TECHNICAL COMMUNICATIONS CORP - Quarter Report: 2018 June (Form 10-Q)

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 June 30, 2018

             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)

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)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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. (Check one):

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. 1,849,025 shares of Common Stock, $0.10 par value, outstanding as of August 10, 2018.

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY

Consolidated Balance Sheets

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

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations

(Unaudited)

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

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations

(Unaudited)

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

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

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

TECHNICAL COMMUNICATIONS CORPORATION AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

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 held in a brokerage account. 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 June 30, 2018, cash equivalents consisted of the following:

As of September 30, 2017, cash equivalents consisted of the following:

As of September 30, 2017, held to maturity securities consisted of the following:

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 filings with the SEC, including its Annual Report on Form 10-K for the fiscal year ended September 30, 2017.

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 1, 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 30, 2017 as filed with the SEC.

Results of Operations (dollar amounts have been rounded to nearest thousandths)

Three Months ended June 30, 2018 compared to Three Months ended July 1, 2017

Net Sales

Net sales for the quarter ended June 30, 2018 were $1,544,000, compared to $1,068,000 for the quarter ended July 1, 2017, an increase of 45%. Sales for the third quarter of fiscal 2018 consisted of $1,469,000, or 95%, from domestic sources and $75,000, or 5%, from international customers as compared to the same period in fiscal 2017, during which sales consisted of $1,057,000, or 99%, from domestic sources and $11,000, or 1%, from international customers.

Foreign sales consisted of shipments to two countries during the quarter ended June 30, 2018 and one country during the quarter ended July 1, 2017. A sale is attributed to a foreign country based on the location of the contracting party. Domestic revenue may include the sale of products shipped through domestic resellers or manufacturers to international destinations. The table below summarizes our principal foreign sales by country during the third quarter of fiscal 2018 and 2017:

For the three months ended June 30, 2018, revenue was derived primarily from sales of our engineering services amounting to $1,396,000. We also sold our internet protocol encryptor to a customer in Saudi Arabia amounting to $55,000 during the period.

For the three months ended July 1, 2017, product sales revenue was derived primarily from shipments of our narrowband radio encryptors to a domestic customer for deployment into Afghanistan amounting to $669,000. We also recorded sales under an engineering services contract amounting to $300,000 during the period.

Gross Profit

Gross profit for the third quarter of fiscal 2018 was $877,000, compared to gross profit of $539,000 for the same period of fiscal 2017, an increase of 63%. Gross profit expressed as a percentage of sales was 57% for the third quarter of fiscal 2018 compared to 51% for the same period in fiscal 2017, which was due to the higher margin engineering services sales in fiscal 2018.

Operating Costs and Expenses

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the third quarter of fiscal 2018 were $522,000, compared to $479,000 for the same quarter in fiscal 2017. This increase of $43,000, or 9%, was attributable to an increase in general and administrative expenses of $36,000 and an increase in selling and marketing expenses of $7,000 during the three months ended June 30, 2018.

The increase in general and administrative expenses for the three months ended June 30, 2018 was primarily attributable to increases in audit fees and other public company costs of $19,000, a write-off of collateral of $12,000 and an increase in personnel-related costs of $5,000.

The increase in selling and marketing expenses for the three months ended June 30, 2018 was attributable to increases in outside sales commissions of $11,000, bid and proposal costs of $26,000 and outside consulting costs of $14,000. These increases were offset by a decrease in product evaluation costs of $39,000.

Product Development Costs

Product development costs for the quarter ended June 30, 2018 were $114,000, compared to $407,000 for the quarter ended July 1, 2017. This decrease of $293,000, or 72%, was attributable to an increase in billable engineering services contracts during the third quarter of fiscal 2018 that resulted in decreased product development costs of $347,000 and reduced personnel related costs of $43,000. These decreased costs were partially offset by an increase in engineering project costs of $97,000 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 sales; 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 $1,396,000 of billable engineering services revenue generated during the third quarter of fiscal 2018 and $300,000 in the third quarter of fiscal 2017.

Net Income/Loss

The Company generated net income of $243,000 for the third quarter of fiscal 2018, compared to a net loss of $344,000 for the same period of fiscal 2017. This net income is primarily attributable to a 63% increase in gross profit and a 28% decrease in operating expenses during the third quarter of fiscal 2018.

Nine Months ended June 30, 2018 compared to Nine Months ended July 1, 2017

Net Sales

Net sales for the nine months ended June 30, 2018 were $3,590,000, compared to $3,084,000 for the nine months ended July 1, 2017, an increase of 16%. Sales for the first nine months of fiscal 2018 consisted of $3,387,000, or 94%, from domestic sources and $204,000, or 6%, from international customers as compared to the same period in fiscal 2017, during which sales consisted of $2,841,000, or 92%, from domestic sources and $243,000, or 8%, from international customers.

Foreign sales consisted of shipments to four countries during the nine month period ended June 30, 2018 and five countries during the same period in fiscal 2017. A sale is attributed to a foreign country based on the location of the contracting party. Domestic revenue may include the sale of products shipped through domestic resellers or manufacturers to international destinations. The table below summarizes our principal foreign sales by country during the first nine months of fiscal 2018 and 2017:

For the nine months ended June 30, 2018, revenue was derived primarily from sales of our engineering services amounting to $3,196,000 and shipments of our narrowband radio encryptors to a customer in the Far East amounting to $90,000 and to a domestic customer for deployment into Afghanistan amounting to $57,000. We also sold our internet protocol encryptor to a customer in Saudi Arabia amounting to $89,000 during the period.

For the nine months ended July 1, 2017, product sales revenue was derived primarily from shipments of our narrowband radio encryptors to a domestic customer for deployment into Afghanistan amounting to $2,450,000. Additional revenue was generated from sales of our engineering services amounting to $300,000. The Company made shipments of our secure telephone and fax encryptor to an international customer in Jordan amounting to $106,000. We also sold our internet protocol encryptor to a customer in Saudi Arabia amounting to $95,000 during the period.

Gross Profit

Gross profit for the first nine months of fiscal 2018 was $1,800,000, compared to gross profit of $2,129,000 for the same period of fiscal 2017, a decrease of 15%. Gross profit expressed as a percentage of sales was 50% for the first nine months of fiscal 2018 compared to 69% for the same period in fiscal 2017, which decrease was due to the lower margin engineering services sales in fiscal 2018. During fiscal 2017 the concentration of sales related to product sales which historically will yield higher margins.

Operating Costs and Expenses

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the first nine months of fiscal 2018 were $1,513,000, compared to $1,669,000 for the same period in fiscal 2017. This decrease of $156,000, or 9%, was attributable to a decrease in selling and marketing expenses of $231,000, which was partially offset by an increase in general and administrative expenses of $75,000 during the nine months ended June 30, 2018.

The decrease in selling and marketing expenses for the nine months ended June 30, 2018 was attributable to decreases in product demonstration costs of $136,000, product evaluation costs of $99,000 and bid and proposal costs of $17,000. These decreases were partially offset by an increase in personnel-related costs of $14,000.

The increase in general and administrative expenses for the nine months ended June 30, 2018 was primarily attributable to increases in audit fees and other public company costs of $94,000. These increases were partially offset by a decrease in personnel-related costs of $25,000 during the period.

Product Development Costs

Product development costs for the nine months ended June 30, 2018 were $415,000, compared to $1,378,000 for the nine months ended July 1, 2017. This decrease of $963,000, or 70%, was attributable to an increase in billable engineering services contracts during the first nine months of fiscal 2018 that resulted in decreased product development costs of $1,021,000 and reduced personnel related costs of $128,000. These decreased costs were partially offset by an increase in engineering project costs of $191,000 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 sales; 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 $3,196,000 of billable engineering services revenue generated during the first nine months of fiscal 2018 and $300,000 in the first nine months of fiscal 2017.

Net Loss

The Company incurred a net loss of $122,000 for the first nine months of fiscal 2018, compared to a net loss of $911,000 for the same period of fiscal 2017. This decrease in net loss is primarily attributable to a 37% decrease in operating expenses and partially offset by a 15% decrease in gross profit during the first nine months of fiscal 2018.

The effects of inflation and changing costs have not had a significant impact on sales or earnings in recent years. As of June 30, 2018, 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 (dollar amounts have been rounded to nearest thousandths)

Our cash and cash equivalents at June 30, 2018 totaled $1,460,000 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 $945,000 at June 30, 2018. 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 on Form 10-Q. The unaudited consolidated financial statements included herein do not include any adjustments to reflect the uncertainty 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 through June 30, 2019. In order to have sufficient cash to fund our operations beyond June 30, 2019, 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 pursuing raising capital through equity or debt arrangements. Although we believe our ability to secure such new business and 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.

Sources and Uses of Cash

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

Operating Activities

The Company used approximately $1,303,000 less cash for operating activities in the first nine months of fiscal 2018 compared to the same period in fiscal 2017. This decrease was primarily attributable to a decrease in the net loss for the nine month period ended June 30, 2018.

Investing Activities

Cash provided by investing activities during the first nine months of fiscal 2018 decreased by approximately $66,000 compared to the same period in fiscal 2017. This change is primarily attributable to a decrease in proceeds from the sale of cost method investment of $76,000 and an increase in additions to equipment and leasehold improvements of $40,000, partially offset by the difference in the maturity of short-term investments in marketable securities of $50,000 during the first nine months of 2018 compared to the same period in fiscal 2017.

Company Facilities

On July 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 is for five years through June 30, 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 June 30, 2024 at an annual rate of $171,000. Rent expense for each of the nine month periods ended June 30, 2018 and July 1, 2017 was $128,000.

Backlog

Backlog at June 30, 2018 and September 30, 2017 amounted to $2,750,000 and $2,675,000, respectively. The orders in backlog at June 30, 2018 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 June 30, 2018, the Company had no outstanding letters of credit. At September 30, 2017, the Company had two outstanding letters of credit in the amounts of $12,000 and $1,000. These collateralized bank accounts represented cash which had 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 nine months ended June 30, 2018 and July 1, 2017, the Company spent $415,000 and $1,378,000, respectively, on internal product development. The Company also spent $1,410,000 on billable development efforts during the first nine months of fiscal 2018 and $152,000 during the same period of fiscal 2017. The Company’s total product development costs during the first nine months of fiscal 2018 were 19% 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 approximately 20% higher compared to 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 June 2019. We also believe that, in the long term, based on current billable activities, cash from operations will be sufficient to meet the product 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 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 issued ASU No. 2014-9: “Revenue from Contracts with Customers” (ASC 606). The standard provides that revenue should be recognized when an entity transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenues and cash flow arising from contracts with customers. The FASB has issued several amendments and updates to the new revenue standard, including how an entity should identify performance obligations. As amended, the new guidance is effective for us beginning October 1, 2018. We have elected to adopt ASC 606 using the modified retrospective method approach as of October 1, 2018. This approach will be applied to all contracts not completed as of October 1, 2018.

The qualitative assessments of the standard provided below are estimates of the expected effects of the adoption of ASC 606. This represents our best estimate of the effects of adopting ASC 606 at the time of the preparation of this Quarterly Report on Form 10-Q. The actual impact of ASC 606 is subject to change from these estimates and such change may be significant, pending the completion of our assessment in the first quarter of fiscal 2019.

Engineering Services Revenue We expect that the deliverables under the current guidance will be consistent with performance obligations identified under ASC 606. The adoption of ASC 606 will not result in a change to the timing of revenue recognition for this segment as the standard requires revenues to be estimated and recognized upon transfer of the promised goods and services. As such, we do not expect the adoption of ASC 606 will result in a material impact to revenue recognition.

Engineering Services Revenue We expect that the deliverables under the current guidance will be consistent with performance obligations identified under ASC 606. The adoption of ASC 606 will not result in a change to the timing of revenue recognition for this segment as the standard requires revenues to be estimated and recognized upon transfer of the promised goods and services. As such, we do not expect the adoption of ASC 606 will result in a material impact to revenue recognition.

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 became 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 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. The Company currently has one operating lease on its facility in Concord, MA. The Company expects to adopt this standard during its fiscal year 2020.

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 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. Accordingly, restricted cash has been grouped with cash and cash equivalents on the statements of cash flows and results for the nine month period ended July 1, 2017 have been retrospectively reclassified.

Other recent accounting pronouncements were issued by the FASB (including its Emerging Issues Task Force), the AICPA and the SEC during the first nine months 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.

Not applicable.

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. As previously disclosed under Item 9A. “Controls and Procedures” in our Annual Report on Form 10-K for our fiscal year ended September 30, 2017, we concluded that our disclosure controls and procedures were not effective as of September 30, 2017 based on the material weakness identified. We did not maintain adequate segregation of duties within our critical financial reporting applications, the related modules and financial reporting processes, which management has determined constituted a material weakness. Further, during the three months ended June 30, 2018, we identified a material weakness in our internal control over significant non-routine transactions.

Based on management’s assessment management has concluded that our disclosure controls and procedures were not effective as of June 30, 2018.

Changes in internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. Other Information

There were no legal proceedings pending against or involving the Company or its subsidiary during the period covered by this quarterly report.

Not applicable.

Not applicable.

Not applicable.

Not applicable.

Not applicable.

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.

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