# Techprecision Corp: Form 10-Q for the period ended Sep 30, 2018

- Company: [Techprecision Corp](/companies/tpcs.md) (CIK 1328792)
- Form: 10-Q
- Filed: 2018-11-13
- Accepted by EDGAR: Nov 13, 2018, 16:18 ET
- Period: 2018-09-30
- Accession: 0001144204-18-059372
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1328792/000114420418059372/tv506197_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1328792/000114420418059372/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-07-01 to 2018-09-30 | $3.6m | us-gaap:Revenues |
| Revenue | 6 months, 2018-04-01 to 2018-09-30 | $7.7m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2018-07-01 to 2018-09-30 | $2.5m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2018-04-01 to 2018-09-30 | $5.6m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2018-07-01 to 2018-09-30 | $1.1m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2018-04-01 to 2018-09-30 | $2.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2018-07-01 to 2018-09-30 | $751.0k | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2018-04-01 to 2018-09-30 | $1.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-07-01 to 2018-09-30 | $344.1k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2018-04-01 to 2018-09-30 | $666.1k | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-07-01 to 2018-09-30 | $90.2k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2018-04-01 to 2018-09-30 | $185.6k | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-07-01 to 2018-09-30 | $77.4k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2018-04-01 to 2018-09-30 | $142.4k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-07-01 to 2018-09-30 | $180.7k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2018-04-01 to 2018-09-30 | $345.1k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-07-01 to 2018-09-30 | $0.01 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2018-04-01 to 2018-09-30 | $0.01 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-07-01 to 2018-09-30 | $0.01 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2018-04-01 to 2018-09-30 | $0.01 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-07-01 to 2018-09-30 | 30,150,485 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2018-04-01 to 2018-09-30 | 30,054,055 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2018-04-01 to 2018-09-30 | −$683.4k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2018-04-01 to 2018-09-30 | $228.1k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2018-09-30 | $1.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-09-30 | $10.3m | us-gaap:AssetsCurrent |
| Total assets | at 2018-09-30 | $17.7m | us-gaap:Assets |
| Current liabilities | at 2018-09-30 | $5.0m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2018-09-30 | $8.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 31,976 characters.

### Statement Regarding Forward Looking Disclosure

The following discussion of the results of our operations and financial condition should be read in conjunction with the 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 implied 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 reliance on individual purchase orders, rather than long-term contracts, to generate revenue;
- 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;
- operating in a single geographic location;
- restrictions in our ability to our 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 economic conditions, industry and market conditions, and growth rates; and
- the risks discussed in “Item 1A. Risk Factors” and elsewhere in our 2018 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 six months ended September 30, 2018 and 2017, our largest customer accounted for approximately 40% and 48% of reported net sales, respectively. Our sales order backlog at September 30, 2018 was approximately $12.1 million compared with a backlog of $14.0 million at March 31, 2018.

For the six months ended September 30, 2018, our net sales and income before income taxes were $7.7 million and $0.5 million, respectively, compared with net sales and income before income taxes of $10.4 million and $1.3 million, respectively, for the six months ended September 30, 2017. Our gross margin for the six months ended September 30, 2018 was 27.8% compared with gross margin of 30.5% in the six months ended September 30, 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 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 2018 Form 10-K, and in Note 2 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. 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, 2018, except for revenue recognition as noted below.

Accounting Standards Codification Topic 606, or ASC 606, sets forth five steps for revenue recognition: identification of the contract, identification of any separate performance obligations in the contracts, determination of the transaction price, allocation of the transaction price to separate performance obligations, and revenue recognition when performance obligations are satisfied.

We recognize revenue over time based on the transfer of control of the promised goods or services to the customer, or at a point in time. This transfer will occur over time when the Company’s performance does not create an asset that has an alternative use to the Company and we have an enforceable right to payment for performance completed to date. Otherwise, control to the promised goods or services transfers to customers at a point in time.

The majority of the Company’s contracts have a single performance obligation and provide title to, or grant a security interest in, work-in-process to the customer. In addition, these contracts contain enforceable rights to payment, allowing the Company to recover both its cost and a reasonable margin on performance completed to date. The combination of these factors indicates that the customer controls the asset (and revenue is recognized) as the asset is created or enhanced. The Company measures progress for performance obligations satisfied 1) over time using input methods (e.g., costs incurred, resources consumed, labor hours expended, time elapsed), or 2) at a point in time when units produced are delivered.

Under arrangements where the customer does not have title to, or a security interest in, the work-in-process, our evaluation of whether revenue should be recognized over time requires significant judgment about whether the asset has an alternative use and whether the entity has an enforceable right to payment for performance completed to date. When one or both of these factors is not present, the Company will recognize revenue at the point in time where control over the promised good or service transfers to the customer, i.e. when the customer has taken physical possession of the product the Company built for the customer.

The Company and its customers occasionally enter into contract modifications, including change orders. We may account for the modification as a separate contract, the termination of an old contract and creation of a new contract, or as part of the original contract, depending on the nature and pricing of the goods or services included in the modification. In general, contract modifications – as well as other changes in estimates of sales, costs, and profits on a performance obligation – are recognized using the cumulative catch-up method of accounting. This method recognizes in the current period the cumulative effect of the changes in current and prior periods. A significant change in an estimate on one or more contracts in a period could have a material effect on the consolidated balance sheet or results of operations for that period. For the six months ended September 30, 2018, net cumulative catch-up adjustments were not material. No individual adjustment was material to the Company's condensed consolidated statements of operations and comprehensive income for the three and six months ended September 30, 2018.

If incentives and other contingencies are provided as part of the contract, the Company will include in the initial transaction price the consideration to which it expects to be entitled under the terms and conditions of the contract, generally estimated using a most likely amount approach. In the context of variable consideration, the Company limits, or constrains, the transaction price to amounts for which the Company believes a significant reversal of revenue is not probable. Adjustments to constrain the transaction price may be due to a portion of the transaction price in being in excess of approved funding, a lack of history with the customer, a lack of history with the goods or services being provided, or other items.

### New Accounting Pronouncements

See Note 3 - New Accounting Standards to the 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 most directly comparable U.S. GAAP financial measures.

### Three Months Ended September 30, 2018 and 2017

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

*(dollars in thousands)*

|  | Three Months Ended September 30, 2018 Amount | Percent | Three Months Ended September 30, 2017 Amount | Percent | Changes Period Ended September 30, 2018 to 2017 Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $3,621 | 100% | $4,589 | 100% | $(968) | (21)% |
| Cost of sales | 2,526 | 70% | 3,156 | 69% | (630) | (20)% |
| Gross profit | 1,095 | 30% | 1,433 | 31% | (338) | (24)% |
| Selling, general and administrative | 751 | 21% | 720 | 16% | 31 | 4% |
| Income from operations | 344 | 9% | 713 | 15% | (369) | (52)% |
| Other income | 4 | -% | 1 | -% | 3 | nm% |
| Interest expense | (90) | (2)% | (100) | (2)% | 10 | 10% |
| Total other expense, net | (86) | (2)% | (99) | (2)% | 13 | 13% |
| Income before income taxes | 258 | 7% | 614 | 13% | (356) | (58)% |
| Income tax expense | 77 | 2% | 246 | 5% | (169) | (69)% |
| Net income | $181 | 5% | $368 | 8% | $(187) | (51)% |

#### nm- not meaningful

### Net Sales

Changes in net sales generally reflect a different product mix when comparing reporting periods. Net sales for the three months ended September 30, 2018 decreased when compared to the three months ended September 30, 2017 on a slower order flow as our customers gauge demand for new components. The slower order flow in fiscal 2018 and shift in production to products with increased cycle times resulted in lower revenue during the second quarter.

For the three months ended September 30, 2018, net sales decreased by $1.0 million, or 21%, to $3.6 million, when compared to $4.6 million for the three months ended September 30, 2017. The second quarter of fiscal year 2019 included $1.4 million of revenue related to the adoption of ASC 606. Net sales in our defense market decreased by $0.5 million in the three months ended September 30, 2018 when compared to the three months ended September 30, 2017. Net sales in our energy market decreased by $0.5 million when compared to the three months ended September 30, 2017, primarily on lower demand for nuclear plant components.

### Cost of Sales and Gross Margin

Cost of sales consists primarily of raw materials, parts, labor, overhead and subcontracting costs. The Company began to reach targeted levels of production during the quarter as gross margin improved to 30.2% for the three months ended September 30, 2018. The increased manufacturing activity has resulted in lower unabsorbed overhead. Our cost of sales for the three months ended September 30, 2018 was $2.5 million, which includes $0.6 million associated with the adoption of ASC 606, compared to $3.2 million for the three months ended September 30, 2017. Gross profit was $1.1 million for the three months ended September 30, 2018 a $0.3 million decrease when compared to $1.4 million in the three months ended September 30, 2017.

### Selling, General and Administrative Expenses

Total selling, general, and administrative expenses, or SG&A, for the three months ended September 30, 2018 increased by $30,696, or 4%, when compared with the three months ended September 30, 2017 primarily due to an increase in share-based compensation expense in connection with executive stock option grants.

### Other Expense, net

We reduced our overall interest rates on debt when we refinanced our debt in fiscal 2017. As a result, interest expense was lower during the three months ended September 30, 2018 when compared to the same period in the prior year and will continue to decrease as we amortize debt principal. The following table reflects other income, interest expense and amortization of debt issue costs for the three months ended September 30:

|  | 2018 | 2017 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Other income | $4,275 | $1,456 | $2,819 | nm% |
| Interest expense | $(75,634) | $(82,920) | $7,286 | (9)% |
| Amortization of debt issue costs | $(14,615) | $(17,494) | $2,879 | (16)% |

#### nm- not meaningful

### Income Taxes

For the three months ended September 30, 2018 we recorded tax expense of $77,374, compared to tax expense of $245,516 for the three months ended September 30, 2017. The lower tax expense for the three months ended September 30, 2018 was primarily the result of the lower earnings before income taxes and a lower federal statutory tax rate of 21% enacted under the Tax Cuts and Jobs Act, or the 2017 Tax Act, in December 2017. The federal statutory tax rate was 34% on higher earnings before income taxes in the same quarter of the prior year.

### Net Income

As a result of the foregoing, for the three months ended September 30, 2018, our net income was $180,715, or $0.01 per share basic and fully diluted, compared with net income of $368,186, or $0.01 per share basic and fully diluted, for the three months ended September 30, 2017.

### Six Months Ended September 30, 2018 and 2017

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

*(dollars in thousands)*

|  | Six Months Ended September 30, 2018 Amount | Percent | Six Months Ended September 30, 2017 Amount | Percent | Changes Period Ended September 30, 2018 to 2017 Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $7,720 | 100% | $10,419 | 100% | $(2,699) | (26)% |
| Cost of sales | 5,572 | 72% | 7,246 | 69% | (1,674) | (23)% |
| Gross profit | 2,148 | 28% | 3,173 | 31% | (1,025) | (32)% |
| Selling, general and administrative | 1,482 | 19% | 1,640 | 16% | (158) | (10)% |
| Income from operations | 666 | 9% | 1,533 | 15% | (867) | (57)% |
| Other income | 7 | -% | 2 | -% | 5 | nm% |
| Interest expense | (186) | (2)% | (209) | (2)% | 23 | 11% |
| Total other expense, net | (179) | (2)% | (207) | (2)% | 28 | 14% |
| Income before income taxes | 487 | 6% | 1,326 | 13% | (839) | (63)% |
| Income tax expense | 142 | 2% | 533 | 5% | (391) | (73)% |
| Net income | $345 | 4% | $793 | 8% | $(448) | (56)% |

#### nm- not meaningful

### Net Sales

Generally, increases and decreases in net sales reflect changes in product mix. Net sales for the six months ended September 30, 2018 decreased when compared to the six months ended September 30, 2017 on a slower order flow as our customers gauge demand for new components. The slower order flow in the prior fiscal year and shift in production to products with increased cycle times resulted in lower revenue during the first six months of fiscal 2019.

For the six months ended September 30, 2018, net sales decreased by $2.7 million, or 26%, to $7.7 million, which includes revenue of $3.8 million associated with the adoption ASC 606, when compared to $10.4 million for the six months ended September 30, 2017. Net sales in our defense market decreased by $1.6 million for the six months ended September 30, 2018 when compared to the six months ended September 30, 2017. Net sales to energy markets decreased by $1.1 million when compared to the six months ended September 30, 2017, primarily on lower demand for nuclear plant components.

### Cost of Sales and Gross Margin

Cost of sales consists primarily of raw materials, parts, labor, overhead and subcontracting costs. Gross margin was 27.8% for the six months ended September 30, 2018 as the Company returned to targeted levels of production. Our cost of sales for the six months ended September 30, 2018 was $5.6 million, which includes $2.2 million associated with the impact of ASC 606, compared to $7.2 million for the six months ended September 30, 2017. The decrease of $1.7 million when compared to the same period in the prior year is due primarily to lower revenue volume as the Company started up new project activity. Gross profit was $2.1 million for the six months ended September 30, 2018 or $1.0 million lower when compared to $3.2 million for the six months ended September 30, 2017.

### Selling, General and Administrative Expenses

Total SG&A expenses for the six months ended September 30, 2018 decreased by approximately $0.2 million due primarily to a decrease in accrued bonus, share-based compensation expense and outside advisory fees when compared to the six months ended September 30, 2017.

### Other Expense, net

We reduced our overall interest rates on debt when we refinanced our debt in fiscal 2017. As a result, interest expense was lower for the six months ended September 30, 2018 compared to the same period in the prior year and will continue to decrease as we amortize debt principal. The following table reflects other income, interest expense and amortization of debt issue costs for the six months ended September 30:

|  | 2018 | 2017 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Other income | $7,015 | $1,547 | $5,468 | nm% |
| Interest expense | $(155,787) | $(172,158) | $16,371 | (10)% |
| Amortization of debt issue costs | $(29,847) | $(37,038) | $7,191 | (19)% |

#### nm- not meaningful

### Income Taxes

For the six months ended September 30, 2018 we recorded tax expense of $142,403, compared to tax expense of $533,151 for the six months ended September 30, 2017. The lower tax expense for the three months ended September 30, 2018 was primarily the result of the lower earnings before income taxes and a lower federal statutory tax rate of 21% enacted under the 2017 Tax Act. The federal statutory tax rate was 34% on higher earnings before income taxes in the same quarter of the prior year.

### Net Income

As a result of the foregoing, for the six months ended September 30, 2018, our net income was $345,100, or $0.01 per share basic and fully diluted, compared with net income of $792,688, or $0.03 per share basic and fully diluted, for the six months ended September 30, 2017.

### Liquidity and Capital Resources

At September 30, 2018, we had working capital of $5.3 million as compared with working capital of $4.9 million at March 31, 2018. At September 30, 2018, we had cash and cash equivalents of $1.4 million. Cash used in operating activities was $0.7 million for the six months ended September 30, 2018 as project and production levels returned to normal levels. This is compared to net cash provided by operating activities for the six months ended September 30, 2017 of $0.5 million, a period where product shipments and net income was higher. The table below presents selected liquidity and capital measures as of:

*(dollars in thousands)*

|  | September 30, 2018 | March 31, 2018 | Change Amount |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $1,401 | $2,689 | $(1,288) |
| Working capital | $5,322 | $4,942 | $380 |
| Total debt | $4,686 | $5,064 | $(378) |
| Total stockholders’ equity | $8,921 | $8,012 | $909 |

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

*(dollars in thousands)*

| Cash flows provided by (used in): | September 30, 2018 | September 30, 2017 | Change Amount |
| --- | ---: | ---: | ---: |
| Operating activities | $(683) | $542 | $(1,225) |
| Investing activities | $(228) | $(765) | $537 |
| Financing activities | $(377) | $(353) | $(34) |

At September 30, 2018, the Company failed to maintain the required DSCR as defined in the Berkshire Loan Agreement, our principal credit facility. On November 2, 2018, the Company executed an instrument with Berkshire Bank under which Berkshire Bank waived the Company’s noncompliance with the DSCR, at September 30, 2018. Subject to the lapse of any applicable cure period, a default under the Berkshire Loan Agreement could have caused the acceleration of all outstanding obligations under the loan. If the lender had demanded repayment and caused the debt to be considered a short-term obligation, the Company would have been unable to pay the obligation because the Company does not have existing facilities or sufficient cash on hand to satisfy these obligations. The waiver does not apply to any future periods. We believe our available cash plus cash provided by operations will be sufficient to fund operating activities, 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 used in operations for the six months ended September 30, 2018 was $0.7 million compared with cash provided by operations of $0.5 million for the six months ended September 30, 2017. The six month period ended September 30, 2018 was marked by an increase in customer project activity which resulted in more cash used to ramp up new projects offset in part by cash collected from customer advances and progress payments. We expect that these new projects will increase the amount of cash we generate from operating activities in the next few fiscal quarters. Favorable timing with customer delivery schedules in the prior year period resulted in higher amounts of cash generated for the six months ended September 30, 2017.

#### Investing activities

Net cash used to purchase and build new equipment totaled $0.2 million for the six months ended September 30, 2018. For the six months ended September 30, 2017, net cash used for new factory machinery and equipment totaled $0.8 million, offset in part by $80,000 in proceeds from the sale of certain machinery and equipment. The Company expects to fund any further investments in machinery and equipment with cash or debt.

#### Financing activities

For the six months ended September 30, 2018 and 2017, net cash used in financing activities were $0.4 million and $0.4 million, respectively. Each period consisted of monthly principal payments in connection with our debt obligations.

All of the above activity resulted in a net decrease in cash of $1.3 million for the six months ended September 30, 2018 compared with a decrease in cash of $0.6 million for the six months ended September 30, 2017.

### Off-Balance Sheet Arrangements

We do not currently have, and have not had at September 30, 2018, any off-balance sheet assets, liabilities or arrangements.

### EBITDA Non-GAAP Financial Measure

To complement our condensed consolidated statements of operations and comprehensive 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 U.S. GAAP.

We define EBITDA as net income plus interest, income taxes, depreciation and amortization.

Net income was $180,715 for the three months ended September 30, 2018 compared with $368,186 for the three months ended September 30, 2017. EBITDA, a non-GAAP financial measure, was $0.5 million for the three months ended September 30, 2018, compared with $0.9 million for the three months ended September 30, 2017, a decrease of $0.4 million over the prior period.

Net income was $345,100 for the six months ended September 30, 2018 compared with $792,688 for the six months ended September 30, 2017. EBITDA, a non-GAAP financial measure, was $1.0 million for the six months ended September 30, 2018, compared with $1.8 million for the six months ended September 30, 2017, a decrease of $0.8 million over the prior period.

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

*(dollars in thousands)*

|  | Three months ended September 30, 2018 | 2017 | Change | Six months ended September 30, 2018 | 2017 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net income | $181 | $368 | $(187) | $345 | $793 | $(448) |
| Income tax expense | $77 | $246 | $(169) | $142 | $533 | $(391) |
| Interest expense (a) | $90 | $100 | $(10) | $186 | $209 | $(23) |
| Depreciation | $186 | $180 | $6 | $372 | $351 | $21 |
| EBITDA | $534 | $894 | $(360) | $1,045 | $1,886 | $(841) |

#### (a) includes amortization of debt issue costs

## Controls and procedures

As filed, 4,146 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, 2018, our disclosure controls and procedures were effective at a reasonable assurance level.

#### Changes in Internal Control over Financial Reporting

Our evaluation did not identify any change in the Company’s internal control over financial reporting during the quarter ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. We implemented internal controls to ensure we adequately evaluated our contracts and properly assessed the impact of the new accounting standards related to revenue recognition on our financial statements in preparation for the adoption of such new standard on April 1, 2018. There were no significant changes to the Company’s internal control over financial reporting due to the adoption of the new standard.

#### 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.

Filed Nov 13, 2018.
Source: SEC EDGAR, the filing index for accession 0001144204-18-059372. Last ingested by Listed: Nov 10, 2026, 04:27 ET. No prices; not investment advice.