NOTE 1.Description of the Business and Basis of Presentation

Company Operations

Technical Communications Corporation (“TCC”) was incorporated in Massachusetts in 1961; its wholly-owned subsidiary, TCC Investment Corp., was organized in that jurisdiction in 1982. Technical Communications Corporation and TCC Investment Corp. are collectively referred to as the “Company”. The Company’s business consists of only one industry segment, which is the design, development, manufacture, distribution, marketing and sale of communications security devices, systems and services. The secure communications solutions provided by TCC protect vital information transmitted over a wide range of data, video, fax and voice networks. TCC’s products have been sold into over 115a significant number of countries and are in service with governments, military agencies, telecommunications carriers, financial institutions and multinational corporations.

Interim Financial Statements

The accompanying unaudited consolidated financial statements of Technical Communications Corporation and its wholly-owned subsidiary (collectively the Company“Company” or “TCC”) include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented and in order to make the financial statements not misleading. All such adjustments are of a normal recurring nature. Interim results are not necessarily indicative of the results to be expected for the fiscal year endingended September 29, 2018.

The September 30, 2017 restated consolidated balance sheet was derived from the September 30, 2017 restated audited consolidated financial statement. Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as allowed by Securities and Exchange Commission (“SEC”) rules and regulations. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s auditedrestated consolidated financial statements and the notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017 asForm 10-K filed with the SEC.June 21, 2019.

We followThe 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 we followthe Company follows to ensure weit consistently report ourreports its financial condition, results of operations, and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification^TM - sometimes referred to as the Codification or ASC.

Liquidity and Ability to Continue as a Going Concern

The Company has suffered recurring losses from operations and had an accumulated deficit of $945,000$2,077,713 at June 30,March 31, 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.Report. Such unaudited consolidated financial statements do not include any adjustments to reflect the uncertaintysubstantial doubt about the Company’s ability to continue as a going concern.

We anticipateThe Company anticipates that our itsprincipal sources of liquidity will only be sufficient to fund our activities through June 30, 2019to January 2020. In order to have sufficient cash to fund our operations beyondJune 30, 2019that point, wethe Company will need to secure new customer contracts, raise additional equity or debt capital or reduce expenses, including payroll and payroll-related expenses.

In order to have sufficient capital resources to fund operations, the Company has been working diligently to secure several large orders with new and existing customers. In addition, we arethe Company is also pursuing raising capital through equity or debt arrangements. Although we believe ourthe Company believes its ability to secure such new business and raise new capital is likely, weit cannot provide assurances weit will be able to do so.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

Should wethe Company be unsuccessful in these efforts, weit would then be forced to implement headcount reductions, employee furloughs and/or reduced hours for certain employees.

employees or cease operations completely.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

Reporting Period

The Company reports their operations on a 52-weekCompany’s by-laws call for its fiscal year with year-end beingto end on the Saturday closest to the reporting period end date.last day of September, unless otherwise decided by its Board of Directors.

NOTE 1.Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

The discussion and analysis of ourthe financial condition and results of operations are based on ourthe unaudited consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these unaudited consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods.

On an ongoing basis, management evaluates its estimates and judgments, including but not limited to those related to marketable securities, receivable reserves, inventory reserves, fair value of financial instruments, impairment of long-lived assets, revenue recognition, stock-based compensation and income taxes. Management bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from these estimates under different assumptions or conditions.

NOTE 2.Restatements

The Company has restated its unaudited consolidated financial statements as of and for the three and six months ended March 31, 2018. The restatements reflect adjustments to correct errors in the Company’s revenue recognition for a certain contract. The error was identified during the Company’s normal closing process, in the course of the Company’s regularly scheduled audit for the year ended September 29, 2018 and during the course of a subsequent review by management. The error resulted from the misinterpretation and misapplication of ASC Topic,605 Revenue Recognition. The effects of the restatement on the Company’s consolidated financial statements for the three and six month periods ended March 31, 2018 are described below.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

Correction of error in the application of the Company’s revenue recognition policy

NOTE 3.Summary of Significant Accounting Policies and Significant Judgments and Estimates

The accounting policies that management believes are most critical to aid in fully understanding and evaluating ourthe reported financial results include the following:

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

Revenue Recognition

Product

The Company’s engineering services revenue is derived from performing funded research and development and technology development for commercial companies and government agencies primarily under fixed-price contracts. On fixed-price contracts that are expected to exceed one year in duration, revenue is recognized pursuant to the proportional performance method based upon the proportion of actual costs incurred to date to the total estimated costs for the contract. The Company receives periodic progress payments based on contract terms.

Equipment revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product and passage of title to the customer has occurred and we havethe Company has determined that collection of the fee is probable. Title to the product generally passes upon shipment of the product, as the products are shipped freight on board shipping point, except for certain foreign shipments for which title passes upon entry of the product into the first port in the buyer’s country. If the product requires installation to be performed by TCC, or other acceptance criteria exist, all revenue related to the product is deferred and recognized upon completion of the installation or satisfaction of the customer acceptance criteria. We provideThe Company provides for a warranty reserve at the time the product revenue is recognized.

We perform funded researchAs of March 31, 2018, billings in excess of revenues of $890,000 were recorded as deferred revenue in relation to contracts based on proportional performance. Deferred revenue represents the cumulative difference between the amounts billed and development and technology developmentrevenue recognized for commercial companies and government agencies under both cost reimbursement and fixed-price contracts. Cost reimbursement contracts provide for the reimbursement of allowable costs and, in some situations, the payment of a fee. These contracts may contain incentive clauses providing for increases or decreases in the fee depending on how actual costs compare with a budget. Revenue from cost reimbursement contracts is recognized as services are performed. On fixed-price contracts that are expected to exceed one year in duration, revenue is recognized pursuant to the proportional performance method based upon the proportion of actual costs incurred to date to the total estimated costs for the contract. In each type of contract, we receive periodic progress payments or payments upon reaching interim milestones, and we retain the rights to the intellectual property developed in government contracts.

All payments to TCC for work performed on contracts with agencies of the U.S. government are subject to audit and adjustment by the Defense Contract Audit Agency, the U.S. Government Accountability Office and other agencies. Adjustments are recognized in the period made. There have been no government audits in recent years and the Company believes the result of such audits, should they occur, would not have a material adverse effect on its financial position or results of operations. WhenIf the current estimates of total contract revenue and contract costs for a product development contract indicate a loss, a provision for the entire loss on the contract is recorded. Any losses incurred in performing funded research and development projects are recognized as funded research and development expenses.

Cost of product revenue includes material, labor and overhead. Costs incurred in connection with funded research and development are included in cost of sales. revenue. Product development costs are charged to billable engineering services, bid and proposal efforts or business development activities, as appropriate. Product development costs charged to billable projects are recorded as cost of sales;revenue; engineering costs charged to bid and proposal efforts are recorded as selling expenses; and product development costs charged to business development activities are recorded as marketing expenses. Product development costs consist primarily of costs associated with personnel, outside contractor and engineering services, supplies and materials. Cost of product revenue includes material, labor and overhead.

Revenue for the six month period ended March 31, 2018 consists of $1,394,000 from engineering sales and $246,000 from the equipment sales as compared to $2,017,000 from the equipment sales and none from engineering sales for the six month period ended April 1, 2017.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

Inventories

We value our

The Company values its inventory at the lower of cost (based on the first-in, first-out method) to purchase and/or manufacture and net realizable value (based on the estimated selling prices, less reasonably predictable costs of completion, disposal, and transportation) of the inventory. WeThe Company periodically reviewreviews inventory quantities on hand and recordrecords a provision for excess and/or obsolete inventory based primarily on ourthe estimated forecast of product demand, as well as historical usage. The Company evaluates the carrying value of inventory on a quarterly basis to determine whether the carrying value is in excess of net realizable value. To the extent that net realizable value is less than the associated carrying values, inventory carrying values are written down. In addition, the Company makes judgments as to future demand requirements and compares those with the current or committed inventory levels. Reserves are established for inventory levels that exceed expected future demand. It is possible that additional reserves above those already established may be required in the future if market conditions for ourthe Company’s products should deteriorate.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

Accounts Receivable

Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on a specific analysis of accounts in the receivable portfolio and historical write-off experience. While management believes no allowance is currently needed, if the financial condition of ourthe Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required, which would reduce our net income. In addition, if the Company becomes aware of a customer’s inability to meet its financial obligations, a specific write-off is recorded in that amount.

Accounting for Income Taxes

The preparation of ourthe Company’s unaudited consolidated financial statements requires usit to estimate our income taxes in each of the jurisdictions in which we operate,the Company operates, including those outside the United States, which may subject the Company to certain risks that ordinarily would not be expected in the United States. The income tax accounting process involves estimating our actual current exposure together with assessing temporary differences resulting from differing treatments of items, such as inventory obsolescence and stock-based compensation, for tax and accounting purposes. These differences result in the recognition of deferred tax assets and liabilities. WeThe Company must then record a valuation allowance to reduce ourits deferred tax assets to the amount that is more likely than not to be realized.

Significant management judgment is required in determining ourthe provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against deferred tax assets. At June 30,March 31, 2018 and September 30, 2017, wethe Company recorded a full valuation allowance against ourits net deferred tax assets of approximately $3.7 million and $4.7$4.9 million, respectively, due to uncertainties related to ourthe Company’s ability to realize these assets. The valuation allowance is based on our estimates of taxable income by jurisdiction and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjustthe Company adjusts these estimates in future periods, weit may need to adjust ourits valuation allowance, which could materially impact ourthe Company’s financial position and results of operations.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

The Company follows appropriateFASB ASC 740-10,Income Taxes, relative to uncertain tax positions. This standard provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements. Uncertain tax positions must meet a recognition threshold of more-likely-than-not in order for those tax positions to be recognized in the financial statements.

Due to the nature of ourthe Company’s current operations in foreign countries (selling products into these countries with the assistance of local representatives), the Company has not been subject to any foreign taxes in recent years, and it is not anticipated that weit will be subject to foreign taxes in the near future.

Fair Value Measurements

In determining fair value measurements, the Company follows the establishedprovisions of FASB ASC 820, Fair Value Measurements and Disclosures. FASB ASC 820 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. The topic provides a consistent definition of fair value that focuses on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The topic also prioritizes, within the measurement of fair value, the use of market-based information over entity-specific information and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date. At June 30,March 31, 2018 and September 30, 2017, the carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, marketable securities, and accounts payable approximate fair value because of their short-term nature.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

The three-level hierarchy is as follows:

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.  The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

The Company’s held to maturity securities are comprised of investments in municipal bonds. These securities represent ownership in individual bonds issued by municipalities within the United States. The value of these securities is disclosed in Note 6.8. The Company’s available for sale securities consist of mutual funds held in money market mutual funds in a brokerage account, which are classified as cash equivalents and measured at fair value.

The Company assesses the levels of the investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer in accordance with the Company’s accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. During the ninesix month period ended June 30,March 31, 2018 and the year ended September 30, 2017, there were no transfers between levels.

The following table sets forth by level, within the fair value hierarchy, the assets measured at fair value on a recurring basis as of June 30,March 31, 2018 and September 30, 2017, in accordance with the fair value hierarchy as defined above. As of June 30,March 31, 2018 and September 30, 2017, the Company did not hold any assets classified as Level 2 or Level 3.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

There were no assets or liabilities measured at fair value on a nonrecurring basis at June 30,March 31, 2018 or September 30, 2017.

Stock-Based Compensation

Stock-based compensation cost is measured at the grant date based on the calculated fair value of the award. The expense is recognized over the participant’s requisite service period, generally the vesting period of the award. The related excess tax benefit received upon the exercise of stock options, if any, is reflected in the Company’s statement of cash flows as a financing activity. There were no excess tax benefits recorded during either of the ninesix month periods ended June 30,March 31, 2018 and JulyApril 1, 2017.

The Company uses the Black-Scholes option pricing model as the method for determining the estimated fair value of its stock awards. The Black-Scholes method of valuation requires several assumptions: (1) the expected term of the stock award, (2) the expected future stock price volatility over the expected term, (3) a risk-free interest rate and (4) the expected dividend rate.

The expected term represents the expected period of time the Company believes the options will be outstanding based on historical information. Estimates of expected future stock price volatility are based on the historic volatility of the Company’s common stock, and the risk free interest rate is based on the U.S. Treasury Note rate. The Company utilizes a forfeiture rate based on an analysis of its actual experience. The forfeiture rate is not material to the calculation of share-based compensation. There were 14,500 and 14,000 options granted during each of the ninesix month periods ended June 30,March 31, 2018 and JulyApril 1, 2017.2017, respectively.

The following table summarizes stock-based compensation costs included in the Company’s consolidated statements of operations for the three and ninesix month periods ended June 30,March 31, 2018 and JulyApril 1, 2017:

NOTE 2.4. Inventories

Inventories consisted of the following:

NOTE 3.5. Income Taxes

The Company has not recorded an income tax benefit on its net loss for the three and ninesix month periods ended June 30,March 31, 2018 and JulyApril 1, 2017 due to its uncertain realizability. During previous fiscal years, the Company recorded a valuation allowance for the full amount of its net deferred tax assets since it could not predict the realization of these assets.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law by the President of the United States. The Tax Act includes a number of changes, including the lowering of the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018. The Company has determined and completed the accounting for certain income tax effects of the Tax Act in applying FASB ASC 740 to the current reporting period. Because the Company records a valuation allowance for its entire deferred income tax asset, there was no impact on the reported amounts in the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q as a result of the Tax Act.

NOTE 4.6. Loss Per Share

Outstanding potentially dilutive stock options, which were not included in the net loss per share amounts as their effect would have been anti-dilutive, were as follows: 201,037228,837 shares at June 30,March 31, 2018 and 251,714252,114 shares at JulyApril 1, 2017. Furthermore, in periods with a net loss, basic and diluted shares will have the same value.

NOTE 5.7. Major Customers and Export SalesRevenue

During each of the three month periodperiods ended June 30,March 31, 2018 and April 1, 2017, the Company had one customer that represented 95%97% and 90%, respectively, of net sales as compared torevenue. During each of the threesix month periodperiods ended JulyMarch 31, 2018 and April 1, 2017, during which the Company had two customers that represented 97% (63% and 34%, respectively) of net sales. During the nine month period ended June 30, 2018, the Company had one customer that represented 91%86% and 90%, respectively, of net sales as compared to the nine month period ended July 1, 2017, during which the Company had two customers that represented 91% (79% and 12%, respectively) of net sales.revenue.

A breakdown of foreign and domestic net salesrevenue for the three and ninesix month periods ended June 30,March 31, 2018 and JulyApril 1, 2017 is as follows:

The Company solddid not sell any products into two foreign countries during the three month period ended June 30,March 31, 2018 and onesold products into three foreign countrycountries during the three month period ended JulyApril 1, 2017. The Company sold products into four foreign countries during each of the ninesix month periodperiods ended June 30,March 31, 2018 and five foreign countries during the nine month period ended JulyApril 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 ourthe Company’s foreign revenues by country as a percentage of total foreign revenue.

A summary of foreign revenue, as a percentage of total foreign revenue by geographic area, is as follows:

The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. Cash equivalents are invested in money market mutual funds. Money market mutual funds held in a brokerage account are considered available for sale. The Company accounts for marketable securities in accordance with FASB ASC 320, .Investments—Debt and Equity Securities. All marketable securities must be classified as one of the following: held to maturity, available for sale, or trading. The Company classifies its marketable securities as either available for sale or held to maturity.

Available for sale securities are carried at fair value, with unrealized holding gains and losses reported in stockholders’ equity as a separate component of accumulated other comprehensive income (loss). Held to maturity securities are carried at amortized cost. The cost of securities sold is determined based on the specific identification method. Realized gains and losses, and declines in value judged to be other than temporary, are included in investment income.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

As of June 30,March 31, 2018, cash equivalents consisted of the following:

As of March 31, 2018, held to maturity securities 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:

NOTE 7.9. Cost Method Investment

On October 30, 2014, the Company made an investment of $275,000 to purchase 11,000 shares of common stock of PulsedLight, Inc., an early stage start-up company located in Bend, Oregon. The investment represented a 10.8% ownership stake in the company at the time of purchase and was accounted for utilizing the cost method of accounting. On January 12, 2016, the Company entered into an agreement to sell its shares in PulsedLight. The net proceeds to the Company after closing costs and certain liabilities amounted to $737,283, of which the Company received $661,466 at closing and of which $75,817 was deposited in an escrow account in accordance with the terms of the sale that required 10% of the proceeds to be held in escrow for one year. The escrow balance as of December 31, 2016 is included in other current assets within the accompanying consolidated balance sheet. The escrow balance was received by the Company in January 2017.