UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark One)

 

X   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
    For the quarterly period ended December 26, 2020
     
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
    For the transition period from ________________ to ________________

 

Commission File Number: 001-34816

 

TECHNICAL COMMUNICATIONS CORPORATION

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. 1,850,403 shares of Common Stock, $0.10 par value, outstanding as of February 5, 2021.

 

 

 

 

INDEX

 

    Page
     
     
PART I Financial Information  
     
Item 1. Financial Statements:  
     
  Consolidated Balance Sheets as of December 26, 2020 (unaudited) and September 26, 2020 1
     
  Consolidated Statements of Operations for the Three Months ended December 26, 2020 and December 28, 2019 (unaudited) 2
     
  Consolidated Statements of Cash Flows for the Three Months ended December 26, 2020 and December 28, 2019 (unaudited) 3
     
  Consolidated Statements of Changes in Stockholders' Equity for the Three Months ended December 26, 2020 and December 28, 2019 (unaudited) 4
     
  Notes to Unaudited Consolidated Financial Statements 5
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
     
Item 4. Controls and Procedures 17
     
PART II Other Information  
     
Item 1. Legal Proceedings 18
     
Item 1A. Risk Factors 18
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
     
Item 3. Defaults Upon Senior Securities 18
     
Item 4. Mine Safety Disclosures 18
     
Item 5. Other Information 18
     
Item 6. Exhibits 18
     
  Signatures 19

 

 

 

 

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY

Consolidated Balance Sheets

 

    December 26, 2020   September 26, 2020
Assets   (Unaudited)    
Current Assets:                
Cash and cash equivalents   $ 666,383     $ 1,513,852  
Accounts receivable - trade     147,930       134,412  
Inventories, net     965,618       902,051  
Other current assets     129,074       153,483  
Total current assets     1,909,005       2,703,798  
                 
Equipment and leasehold improvements     4,595,152       4,595,152  
Less: accumulated depreciation and amortization     (4,580,183 )     (4,576,423 )
Equipment and leasehold improvements, net     14,969       18,729  
                 
Operating lease right-of-use asset     521,237       558,767  
                 
Total Assets   $ 2,445,211     $ 3,281,294  
                 
Liabilities and Stockholders’ Equity                
Current Liabilities:                
Current operating lease liabilities   $ 153,680     $ 152,248  
Current portion of long-term debt     992       -  
Accounts payable     178,580       66,154  
Customer deposits     227,470       161,953  
Deferred income     -       474,400  
Accrued liabilities:                
Accrued compensation and related expenses     201,588       250,750  
Accrued commissions     114,094       229,314  
Other current liabilities     16,064       25,531  
Total current liabilities     892,468       1,360,350  
                 
Long-term operating lease liability     367,558       406,519  
Note payable – long-term (Note 7)     149,008       150,000  
                 
Total Liabilities     1,409,034       1,916,869  
                 
Commitments and contingencies                
                 
Stockholders’ Equity:                
Common stock, par value $0.10 per share; 7,000,000 shares authorized; 1,850,403 shares issued and outstanding at December 26, 2020 and September 26, 2020     185,041       185,041  
Additional paid-in capital     4,258,828       4,244,965  
Accumulated deficit     (3,407,692 )     (3,065,581 )
Total stockholders’ equity     1,036,177       1,364,425  
                 
Total Liabilities and Stockholders’ Equity   $ 2,445,211     $ 3,281,294  

 

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 26, 2020   December 28, 2019
         
Net revenue   $ 166,925     $ 665,925  
Cost of revenue     43,627       357,074  
Gross profit     123,298       308,851  
                 
Operating expenses:                
Selling, general and administrative     545,221       583,348  
Product development     392,427       205,394  
Total operating expenses     937,648       788,742  
                 
Operating loss     (814,350 )     (479,891 )
                 
Other income (expense):                
Grant income     474,400       -  
Interest income     2       219  
Interest expense     (2,163 )     (802 )
Total other income (expense)     472,239       (583 )
                 
                 
Net loss   $ (342,111 )   $ (480,474 )
                 
Net loss per common share:                
Basic   $ (0.19 )   $ (0.26 )
Diluted   $ (0.19 )   $ (0.26 )
                 
Weighted average shares:                
Basic     1,850,403       1,850,403  
Diluted     1,850,403       1,850,403  

 

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

  Page 2  

 

 

 

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

 

    Three Months Ended
    December 26, 2020   December 28, 2019
Operating Activities:                
Net loss   $ (342,111 )   $ (480,474 )
                 
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     3,760       5,842  
Stock-based compensation     13,863       12,775  
                 
Changes in certain operating assets and liabilities:                
Accounts receivable     (13,518 )     (144,302 )
Inventories     (63,567 )     14,006  
Other current assets     24,409       17,937  
Customer deposits     65,517       106,439  
Deferred income     (474,400 )     -  
Accounts payable and other accrued liabilities     (61,422 )     (377,787 )
                 
Net cash used in operating activities     (847,469 )     (845,564 )
                 
                 
Cash and cash equivalents at beginning of the period     1,513,852       1,593,395  
                 
Cash and cash equivalents at end of the period   $ 666,383     $ 747,831  
                 
Supplemental Disclosures:                
                 
Income taxes paid   $ -     $ 912  

 

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

 

  Page 3  

 

 

 

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders' Equity

(Unaudited)

 

    Three Months Ended
    December 26, 2020   December 28, 2019
         
Shares of common stock:                
Beginning balance     1,850,403       1,850,403  
                 
Ending balance     1,850,403       1,850,403  
                 
Common stock at par value:                
Beginning balance   $ 185,041     $ 185,041  
                 
Ending balance   $ 185,041     $ 185,041  
                 
Additional paid-in capital:                
Beginning balance   $ 4,244,965     $ 4,189,439  
Stock-based compensation     13,863       12,775  
                 
Ending balance   $ 4,258,828     $ 4,202,214  
                 
Accumulated deficit:                
Beginning balance   $ (3,065,581 )   $ (2,154,931 )
Net loss     (342,111 )     (480,474 )
                 
Ending balance     (3,407,692 )     (2,635,405 )
                 
                 
Total stockholders’ equity   $ 1,036,177     $ 1,751,850  

 

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

 

 

  Page 4  

 

 

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 sometimes collectively referred to herein 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 over 115 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 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 ending September 25, 2021.

 

The September 26, 2020 consolidated balance sheet contained herein was derived from the Company’s audited consolidated balance sheet at September 26, 2020 as contained in the Company’s Annual Report on Form 10-K for the fiscal year then ended as filed with the U.S. Securities and Exchange Commission (“SEC”). Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as allowed by SEC rules and regulations. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the fiscal year ended September 26, 2020 included in its Annual Report on Form 10-K as filed with the SEC (the “2020 Annual Report”).

  

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 CodificationTM - sometimes referred to as the Codification or ASC.

 

Liquidity and Ability to Continue as a Going Concern

 

For the quarter ended December 26, 2020, the Company generated a net loss of $342,000. 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 $3,408,000 at December 26, 2020. 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.

 

In December 2020, the Company implemented a partial furlough plan for the majority of salaried employees. This plan reduced the workweek to 24 hours and salaries have been reduced commensurately. With this furlough plan in place we anticipate that our principal sources of liquidity will be sufficient to fund our activities to June 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.

 

  Page 5  

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

 

In order to have sufficient capital resources to fund operations, the Company has been working diligently to secure several large orders with new and existing customers. The receipt of these orders has been significantly delayed and will continue to be difficult to predict due to the impact of the COVID-19 pandemic on our customers, as a result of their operations being reduced or shut down. TCC has been able to maintain its operations during this sustained period of disruption, but a continuation of the disruption in either our customers’ operations or those of the Company will continue to have a material adverse impact on sales activity and revenue.

 

Since the start of the pandemic, the Company has been able to secure capital in the form of debt financing to assist with funding its operations. On February 1, 2021, the Company received a loan from bankHometown, under the U.S. Small Business Administration's Paycheck Protection Program as authorized under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”). The loan, evidenced by a promissory note, is in the principal amount of $474,400 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%. Loan payments will be deferred for borrowers who apply for loan forgiveness until 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 (either 8 weeks or 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 one year from the date of issuance. Also in fiscal year 2020 the Company received a $474,400 PPP loan under the Coronavirus Aid, Relief and Economic Security Act. The entire PPP loan amount was forgiven by the SBA on January 11, 2021.

 

The Company is considering raising capital through equity or debt arrangements in addition to the funding received from the SBA, although we cannot provide assurances we will be able to secure such new funding, especially in light of the tightening of the credit markets and volatility of the capital markets as a result of the coronavirus. Moreover, the Company’s common stock was delisted from the NASDAQ Capital Market effective January 25, 2021; while TCC expects its common stock to be quoted on the OTC Bulletin Board, the change in listing may have a negative impact on the liquidity of the stock and the Company’s ability to raise capital through offerings of its equity securities.

 

Should the Company be unsuccessful in these efforts, it would be forced to implement headcount reductions, additional employee furloughs and/or reduced hours for certain employees, or cease operations completely.

 

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 TCC and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The discussion and analysis of the Company’s financial condition and results of operations are based on the 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.

 

  Page 6  

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

 

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.   Summary of Significant Accounting Policies and Significant Judgments and Estimates

 

The Company’s significant accounting policies are described in “Note 2. Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in its 2020 Annual Report and are supplemented by the notes included in this Quarterly Report on Form 10-Q. The financial statements and related notes included in this Quarterly Report should be read in conjunction with the Company’s 2020 Annual Report.

 

NOTE 3.   Stock-Based Compensation

 

The following table summarizes stock-based compensation costs included in the Company’s consolidated statements of operations for the first quarter of each of fiscal 2021 and 2020:

 

    2021   2020
         
Selling, general and administrative expenses   $ 11,373     $ 11,082  
Product development expenses     2,490       1,693  
Total share-based compensation expense before taxes   $ 13,863     $ 12,775  

 

As of December 26, 2020, there was $138,434 of unrecognized compensation expense related to options outstanding. The unrecognized compensation expense will be recognized over the remaining requisite service period. As of December 26, 2020, the weighted average period over which the compensation expense is expected to be recognized is 3.17 years.

 

The Technical Communications Corporation 2005 Non-Statutory Stock Option Plan and 2010 Equity Incentive Plan had expired as of December 26, 2020 and options are no longer available for grant thereunder, although vested, unexercised options under such plans remain outstanding. There were an aggregate of 600,000 shares authorized for issuance under these plans, of which options to purchase 154,400 shares were outstanding at December 26, 2020. Vesting periods were at the discretion of the Board of Directors and typically ranged between zero and five years. Options under these plans were granted with an exercise price equal to fair value at time of grant and have a term of ten years from the date of grant.

 

The following table summarizes stock option activity during the first three months of fiscal 2021:

 

    Options Outstanding
    Number of Shares   Weighted Average   Weighted Average
Contractual Life
    Unvested   Vested   Total   Exercise Price   (in years)
                     
Outstanding, September 26, 2020     71,600       86,300       157,900     $ 4.54       6.54  
Grants     -       -       -       -       -  
Vested     -       -       -                  
Cancellations/forfeitures     -       (3,500 )     (3,500 )     11.84          
                                         
Outstanding, December 26, 2020     71,600       82,800       154,400     $ 4.38       6.43  

 

  Page 7  

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

 

Information related to the stock options vested and expected to vest as of December 26, 2020 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
                     
$1.01   -   $2.00       20,000       8.94     $ 1.87       4,000     $ 1.87  
$2.01   -   $3.00       34,300       7.16       2.61       14,000       2.72  
$3.01   -   $4.00       46,500       8.29       3.61       17,700       3.63  
$4.01   -   $5.00       16,600       3.49       4.34       16,400       4.33  
$5.01   -   $10.00       30,000       3.85       7.92       23,700       8.10  
$10.01   -   $15.00       7,000       1.35       10.20       7,000       10.20  
                154,400       6.43     $ 4.38       82,800     $ 5.36  

 

The aggregate intrinsic value of the Company’s “in-the-money” outstanding and exercisable options as of December 26, 2020 and December 28, 2019 was $0 and $33,758, respectively. Nonvested stock options are subject to the risk of forfeiture until the fulfillment of specified conditions.

 

NOTE 4.   Revenue

 

The following table presents the Company’s revenues disaggregated by revenue type for the first three months of fiscal 2021 and 2020.

 

Revenue type:

    2021   2020
         
Engineering services   $ -     $ 408,824  
Equipment sales     166,925       257,101  
Total   $ 166,925     $ 665,925  

 

Engineering services revenue consists of funded research and development and technology development for commercial companies and government agencies primarily under fixed-price contracts. The Company also derives revenue from developing and designing custom cryptographic solutions for customers’ unique secure voice, data and video communications requirements and integrating such solutions into existing systems. These contracts can vary but typically call for fixed monthly payments or payments due upon meeting certain milestones. Customers are billed monthly or upon achieving the milestone and payments are due on a net basis after the billing date.

 

Equipment sales revenue consists of sales of communications security equipment for voice, data, facsimile and video networks for military, government and corporate/industrial applications. Equipment sales are billed to the customer upon shipment with typical payment terms requiring a down payment at the time of order with the balance due prior to shipment. For government and certain long term customers, we may grant net payment terms.

 

NOTE 5.   Inventories

 

Inventories consisted of the following:

   

December 26,

2020

 

September 26,

2020

Finished goods   $ 38,740     $ 75,289  
Work in process     167,611       176,980  
Raw materials     759,267       649,782  
Total inventory, net   $ 965,618     $ 902,051  

 

  Page 8  

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

 

NOTE 6.   Leases

 

The Company leases space from a third party for all manufacturing, research and development, and corporate operations. The initial term of the lease was for five years through March 31, 2019 at an annual rate of $171,000. In addition, the lease contains options to extend the lease for two and one-half years through September 30, 2021 and another two and one-half years through March 31, 2024 at an annual rate of $171,000. In September 2018, the Company exercised its option to extend the term of the lease through September 2021. The Company believes that it will exercise the remaining option to extend the lease, notice of which must be given by March 1, 2021. As such, the Company uses the extended lease term in its calculation of the lease liability and right-of-use asset. The Company classifies this lease as an operating lease with the costs recognized as a selling, general and administrative expense in its consolidated statements of operations. The lease expense for each of the three month periods ended December 26, 2020 and December 28, 2019 was $43,000.

 

The table below presents the maturity of the Company’s operating lease liability as of December 26, 2020:

 

January - September 2021   $ 127,953  
2022     170,604  
2023     170,604  
2024     85,302  
Total lease payments     554,463  
Less: Imputed interest     (33,225 )
Total lease liability   $ 521,238  

 

NOTE 7.   Debt

 

On April 17, 2020, the Company was granted a loan (the “Loan”) from bankHometown in the principal amount of $474,400 pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business.

 

The Loan, which was in the form of a Note dated April 17, 2020, was payable over eighteen months at an annual interest rate of 1% commencing on October 17, 2020 to the extent not forgiven. The Company used the entire Loan amount for qualifying expenses and the Loan was forgiven in its entirety on January 11, 2021. The AICPA and the SEC Office of the Chief Accountant have indicated a borrower may elected to account for a PPP loan as a government grant in substance by applying the guidance in IAS 20 by analogy if it is probable that it will meet both (a) the eligibility criteria for a PPP loan, and (b) the loan forgiveness criteria for all or substantially all of the PPP loan. The Company has elected to adopt this method of accounting for this PPP loan under IAS 20, and has recognized the loan forgiveness as grant income for the full amount of the Loan.

 

On August 10, 2020, the Company also was granted a loan (the “SBA Loan”) from the SBA in the principal amount of $150,000, pursuant to the Economic Injury Disaster Loan program. The SBA Loan, which is in the form of a Promissory Note dated August 10, 2020, is payable in monthly installments of $731, including principal and interest, over 30 years at an interest rate of 3.75% commencing on August 10, 2021. The SBA Loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The proceeds from this loan must be used solely as working capital to alleviate economic injury caused by the Covid-19 pandemic.

 

As part of the SBA Loan, the Company granted the SBA a continuing security interest in and to any and all “Collateral” to secure payment and performance of all debts, liabilities and obligations of the Company to the SBA under the SBA Loan. The Collateral includes all tangible and intangible personal property that the Company owns or acquires or creates immediately upon the acquisition or creation thereof, including, but not limited to: (a) inventory, (b) equipment, (c) instruments, including promissory notes, (d) chattel paper, including tangible chattel paper and electronic chattel paper, (e) documents, (f) letter of credit rights, (g) accounts, including health-care

  Page 9  

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

 

insurance receivables and credit card receivables, (h) deposit accounts, (i) commercial tort claims, (j) general intangibles, including payment intangibles and software, and (k) as-extracted collateral, in each case as such terms may from time to time be defined in the Uniform Commercial Code.

 

The aggregate amounts of principal maturities of long-term debt as of December 26, 2020 were as follows:

 

2021   $ 992  
2022     3,051  
2023     3,167  
2024     3,288  
2025     3,414  
Thereafter     136,088  
    $ 150,000  

 

NOTE 8.   Income Taxes

 

The Company has not recorded an income tax benefit on its net loss for the three month periods ended December 26, 2020 and December 28, 2019 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.

 

NOTE 9.   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: 154,400 shares at December 26, 2020 and 237,500 shares at December 28, 2019.

 

NOTE 10.   Major Customers and Export Sales

 

During the three months ended December 26, 2020, the Company had two customers that represented 100% (89% and 11%, respectively) of net revenue and at December 26, 2020 had one customer representing 100% of accounts receivable. During the three months ended December 28, 2019, the Company had two customers that represented 87% (61% and 26%, respectively) of net revenue and at December 28, 2019 had one customer representing 99% of accounts receivable.

 

A breakdown of foreign and domestic net revenue for first three months of fiscal 2021 and 2020 is as follows:

 

    2021   2020
         
Domestic   $ -     $ 492,209  
Foreign     166,925       173,716  
Total net revenue   $ 166,925     $ 665,925  

 

The Company sold products into two countries during the three month period ended December 26, 2020 and one country during the three month period ended December 28, 2019. 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 foreign revenues by country as a percentage of total foreign revenue for the first quarters of fiscal 2021 and 2020.

 

    2021   2020
         
Morocco     89 %     -  
Saudi Arabia     11 %     100 %

 

  Page 10  

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

 

A summary of foreign revenue, as a percentage of total foreign revenue by geographic area, for the first quarters of fiscal 2021 and 2020 is as follows:

 

    2021   2020
                 
Mid-East and Africa     100 %     100 %

 

NOTE 11.   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. Substantially all 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.

 

NOTE 12.   Subsequent Event

 

On February 1, 2021, the Company received a loan from bankHometown, under the U.S. Small Business Administration's Paycheck Protection Program as authorized under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”). The loan, evidenced by a promissory note, is in the principal amount of $474,400 and all or a portion of the loan is expected to be forgiven under the provisions of the Economic Aid Act. Any amount of the loan not forgiven will be paid back over five years at an interest rate of 1%. Loan payments will be deferred for borrowers who apply for loan forgiveness until 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 (either 8 weeks or 24 weeks).

 

 

 

 

  Page 11  

 

 

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

 

Forward-Looking Statements

 

Certain statements contained herein or as may otherwise be incorporated by reference herein that are not purely historical constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include but are not limited to statements regarding anticipated operating results, future earnings, and the Company’s ability to achieve growth and profitability. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, including but not limited to the impact of the COVID-19 pandemic (including its duration and severity) and governmental actions in response thereto; the effect of foreign political unrest; domestic and foreign government policies and economic conditions; future changes in export laws or regulations; changes in technology; the ability to hire, retain and motivate technical, management and sales personnel; the risks associated with the technical feasibility and market acceptance of new products; changes in telecommunications protocols; the effects of changing costs, exchange rates and interest rates; and the Company's ability to secure adequate capital resources. Such risks, uncertainties and other factors could cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. For a more detailed discussion of the risks facing the Company, see the Company’s filings with the SEC, including its Annual Report on Form 10-K for the fiscal year ended September 26, 2020.

 

Overview

 

The Company designs, manufactures, markets and sells communications security equipment that utilizes various methods of encryption to protect the information being transmitted. Encryption is a technique for rendering information unintelligible, which information can then be reconstituted if the recipient possesses the right decryption “key”. The Company manufactures several standard secure communications products and also provides custom-designed, special-purpose secure communications products for both domestic and international customers. The Company’s products consist primarily of voice, data and facsimile encryptors. Revenue is generated principally from the sale of these products, which have traditionally been to foreign governments either through direct sale, pursuant to a U.S. government contract, or made as a sub-contractor to domestic corporations under contract with the U.S. government. We also sell these products to commercial entities and U.S. government agencies. We generate additional revenues from contract engineering services performed for certain government agencies, both domestic and foreign, and commercial entities.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

There have been no material changes in the Company’s critical accounting policies or critical accounting estimates since September 26, 2020 and we have not adopted any accounting policies that have had or will have a material impact on our consolidated financial statements. For further discussion of our accounting policies see Note 2, Summary of Significant Accounting Policies and Significant Judgments and Estimates in the Notes to Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q and the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended September 26, 2020 as filed with the SEC.

 

Results of Operations

 

Three Months ended December 26, 2020 compared to Three Months ended December 28, 2019

 

Net Revenue

 

Total net revenue for the quarter ended December 26, 2020 was $167,000, compared to $666,000 for the quarter ended December 28, 2019, a decrease of 75%. Revenue for the first quarter of fiscal 2021 consisted of 100% from international customers as compared to the same period in fiscal 2020, during which revenue consisted of $492,000, or 74%, from domestic sources and $174,000, or 26%, from international customers.

 

  Page 12  

 

Foreign sales consisted of a shipment to two countries during the quarter ended December 26, 2020 and one country during the quarter ended December 28, 2019. 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 2021 and 2020:

 

    2021   2020
         
Morocco   $ 148,000     $ -  
Saudi Arabia     19,000       174,000  
    $ 167,000     $ 174,000  

 

For the three months ended December 26, 2020, revenue was derived from sales of our DSP9000 radio ciphering equipment amounting to $148,000 and shipments of our internet protocol data encryptors amounting to $19,000.

 

For the three months ended December 28, 2019, revenue was derived primarily from sales of our engineering services amounting to $409,000 and shipments of our internet protocol data encryptors to a customer in a Middle Eastern country amounting to $172,000.

 

Gross Profit

 

Gross profit for the first quarter of fiscal 2021 was $123,000, compared to gross profit of $309,000 for the same period of fiscal 2020, a decrease of 60%. Gross profit expressed as a percentage of total net revenue was 74% for the first quarter of fiscal 2021 compared to 46% for the same period in fiscal 2020. This increase in gross profit expressed as a percentage of total net revenue was primarily due to the higher sales volume of higher margin equipment sales in fiscal 2021.

 

Operating Costs and Expenses

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the first quarter of fiscal 2021 were $545,000, compared to $583,000 for the same quarter in fiscal 2020. This decrease of $38,000, or 7%, was attributable to decreases in general and administrative expenses of $36,000 and decreases in selling and marketing expenses of $2,000 during the three months ended December 26, 2020.

 

The decrease in general and administrative expenses for the three months ended December 26, 2020 was primarily attributable to decreases in payroll and payroll related expenses of $13,000, audit and legal fees of $7,000, director fees of $10,000 and a decrease in insurance of $7,000. These decreases were partially offset by an increase in outside certification costs of $6,000 during the quarter.

 

The decrease in selling and marketing expenses for the three months ended December 26, 2020 was primarily attributable to decreases in third party sales support and outside commissions of $31,000 and product demonstration costs of $19,000. These decreases were offset by increases in engineering support of sales efforts of $41,000 and bid and proposal costs of $6,000 for the period.

 

Product Development Costs

 

Product development costs for the quarter ended December 26, 2020 were $392,000, compared to $205,000 for the quarter ended December 28, 2019. This increase of $187,000, or 91%, was attributable to a decrease in billable engineering services contracts during the first quarter of fiscal 2021 that resulted in increased product development costs of $217,000. These increased costs were partially offset by a decrease in payroll and payroll-related expenses of $46,000 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 no engineering services revenue generated during the first quarter of fiscal 2021 and $409,000 generated during the first quarter of fiscal 2020.

 

  Page 13  

 

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 $342,000 for the first quarter of fiscal 2021, compared to a net loss of $480,000 for the same period of fiscal 2020. This decrease in net loss is primarily attributable to grant income associated with the forgiveness of a Small Business Administration loan of $474,000 during the first quarter of fiscal 2021.

 

Liquidity and Capital Resources

 

Our cash and cash equivalents at December 26, 2020 totaled $666,000 and we had a SBA note payable in the amount of $150,000.

 

Liquidity and Ability to Continue as a Going Concern

 

For the quarter ended December 26, 2020, the Company generated a net loss of $342,000. 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 $3,408,000 at December 26, 2020. 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.

 

In December 2020 the Company implemented a partial furlough plan for the majority of salaried employees. This plan reduced the workweek to 24 hours and salaries have been reduced commensurately. With this furlough plan in place we anticipate that our principal sources of liquidity will be sufficient to fund our activities to June 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.

 

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. On February 1, 2021, the Company received a loan from bankHometown, under the U.S. Small Business Administration's Paycheck Protection Program as authorized under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”). The loan, evidenced by a promissory note, is in the principal amount of $474,400 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%. Loan payments will be deferred for borrowers who apply for loan forgiveness until 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 (either 8 weeks or 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.

 

  Page 14  

 

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 one year from the date of issuance. Also in fiscal year 2020, the Company received a $474,400 PPP loan under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The entire PPP loan amount was forgiven by the SBA on January 11, 2021.

 

The Company is considering raising capital through equity or debt arrangements in addition to the funding received from the SBA, although we cannot provide assurances we will be able to secure such new funding, especially in light of the tightening of the credit markets and volatility of the capital markets as a result of the coronavirus. Moreover, the Company’s common stock was delisted from the NASDAQ Capital Market effective January 25, 2021; while TCC expects its common stock to be quoted on the OTC Bulletin Board, the change in listing may have a negative impact on the liquidity of the stock and the Company’s ability to raise capital through offerings of its equity securities.

 

Should the Company be unsuccessful in these efforts, it would be forced to implement headcount reductions, additional employee furloughs and/or reduced hours for certain employees, or cease operations completely. 

 

Sources and Uses of Cash

 

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

 

    December 26,
2020 		  December 28,
2019
         
Net loss   $ (342,000 )   $ (480,000 )
Changes not affecting cash     18,000       19,000  
Changes in assets and liabilities     (524,000 )     (384,000 )
                 
Cash used in operating activities     (848,000 )     (845,000 )
                 
Net change in cash and cash equivalents     (848,000 )     (845,000 )
Cash and cash equivalents - beginning of period     1,514,000       1,593,000  
                 
Cash and cash equivalents - end of period   $ 666,000     $ 748,000  

 

Company Facilities

 

On April 1, 2014, the Company entered into a lease for its current facilities. This lease is for 22,800 square feet located at 100 Domino Drive, Concord, MA. The Company has been a tenant in this space since 1983. This is the Company’s only facility and houses all manufacturing, research and development, and corporate operations. The initial term of the lease was for five years through March 31, 2019 at an annual rate of $171,000. In addition, the lease contains options to extend the lease for two and one-half years through September 30, 2021 and another two and one-half years through March 31, 2024 at an annual rate of $171,000. In September 2018, the Company exercised its option to extend the term of the lease through September 2021. The lease expense for each of the three month periods ended December 26, 2020 and December 28, 2019 was $43,000.

 

Debt Instruments

 

On April 17, 2020, the Company was granted a loan (the “Loan”) from bankHometown in the principal amount of $474,400 pursuant to the PPP under the CARES Act. The Loan, which was in the form of a Note dated April 17, 2020, was payable over eighteen months at an annual interest rate of 1%, commencing on October 17, 2020 to the extent not forgiven. The Company used the entire Loan amount for qualifying expenses and the SBA forgave the Loan in its entirety on January 11, 2021.

 

  Page 15  

 

The Company also was granted a loan by the SBA in August 2020. This loan was evidenced by a promissory note issued on August 10, 2020 under the Economic Injury Disaster Loan program of the SBA in the amount of $150,000. This note is payable monthly over 30 years at an annual interest rate of 3.75% commencing one year from the date of issuance.

 

Backlog

 

Backlog at December 26, 2020 and September 26, 2020 amounted to $660,000 and $701,000, respectively. The orders in backlog at December 26, 2020 are expected to ship and/or services are expected to be performed over the next nine months depending on customer requirements and product availability.

 

Performance guaranties

 

Certain foreign customers require the Company to guarantee bid bonds and performance of products sold. These guaranties typically take the form of standby letters of credit. Guaranties are generally required in amounts of 5% to 10% of the purchase price and last in duration from three months to one year. At December 26, 2020 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 three month periods ended December 26, 2020 and December 28, 2019 the Company spent $392,000 and $205,000, respectively, on internal product development. The Company also spent $236,000 on billable development efforts during the first three months of fiscal 2020. The Company’s total product development costs during the first three months of fiscal 2021 were 11% lower than the same period in fiscal 2020 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 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.

 

  Page 16  

 

Other recent accounting pronouncements were issued by the FASB (including its Emerging Issues Task Force) and the SEC during the first three months of the Company’s 2021 fiscal year but such pronouncements are not believed by management to have a material impact on the Company’s present or future financial statements.

 

Off-Balance Sheet Arrangements

 

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

 

  Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

  Item 4. Controls and Procedures

 

Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that review and evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of December 26, 2020 as a result of the material weaknesses in our internal control over financial reporting discussed below.

  

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

 

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

 

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

 

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

  

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

 

  Page 17  

 

PART II. Other Information

 

  Item 1. Legal Proceedings

 

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

 

  Item 1A. Risk Factors

 

Investors may find it difficult to trade or obtain quotations for our common stock.

 

Effective January 25, 2021, shares of our common stock were no longer listed on the NASDAQ Capital Market.  Although our common stock is now quoted on the Over the Counter Bulletin Board, investors may find that trading of our common stock is limited.  There can be no assurance a more active market for our common stock will develop. Accordingly, investors may be required to bear the economic risk of an investment in our common stock for an indefinite period of time.  In addition, the Company may find it more difficult to raise capital through offerings of its capital stock because its securities are no longer listed on a national securities exchange, and may suffer reputational damage due to the delisting action.

 

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

 

Not applicable.

 

  Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

  Item 4. Mine Safety Disclosures

 

Not applicable.

 

  Item 5. Other Information

 

Not applicable.

 

  Item 6. Exhibits

 

  10.1 Loan Agreement with BankHometown dated February 1, 2021
     
  31.1 Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

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

 

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

 

  101.INS XBRL Report Instance Document

 

  101.SCH XBRL Taxonomy Extension Schema Document

 

  101.CAL XBRL Taxonomy Calculation Linkbase Document

 

  101.LAB XBRL Taxonomy Label Linkbase Document

 

  101.PRE XBRL Presentation Linkbase Document

 

  101.DEF XBRL Taxonomy Extension Definition Linkbase Document

 

 

  Page 18  

 

SIGNATURES

 

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

 

 

      TECHNICAL COMMUNICATIONS CORPORATION  
      (Registrant)  
             
February 9, 2021       By:  /s/ Carl H. Guild, Jr.  
Date         Carl H. Guild, Jr., President and Chief  
          Executive Officer  
             
             
February 9, 2021       By:  /s/ Michael P. Malone  
Date         Michael P. Malone, Chief Financial Officer  

 

 

 

 

 

 

 

 

 

Page 19

 

 

Exhibit 10.1

 

 

 

 

NOTE

 

 

SBA Loan # 6828888309
SBA Loan Name Technical Communications Corporation
Date January 28, 2021
Loan Amount 474,404.60
Interest Rate 1.00%
Borrower Technical Communications Corporation
Operating Company n/a
Lender Hometown Bank

 

1. PROMISE TO PAY:

 

In return for the Loan, Borrower promises to pay to the order of Lender the amount of

four hundred seventy four thousand four hundred four and 60/100   ($ 474,404.60)

 

Dollars, interest on the unpaid principal balance, and all other amounts required by this Note.

 

2. DEFINITIONS:

 

“Covered Period” means the period beginning on the date of disbursement of the Loan and ending at any point between 8-weeks and 24 weeks after the date of disbursement of the Loan, as elected by Borrower.

 

“Deferral Period” means the period beginning on the date of disbursement of the Loan and ending on the date on which the amount determined to be forgiven under this Note under the Program Rules is remitted by the SBA to Lender; provided, however, that, in the event the Borrower has not submitted an application for forgiveness to Lender on or before 10 months from the end of the Covered Period (the “Forgiveness Deadline”), the Deferral Period shall end as of the day following the Forgiveness Deadline.

 

“Loan” means the loan evidenced by this Note.

 

“Loan Documents” means the documents related to this Loan signed by Borrower.

 

“Program Rules” means all statutes applicable to the Paycheck Protection Program of the Small Business Act (15 U.S.C. §636), as amended by the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136), the Paycheck Protection Program Flexibility Act of 2020 (P.L. 116-142), and the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Pub. L. 116-260), and all regulations, rules and guidance applicable to the Paycheck Protection Program at any time issued by the United States Department of the Treasury or the SBA.

 

    1 of 6

 

“SBA” means the Small Business Administration, an Agency of the United States of America.

 

3. PAYMENT TERMS:

 

Borrower must make all payments at the place Lender designates. The payment terms for this Note are:

 

Compliance with Program Rules: This Note, and the Loan evidenced hereby is subject to the Program Rules. If the terms of this Note conflict in any way with the Program Rules or fail to include any term required under the Program Rules, this Note shall be deemed automatically amended to eliminate any such conflict and/or to include such term. Promptly following request by Lender, Borrower shall execute and deliver to Lender any documentation deemed necessary by Lender to ensure that this Note and the Loan evidenced hereby comply in all respect with the Program Rules.

 

Forgiveness. Borrower may apply to Lender for forgiveness of the Loan in an amount equal to the sum of the following costs incurred by Borrower during the Covered Period:

 

(a) Payroll costs
(b) Any payment of interest on a covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation)
(c) Any payment on a covered rent obligation
(d) Any covered utility payment
(e) Any covered operations expenditures
(f) Any covered property damage
(g) Any covered supplier costs
(h) Any covered worker protection expenditures

 

The amount of loan forgiveness shall be calculated (and may be reduced) in accordance with the requirements of the Program Rules. Not more than 40% of the amount forgiven can be attributable to non-payroll costs.

 

Upon application of the Borrower, and provision by Borrower of the documentation required under the Program Rules, SBA will make a determination of the principal and interest amounts to be forgiven.

 

Maturity: Any remaining balance of this Note that Lender determines cannot be forgiven under the Program Rules shall be due and payable in full on January 28        , 2026. (5 years from the date of Note)

 

Interest: Interest on this Note shall begin to accrue on the date hereof at the interest rate set forth above. The interest rate is fixed and will not change during the term of this Note. Interest shall be computed on an actual / 365 simple interest basis; that is by multiplying the interest rate by the outstanding principal balance, multiplying the resulting product by the actual number of days the principal balance is outstanding and dividing the resulting product by 365.

 

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Deferral Period: No payments will be due during the Deferral Period, provided that interest will continue to accrue during the Deferral Period. Such accrued interest shall be paid in consecutive monthly installments along with the principal installments described below.

 

Payment Terms: Borrower shall repay the principal balance of this Note in consecutive equal monthly installments, with the first such installment due on the day immediately following the expiration of the Deferral Period and the remaining payments due on the same day of each month thereafter. Borrower shall pay all accrued interest, and an installment of the interest accrued during the Deferral Period, on each day that a principal installment is due. Lender will apply each payment first to pay applicable late charges, then to pay interest accrued to the day Lender received the payment, then to interest accrued during the Deferral Period, then to bring principal current, and will apply any remaining balance to reduce principal.

 

Payment Schedule: Lender will provide Borrower with a schedule of payments once the amounts to be forgiven have been determined and the principal balance to be repaid becomes known.

 

Prepayment: Borrower may prepay this Note at any time without penalty. Borrower may prepay 20 percent or less of the unpaid principal balance of this Note at any time without notice. If Borrower prepays more than 20 percent and the Loan has been sold on the secondary market, Borrower must:

 

(a) Give Lender prior written notice;
(b) Pay all accrued interest; and
(c) If the prepayment is received less than 21 days from the date Lender received the notice, pay an amount equal to 21 days’ interest from the date Lender received the notice, less any interest accrued during the 21 days and paid under clause (b) of this paragraph.

 

If Borrower does not prepay within 30 days from the date Lender received the notice, Borrower must give Lender a new notice. All prepayments will be applied to principal installments in inverse order of maturity.

 

Default Interest and Late Charges: Upon the occurrence of a default, the interest rate on this Note shall be automatically increased to percent (6.0%) per annum. If payment due on this Note is not paid within fifteen days of its due date, Borrower will pay to Lender a late charge equal to the greater of $15.00 and 5% of the late payment. To the extent any increased interest and/or or late fee otherwise payable under this Note is prohibited or exceeds any limit provided by applicable law, including the Program Rules, such increased interest and / or late fee shall be reduced to the maximum amount allowed.

 

Non-Recourse. Lender and SBA shall have no recourse against any individual shareholder, member or partner of Borrower for non-payment of the Loan, except to the extent that such shareholder, member or partner uses the Loan proceeds for an unauthorized purpose.

 

Loan Program Modifications. Borrower understands and agrees that the Program Rules may change, be altered or amended by acts of the United States or regulations of SBA or other agencies charged with implementing the Paycheck Protection Program. Such acts and regulations are deemed to be automatically incorporated into this Note, and Borrower agrees to be bound by such acts and regulations, without prior notification from Lender.

 

Business Day: If any installment of principal and interest is due on a day other than a day on which Lender is open for the conduct of normal banking activities, such installment shall be due on the next day for which Lender is open for the conduct of normal banking activities.

 

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Electronic Signatures; Counterparts. This Note and all documents delivered in connection herewith (including Borrower’s application for the Loan) may be executed and/or transmitted electronically or digitally (including, without limitation, via facsimile, electronic mail in .pdf, DocuSign, or similar platform) and shall be considered originals and shall have the same legal effect, validity and enforceability as manually executed paper originals. This Note and all such other documents may be executed in as many counterparts as necessary or convenient, including both paper and electronic or digital counterparts, but all such counterparts are one and the same document. For the avoidance of doubt, the authorization under this paragraph includes, without limitation, use or acceptance by the parties of a manually executed counterpart which has been converted into electronic form (such as scanned into a .pdf file), or an electronically or digitally signed document converted into another format, for transmission, delivery and/or retention. Upon request from Lender, and to the extent required by the Program Rules, Borrower shall execute and deliver manually executed originals of this Note and such other documents.

 

Other Debt Owed to Lender: No collateral granted to Lender by Borrower to secure other debt owed to Lender by Borrower shall secure this Note, notwithstanding any cross-collateralization provision or similar provision in the documentation applicable to such other debt.

 

Right of Setoff: To the extent permitted by applicable law, at any time following a default on this Note, Lender may set off any amounts owed by Lender to Borrower with respect to any account maintained by Borrower with Lender against any amounts owed by Borrower under this Note.

 

4. DEFAULT:

 

Borrower is in default under this Note if Borrower does not make a payment when due under this Note, or if Borrower or Operating Company:

 

A. Fails to do anything required by this Note and other Loan Documents;
B. Defaults on any other loan with Lender;
C. Does not disclose, or anyone acting on their behalf does not disclose, any material fact to Lender or SBA;
D. Makes, or anyone acting on their behalf makes, a materially false or misleading representation to Lender or SBA;
E. Defaults on any loan or agreement with another creditor, if Lender believes the default may materially affect Borrower’s ability to pay this Note;
F. Fails to pay any taxes when due;
G. Becomes the subject of a proceeding under any bankruptcy or insolvency law;
H. Has a receiver or liquidator appointed for any part of their business or property;
I. Makes an assignment for the benefit of creditors;
J. Has any adverse change in financial condition or business operation that Lender believes may materially affect Borrower’s ability to pay this Note;
K. Reorganizes, merges, consolidates, or otherwise changes ownership or business structure without Lender’s prior written consent; or

 

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L. Becomes the subject of a civil or criminal action that Lender believes may materially affect Borrower’s ability to pay this Note.

 

5. LENDER’S RIGHTS IF THERE IS A DEFAULT:

 

Without notice or demand and without giving up any of its rights, Lender may:

 

A. Require immediate payment of all amounts owing under this Note;
B. Collect all amounts owing from Borrower; or
C. File suit and obtain judgment.

 

6. LENDER’S GENERAL POWERS:

 

Without notice and without Borrower’s consent, Lender may:

 

A. Incur expenses, including attorney fees, to collect amounts due under this Note or to enforce the terms of this Note or any other Loan Document. Among other things, the expenses may include payments for reasonable attorney’s fees and costs. If Lender incurs such expenses, it may demand immediate repayment from Borrower or add the expenses to the principal balance;
B. Release anyone obligated to pay this Note; and
C. Take any action necessary collect amounts owing on this Note.

 

7. WHEN FEDERAL LAW APPLIES:

 

When SBA is the holder, this Note will be interpreted and enforced under federal law, including SBA regulations. Lender or SBA may use state or local procedures for filing papers, recording documents, giving notice, foreclosing liens, and other purposes. By using such procedures, SBA does not waive any federal immunity from state or local control, penalty, tax, or liability. As to this Note, Borrower may not claim or assert against SBA any local or state law to deny any obligation, defeat any claim of SBA, or preempt federal law.

 

8. SUCCESSORS AND ASSIGNS:

 

Under this Note, Borrower and Operating Company include the successors of each, and Lender includes its successors and assigns.

 

9. GENERAL PROVISIONS:

 

A. Borrower waives all suretyship defenses.
B. Borrower must sign all documents necessary at any time to comply with the Loan Documents.
C. Lender may exercise any of its rights separately or together, as many times and in any order it chooses. Lender may delay or forgo enforcing any of its rights without giving up any of them.
D. Borrower may not use an oral statement of Lender or SBA to contradict or alter the written terms of this Note.
E. If any part of this Note is unenforceable, all other parts remain in effect.

 

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F. To the extent allowed by law, Borrower waives all demands and notices in connection with this Note, including presentment, demand, protest, and notice of dishonor.
G. Except as otherwise set forth herein, this Note and the rights and obligations of the parties hereto shall be governed and interpreted according to the laws of the Commonwealth of Massachusetts.
H. This Note shall be binding upon the heirs, executors, administrators, successors and assigns of the Borrower and shall inure to the benefit of Lender's successors and assigns.
I. TO THE FULLEST EXTENT PERMITTED BY LAW, BORROWER HEREBY KNOWINGLY AND VOLUNTARILY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY DISPUTE, WHETHER IN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BY THIS NOTE OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION WITH THIS NOTE.

 

10. STATE-SPECIFIC PROVISIONS:

 

Any legal action or proceeding arising out of or relating to this Note shall be instituted in the state or federal courts located in the Commonwealth of Massachusetts, and Borrower hereby irrevocably submits to the jurisdiction of each such court in any such action or proceeding. This Note shall take effect as a sealed instrument.

 

11. BORROWER’S NAME AND SIGNATURE:

 

By signing below, each individual or entity becomes obligated under this Note as Borrower.

 

By signing below, Borrower additionally certifies to Lender that:

 

A. Borrower acknowledges that if Borrower defaults on the Loan, SBA may be required to pay Lender under the SBA guarantee, and SBA may then seek recovery on the Loan (to the extent any balance remains after forgiveness of the loan, as described in Paragraph 3 above);
B. Borrower will keep books and records in a manner satisfactory to Lender, furnish financial statements as requested by Lender, and allow Lender and SBA to inspect and audit books, records and papers relating to Borrower’s financial or business condition; and
C. Borrower will not, without Lender’s consent, change its ownership structure, make any distribution of company assets that would adversely affect its financial condition or transfer (including by pledge) or dispose of any assets, except in the ordinary course of business.

 

 

Technical Communications Corporation (Borrower Name)
By: E-SIGNED by Michael Malone on 2021-02-01 10:50:24 EST   Date:  2021-02-01 10:50:24 EST
     
Name:  Michael Malone    
     
Title: CFO    

 

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Borrower Certifications and Agreements -- Paycheck Protection Program Loan

 

 

The undersigned is the duly elected, qualified, and acting CFO of Technical Communications Corporation (“Borrower”). In connection with Borrower’s submission of an application (the “Application”) for a loan (the “Loan”) from Hometown Bank (“Lender”) under the Paycheck Protection Program (“PPP”) of the Small Business Act (15 U.S.C. § 636), Paycheck Protection Program of the Small Business Act (15 U.S.C. § 636), as amended by the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136), the Paycheck Protection Program Flexibility Act of 2020 (P.L. 116-142), and the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Pub. L. 116-260), and as implemented and interpreted by all regulations, rules and guidance applicable to the PPP Program at any time issued by the United States Department of the Treasury or the United States Small Business Administration (collectively, the “PPP Program Rules”), the Borrower hereby certifies, attests, confirms to and agrees with Lender as follows:

 

  1. Borrower acknowledges that neither Lender nor any of its officers, trustees, employees, affiliates or agents has provided any assurance to Borrower that all or any portion of the Loan will be forgiven. Borrower also acknowledges that the PPP is subject to change due to reasons outside Lender’s control, including as a result of changes in the PPP Program Rules, and such changes may be effective retroactively to apply with respect to the Application, the Loan and the forgiveness of the Loan. Borrower further acknowledges and agrees that Lender shall have no liability to Borrower as a result of any change in the PPP Program Rules.

 

2. Borrower acknowledges and agrees that (a) neither Lender nor any of its officers, trustees, employees, affiliates or agents has provided any financial advice to Borrower or any of its owners, directors, officers or affiliates in connection with the PPP, including the Application and the Loan or whether Borrower can reasonably expect that some or all of the Loan may be forgiven, (b) neither Lender nor any of its officers, directors, trustees, employees, affiliates or agents has recommended that the Borrower submit the Application or accept the Loan, (c) Borrower has calculated without relying on any advice from Lender the amount of Borrower’s “average monthly payroll costs” as that term is used in the Application, and (d) Borrower will calculate without relying on any advice from Lender the portion of the Loan that Borrower believes should be forgiven under the PPP Program Rules.
3. The person whose name is set forth below is a duly elected, qualified, and acting officer, manager, member or other representative of Borrower as of the date hereof and as of the date of the Application, holding the position set forth opposite his/her name, and the signature set forth opposite his/her name is his/her true signature.

 

Name   Office   Signature
Michael Malone   CFO   E-SIGNED by Michael Malone on 2021-02-01 10:50:34 EST

 

4. The officer identified immediately above in paragraph 3 has been duly authorized by all necessary action on the part of Borrower’s board of directors, managers or similar governing body to execute and deliver, for and on behalf of Borrower, and to bind Borrower to perform under, the Application and all other agreements, instruments, certificates and documents required by Lender in connection with the Loan. The undersigned person agrees that he or she will be liable personally to indemnify and hold each an Indemnified Party harmless to the fullest extent permitted by law, from and against any and all losses, claims, damages and liabilities, joint or several, to which such Indemnified Party may become subject under applicable law related to or arising out of any false statement by the undersigned person in this paragraph.

 

Signature: E-SIGNED by Michael Malone on 2021-02-01 10:50:36 EST   Dated:  2021-02-01 10:50:36 EST
Printed Name:  Michael Malone    
Printed Title: CFO    

 

 

 

 

 

 

 

 

 

Exhibit 31.1

 

CERTIFICATION

 

 

I, Carl H. Guild, Jr., certify that:

 

(1) I have reviewed this quarterly report on Form 10-Q of Technical Communications Corporation;

 

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

/s/ Carl H. Guild, Jr.                              

Carl H. Guild, Jr.

President and Chief Executive Officer

Date: February 9, 2021

 

 

 

Exhibit 31.2

CERTIFICATION

 

I, Michael P. Malone, certify that:

 

(1) I have reviewed this quarterly report on Form 10-Q of Technical Communications Corporation;

 

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

/s/ Michael P. Malone                              

Michael P. Malone

Chief Financial Officer

Date: February 9, 2021

Exhibit 32

 

CERTIFICATION PURSUANT TO

18 U.S.C. § 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

 

 

Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned President and Chief Executive Officer and Chief Financial Officer of Technical Communications Corporation (the “Company”) certifies that, to his knowledge:

 

1) the Company’s Quarterly Report on Form 10-Q for the quarter ended December 26, 2020 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

2) the information contained in the Company’s Quarterly Report on Form 10-Q for the quarter ended December 26, 2020 fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

/s/ Carl H. Guild, Jr.   /s/ Michael P. Malone  
Carl H. Guild, Jr.   Michael P. Malone  
President and Chief Executive Officer   Chief Financial Officer  
       
Date: February 9, 2021   Date: February 9, 2021