# Techprecision Corp: Form 10-Q for the period ended Dec 31, 2017

- Company: [Techprecision Corp](/companies/tpcs.md) (CIK 1328792)
- Form: 10-Q
- Filed: 2018-02-13
- Accepted by EDGAR: Feb 13, 2018, 16:40 ET
- Period: 2017-12-31
- Accession: 0001144204-18-007986
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1328792/000114420418007986/tv484899_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1328792/000114420418007986/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2017-10-01 to 2017-12-31 | $3.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2017-04-01 to 2017-12-31 | $10.5m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2017-10-01 to 2017-12-31 | $422.8k | us-gaap:GrossProfit |
| Gross profit | 9 months, 2017-04-01 to 2017-12-31 | $3.6m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2017-10-01 to 2017-12-31 | $596.3k | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2017-04-01 to 2017-12-31 | $2.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2017-10-01 to 2017-12-31 | −$173.5k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2017-04-01 to 2017-12-31 | $1.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2017-10-01 to 2017-12-31 | $104.9k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2017-04-01 to 2017-12-31 | $314.1k | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-10-01 to 2017-12-31 | $413.1k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2017-04-01 to 2017-12-31 | $946.2k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-10-01 to 2017-12-31 | −$691.4k | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Net income | 9 months, 2017-04-01 to 2017-12-31 | $101.3k | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Diluted EPS | 3 months, 2017-10-01 to 2017-12-31 | −$0.02 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2017-04-01 to 2017-12-31 | $0.00 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-10-01 to 2017-12-31 | −$0.02 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2017-04-01 to 2017-12-31 | $0.00 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-10-01 to 2017-12-31 | 28,824,593 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2017-04-01 to 2017-12-31 | 29,564,841 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2017-04-01 to 2017-12-31 | $1.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2017-04-01 to 2017-12-31 | $914.6k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2017-12-31 | $3.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-12-31 | $7.8m | us-gaap:AssetsCurrent |
| Total assets | at 2017-12-31 | $15.1m | us-gaap:Assets |
| Current liabilities | at 2017-12-31 | $2.4m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2017-12-31 | $8.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 30,769 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 entitled “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 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 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:

- our ability to change the composition of our revenues and effectively reduce 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;
- restrictions in our ability to our operate our business due to our outstanding indebtedness;
- government regulations and requirements;
- pricing and business development difficulties;
- 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
- the risks discussed in “Item 1A. Risk Factors” and elsewhere in our 2017 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 U.S. 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 the 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 are seeking more long-term projects with predictable cost structures.

We historically have experienced, and continue to experience, customer concentration. For the nine months ended December 31, 2017 and December 31, 2016, our largest customer accounted for approximately 38% and 47% of reported net sales, respectively. Our sales order backlog at December 31, 2017 was approximately $11.2 million compared with a backlog of $15.8 million at March 31, 2017.

For the nine months ended December 31, 2017, our net sales and income before income taxes were $14.1 million and $1.0 million, respectively, compared with net sales and income before income taxes of $13.6 million and $2.0 million, respectively, for the nine months ended December 31, 2016. Our gross margins for the nine months ended December 31, 2017 were 25.6% compared with gross margins of 37.2% in the nine months ended December 31, 2016. We generated $1.3 million of cash from operating activities and invested $0.9 million in new machinery and equipment for the nine months ended December 31, 2017. We had a cash balance of $3.0 million at December 31, 2017.

### Critical Accounting Policies

The preparation of the unaudited 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 contract accounting, 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 2017 Form 10-K. There were no significant changes in the critical accounting policies during the nine months ended December 31, 2017, nor did we make any changes to our accounting policies that would have changed these critical accounting policies.

### New Accounting Pronouncements

See Note 3 - New Accounting Standards to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q 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 and in foreign markets. 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. 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 measures” 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, 2017 and 2016

The following table sets forth information from our Condensed Consolidated Statements of Operations and Comprehensive Income, in dollars and as a percentage of revenue:

*(dollars in thousands)*

|  | December 31, 2017 Amount | Percent | December 31, 2016 Amount | Percent | Changes Period Ended December 31, 2017 to 2016 Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $3,642 | 100% | $5,319 | 100% | $(1,677) | (32)% |
| Cost of sales | 3,220 | 88% | 3,267 | 61% | (47) | (1)% |
| Gross profit | 422 | 12% | 2,052 | 39% | (1,630) | (79)% |
| Selling, general and administrative | 596 | 16% | 1,955 | 37% | (1,359) | (70)% |
| Gain from claims assignment settlement | -- | --% | (1,122) | (21)% | 1,122 | 100% |
| (Loss) income from operations | (174) | (5)% | 1,219 | 23% | (1,393) | nm% |
| Other expense, net | (104) | (3)% | (206) | (4)% | 102 | 49% |
| (Loss) income before income taxes | (278) | (8)% | 1,013 | 19% | (1,291) | nm% |
| Income tax expense | 413 | 11% | 21 | --% | 392 | nm% |
| Net (loss) income | $(691) | (19)% | $992 | 19% | $(1,683) | nm% |

#### nm - not meaningful

### Net Sales

Our shipments in the three months ended December 31, 2017 included orders for new and repeat business from existing key customers. Customer acceptance and the timing of delivery dates play a significant role as to when we can recognize revenue in any given period. Changes in net sales reflect a different product mix when comparing reporting periods as our customers gauge their demand for new components. For the three months ended December 31, 2017, net sales decreased by $1.7 million, or 32%, to $3.6 million when compared to $5.3 million for the three months ended December 31, 2016. Net sales in our defense market decreased by $1.6 million in the three months ended December 31, 2017 when compared to the three months ended December 31, 2016, because of a slowdown in customer project activity caused by defense customer appropriations and funding delays. The December 31, 2016 sales were higher because of favorable timing with customer schedules in that prior year period. Net sales in our precision industrial market decreased by $0.3 million when compared to the three months ended December 31, 2016 on lower shipments of large scale medical device components. Net sales in our energy market increased by $0.2 million when compared to the three months ended December 31, 2016, primarily on a higher shipment volume of nuclear plant components.

### 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 December 31, 2017 decreased by $47,000 compared to the three months ended December 31, 2016. Gross profit decreased by $1.6 million for the three months ended December 31, 2017 when compared to the three months ended December 31, 2016. Gross margin in any reporting period is impacted by the mix of products and services we provide on projects completed within that period. Gross margins were 11.6% and 38.6% for the three months ended December 31, 2017 and 2016, respectively. Gross margin was lower for the three months ended December 31, 2017 due to a higher mix of low margin component shipments and under absorbed overhead related to the slowdown in project activity.

### Selling, General and Administrative Expenses

Total SG&A expenses for the three months ended December 31, 2017 decreased by approximately $1.4 million due primarily to a $1.0 million decrease in share based compensation expense when compared to the three months ended December 31, 2016.

### Other Income (Expense)

The following table reflects other income, interest expense and amortization of debt issue costs for the three months ended December 31:

*(dollars in thousands)*

|  | 2017 | 2016 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Other income | $86 | $1,130 | $(1,044) | (92)% |
| Interest expense | $(89,249) | $(157,112) | $67,863 | 43% |
| Amortization of debt issue costs | $(15,612) | $(50,409) | $34,797 | 69% |

Interest expense and amortization of debt issue costs for the three months ended December 31, 2017 were lower when compared to the three months ended December 31, 2016. The decrease in interest expense is primarily due to lower interest rates in connection with our debt refinancing transactions completed in fiscal 2017. Amortization of debt issue costs for the three months ended December 31, 2017 decreased when compared to the three months ended December 31, 2016 because of lower debt issue costs in connection with our new debt refinancing transaction completed in fiscal 2017.

### Income Taxes

For the three months ended December 31, 2017 we recorded tax expense of $413,096, compared to tax expense of $20,598 for the three months ended December 31, 2016.

With the enactment of the Tax Act, our December 31, 2017 financial results included a $0.5 million discrete tax item related to the re-measurement of our U.S. deferred tax assets at the new lower 21% U.S. federal statutory tax rate. These estimates are based on the Company's initial analysis of the Tax Act and may be adjusted in future periods as required. The Tax Act has significant complexity and implementation guidance from the Internal Revenue Service, clarifications of state tax law and the completion of the Company’s 2017 tax return filings could all impact these estimates.

The lower tax expense for the three months ended December 31, 2016 was primarily the result of the utilization of net operating losses and the associated reduction in the valuation allowance which had been provided for this deferred tax asset.

### Net Income (Loss)

As a result of the foregoing, for the three months ended December 31, 2017, our net loss was $691,391, or $0.02 per share basic and fully diluted, compared with net income of $992,094, or $0.03 per share basic and fully diluted, for the three months ended December 31, 2016.

### Nine Months Ended December 31, 2017 and 2016

The following table sets forth information from our Condensed Consolidated Statements of Operations and Comprehensive Income, in dollars and as a percentage of revenue:

*(dollars in thousands)*

|  | December 31, 2017 Amount | Percent | December 31, 2016 Amount | Percent | Changes Period Ended December 31, 2017 to 2016 Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $14,061 | 100% | $13,620 | 100% | $441 | 3% |
| Cost of sales | 10,465 | 74% | 8,559 | 63% | 1,906 | 22% |
| Gross profit | 3,596 | 26% | 5,061 | 37% | (1,465) | (29)% |
| Selling, general and administrative | 2,236 | 16% | 3,583 | 26% | (1,347) | (38)% |
| Gain from claims assignment settlement | -- |  | (1,122) | (8)% | 1,122 | 100% |
| Income from operations | 1,360 | 10% | 2,600 | 19% | (1,240) | (48)% |
| Other income (expense), net | (313) | (2)% | (575) | (4)% | 262 | 46% |
| Income before income taxes | 1,047 | 7% | 2,025 | 15% | (978) | (48)% |
| Income tax expense | 946 | 7% | 42 | -% | 904 | --% |
| Net income | $101 | --% | $1,983 | 15% | $(1,882) | --% |

#### nm - not meaningful

### Net Sales

Our shipments in the nine months ended December 31, 2017 included orders for new and repeat business from existing key customers. Customer acceptance and the timing of delivery dates play a significant role as to when we can recognize revenue in any given period. Changes in net sales reflect a different product mix when comparing reporting periods as our customers gauge their demand for new components. For the nine months ended December 31, 2017, net sales increased by $0.4 million, or 3%, to $14.1 million when compared to $13.6 million for the nine months ended December 31, 2016. Net sales in our defense market increased by $0.9 million in the nine months ended December 31, 2017 when compared to the nine months ended December 31, 2016, primarily on higher shipments of new product components to one of our largest defense customers. Net sales in our energy market increased by $1.6 million when compared to the nine months ended December 31, 2016, primarily on a higher shipment volume of nuclear plant components. Net sales in our precision industrial market decreased by $2.1 million when compared to the three months ended December 31, 2016 on lower shipments of large scale medical device components.

### 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, 2017 increased by $1.9 million compared to the nine months ended December 31, 2016 primarily on higher sales volume and higher amounts of unabsorbed overhead. Gross profit decreased by $1.5 million for the nine months ended December 31, 2017 when compared to the nine months ended December 31, 2016. Gross margin in any reporting period is impacted by the mix of products and services we provide on projects completed within that period. Gross margins were 25.7% and 37.1% for the nine months ended December 31, 2017 and 2016, respectively. Lower gross margin for the nine months ended December 31, 2017 were primarily the result of higher volume of low margin components shipped during the period plus higher amounts of unabsorbed overhead related to the slowdown in project activity.

### Selling, General and Administrative Expenses

Total SG&A expenses decreased by approximately $1.3 million for the nine months ended December 31, 2017 compared to the nine months ended December 31, 2016, primarily the result of lower share based compensation.

### Other Income (Expense)

The following table reflects other income, interest expense and amortization of debt issue costs for the nine months ended December 31:

*(dollars in thousands)*

|  | 2017 | 2016 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Other income | $1,633 | $8,705 | $(7,072) | (81)% |
| Interest expense | $(261,406) | $(443,541) | $182,135 | 41% |
| Amortization of debt issue costs | $(52,651) | $(140,458) | $87,807 | 63% |

Interest expense and amortization of debt issue costs for the nine months ended December 31, 2017 were lower when compared to the nine months ended December 31, 2016. The decrease in interest expense is primarily due to lower interest rates in connection with the debt refinancing transactions completed in fiscal 2017. Lower debt issue costs in connection with our refinanced debt resulted in lower amortization for the nine months ended December 31, 2017 when compared to the nine months ended December 31, 2016.

### Income Taxes

The Tax Act reduces the U.S. federal statutory tax rate from 35% to 21%, effective January 1, 2018. U.S. tax law requires that taxpayers with a fiscal year that begins before and ends after the effective date of a rate change calculate a blended tax rate based on the pro rata number of days in the fiscal year before and after the effective date. As a result, for the fiscal year ending March 31, 2018, the Company’s U.S. federal statutory income tax rate will be 31.55%.

For the nine months ended December 31, 2017 we recorded tax expense of $946,247 compared to tax expense of $41,556 for the nine months ended December 31, 2016.

With the enactment of the Tax Act, our December 31, 2017 financial results included a $0.5 million discrete tax item related to the re-measurement of our U.S. deferred tax assets at the new lower 21% U.S. federal statutory tax rate. Estimates are based on the Company's initial analysis of the Tax Act and may be adjusted in future periods as required. The Tax Act has significant complexity and implementation guidance from the Internal Revenue Service, clarifications of state tax law and the completion of the Company’s 2017 tax return filings could all impact these estimates.

The valuation allowance on deferred tax assets at December 31, 2017 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.

The lower effective tax rate for the nine months ended December 31, 2016 was the result of the utilization of net operating losses and the associated reduction in the valuation allowance which had been provided for this deferred tax asset.

### Net Income

As a result of the foregoing, for the nine months ended December 31, 2017, our net income was $101,297 or $0.00 per share basic and fully diluted, compared with net income of $2.0 million or $0.07 per share basic and fully diluted, for the nine months ended December 31, 2016.

### 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 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 U.S. GAAP.

We define EBITDA as net loss or income plus interest, income taxes, depreciation and amortization. Net loss was $691,391 for the three months ended December 31, 2017, as compared to net income of $992,094 for the three months ended December 31, 2016. Net income was $101,297 for the nine months ended December 31, 2017, as compared to net income of $2.0 million for the nine months ended December 31, 2016. EBITDA was $1.9 million for the nine months ended December 31, 2017, as compared to $3.1 million for the nine months ended December 31, 2016.

The following table provides a reconciliation of EBITDA to net income, the most directly comparable U.S. GAAP measure reported in our condensed consolidated financial statements:

*(dollars in thousands)*

|  | Three months ended December 31, 2017 | Three months ended December 31, 2016 | Change Amount |
| --- | ---: | ---: | ---: |
| Net income (loss) | $(691) | $992 | $(1,683) |
| Income tax expense | 413 | 21 | 392 |
| Interest expense (1) | 105 | 208 | (103) |
| Depreciation | 172 | 166 | 6 |
| EBITDA | $(1) | $1,387 | $(1,388) |

*(dollars in thousands)*

|  | Nine months ended December 31, 2017 | Nine months ended December 31, 2016 | Change Amount |
| --- | ---: | ---: | ---: |
| Net income | $101 | $1,983 | $(1,882) |
| Income tax expense | 946 | 42 | 904 |
| Interest expense (1) | 314 | 584 | (270) |
| Depreciation | 524 | 519 | 5 |
| EBITDA | $1,885 | $3,128 | $(1,243) |

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

### Liquidity and Capital Resources

At December 31, 2017, we had cash and cash equivalents of $3.0 million. Net cash provided by operating activities for the nine months ended December 31, 2017 was $1.3 million, compared to net cash provided by operating activities for the nine months ended December 31, 2016 of $1.9 million. Net cash used in investing activities was $0.8 million for the nine months ended December 31, 2017. At December 31, 2017, we had working capital of $5.4 million as compared with working capital of $5.0 million at March 31, 2017. The table below presents selected liquidity and capital measures as of:

*(dollars in thousands)*

|  | December 31, 2017 | March 31, 2017 | Change Amount |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $2,971 | $3,066 | $(95) |
| Working capital | $5,372 | $4,979 | $393 |
| Total debt | $5,248 | $5,781 | $(533) |
| Total stockholders’ equity | $8,301 | $7,970 | $331 |

19

The following table summarizes our primary cash flows for the periods presented:

*(dollars in thousands)*

| Cash flows provided by (used in): | December 31, 2017 | December 31, 2016 | Change Amount |
| --- | ---: | ---: | ---: |
| Operating activities | $1,274 | $1,912 | $(638) |
| Investing activities | (835) | (453) | (382) |
| Financing activities | (533) | 1,004 | (1,537) |
| Effect of exchange rate on cash and cash equivalents | (1) | -- | (1) |
| Net (decrease) increase in cash and cash equivalents | $(95) | $2,463 | $(2,558) |

At December 31, 2017 we were in compliance with all financial covenants contained in all of our debt agreements. We believe our available cash 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.

#### 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. Cash provided by operations for the nine months ended December 31, 2017 was $1.3 million compared with cash provided by operations of $1.9 million for the nine months ended December 31, 2016. The nine month period ended December 31, 2017 was marked by a slowdown in customer project activity which resulted in less cash collected from customer advances and progress payments. For the nine months ended December 31, 2016, cash generated from operations was augmented by a $614,452 cash payment in accordance with a Claims Assignment Settlement. The resolution of this claim was recognized as a gain of $1.1 million in the Statement of Operations and Comprehensive Income.

#### Investing activities

Net cash used in investing activities totaled $0.8 million for the nine months ended December 31, 2017. We expended $0.9 million for new factory machinery and equipment, offset in part by $80,000 in proceeds from the sale of certain machinery and equipment. In the next twelve months, we anticipate making further investments in new factory machinery and equipment, which we believe will allow us to meet certain anticipated customer needs. The Company anticipates funding further investments of approximately $500,000 with cash or debt.

#### Financing activities

For the nine months ended December 31, 2017, net cash used in financing activities was $0.5 million of monthly principal payments in connection with our debt obligations. For the nine months ended December 31, 2016, cash provided by financing activities was $1.0 million. During the nine months ended December 31, 2016, we received proceeds of $6.2 million from our new long-term debt agreements, and we disbursed $4.7 million of the proceeds as payment in full for the principal obligations under our previous loan agreements. We also paid $159,137 in loan closing costs and $335,486 for monthly principal payments on our outstanding debt during the nine months ended December 31, 2016.

All of the above activity resulted in a net decrease in cash of $95,127 for the nine months ended December 31, 2017 compared with an increase in cash of $2.5 million for the nine months ended December 31, 2016.

### Off-Balance Sheet Arrangements

We do not currently have, and have not had during the nine months ended December 31, 2017, any off-balance sheet assets, liabilities or arrangements.

## Controls and procedures

As filed, 3,698 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, 2017, 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 U.S. 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, 2017, 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, 2018.
Source: SEC EDGAR, the filing index for accession 0001144204-18-007986. Last ingested by Listed: Nov 10, 2026, 04:27 ET. No prices; not investment advice.