2017 and December 31, 2016 was $43,000.
Backlog
Backlog at December 30, 2017 and September 30, 2017 amounted to
$965,000 and $1,975,000, respectively. The orders in backlog at December 30, 2017 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 guarantees
Certain foreign customers require the Company
to guarantee bid bonds and performance of products sold. These guarantees typically take the form of standby letters of credit.
Guarantees are generally required in amounts of 5% to 10% of the purchase price and last in duration from three months to one year.
At December 30, 2017 and September 30, 2017, the Company had two outstanding letters of credit in the amounts of $12,000 and $1,000.
These collateralized bank accounts represent cash which has restrictions on its use.
Research and development
Research and development efforts are undertaken by the Company primarily
on its own initiative. In order to compete successfully, the Company must improve existing products and develop new products, as
well as attract and retain qualified personnel. No assurances can be given that the Company will be able to hire and train such
technical management and sales personnel or successfully improve and develop its products.
During the three months ended December 30, 2017 and December 31,
2016, the Company spent $166,000 and $494,000, respectively, on internal product development. The Company also spent $367,000
on billable development efforts during the first three months of fiscal 2018. There were no billable development efforts during
the first quarter of fiscal 2017. The Company’s total product development costs during the first quarter of fiscal 2018
were 10% higher than the same period in fiscal 2017 but in line with its planned commitment to research and development, and reflected
the costs of custom development, product capability enhancements and production readiness. It is expected that development expenses
for fiscal 2018 will be consistent with fiscal 2017 levels.
It is anticipated that cash from operations will fund our near-term research and development and marketing
activities through at least the end of calendar year 2019. 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 in fiscal 2018.
New Accounting Pronouncements
ASU 2014-09, Revenue from Contracts with Customers, amended by
ASU 2015-14 (Topic 606), ASU 2016-10, ASU 2016-11 and ASU 2016-12
In May 2014, the FASB and the International Accounting Standards Board issued guidance on the principles
for recognizing revenue and developing a common revenue standard for U.S. GAAP and International Financial Reporting Standards
that would: (1) remove inconsistencies and weaknesses in revenue requirements, (2) provide a more robust framework for addressing
revenue issues, (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital
markets, (4) provide more useful information to users of financial statements through improved disclosure requirements, and (5)
simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. This guidance
is effective prospectively for annual reporting periods beginning after December 15, 2017, including interim periods within that
reporting period. The impact of this guidance was determined to be immaterial on the Company’s consolidated financial statements.
This guidance will become effective for the Company as of the beginning of our 2019 fiscal year.
ASU No. 2015-11, Inventory (Topic 330): Simplifying
the Measurement of Inventory
In July
2015, the FASB issued guidance with respect to inventory measurement. This ASU requires inventory to be measured at the lower of
cost and net realizable value. The provisions of this ASU are effective for fiscal years beginning after December 15, 2016, including
interim periods within those fiscal years. The amendment is required to be applied prospectively, and early adoption is permitted.
This guidance was adopted by the Company in the first quarter of fiscal 2018; the adoption of this standard did not have a material
impact on our financial statements.
ASU
No. 2016-02, Leases
In February
2016, the FASB issued guidance with respect to leases. This ASU requires entities
to recognize right-of-use assets and lease
liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting
guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and
quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and
uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December
15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption
permitted. We are currently evaluating the potential impact this standard will have on our financial statements and related disclosure.
ASU No. 2016-09, Improvements to Employee
Share-Based Payment Accounting
In March 2016, the FASB issued guidance that
simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities,
including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in
the statement of cash flows. The new guidance is effective for annual periods beginning after December 15, 2016, including interim
periods within those fiscal years.
This guidance was adopted by the Company in the first
quarter of fiscal 2018; the adoption of this standard did not have a material impact on our financial statements.
ASU No. 2016-18, Restricted Cash Presentation on Statement of
Cash Flows
In November 2016,
the FASB issued guidance in regards to additional disclosure surrounding restricted cash activity. The amendments in this update
require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash
and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the statement of cash flows. The new guidance is effective for annual periods beginning after
December 15, 2017, including interim periods within those fiscal years. The Company has elected to early adopt effective October
1, 2017. Accordingly, restricted cash has been grouped with cash and cash equivalents on the statements of cash flows and results
for the three month period ended December 31, 2016 have been retrospectively reclassified.
Other
recent accounting pronouncements were issued by the FASB (including its Emerging Issues Task Force), and the SEC during the first
quarter of our 2018 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.