# Techprecision Corp: Form 10-Q for the period ended Sep 30, 2020

- Company: [Techprecision Corp](/companies/tpcs.md) (CIK 1328792)
- Form: 10-Q
- Filed: 2020-11-12
- Accepted by EDGAR: Nov 12, 2020, 16:21 ET
- Period: 2020-09-30
- Accession: 0001104659-20-124428
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1328792/000110465920124428/tm2029666-1_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1328792/000110465920124428/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-07-01 to 2020-09-30 | $4.7m | us-gaap:Revenues |
| Revenue | 6 months, 2020-04-01 to 2020-09-30 | $8.0m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2020-07-01 to 2020-09-30 | $3.6m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2020-04-01 to 2020-09-30 | $6.2m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2020-07-01 to 2020-09-30 | $1.1m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2020-04-01 to 2020-09-30 | $1.8m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2020-07-01 to 2020-09-30 | $696.0k | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2020-04-01 to 2020-09-30 | $1.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-07-01 to 2020-09-30 | $432.8k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2020-04-01 to 2020-09-30 | $336.5k | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-07-01 to 2020-09-30 | $51.6k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2020-04-01 to 2020-09-30 | $109.5k | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-07-01 to 2020-09-30 | $111.3k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2020-04-01 to 2020-09-30 | $73.9k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 6 months, 2020-04-01 to 2020-09-30 | $154.5k | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Diluted EPS | 3 months, 2020-07-01 to 2020-09-30 | $0.01 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2020-04-01 to 2020-09-30 | $0.01 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-07-01 to 2020-09-30 | $0.01 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2020-04-01 to 2020-09-30 | $0.01 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-07-01 to 2020-09-30 | 30,987,233 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2020-04-01 to 2020-09-30 | 31,002,130 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2020-04-01 to 2020-09-30 | −$739.5k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2020-04-01 to 2020-09-30 | $354.8k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2020-09-30 | $1.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-09-30 | $9.8m | us-gaap:AssetsCurrent |
| Total assets | at 2020-09-30 | $16.1m | us-gaap:Assets |
| Current liabilities | at 2020-09-30 | $2.8m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2020-09-30 | $9.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,588 characters.

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;
- external factors, including the COVID-19 pandemic, that may be outside of our control;
- the impacts of the COVID-19 pandemic and government-imposed lockdowns in response thereto;
- 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;

14

- 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;
- the risk that the proposed acquisition of Stadco may not be completed in a timely manner or at all, which may adversely affect the Company’s business and the price of Company’s common stock;
- the failure of either party to satisfy any of the conditions to the consummation of the proposed acquisition of Stadco and uncertainties as to the timing of the consummation of the proposed acquisition;
- the occurrence of any event, change or other circumstance that could give rise to the termination of the securities purchase agreement governing the acquisition;
- the effect of the announcement or pendency of the proposed acquisition on the Company’s business relationships, operating results and business generally;
- risks related to diverting management’s attention from the Company’s ongoing business operations;
- unexpected costs, charges or expenses resulting from the proposed acquisition; and
- those risks discussed in “*Item 1A. Risk Factors”* and elsewhere in our 2020 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

#### Contract Manufacturing

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.

#### Financial Results

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 and in foreign markets. Generally, our projects are made up of short-term contracts with a production timeline that can range from three to as much as thirty-six months. Units manufactured under the majority of our customer contracts are delivered on time and with a positive gross margin. Our results of operations for any specific period 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.

If revenue for a particular quarter is below our expectations, we may not be able to proportionally reduce operating expenses for that quarter. Therefore, a revenue shortfall would have a disproportionate effect on our operating results for that quarter. We have reported operating losses in three of the last five quarters. In Fiscal 2020 we reported a loss from operations of $0.1 million, due primarily to an increase in cost of sales for losses on certain customer projects. Until we complete and deliver the final units from these projects, they will continue to dampen gross margin in future quarterly periods.

For the six months ended September 30, 2020, our net sales and net income were $8.0 million and $0.2 million, respectively, compared with net sales of $7.4 million and net loss of $0.1 million for the six months ended September 30, 2019. Our gross margin for the six months ended September 30, 2020 and 2019 was 22.8% and 20.6%, respectively. We used $0.7 million of cash in operations for the six months ended September 30, 2020 and had a cash balance of $1.1 million at September 30, 2020. Our sales order backlog at September 30, 2020 and March 31, 2020 was approximately $14.8 million and $16.8 million, respectively.

#### Acquisition of Stadco

We recently announced an agreement to purchase a company that manufactures precision parts for the defense and aerospace industries. Incremental costs incurred for due diligence as a result of this agreement could impact earnings in future quarterly periods. Because of the size of this acquisition target relative to our business, following closing, we expect to report that our results of operations, cash flows and financial condition will differ materially from those reported to date. The acquisition agreement is subject to certain conditions, and may or may not be completed unless all of the conditions set forth in the agreement are completed. Failure to successfully integrate and realize the expected benefits of such acquisitions or to implement our acquisition strategy, including successfully integrating acquired businesses, could have an adverse effect on our business, financial condition and results of operations.

#### COVID-19

At the end of March 2020, the outbreak of coronavirus (COVID-19) had spread worldwide as a pandemic. The full extent of the outbreak, related business and travel restrictions and changes to social behavior intended to reduce its spread remain uncertain and subject to change as the health crisis continues to evolve in the U.S. and abroad. The directives imposed by federal, state and local governments did not impair our ability to maintain operations during the first half of fiscal 2021 as the Company was designated an “Essential Service.” The pandemic has nevertheless negatively affected certain of the Company’s customers, suppliers and labor force, and with the changing conditions as a result of the COVID-19 outbreak, the impact on our operations and financial results for the remainder of fiscal 2021 remains uncertain.

We and our customers have been designated essential services as national critical infrastructure companies by the U.S. Department of Homeland Security. Additionally, we believe that the long term outlook for the defense industry remains positive as we continue to see meaningful opportunities in our defense sector, primarily in the nuclear submarine business for the next twelve months and beyond.

### 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 2020 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 six months ended September 30, 2020.

### 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.

### 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 most directly comparable U.S. GAAP financial measures.

### Three Months Ended September 30, 2020 and 2019

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

*(dollars in thousands)*

|  | September 30, 2020 Amount | Percent | September 30, 2019 Amount | Percent | Changes Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $4,714 | 100% | $3,074 | 100% | $1,640 | 53% |
| Cost of sales | 3,585 | 76% | 2,660 | 87% | 925 | 35% |
| Gross profit | 1,129 | 24% | 414 | 13% | 715 | 173% |
| Selling, general and administrative | 696 | 15% | 741 | 24% | (45) | (6)% |
| Operating income (loss) | 433 | 9% | (327) | (11)% | 760 | 232% |
| Other expense, net | (51) | (1)% | (71) | (2)% | 20 | 28% |
| Income (loss) before taxes | 382 | 8% | (398) | (13)% | 780 | 196% |
| Income tax expense (benefit) | 111 | 2% | (107) | (4)% | 218 | 204% |
| Net income (loss) | $271 | 6% | $(291) | (9)% | $562 | 193% |

### Net Sales

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).

Net sales were $4.7 million for the three months ended September 30, 2020, or 53% higher when compared to net sales for the three months ended September 30, 2019 of $3.1 million. Net sales in our defense markets increased by 13% when compared to the three months ended September 30, 2019, as our defense backlog remains strong as new orders for components continue to flow down from our prime defense contractors. Net sales to other commercial markets increased by $1.3 million when compared to the three months ended September 30, 2019, primarily on completed projects for components shipped to energy and medical customers. We have experienced repeat business in these markets, but the order flow is uneven and difficult to forecast.

### 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 three months ended September 30, 2020 were $3.6 million compared to $2.7 million for the three months ended September 30, 2019. Gross margin was 23.9% for the three months ended September 30, 2020 and 13.5% for the three months ended September 30, 2019. Gross profit was $1.1 million for the three months ended September 30, 2020, or $0.7 million higher when compared to the three months ended September 30, 2019.

Our fiscal 2021 second quarter gross profit was higher due to a favorable project product mix with higher margins and efficient throughput that included actual labor hours that were in-line with estimates to complete. Our fiscal 2020 second quarter included a loss provision for certain customer projects and under-absorbed factory overhead which dampened gross margin for that period.

We continue to solve learning-curve challenges on a limited number of projects in the manufacturing schedule which had an unfavorable financial impact in fiscal 2020. Progress notwithstanding, until we complete and deliver the final units from these projects, they will continue to dampen gross margin in future quarterly periods.

### Selling, General and Administrative Expenses

Total selling, general and administrative expenses for the three months ended September 30, 2020 decreased by $44,975 due primarily to a decrease in outside advisory services and travel expenses as a result of the COVID-19 pandemic when compared to the three months ended September 30, 2019.

### Other Expense, net

Interest expense was lower for the three months ended September 30, 2020 when compared to the three months ended September 30, 2019, and should continue to be lower than the prior year, barring any additional borrowings for working capital purposes under our revolving credit facility. Debt issue costs increased as the Company began to amortize costs associated with increasing the borrowing limit under the Revolver loan with Berkshire bank and borrowings under the payroll protection program, or PPP. The following table reflects other income, interest expense and amortization of debt issue costs for the three months ended:

|  | September 30, 2020 | September 30, 2019 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Other income, net | $804 | $1,448 | $(644) | (44)% |
| Interest expense | $(35,975) | $(64,515) | $28,540 | 44% |
| Amortization of debt issue costs | $(15,607) | $(8,081) | $(7,526) | (93)% |

### Income Taxes

For the three months ended September 30, 2020 we recorded tax expense of $111,302 compared to a tax benefit of $107,576 for the three months ended September 30, 2019. Tax benefit for the three months ended September 30, 2019 was the result of an operating loss.

### Net Income (Loss)

As a result of the foregoing, for the three months ended September 30, 2020, we recorded net income of $0.3 million, compared with a net loss of $0.3 million, for the three months ended September 30, 2019.

### Six Months Ended September 30, 2020 and 2019

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)*

|  | September 30, 2020 Amount | Percent | September 30, 2019 Amount | Percent | Changes Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $7,996 | 100% | $7,408 | 100% | $588 | 8% |
| Cost of sales | 6,170 | 77% | 5,885 | 79% | 285 | 5% |
| Gross profit | 1,826 | 23% | 1,523 | 21% | 303 | 20% |
| Selling, general and administrative | 1,489 | 19% | 1,482 | 20% | 7 | -% |
| Operating income (loss) | 337 | 4% | 41 | 1% | 296 | 728% |
| Other expense, net | (108) | (1)% | (128) | (2)% | 20 | 16% |
| Income (loss) before taxes | 229 | 3% | (87) | (1)% | 316 | 361% |
| Income tax expense (benefit) | 74 | 1% | (17) | -% | 91 | 526% |
| Net income (loss) | $155 | 2% | (70) | (1)% | $225 | 320% |

### Net Sales

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).

Changes in net sales generally reflect a different product mix and project volume when comparing the current and prior year periods. Net sales were $8.0 million for the six months ended September 30, 2020, or 8% higher when compared to net sales for the six months ended September 30, 2019 of $7.4 million. For the six months ended September 30, 2020, net sales in our defense markets decreased by $0.1 million when compared to the six months ended September 30, 2019. However, our defense backlog remains strong as new orders for components continue to flow down from our prime defense contractors. Net sales to other commercial markets increased by $0.7 million when compared to the six months ended September 30, 2019 on projects completed for customers in the energy and medical markets. We have repeat business in this sector, but the order flow can be uneven and difficult to forecast.

### 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 six months ended September 30, 2020 were $6.2 million compared to $5.9 million for the six months ended September 30, 2019. Gross margin was 22.8% for the six months ended September 30, 2020 and 20.6% for the six months ended September 30, 2019. Gross profit was $1.8 million for the six months ended September 30, 2020, or 20% higher when compared to the six months ended September 30, 2019.

Overall, more labor hours were used on higher margin projects during the six month period. As a result, labor costs and factory overhead were lower as a percentage of revenue, due to the efficient throughput as actual labor hours were in line with original estimates to complete.

### Selling, General and Administrative Expenses

Total selling, general and administrative expenses for the six months ended September 30, 2020 increased by $6,988 as an increase in salaries and stock-based compensation more than offset a decrease in professional fees and travel expenses when compared to the six months ended September 30, 2019.

### Other Expense, net

Interest expense was lower for the six months ended September 30, 2020 when compared to the six months ended September 30, 2019, and should continue to be lower than the prior year, barring any additional borrowings for working capital purposes under our revolving credit facility. Debt issue costs increased as we began to amortize costs associated with amendments to the existing Berkshire loan agreement bank and new borrowings under the payroll protection program, or PPP.

Other income for the six months ended September 30, 2019 included proceeds from the sale of machinery and equipment of $16,000. The following table reflects other income, interest expense and amortization of debt issue costs for the six months ended:

|  | September 30, 2020 | September 30, 2019 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Other income, net | $1,456 | $20,878 | $(19,422) | (93)% |
| Interest expense | $(78,394) | $(128,349) | $49,955 | 39% |
| Amortization of debt issue costs | $(31,086) | $(20,770) | $(10,316) | (50)% |

#### nm – not meaningful

### Income Taxes

For the six months ended September 30, 2020 we recorded tax expense of $73,942 and a tax benefit of $17,358 for the six months ended September 30, 2019. The tax benefit for the six months ended September 30, 2019 was the result of an operating loss.

The valuation allowance on deferred tax assets at September 30, 2020 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 Income (Loss)

As a result of the foregoing, for the six months ended September 30, 2020, we recorded net income of $0.2 million, compared with a net loss of $0.1 million for the six months ended September 30, 2019.

### Liquidity and Capital Resources

On May 8, 2020, the Company, through its wholly owned subsidiary Ranor, Inc., issued a promissory note, or the Note, evidencing an unsecured loan in the amount of $1,317,100 made to Ranor under the Paycheck Protection Program, or the PPP. The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, and is administered by the U.S. Small Business Administration, or the SBA. The loan to Ranor was made through Berkshire Bank.

The Note provides for an interest rate of 1.00% per year and matures two years after the issuance date. Principal and accrued interest are payable monthly in equal installments commencing on the date that is approximately six months after the date funds are first disbursed on the loan and continuing through the maturity date, unless the Note is forgiven as described below. To be available for loan forgiveness, the Note may only be used for payroll costs, costs related to certain group health care benefits and insurance premiums, rent payments, utility payments, mortgage interest payments and interest payments on any other debt obligation that existed before February 15, 2020. The Note may be prepaid at any time prior to maturity with no prepayment penalties and contains events of default and other conditions customary for a Note of this type.

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loan granted under the PPP, with such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment of payroll costs, certain group health care benefits and insurance premiums, and any payments of mortgage interest, rent, and utilities. The terms of any forgiveness may also be subject to further requirements in any regulations and guidelines the SBA may adopt. While the Company currently believes that its use of the Note proceeds will meet the conditions for forgiveness under the PPP, no assurance is provided that the Company will obtain forgiveness of the Note in whole or in part.

On June 5, 2020, the PPP was amended to give borrowers more time to spend loan proceeds and still obtain loan forgiveness. The amendments extended the length of the covered period as defined in the CARES Act from eight to twenty-four weeks, while allowing borrowers that received PPP loans before June 5, 2020 to elect to use the original eight-week covered period. In addition, the amendments provide that if the borrower does not apply for forgiveness of a loan within ten months after the last day of the covered period, the PPP loan is no longer deferred and the borrower must begin paying principal and interest. As provided under the amendments, our first payment, if required, would not be due until August 25, 2021.

We also have a revolving line of credit with Berkshire Bank available as a resource, if necessary. The Company borrowed $1.0 million under the Revolver Loan on April 3, 2020 and repaid that principal on June 30, 2020. There were no borrowed amounts outstanding under the Revolver Loan at September 30, 2020 and March 31, 2020. Interest-only payments on advances made under the Revolver Loan during the six months ended September 30, 2020 totaled $5,986 at a weighted average interest rate of 2.76%. Unused borrowing capacity at September 30, 2020 was $3.0 million. The maturity date of the Revolver Loan is December 20, 2020.

At September 30, 2020, we had cash and cash equivalents of $1.1 million and working capital of $7.1 million. We believe our available cash plus cash expected to be provided by operations during fiscal 2021, and borrowing capacity available under the Revolver Loan 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. However, following the closing of the acquisition of Stadco, or in connection therewith, we may need to reevaluate our financing needs in light of the significant changes we expect to the combined company’s capital resource needs. As a result, we may decide to seek new debt and/or equity financing.

The table below presents selected liquidity and capital measures at:

*(dollars in thousands)*

|  | September 30, 2020 | March 31, 2020 | Change Amount |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $1,092 | $931 | $161 |
| Working capital | $7,057 | $5,595 | $1,462 |
| Total debt | $3,850 | $2,587 | $1,263 |
| Total stockholders’ equity | $9,736 | $9,469 | $267 |

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

*(dollars in thousands)*

| Cash flows provided by (used in): | September 30, 2020 | September 30, 2019 | Change Amount |
| --- | ---: | ---: | ---: |
| Operating activities | $(739) | $938 | $(1,677) |
| Investing activities | (355) | (11) | (344) |
| Financing activities | 1,255 | (409) | 1,664 |
| Net increase in cash | $161 | $518 | $(357) |

#### 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, progress payments and payments made after shipment of finished goods. Cash used in operations for the six months ended September 30, 2020 was $0.7 million compared with cash provided by operations of $0.9 million for fiscal 2020.

In the first six months of fiscal 2021, our accounts receivable and contract assets increased and contract liabilities decreased due to a period of efficient throughput and spending on new projects, improving turnover, but still resulting in a higher amount of cash used in operations for the period ended September 30, 2020. Also, we have encountered some delayed inspections, deliveries, and disrupted supply chain issues, due to travel restrictions in connection with the COVID-19 pandemic. The future financial impact of the COVID-19 pandemic cannot be reasonably estimated at this time as its impact depends on future developments, which are highly uncertain and cannot be predicted.

#### Investing activities

We anticipate that we will spend approximately $0.2 million in new factory machinery and equipment during the remainder of fiscal 2021. Net cash used in investing activities for purchases of property, plant and equipment in the six months ended September 30, 2020 and 2019 totaled $354,788 and $11,544, respectively.

#### Financing activities

On May 8, 2020 we borrowed $1.3 million under the CARES Act payroll protection program. On April 3, 2020 we borrowed $1.0 million under our Revolver loan, then paid down $1.0 million in principal on June 30, 2020.

For the six months ended September 30, 2020 and 2019 we made monthly principal payments of $53,614 and $402,889 in connection with our term debt and finance lease obligations.

All of the above activity resulted in a net increase in cash of $0.2 million for the six months ended September 30, 2020 compared with an increase in cash of $0.5 million for the six months ended September 30, 2019.

### Off-Balance Sheet Arrangements

We do not currently have, and have not had, any off-balance sheet assets, liabilities or arrangements at September 30, 2020.

### EBITDA Non-GAAP Financial Measure

To complement our condensed consolidated statements of operations and comprehensive income (loss) and condensed consolidated statements of cash flows, we use EBITDA, a non-GAAP financial measure. Net income (loss) 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 income (loss) plus interest, income taxes, depreciation and amortization. EBITDA, a non-GAAP financial measure, was $0.7 million for the six months ended September 30, 2020, as compared to $0.4 million for the six months ended September 30, 2019. The following table provides a reconciliation of EBITDA to net income (loss), the most directly comparable GAAP measure reported in our condensed consolidated financial statements for the following periods:

*(dollars in thousands)*

|  | Three Months ended September 30, 2020 | 2019 | Change | Six Months ended September 30, 2020 | 2019 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net income (loss) | $271 | $(291) | $562 | $155 | $(70) | $225 |
| Income tax expense (benefit) | 111 | (107) | 218 | 74 | (17) | 91 |
| Interest expense (1) | 52 | 73 | (21) | 110 | 149 | (39) |
| Depreciation | 170 | 190 | (20) | 339 | 380 | (41) |
| EBITDA | $604 | $(135) | $739 | $678 | $442 | $236 |

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

## Controls and procedures

As filed, 3,696 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 September 30, 2020, 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 September 30, 2020, 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.

## Risk factors

As filed, 7,036 characters.

***Our ability to complete the acquisition of Stadco is subject to closing conditions, including the receipt of consents and approvals from third parties, which may impose conditions that could adversely affect us or cause the acquisition not to be completed.***

Our acquisition of Stadco and its affiliates is subject to a number of closing conditions as specified in the stock purchase agreement entered into with Stadco and its holding company. These include, among others, the entry into arrangements with certain lenders of Stadco and its affiliates and the absence of governmental restraints or prohibitions preventing the consummation of the acquisition. No assurance can be given that the required consents and approvals will be obtained or that the closing conditions will be satisfied in a timely manner or at all. Any delay in completing the acquisition could cause the combined company not to realize, or to be delayed in realizing, some or all of the benefits that we expect to achieve. In addition, we can provide no assurance that these conditions will not result in the abandonment or delay of the acquisition. The occurrence of any of these events could have a material adverse effect on our results of operations, cash flows, financial condition and/or the trading price of our common stock.

***We may not achieve the intended benefits of our acquisition of Stadco, and the acquisition may disrupt our current plans or operations.***

We may not be able to successfully integrate Stadco’s business and assets or otherwise realize the expected benefits of the transaction, including anticipated annual operating cost and capital synergies to the extent currently anticipated, or at all. To realize these anticipated benefits, our business and Stadco’s business must be successfully combined, which is subject to our ability to consolidate operations, corporate cultures and systems and our ability to eliminate redundancies and costs. Difficulties in integrating Stadco into our operations may result in the combined company performing differently than expected, in operational challenges or in the failure to realize anticipated synergies and efficiencies in the expected time frame or at all. The integration of the two companies may result in material challenges, including the diversion of management’s attention from ongoing business concerns; retaining key management and other employees; retaining existing business and operational relationships, including customers and other counterparties, and attracting new business and operational relationships; the possibility of faulty assumptions underlying expectations regarding the integration process and associated expenses; consolidating corporate and administrative infrastructures and eliminating duplicative operations; coordinating geographically separate organizations; difficulties in the assimilation of employees and corporate cultures; unanticipated issues in integrating information technology, communications and other systems; as well as unforeseen expenses or delays associated with the acquisition. If we are not successful in integrating Stadco’s business and assets or otherwise fail to realize the expected operating efficiencies, cost savings and other benefits currently anticipated from the Stadco acquisition, our results of operations, cash flows and financial condition may be materially adversely affected.

***Whether or not it is completed, the announcement and pendency of the acquisition of Stadco could cause disruptions in our business, which could have an adverse effect on our business and financial results.***

Whether or not it is completed, the announcement and pendency of our acquisition of Stadco could cause disruptions in our business: our and Stadco’s current and prospective employees may experience uncertainty about their future roles with the combined company, which might adversely affect the ability to retain key employees; uncertainty regarding the completion of the acquisition may cause customers, suppliers, distributors, vendors, strategic partners or others to delay or defer entering into contracts, make other decisions or seek to change or cancel existing business relationships; and the attention of management may be directed toward the completion of the acquisition. If the acquisition is not completed, we will have incurred significant costs and diverted management resources, for which we will have received little or no benefit.

***We are expected to incur substantial expenses related to the acquisition of Stadco and its affiliates and the integration of their business with ours.***

We expect to incur substantial expenses in connection with the integration of our business with Stadco and its affiliates. There are a large number of processes, policies, procedures, operations, technologies and systems that must be integrated, including purchasing, accounting and finance, sales, payroll, pricing, revenue management, marketing and benefits. In addition, our and Stadco’s businesses will continue to maintain a presence in Westminster, Massachusetts and Los Angeles, California, respectively. Some of these costs will be non-recurring expenses related to the acquisition itself, including legal and accounting costs and systems consolidation costs. We may also incur additional costs to attract, motivate or retain management personnel and other key employees. We have incurred and will continue to incur acquisition fees and costs related to formulating integration plans for the combined business, and the execution of these plans may lead to additional unanticipated costs.

***Our stockholders may not realize a benefit from the acquisition of Stadco commensurate with the ownership dilution they will experience in connection with the transaction.***

If the combined company is unable to realize the full strategic and financial benefits currently anticipated from the acquisition of Stadco and its affiliates, our stockholders will have experienced substantial dilution of their ownership interests without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the combined company is able to realize only part of the strategic and financial benefits currently anticipated from the acquisition.

***The market price of our common stock following the acquisition of Stadco may decline as a result of the transaction.***

The market price of our common stock may decline as a result of our acquisition of Stadco and its affiliates for a number of reasons, including if:

- investors react negatively to the prospects of the combined company’s business and financial condition following the acquisition;
- the effect of the acquisition on the combined company’s business and prospects is not consistent with the expectations of financial or industry analysts; or
- the combined company does not achieve the perceived benefits of the acquisition as rapidly or to the extent anticipated by management and the Company’s investors, or at all.

Filed Nov 12, 2020.
Source: SEC EDGAR, the filing index for accession 0001104659-20-124428. Last ingested by Listed: Nov 10, 2026, 04:27 ET. No prices; not investment advice.