# Techprecision Corp: Form 10-Q for the period ended Dec 31, 2019

- Company: [Techprecision Corp](/companies/tpcs.md) (CIK 1328792)
- Form: 10-Q
- Filed: 2020-02-13
- Accepted by EDGAR: Feb 13, 2020, 16:17 ET
- Period: 2019-12-31
- Accession: 0001104659-20-020190
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1328792/000110465920020190/tm205261-1_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1328792/000110465920020190/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-10-01 to 2019-12-31 | $3.7m | us-gaap:Revenues |
| Revenue | 9 months, 2019-04-01 to 2019-12-31 | $11.1m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2019-10-01 to 2019-12-31 | $3.4m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2019-04-01 to 2019-12-31 | $9.2m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2019-10-01 to 2019-12-31 | $314.3k | us-gaap:GrossProfit |
| Gross profit | 9 months, 2019-04-01 to 2019-12-31 | $1.8m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2019-10-01 to 2019-12-31 | $662.7k | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2019-04-01 to 2019-12-31 | $2.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-10-01 to 2019-12-31 | −$348.4k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2019-04-01 to 2019-12-31 | −$307.7k | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-10-01 to 2019-12-31 | $69.3k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2019-04-01 to 2019-12-31 | $218.4k | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-10-01 to 2019-12-31 | −$97.7k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2019-04-01 to 2019-12-31 | −$115.1k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-10-01 to 2019-12-31 | −$319.8k | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Net income | 9 months, 2019-04-01 to 2019-12-31 | −$390.0k | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Diluted EPS | 3 months, 2019-10-01 to 2019-12-31 | −$0.01 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2019-04-01 to 2019-12-31 | −$0.01 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-10-01 to 2019-12-31 | −$0.01 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2019-04-01 to 2019-12-31 | −$0.01 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-10-01 to 2019-12-31 | 29,254,594 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2019-04-01 to 2019-12-31 | 29,254,230 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2019-04-01 to 2019-12-31 | $609.4k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2019-04-01 to 2019-12-31 | $35.2k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2019-12-31 | $2.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-12-31 | $8.8m | us-gaap:AssetsCurrent |
| Total assets | at 2019-12-31 | $15.3m | us-gaap:Assets |
| Current liabilities | at 2019-12-31 | $3.4m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2019-12-31 | $9.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 28,654 characters.

### Statement Regarding Forward Looking Disclosure

The following discussion of the results of our operations and financial condition should be read in conjunction with our condensed consolidated financial statements and the related notes, which appear elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q, including this section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may contain predictive or “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of current or historical fact contained in this quarterly report, including statements that express our intentions, plans, objectives, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “should,” “would” and similar expressions, as they relate to us, are intended to identify forward-looking statements.

These statements are based on current expectations, estimates and projections made by management about our business, our industry and other conditions affecting our financial condition, results of operations or business prospects. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, the forward-looking statements due to numerous risks and uncertainties. Factors that could cause such outcomes and results to differ include, but are not limited to, risks and uncertainties arising from:

- our reliance on individual purchase orders, rather than long-term contracts, to generate revenue;
- our ability to balance the composition of our revenues and effectively control operating expenses;
- the availability of appropriate financing facilities impacting our operations, financial condition and/or liquidity;
- our ability to receive contract awards through competitive bidding processes;
- our ability to maintain standards to enable us to manufacture products to exacting specifications;
- our ability to enter new markets for our services;
- our reliance on a small number of customers for a significant percentage of our business;
- competitive pressures in the markets we serve;
- changes in the availability or cost of raw materials and energy for our production facilities;
- operating in a single geographic location;
- restrictions in our ability to operate our business due to our outstanding indebtedness;
- government regulations and requirements;
- pricing and business development difficulties;
- changes in government spending on national defense;
- our ability to make acquisitions and successfully integrate those acquisitions with our business;
- general industry and market conditions and growth rates;
- general economic conditions; and
- those risks discussed in “*Item 1A. Risk Factors”* and elsewhere in our 2019 Annual Report on Form 10-K, as well as those described in any other filings which we make with the SEC.

Any forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this Quarterly Report on Form 10-Q, except as required by applicable law. Investors should evaluate any statements made by us in light of these important factors.

### Overview

We offer a full range of services required to transform raw materials into precision finished products. Our manufacturing capabilities include: fabrication operations (cutting, press and roll forming, assembly, welding, heat treating, blasting and painting) and machining operations including CNC (computer numerical controlled) horizontal and vertical milling centers. We also provide support services to our manufacturing capabilities: manufacturing engineering (planning, fixture and tooling development, manufacturing), quality control (inspection and testing), materials procurement, production control (scheduling, project management and expediting) and final assembly.

All manufacturing is done in accordance with our written quality assurance program, which meets specific national and international codes, standards, and specifications. Ranor holds several certificates of authorization issued by the American Society of Mechanical Engineers and the National Board of Boiler and Pressure Vessel Inspectors. The standards used are specific to the customers’ needs, and our manufacturing operations are conducted in accordance with these standards.

Because our revenues are derived from the sale of goods manufactured pursuant to a contract, and we do not sell from inventory, it is necessary for us to constantly seek new contracts. There may be a time lag between our completion of one contract and commencement of work on another contract. During such periods, we may continue to incur overhead expense but with lower revenue resulting in lower operating margins. Furthermore, changes in either the scope of an existing contract or related delivery schedules may impact the revenue we receive under the contract and the allocation of manpower. Although we provide manufacturing services for large governmental programs, we usually do not work directly for the government or its agencies. Rather, we perform our services for large governmental contractors. Our business is dependent in part on the continuation of governmental programs which require our services and products.

Our contracts are generated both through negotiation with the customer and from bids made pursuant to a request for proposal. Our ability to receive contract awards is dependent upon the contracting party’s perception of such factors as our ability to perform on time, our history of performance, including quality, our financial condition and our ability to price our services competitively. Although some of our contracts contemplate the manufacture of one or a limited number of units, we continue to seek more long-term projects with predictable cost structures.

All of our sales recorded for the nine months ended December 31, 2019 were generated in the U.S. We have experienced, and continue to experience, customer concentration. For the nine months ended December 31, 2019 and 2018, our largest customer accounted for approximately 21% and 36% of reported net sales, respectively. For the nine months ended December 31, 2019, we had five customers which accounted for approximately 74% of our revenue, in the aggregate. Our sales order backlog at December 31, 2019 and March 31, 2019 was approximately $17.0 million and $12.6 million, respectively.

For the nine months ended December 31, 2019, our net sales were $11.1 million compared with net sales of $12.0 million for the nine months ended December 31, 2018. Our gross margin for the nine months ended December 31, 2019 and 2018 was 16.6% and 26.0%, respectively. Our gross margin for the nine months ended December 31, 2019 was impacted by higher cost of sales primarily due to cost overruns on certain customer projects. We generated $0.6 million of cash from operating activities in the nine months ended December 31, 2019 and had a cash balance of $2.0 million at December 31, 2019.

### Critical Accounting Policies

The preparation of the condensed consolidated financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions 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. We continually evaluate our estimates, including those related to revenue recognition, inventories, recovery of long-lived assets, income taxes and the valuation of equity transactions. These estimates and assumptions require management's most difficult, subjective or complex judgments. Actual results may differ under different assumptions or conditions.

Our significant accounting policies are set forth in detail in Note 2 to the consolidated financial statements included in the 2019 Annual Report on Form 10-K. We consider the policies relating to revenue recognition to be a critical accounting policy. There have been no significant changes to our critical accounting policies during the nine months ended December 31, 2019.

### Accounting Pronouncements

#### New Accounting Standards

See Note 3, Accounting Standards Update, in the Notes to the condensed consolidated financial statements in “*Item 1. Financial Statements”* for a discussion of recently adopted new accounting guidance and new accounting guidance not yet adopted.

### Results of Operations

Our results of operations are affected by a number of external factors including the availability of raw materials, commodity prices (particularly steel), macroeconomic factors, including the availability of capital that may be needed by our customers, and political, regulatory and legal conditions in the United States. Generally, our product mix is made up of short-term contracts with a production timeline of less than twelve months. Units manufactured under the majority of our customer contracts are delivered on time and with a positive gross margin. Our results of operations are also affected by our success in booking new contracts, the timing of revenue recognition, delays in customer acceptances of our products, delays in deliveries of ordered products and our rate of progress fulfilling obligations under our contracts. A delay in deliveries or cancellations of orders could have an unfavorable impact on liquidity, cause us to have inventories in excess of our short-term needs, and delay our ability to recognize, or prevent us from recognizing, revenue on contracts in our order backlog.

### Key Performance Indicators

While we prepare our financial statements in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, we also utilize and present certain financial measures that are not based on or included in U.S. GAAP. We refer to these as Non-GAAP financial measures. Please see the section “*EBITDA Non-GAAP financial measure”* below for further discussion of these financial measures, including the reasons why we use such financial measures and reconciliations of such financial measures to the nearest U.S. GAAP financial measures.

### Three Months Ended December 31, 2019 and 2018

The following table sets forth information from our condensed consolidated statements of operations and comprehensive (loss) income, in dollars and as a percentage of revenue:

*(dollars in thousands)*

|  | 2019 Amount | Percent | 2018 Amount | Percent | Changes Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $3,667 | 100% | $4,270 | 100% | $(603) | (14)% |
| Cost of sales | 3,353 | 91% | 3,299 | 77% | 54 | 2% |
| Gross profit | 314 | 9% | 971 | 23% | (657) | (68)% |
| Selling, general and administrative | 663 | 18% | 632 | 15% | 31 | 5% |
| (Loss) income from operations | (349) | (9)% | 339 | 8% | (688) | (203)% |
| Other expense, net | (69) | (2)% | (86) | (2)% | 17 | 20% |
| (Loss) income before taxes | (418) | (11)% | 253 | 6% | (671) | (265)% |
| Income tax (benefit) expense | (98) | (3)% | 35 | 1% | (133) | (382)% |
| Net (loss) income | $(320) | (8)% | $218 | 5% | $(538) | (247)% |

### Net Sales

Net sales were $3.7 million for the three months ended December 31, 2019, or 14% lower when compared to net sales for the three months ended December 31, 2018 of $4.3 million. Changes in net sales generally reflect a different product mix and project volume when comparing the current and prior periods.

Net sales to defense customers decreased by $1.0 million when compared to the three months ended December 31, 2018. Defense market revenue was lower due to a product mix that includes certain low margin customer projects when compared with a higher margin product mix in the same quarter a year ago. Increases in estimated hours to complete these certain low margin projects continued to dampen revenue recognition. Net sales in energy and industrial markets increased by $0.3 million and $0.1 million, respectively.

### Cost of Sales and Gross Margin

Cost of sales consists primarily of raw materials, parts, labor, overhead and subcontracting costs. Our cost of sales were $3.4 million for the three months ended December 31, 2019, compared to $3.3 million for the three months ended December 31, 2018. Gross profit was $0.3 million or a $0.7 million decrease when compared to the three months ended December 31, 2018. As a result, gross margin was 8.6% for the three months ended December 31, 2019, compared to 22.7% for the three months ended December 31, 2018.

An increase in the loss provision for certain customer projects had a negative impact on gross profit and gross margin as more labor hours were used on less profitable projects. We incurred an additional $0.3 million in cost overruns in the third quarter of fiscal 2020.

### Selling, General and Administrative Expenses

Total selling, general and administrative expenses for the three months ended December 31, 2019 increased by $30,892 when compared to the three months ended December 31, 2018, due primarily to an increase in professional fees for accounting and legal services.

### Other Expense, net

Interest expense and debt cost amortization was lower for the three months ended December 31, 2019 when compared to the three months ended December 31, 2018, and, absent any changes to outstanding indebtedness, will continue to decrease as we amortize debt principal to maturity. The following table reflects other income, interest expense and amortization of debt issue costs for the three months ended:

|  | December 31, 2019 | December 31, 2018 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Other income, net | $185 | $1,590 | $(1,405) | (88)% |
| Interest expense | $(58,817) | $(74,523) | $15,706 | 21% |
| Amortization of debt issue costs | $(10,511) | $(13,791) | $3,280 | 24% |

17

### Income Taxes

As a result of the foregoing, principally our lower net sales and cost of sales, the Company reported a pretax loss and recorded a tax benefit of $97,734 for the three months ended December 31, 2019. For the three months ended December 31, 2018 we recorded tax expense of $34,701.

### Net (Loss) Income

As a result of the foregoing, for the three months ended December 31, 2019, we recorded net loss of $0.3 million compared with net income of $0.2 million for the three months ended December 31, 2018.

### Nine Months Ended December 31, 2019 and 2018

The following table sets forth information from our condensed consolidated statements of operations and comprehensive (loss) income, in dollars and as a percentage of revenue:

*(dollars in thousands)*

|  | 2019 Amount | Percent | 2018 Amount | Percent | Changes Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $11,075 | 100% | $11,990 | 100% | $(915) | (8)% |
| Cost of sales | 9,238 | 83% | 8,872 | 74% | 366 | 4% |
| Gross profit | 1,837 | 17% | 3,118 | 26% | (1,281) | (41)% |
| Selling, general and administrative | 2,145 | 19% | 2,113 | 18% | 32 | 2% |
| (Loss) income from operations | (308) | (3)% | 1,005 | 8% | (1,313) | (131)% |
| Other expense, net | (197) | (2)% | (265) | (2)% | 68 | 26% |
| (Loss) income before taxes | (505) | (5)% | 740 | 6% | (1,245) | (168)% |
| Income tax (benefit) expense | (115) | (1)% | 177 | 1% | (292) | (165)% |
| Net (loss) income | $(390) | (4)% | $563 | 5% | $(953) | (169)% |

### Net Sales

Changes in net sales generally reflect a different product mix and project volume when comparing the current and prior periods. Net sales were $11.1 million for the nine months ended December 31, 2019, or 8% lower when compared to net sales for the nine months ended December 31, 2018 of $12.0 million. Net sales in defense markets decreased by $1.8 million when compared to the nine months ended December 31, 2018.

The Company records most of its revenue over time as it completes performance obligations. We measure progress for performance obligations satisfied over time using input methods (e.g., labor hours expended and time elapsed). Our current product mix includes certain customer projects with little or no margin which has consumed a higher number of actual labor hours than originally estimated to complete. The higher actual labor hours had the effect of consuming hours that could have been allocated to higher margin projects. This set of conditions has had a negative impact on revenue recognition and cost of sales primarily in our defense markets during the nine months ended December 31, 2019. Our defense backlog, however, remains strong as new orders for components continue to flow from prime defense contractors.

For the nine months ended December 31, 2019, revenue in energy and precision industrial markets increased by $0.2 million and $0.7 million, respectively.

Remaining performance obligations reflect future revenue that will be recorded in subsequent periods as projects in progress are completed. At December 31, 2019, the Company had $17.0 million of remaining performance obligations, an increase of $2.9 million when compared with December 31, 2018.

### Cost of Sales and Gross Margin

Cost of sales consists primarily of raw materials, parts, labor, overhead and subcontracting costs. Our cost of sales for the nine months ended December 31, 2019 were $9.2 million compared to $8.9 million for the nine months ended December 31, 2018. Gross profit decreased by $1.3 million to $1.8 million. Gross margin was lower at 16.6% for the nine months ended December 31, 2019 compared to 26.0% for the nine months ended December 31, 2018.

In the nine months ended December 31, 2019, gross profit and gross margin were impacted by an increase of $0.7 million in cost of sales for potential losses on certain customer projects. The fiscal 2020 nine month period was also marked by a higher number of new project startup activities, and a higher number of labor allocated to less profitable projects.

### Selling, General and Administrative Expenses

Total selling, general and administrative expenses for the nine months ended December 31, 2019 were up slightly due primarily to an increase in professional fees, almost entirely offset by a decrease in salary expense when compared to the nine months ended December 31, 2018.

### Other Expense, net

Interest expense and debt cost amortization was lower for the nine months ended December 31, 2019 when compared to the nine months ended December 31, 2018, and, absent any changes to our outstanding indebtedness, will continue to decrease as we amortize debt principal to maturity. Other income, net for the nine months ended December 31, 2019 includes proceeds from the sale of machinery and equipment for $16,000. The following table reflects other income, interest expense and amortization of debt issue costs for the nine months ended:

|  | December 31, 2019 | December 31, 2018 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Other income, net | $21,063 | $8,605 | $12,458 | 145% |
| Interest expense | $(187,167) | $(230,310) | $43,143 | 19% |
| Amortization of debt issue costs | $(31,280) | $(43,638) | $12,358 | 28% |

### Income Taxes

For the nine months ended December 31, 2019 we recorded a tax benefit of $0.1 million compared to tax expense of $0.2 million for the nine months ended December 31, 2018. The tax benefit for the nine months ended December 31, 2019 was primarily the result of a pretax loss recorded for the period in all tax jurisdictions. Our effective tax rate for the first nine months of fiscal 2020 was 22.8%.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The valuation allowance on deferred tax assets at December 31, 2019 was approximately $1.7 million. We believe that it is more likely than not that the benefit from certain state and foreign NOL carryforwards and other deferred tax assets will not be realized. In recognition of this risk, we continue to provide a valuation allowance on these items. In the event future taxable income is below management’s estimates or is generated in tax jurisdictions different than projected, the Company could be required to increase the valuation allowance for deferred tax assets. This would result in an increase in the Company’s effective tax rate.

### Net (Loss) Income

As a result of the foregoing, for the nine months ended December 31, 2019, we recorded net loss of $0.4 million compared with net income of $0.6 million for the nine months ended December 31, 2018.

### Liquidity and Capital Resources

On December 23, 2019 we entered into a Third Modification to Loan Agreement, or the Third Modification, and an Amended and Restated Promissory Note with Berkshire Bank. The Third Modification amends and modifies the Loan Agreement between Ranor and Berkshire Bank dated December 20, 2016, as amended by the First Modification to Loan Agreement dated June 6, 2018 and the Second Modification to Loan Agreement and First Modification and Allonge to Promissory Note dated December 19, 2018.

Under the Third Modification, Ranor and Berkshire Bank agreed to increase the maximum principal amount available under the Revolver Loan from $1,000,000 to $3,000,000, which is available for refinancing existing indebtedness and for working capital and general corporate purposes. Additionally, the parties agreed to lower the interest rate on advances made under the Revolver Loan based on LIBOR. Prior to the Third Modification, interest accrued on advances made under the Revolver Loan at a variable rate equal to the one-month LIBOR plus 275 basis points. Under the Third Modification, interest accrues on such advances at a variable rate equal to the one-month LIBOR plus 225 basis points. The Third Modification contains customary LIBOR replacement provisions.

The maturity date of the Revolver Loan remains December 20, 2020, and all other material terms of the Loan Agreement and Line of Credit Note were unchanged.

At December 31, 2019, we had cash and cash equivalents of $2.0 million and working capital of $5.4 million. In January 2020, the Company used $1.1 million from available cash and repaid in full its capital equipment obligation with Peoples Capital. This payment reduced our total debt obligations to $2.6 million at January 17, 2020 from $3.7 million at December 31, 2019.

We believe our available cash plus cash provided from operations will be sufficient to fund our operations, capital expenditures and principal and interest payments under our debt obligations through the 12 months from the issuance date of our financial statements. We also have a Revolver Loan with Berkshire Bank available as a resource, if necessary. The table below presents selected liquidity and capital measures for the periods ended:

*(dollars in thousands)*

|  | December 31, 2019 | March 31, 2019 | Change Amount |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $1,968 | $2,037 | $(69) |
| Working capital | $5,381 | $6,250 | $(869) |
| Total debt | $3,687 | $4,297 | $(610) |
| Total stockholders’ equity | $9,410 | $9,711 | $(301) |

The following table summarizes the primary components of cash flows for the nine months ended:

*(dollars in thousands)*

| Cash flows provided by (used in): | December 31, 2019 | December 31, 2018 | Change Amount |
| --- | ---: | ---: | ---: |
| Operating activities | $609 | $121 | $488 |
| Investing activities | (35) | (403) | 368 |
| Financing activities | (642) | (570) | (72) |
| Net decrease in cash | $(68) | $(852) | $784 |

#### Operating activities

Our primary sources of cash are from accounts receivable collections, customer advance payments and project progress payments. Our customers make advance payments and progress payments under the terms of each manufacturing contract. Our cash flows can fluctuate significantly from period to period as the composition of our receivables collections mix changes between advance payments and customer payments made after shipment of finished goods. We use cash to pay suppliers, employee wages and benefits, and interest and taxes.

Cash provided by operations for the nine months ended December 31, 2019 and 2018 was $0.6 million and $0.1 million, reflecting a change of $0.5 million. Favorable timing with customer advance payments and progress payments resulted in higher amounts of cash generated for the nine months ended December 31, 2019. The nine months ended December 31, 2019 was marked by an increase in project startup activity which resulted in more cash collected from customer advances and progress payments. At December 31, 2018, the Company had fewer sales orders in production, which led to a slower cash build at the end of the first nine months of fiscal 2019.

#### Investing activities

We anticipate that we will continue to make small investments in new factory machinery and equipment over the next calendar year. Net cash used in investing activities totaled $35,225 for the nine months ended December 31, 2019. We expended $0.4 million for new factory machinery and equipment for the nine months ended December 31, 2018.

#### Financing activities

We used $0.6 million of cash in financing activities for the nine months ended December 31, 2019 and 2018 for monthly principal payments in connection with our debt obligations.

All of the above activity resulted in a net decrease in cash of $0.1 million for the nine months ended December 31, 2019 compared with a decrease in cash of $0.9 million for the nine months ended December 31, 2018.

### Off-Balance Sheet Arrangements

We do not currently have, and have not had any off-balance sheet assets, liabilities or arrangements at December 31, 2019.

### EBITDA Non-GAAP Financial Measure

To complement our condensed consolidated statements of operations and comprehensive (loss) income and condensed consolidated statements of cash flows, we use EBITDA, a non-GAAP financial measure. Net income is the financial measure calculated and presented in accordance with U.S. GAAP that is most directly comparable to EBITDA. We believe EBITDA provides our board of directors, management and investors with a helpful measure for comparing our operating performance with the performance of other companies that have different financing and capital structures or tax rates. We also believe that EBITDA is a measure frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry, and is a measure contained in our debt covenants. However, while we consider EBITDA to be an important measure of operating performance, EBITDA and other non-GAAP financial measures have limitations, and investors should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.

We define EBITDA as net (loss) income plus interest, income taxes, depreciation and amortization. The following table provides a reconciliation of EBITDA to net income, the most directly comparable GAAP measure reported in our condensed consolidated financial statements for the three and nine months ended:

*(dollars in thousands)*

|  | Three Months ended December 31, 2019 | 2018 | change | Nine Months ended December 31, 2019 | 2018 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net (loss) income | $(320) | $218 | $(538) | $(390) | $563 | $(953) |
| Income tax (benefit) expense | (98) | 35 | (133) | (115) | 177 | (292) |
| Interest expense (1) | 69 | 88 | (19) | 218 | 274 | (56) |
| Depreciation | 168 | 187 | (19) | 548 | 559 | (11) |
| EBITDA | $(181) | $528 | $(709) | $261 | $1,573 | $(1,312) |

#### (1) Includes amortization of debt issue costs.

## Controls and procedures

As filed, 3,694 characters.

#### Evaluation of Disclosure Controls and Procedures.

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are controls and procedures that are designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and includes controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, an evaluation was carried out, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2019, our disclosure controls and procedures were effective at a reasonable assurance level.

#### Inherent Limitations Over Internal Controls

The Company’s internal control over financial reporting is designed under the supervision of our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods is subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

#### Changes in Internal Control over Financial Reporting

For the quarter ended December 31, 2019, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

Filed Feb 13, 2020.
Source: SEC EDGAR, the filing index for accession 0001104659-20-020190. Last ingested by Listed: Nov 10, 2026, 04:27 ET. No prices; not investment advice.