Techprecision Corp 10-Q for FY2023 Q2
Techprecision Corp (TPCS)
About this 10-Q
Techprecision Corp filed this 10-Q on November 17, 2022, covering the quarter ended September 30, 2022 (FY2023 Q2).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $8.52M
- up 77.7% from $4.8M a year earlier
- Net income
- $390.94K
- compared with a net loss of $220.41K a year earlier
- Diluted EPS
- $0.01
- compared with -$0.01 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of |
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incorporation or organization) |
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(Address of principal executive offices) |
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Registrant’s telephone number, including area code |
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ | ☐ | No |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒ | ☐ | No |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ | Yes | No |
The number of shares outstanding of the registrant’s common stock as of November 4, 2022 was
TABLE OF CONTENTS
| | Page |
3 | ||
3 | ||
| 3 | |
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) | 4 |
| 5 | |
| 6 | |
| 7 | |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 22 | |
34 | ||
34 | ||
36 | ||
36 | ||
| 37 |
2
PART I
ITEM 1. FINANCIAL STATEMENTS
TECHPRECISION CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
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| September 30, |
| March 31, | ||
| | 2022 | | 2022 | ||
ASSETS | | | |
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Current assets: |
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Cash and cash equivalents | | $ | | | $ | |
Accounts receivable | |
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Contract assets | |
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Raw materials | | | | | | |
Work-in-process | | | | | | |
Other current assets | |
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Total current assets | |
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Property, plant and equipment, net | |
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Right of use asset, net | | | | | | |
Deferred income taxes | |
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Other noncurrent assets, net | |
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Total assets | | $ | | | $ | |
LIABILITIES AND STOCKHOLDERS’ EQUITY: | |
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Current liabilities: | |
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Accounts payable | | $ | | | $ | |
Accrued expenses | |
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Contract liabilities | |
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Current portion of long-term lease liability | | | | | | |
Current portion of long-term debt | |
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Total current liabilities | |
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Long-term debt, net | |
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Long-term lease liability | | | | | | |
Other noncurrent liability | | | | | | |
Total liabilities | | | | | | |
Commitments and contingencies - see Note 15 | |
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Stockholders’ Equity: | |
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Common stock - par value $ | |
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Additional paid in capital | |
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Retained earnings | |
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Total stockholders’ equity | |
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Total liabilities and stockholders’ equity | | $ | | | $ | |
See accompanying notes to the condensed consolidated financial statements.
3
TECHPRECISION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (unaudited)
| | Three Months Ended September 30, | | Six Months Ended September 30, | ||||||||
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| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Net sales | | $ | | | $ | | | $ | | | $ | |
Cost of sales | |
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Gross profit | |
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Selling, general and administrative | |
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Loss from operations | |
| ( | |
| ( | |
| ( | |
| ( |
Other income | |
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Interest expense | |
| ( | |
| ( | |
| ( | |
| ( |
PPP loan forgiveness | | | — | | | — | | | — | | | |
Refundable employee retention tax credits | | | | | | — | | | | | | — |
Total other income (expense) | |
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| ( | |
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Income (loss) before income taxes | |
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| ( | |
| ( | |
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Income tax expense (benefit) | |
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| ( | |
| ( | |
| ( |
Net income (loss) | | $ | | | $ | ( | | $ | ( | | $ | |
Other comprehensive loss: | |
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| | |
| | |
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Foreign currency translation adjustments | | $ | — | | $ | ( | | $ | — | | $ | ( |
Other comprehensive loss | | $ | — | | $ | ( | | $ | — | | $ | ( |
Comprehensive income (loss) | | $ | | | $ | ( | | $ | ( | | $ | |
Net income (loss) per share basic | | $ | | | $ | ( | | $ | ( | | $ | |
Net income (loss) per share diluted | | $ | | | $ | ( | | $ | ( | | $ | |
Weighted average shares outstanding - basic | | | | | | | | | | | | |
Weighted average shares outstanding - diluted | | | | | | | | | | | | |
See accompanying notes to the condensed consolidated financial statements.
4
TECHPRECISION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)
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| Accumulated |
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| | Common | | | | | Additional | | Other | | | | Total | ||||
| | Stock | | Par | | Paid in | | Comprehensive | | Retained | | Stockholders’ | |||||
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| Outstanding |
| Value |
| Capital |
| Income |
| Earnings |
| Equity | |||||
Balance 3/31/2021 | | | | $ | | | $ | | | $ | | | $ | | | $ | |
Stock-based compensation | | — | | | — | | | | | | — | | | — | | | |
Net income |
| — | |
| — | | | — | | | — | |
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Foreign currency translation adjustment |
| — | |
| — | | | — | |
| | | | — | |
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Balance 6/30/2021 |
| | | $ | | | $ | | | $ | | | $ | | | $ | |
Restricted stock award | | | | | | | | ( | | | | | | | | | — |
Common stock issued for acquired business | | | | | | | | | | | | | | | | | |
Proceeds from sale of common stock, net | | | | | | | | | | | | | | | | | |
Issuance of warrants | | | | | | | | | | | | | | | | | |
Stock-based compensation | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | ( | | | ( |
Foreign currency translation adjustment | | | | | | | | | | | ( | | | | | | ( |
Balance 9/30/2021 | | | | $ | | | $ | | | $ | | | $ | | | $ | |
| | | | | | | | | | | | | | | | | |
Balance 3/31/2022 | | | | $ | | | $ | | | $ | — | | $ | | | $ | |
Stock-based compensation | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | ( | | | ( |
Balance 6/30/2022 | | | | $ | | | $ | | | $ | — | | $ | | | $ | |
Stock-based compensation | | | | | | | | | | | | | | | | | |
Stock issued for contingent consideration | | | | | | | | | | | | | | | | | |
Stock award nonemployee directors | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | — | | | | | | |
Balance 9/30/2022 | | | | $ | | | $ | | | $ | — | | $ | | | $ | |
See accompanying notes to the condensed consolidated financial statements.
5
TECHPRECISION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
| | Six Months Ended September 30, | ||||
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| 2022 |
| 2021 | ||
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
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Net (loss) income | | $ | ( | | $ | |
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: | |
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Depreciation and amortization | |
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Amortization of debt issue costs | |
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Stock based compensation expense | |
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Change in contract loss provision | |
| ( | |
| ( |
Deferred income taxes | |
| ( | |
| ( |
PPP loan forgiveness | | | — | | | ( |
Change in fair value for contingent consideration | | | | | | — |
Changes in operating assets and liabilities: | |
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Accounts receivable | |
| | |
| ( |
Contract assets | |
| ( | |
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Work-in-process and raw materials | | | ( | | | |
Other current assets | |
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Accounts payable | |
| | |
| ( |
Accrued expenses | |
| ( | |
| ( |
Contract liabilities | |
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Other noncurrent liabilities | | | | | | — |
Net cash provided by (used in) operating activities | |
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| ( |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
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Business acquisition, net of cash acquired | | | — | | | ( |
Fixed asset deposit | | | ( | | | — |
Purchases of property, plant and equipment | |
| ( | |
| ( |
Net cash used in investing activities | |
| ( | |
| ( |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
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Proceeds from term loan | | | — | | | |
Closing costs related to common stock sale | | | — | | | ( |
Proceeds from sale of common stock | | | — | | | |
Debt issue costs | |
| ( | |
| ( |
Revolver loan payments and borrowings, net | | | ( | | | |
Payments of principal for leases | | | ( | | | ( |
Repayments of long-term debt | |
| ( | |
| ( |
Net cash (used in) provided by financing activities | |
| ( | |
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Effect of exchange rate on cash and cash equivalents | |
| — | |
| ( |
Net decrease in cash and cash equivalents | |
| ( | |
| ( |
Cash and cash equivalents, beginning of period | |
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Cash and cash equivalents, end of period | | $ | | | $ | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: | |
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Cash paid for interest, net of amounts capitalized | | $ | | | $ | |
See accompanying notes to the condensed consolidated financial statements.
6
SUPPLEMENTAL INFORMATION - NONCASH INVESTING AND FINANCING TRANSACTIONS:
Six Months Ended September 30, 2021
On August 25, 2021, in exchange for the issuance of
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 - DESCRIPTION OF BUSINESS
TechPrecision Corporation, or “TechPrecision”, is a Delaware corporation organized in February 2005 under the name Lounsberry Holdings II, Inc. On February 24, 2006, we acquired all the issued and outstanding capital stock of our wholly owned subsidiary Ranor, Inc., or “Ranor.” Ranor, together with its predecessors, has been in continuous operation since 1956. The name was changed to TechPrecision Corporation on March 6, 2006.
TechPrecision is the parent company of Ranor, Westminster Credit Holdings, LLC, or “WCH”, Stadco New Acquisition, LLC, or “Acquisition Sub”, Stadco and Wuxi Critical Mechanical Components Co., Ltd., or “WCMC”, a wholly foreign owned enterprise. WCMC was dissolved and deregistered in November 2021 and has had no customers or operations for over five years. TechPrecision, Ranor, WCH, WCMC (until November 2021), Acquisition Sub and Stadco are collectively referred to as the “Company”, “we”, “us” or “our”.
On August 25, 2021, the Company completed its previously announced acquisition of Stadco, pursuant to that certain stock purchase agreement with Acquisition Sub, Stadco Acquisition, LLC, Stadco and each equity holder of Stadco Acquisition, LLC. On the closing date, the Company, through Acquisition Sub, acquired all the issued and outstanding capital stock of Stadco from Stadco Acquisition, LLC in exchange for the issuance of shares of the Company’s common stock to Stadco Acquisition, LLC. As a result of the acquisition, Stadco is now our wholly owned indirect subsidiary. See Note 3 for additional disclosures related to this business combination.
We manufacture large-scale metal fabricated and machined precision components and equipment. These products are used in a variety of markets including defense and aerospace, nuclear, medical, and precision industrial. All our operations and customers are in the United States, or “U.S.”.
NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation - The accompanying condensed consolidated financial statements include the accounts of TechPrecision, Ranor, Stadco, WCH, Acquisition Sub, and WCMC, until its dissolution. Intercompany transactions and balances have been eliminated in consolidation. The accompanying condensed consolidated balance sheets as of September 30, 2022, the condensed consolidated statements of operations and comprehensive income (loss) and stockholders’ equity for the three and six months ended September 30, 2022 and 2021, and the condensed consolidated statements of cash flows for the six months ended September 30, 2022 and 2021 are unaudited, but, in the opinion of management, include all adjustments that are necessary for a fair presentation of our financial statements for interim periods in accordance with U.S. Generally Accepted Accounting Principles, or “U.S. GAAP”. All adjustments are of a normal, recurring nature, except as otherwise disclosed. The results of operations for an interim period are not necessarily indicative of the results of operations to be expected for the fiscal year.
These notes to the condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or the “SEC”, for Quarterly Reports on Form 10-Q. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited financial statements and related notes should be read in conjunction with the consolidated financial statements included with our Annual Report on Form 10-K for the fiscal year ended March 31, 2022, filed with the SEC on August 10, 2022.
7
Use of Estimates in the Preparation of Financial Statements - In preparing the condensed consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and revenues and expenses during the reported period. We continually evaluate our estimates, including those related to revenue recognition and income taxes. We base our estimates on historical and current experiences and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates.
Liquidity and Going Concern – We reported a net loss of $
As of September 30, 2022, we had $
On September 15, 2022, Ranor entered into a Fourth Amendment to Amended and Restated Loan Agreement and Fourth Amendment to Promissory Note to further extend the maturity date of the Ranor Term Loan to December 15, 2022. We intend to refinance the original term loan in the principal amount of $
Our debt financing agreements limit our capital expenditures to $
Berkshire Bank waived the Company’s noncompliance with certain of the financial and related covenants at September 30, 2022. The bank retains the right to act on covenant violations that occur after the date of delivery of the waiver. 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.
We had cash and cash equivalents of $
In order for us to continue operations beyond the next twelve months and be able to discharge our liabilities and commitments in the normal course of business, we must secure new long-term financing on terms consistent with our near-term business plans. Assuming we are successful refinancing the Ranor Term Loan and renewing the Revolver Loan, we believe our available cash, plus cash expected to be provided by operations, refundable Employee Retention Tax Credits, and borrowing capacity available under the Revolver Loan, will be sufficient to fund our operations, expected capital expenditures, and principal and interest payments under our lease and debt obligations through the next 12 months from the issuance date of our financial statements. The Company intends to renew the Revolver Loan. There was $
The uncertainty associated with the refinancing of the Ranor Term Loan which is due on December 15, 2022, and the Revolver Loan which is due on December 20, 2022, raises substantial doubt about our ability to continue as a going concern.
8
The condensed consolidated financial statements for the six months ended September 30, 2022 were prepared on the basis of a going concern which contemplates that we will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should we be required to liquidate assets. Our ability to satisfy our current liabilities and to continue as a going concern is dependent upon the timely availability of long-term financing and successful execution of our operating plan. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
NOTE 3 – BUSINESS COMBINATION
Stadco Acquisition
On August 25, 2021, the closing date, the Company completed its previously announced acquisition of Stadco, pursuant to that certain stock purchase agreement, dated as of October 16, 2020, or the “SPA”, among TechPrecision, Stadco New Acquisition LLC, Stadco Acquisition, LLC, or “Holdco”, and each stockholder of Holdco. Stadco is a company in the business of manufacturing high-precision parts, assemblies and tooling for aerospace, defense, and industrial customers.
Also on the closing date, the Company completed its previously announced acquisition of certain indebtedness obligations of Stadco, pursuant to that certain Amended and Restated Loan Purchase and Sale Agreement, dated as of April 23, 2021, with Sunflower Bank, N.A., as amended by Amendment to Amended and Restated Loan Purchase and Sale Agreement, dated as of June 28, 2021, together, the “Loan Purchase Agreement”. On August 25, 2021, WCH, as assignee of Acquisition Sub, paid $
Pursuant to the SPA, and upon the terms and subject to the conditions therein, the Company acquired all of the issued and outstanding capital stock of Stadco in exchange for the issuance of
On August 25, 2021, the Company entered into a Securities Purchase Agreement with a limited number of institutional and other accredited investors, pursuant to which investors committed to subscribe for and purchase
Stadco’s assets and liabilities were measured at estimated fair values on August 25, 2021, primarily using Level 1 and Level 3 inputs. Estimates of fair value represent management’s best estimate and require a complex series of judgments about future events and uncertainties. Third-party valuation specialists were engaged to assist in the valuation of these assets and liabilities.
9
Included in the total consideration transferred is $
Measurement Period Adjustments
The Company has completed the process of measuring the fair value of assets acquired and liabilities assumed. In the third and fourth quarters of fiscal 2022, the Company made certain measurement period adjustments to reflect the facts and circumstances in existence at the acquisition date. These measurement period adjustments are related to changes in preliminary assumptions and initial estimates that would have been recognized if all the facts and circumstances had been known at the time of acquisition. The table below presents the fair value of assets acquired and liabilities assumed on the acquisition date based on the best information it has received to date in accordance with Accounting Standards Codification (“ASC”) 805.
| | | | | | | | | | | | | | Adjusted | |
| | Reported at | | ERTC | | Customer | | Fixed | | Totals | |||||
| | August 25, | | refundable | | claim2 and | | Asset | | August 25, | |||||
|
| 2021 |
| credit1 |
| Warrant3 |
| Valuation4 |
| 2021 | |||||
Total consideration transferred | $ | | | | — | | $ | | | | — | | $ | | |
Recognized amounts of identifiable assets acquired and liabilities assumed: | |
| | | | | | | | | | | | | |
Accounts receivable | | | | | | — | | | — | | | — | | | |
Inventory | |
| | | | — | | | — | | | — | | | |
Other current assets | | | | | | | | | — | | | — | | | |
Property, plant, and equipment and right of use assets | |
| | | | — | | | — | | | | | | |
Accounts payable, accrued expenses, and other current liabilities | |
| ( | | | ( | | | ( | | | — | | | ( |
Lease obligations | |
| ( | | | — | | | — | | | — | | | ( |
Net assets | | | | | | | | | ( | | | | | | |
Goodwill | |
| | | | ( | | | | | | ( | | | — |
Total | | $ | | | $ | — | | $ | | | $ | — | | $ | |
All measurement period adjustments were offset against goodwill:
1In calendar year 2021 our Stadco subsidiary filed for a refund of tax credits for $
2Customer claim of $
3Warrant issued to former shareholder in connection with the acquisition valued at $
4Fixed asset adjustments related to changes in preliminary valuation assumptions and estimates, including estimates of asset useful lives.
10
Supplemental Pro Forma Information
The pro forma results have been prepared for comparative purposes only and do not necessarily represent what the revenue or results of operations would have been had the acquisition been completed on April 1, 2021. In addition, these results are not intended to be a projection of future operating results and do not reflect synergies that might be achieved from the acquisition.
The following table discloses the pro forma results for the combined entities, assuming the acquisition date had occurred on April 1, 2021, for the three and six months ended September 30, 2021:
| | Pro forma combined | ||||
| | Three months ended | | Six months ended | ||
| | September 30, | | September 30, | ||
|
| 2021 |
| 2021 | ||
Net sales | | $ | | | $ | |
Operating loss | | $ | ( | | $ | ( |
Loss before income taxes | | $ | ( | | $ | ( |
Net loss | | $ | ( | | $ | ( |
EPS basic | | $ | ( | | $ | ( |
EPS dilutive | | $ | ( | | $ | ( |
Weighted average shares outstanding – basic | | | | | | |
Weighted average shares outstanding - diluted | | | | | | |
The pro forma results include adjustments for the purchase accounting impact, including, but not limited to, depreciation and amortization associated with the acquired tangible assets, and an adjustment for interest expense related to the new long-term debt, the alignment of accounting policies, and the elimination of transactions between TechPrecision and Stadco. Other adjustments reflected in the pro forma results are as follows:
| ● | For the three and six months ended September 30, 2021, included a net change in depreciation and amortization of $ |
| ● | For the six months ended September 30, 2021, in selling, general and administrative, excluded non-recurring expense of $ |
| ● | For the three and six months ended September 30, 2021, excluded $ |
| ● | For the three and six months ended September 30, 2021, excluded interest expense of $ |
NOTE 4 - REVENUE
The Company generates revenue primarily from performance obligations completed under contracts with customers in two main market sectors: defense and precision industrial. The period over which the Company performs its obligations can be between and .Revenue is recognized over-time or at a point-in-time given the terms and conditions of the related contracts. The Company utilizes an inputs methodology based on estimated labor hours to measure performance progress. This model best depicts the transfer of control to the customer.
11
The Company’s contract portfolio is comprised of fixed-price contracts and provide for product type sales only. The following table presents net sales on a disaggregated basis by market and contract type:
| | | | | | | | | |
Net Sales by market |
| Defense |
| Industrial |
| Totals | |||
Three months ended September 30, 2022 | | $ | | | $ | | | $ | |
Three months ended September 30, 2021 | | $ | | | $ | | | $ | |
Six months ended September 30, 2022 | | $ | | | $ | | | $ | |
Six months ended September 30, 2021 | | $ | | | $ | | | $ | |
Net Sales by contract type |
| Over-time |
| Point-in-time |
| Totals | |||
Three months ended September 30, 2022 | | $ | | | $ | | | $ | |
Three months ended September 30, 2021 | | $ | | | $ | | | $ | |
Six months ended September 30, 2022 | | $ | | | $ | | | $ | |
Six months ended September 30, 2021 | | $ | | | $ | |
| $ | |
As of September 30, 2022, the Company had $
We are dependent each year on a small number of customers who generate a significant portion of our business, and these customers change from year to year. The following table sets forth revenues from customers who accounted for more than 10% of our net sales.
| | Three months ended | | Three months ended | | Six months ended | | Six months ended |
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| September 30, 2022 |
| September 30, 2021 | | September 30, 2022 |
| September 30, 2021 |
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Customer |
| Amount |
| Percent |
| Amount |
| Percent |
| Amount |
| Percent |
| Amount |
| Percent |
| ||||
A | | $ | |
| | % | $ | |
| | % | $ | |
| | % | $ | |
| | % |
B | | $ | * |
| * | % | $ | |
| | % | $ | * | | * | % | $ | |
| | % |
C | | $ | * |
| * | % | $ | |
| | % | $ | * |
| * | % | $ | |
| | % |
D | | $ | |
| | % | $ | * |
| * | % | $ | |
| | % | $ | * |
| * | % |
E | | $ | | | | % | $ | * | | * | % | $ | | | | % | $ | * | | * | % |
*Less than 10% of total
In our condensed consolidated balance sheet, contract assets and contract liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. For the six months ended September 30, 2022, we recognized revenue of approximately $
| | | | | | | | | |
| | | | Progress | | | |||
|
| Unbilled |
| payments |
| Total | |||
September 30, 2022 | | $ | | | $ | ( | | $ | |
March 31, 2022 | | $ | | | $ | ( | | $ | |
NOTE 5 - INCOME TAXES
The Company accounts for income taxes under ASC 740, Income Taxes. The tax provision for interim periods is determined using the estimated annual effective consolidated tax rate, based on the current estimate of full-year earnings before taxes, adjusted for the impact of discrete quarterly items. The Company recorded income tax expense of $
The valuation allowance on deferred tax assets was approximately million at September 30, 2022. We believe that it is more likely than not that the benefit from certain state net operating losses, or NOLs, carryforwards and other deferred tax assets will not be realized. 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.
12
NOTE 6 - EARNINGS PER SHARE
Basic EPS is computed by dividing reported earnings available to stockholders by the weighted average shares outstanding. Diluted EPS also includes the effect of stock options that would be dilutive. The following table provides a reconciliation of the numerators and denominators reflected in the basic and diluted earnings per share computations for the three months ended:
| | Three Months ended | | Three Months ended | | Six Months ended | | Six Months ended | ||||
|
| September 30, 2022 |
| September 30, 2021 |
| September 30, 2022 |
| September 30, 2021 | ||||
Basic EPS | | | | | | | | | | | | |
Net income (loss) | | $ | | | $ | ( | | $ | ( | | $ | |
Weighted average shares | |
| | |
| | |
| | |
| |
Net income (loss) per share | | $ | | | $ | ( | | $ | ( | | $ | |
Diluted EPS | |
| | |
| | |
| | |
| |
Net income (loss) | | $ | | | $ | ( | | $ | ( | | $ | |
Dilutive effect of stock options | |
| | |
| -- | |
| -- | |
| |
Weighted average shares | |
| | |
| | |
| | |
| |
Net income (loss) per share | | $ | | | $ | ( | | $ | ( | | $ | |
All potential common stock equivalents that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. For the six months ended September 30, 2022, there were potential anti-dilutive stock options and warrants of
NOTE 7 – STOCK-BASED COMPENSATION
The 2016 TechPrecision Equity Incentive Plan, or the “2016 Plan”, is designed to reflect our commitment to having best practices in both compensation and corporate governance. The 2016 Plan provides for a share reserve of
The 2016 Plan authorizes the award of incentive and non-qualified stock options, restricted stock awards, restricted stock units, and performance awards to employees, directors, consultants, and other individuals who provide services to TechPrecision or its affiliates. The purpose of the 2016 Plan is to: (a) enable TechPrecision and its affiliated companies to recruit and retain highly qualified employees, directors and consultants; (b) provide those employees, directors and consultants with an incentive for productivity; and (c) provide those employees, directors and consultants with an opportunity to share in the growth and value of the Company. Subject to adjustment as provided in the 2016 Plan, the maximum number of shares of common stock that may be issued with respect to awards under the 2016 Plan is
At September 30, 2022, there were
| | | | | | | | | | Weighted |
| | | | | | | | | | Average |
| | | | Weighted | | Aggregate | | Remaining | ||
| | Number Of | | Average | | Intrinsic | | Contractual Life | ||
|
| Options |
| Exercise Price |
| Value |
| (in years) | ||
Outstanding at 3/31/2021 | | | | $ | | | $ | | | |
Canceled |
| ( | | | | |
| | | |
Outstanding at 3/31/2022 | | | | $ | | | $ | | | |
Outstanding at 9/30/2022 |
| | | $ | | | $ | | | |
Vested or expected to vest at 9/30/2022 |
| | | $ | | | $ | | | |
Exercisable and vested at 9/30/2022 | | | | $ | | | $ | | | |
13
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the closing stock price on the last trading day of the second quarter of fiscal 2023 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2022. This amount changes based on the fair market value of the Company’s common stock.
The maximum contractual term is
| | | | Weighted | | | | | | | | |
| | | | Average | | | | | | | | |
| | | | Remaining | | Weighted | | | | Weighted | ||
| | Options | | Contractual | | Average | | Options | | Average | ||
Range of Exercise Prices: |
| Outstanding |
| Term |
| Exercise Price |
| Exercisable |
| Exercise Price | ||
‑ | | | | | $ | | | | | $ | | |
‑ |
| |
| | $ | |
| | | $ | | |
Totals |
| |
| | |
| |
| | |
| |
Board of Directors Common Stock Award
On September 15, 2022, the board of directors granted each non-employee director
Restricted Stock Awards
Our board periodically authorizes the issuance of restricted stock as service-based awards measured at fair value on the date of grant based on the number of shares expected to vest and the quoted market price of the Company’s common stock. The shares of restricted stock fully vest and cease to be subject to forfeiture one year from the grant date. Each grantee is required to have been serving as a director on the vesting date and must have been continuously serving in such capacity from the grant date through the vesting date for the shares of restricted stock to vest. Prior to the vesting date, the grantee is not permitted to sell, transfer, pledge, assign or otherwise encumber the shares of restricted stock and if the grantee’s service with the Company has terminated prior to the vesting date, subject to certain exceptions, the grantee’s restricted stock is forfeited automatically.
On September 17, 2021, we granted a total of
On January 24, 2022, the board of directors, in recognition of their special efforts in completing the previously disclosed acquisition of Stadco, granted (a) an aggregate total of
Total recognized compensation cost related to the restricted stock awards for the three and six months ended September 30, 2022 was $
14
NOTE 8 - CONCENTRATION OF CREDIT RISK
We maintain bank account balances, which, at times, may exceed insured limits. We have not experienced any losses with these accounts and believe that we are not exposed to any significant credit risk on cash.
On September 30, 2022, there were trade accounts receivable balances outstanding from
| | September 30, 2022 | | March 31, 2022 |
| ||||||
Customer |
| Dollars |
| Percent |
| Dollars |
| Percent |
| ||
A | | $ | * | | * | % | $ | | | | % |
B | | $ | * |
| * | % | $ | |
| | % |
C | | $ | |
| | % | $ | * |
| * | % |
D | | $ | | | | % | $ | | | | % |
E | | $ | | | | % | $ | * | | * | % |
F | | $ | * | | * | % | $ | | | | % |
G | | $ | | | | % | $ | * | | * | % |
*less than 10% of total
NOTE 9 - OTHER CURRENT ASSETS
Other current assets included the following as of: |
| September 30, 2022 |
| March 31, 2022 | ||
Prepaid taxes | | $ | | | $ | |
ERTC refundable credits |
| | |
| | |
Prepaid insurance |
| | |
| | |
Prepaid subscriptions |
| | |
| | |
Payments advanced to suppliers | | | | | | |
Employee advances | | | | | | |
Prepaid advisory fees, other |
| | |
| | |
Total | | $ | | | $ | |
NOTE 10 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following as of: |
| September 30, 2022 |
| March 31, 2022 | ||
Land | | $ | | | $ | |
Building and improvements | |
| | |
| |
Machinery equipment, furniture, and fixtures | |
| | |
| |
Construction in progress | |
| | |
| -- |
Total property, plant, and equipment | |
| | |
| |
Less: accumulated depreciation | |
| ( | |
| ( |
Total property, plant and equipment, net | | $ | | | $ | |
15
NOTE 11 - ACCRUED EXPENSES
Accrued expenses included the following as of: |
| September 30, 2022 |
| March 31, 2022 | ||
Accrued compensation | | $ | | | $ | |
Provision for claims | | | | | | |
Provision for contract losses |
| | |
| | |
Accrued professional fees |
| | |
| | |
Accrued project costs |
| | |
| | |
Contingent consideration | | | — | | | |
Other |
| | |
| | |
Total | | $ | | | $ | |
Accrued compensation includes amounts for executive bonuses, payroll and vacation and holiday pay. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in the provision are recorded in cost of sales. Accrued project costs are estimates for certain project expenses during the reporting period.
NOTE 12 – DEBT
Long-term debt included the following as of: |
| September 30, 2022 |
| March 31, 2022 | ||
Stadco Term Loan, at | | $ | | | $ | |
Ranor Term Loan, at | | | | | | |
Ranor Revolver Loan due December 2022 | | | | | | |
Total debt | | $ | | | $ | |
Less: debt issue costs unamortized | | $ | | | $ | |
Total debt, net | | $ | | | $ | |
Less: Current portion of long-term debt | | $ | | | $ | |
Total long-term debt, net | | $ | | | $ | |
Stadco Term Loan
On August 25, 2021, Stadco borrowed $
The Company is required to pay a late charge in the amount of
Unamortized debt issue costs at September 30, 2022 and March 31, 2022 were $
Ranor Term Loan
The Ranor Term Loan was made to Ranor by Berkshire Bank in 2016 in the amount of $
On December 17, 2021, Ranor and certain affiliates of the Company entered into a First Amendment to the Amended and Restated Loan Agreement and First Amendment to Promissory Note to extend the maturity date of the Ranor Term Loan from December 20, 2021 to March 18, 2022.
16
On March 18, 2022, Ranor and certain affiliates of the Company entered into a Second Amendment to Amended and Restated Loan Agreement and Second Amendment to Promissory Note to further extend the maturity date of the Ranor Term Loan to June 16, 2022.
On June 16, 2022, Ranor and certain affiliates of the Company entered into a Third Amendment to the Amended and Restated Loan Agreement and Third Amendment to the Promissory Note to further extend the maturity date of the Ranor Term Loan to September 16, 2022.
On September 15, 2022, Ranor and certain affiliates of the Company entered into a Fourth Amendment to the Amended and Restated Loan Agreement and Fourth Amendment to the Promissory Note to further extend the maturity date of the Ranor Term Loan to December 15, 2022.
A balloon principal payment of approximately $
In accordance with the amended loan agreement, the maximum amount that can now be borrowed under the Revolver loan is $
The Company agrees to pay to Berkshire Bank, as consideration for Berkshire Bank’s agreement to make the Revolver Loan available, a nonrefundable Revolver Loan fee equal to
Under the promissory note for the Revolver Loan, the Company can elect to pay interest at an adjusted LIBOR-based rate or an Adjusted Prime Rate. The minimum adjusted LIBOR-based rate is
There was approximately $
Unamortized debt issue costs at September 30, 2022 and March 31, 2022 were $
Berkshire Loan Covenants
For purposes of this discussion, Ranor and Stadco are referred to together as the “Borrowers”. The Ranor Term Loan, the Stadco Term Loan and the Revolver Loan, or together, the “Berkshire Loans”, may be accelerated upon the occurrence of an event of default as defined in the Berkshire Loan Agreement. Upon the occurrence and during the continuance of any of certain default events, at the option of Berkshire Bank, or automatically without notice or any other action upon the occurrence of any event specified in the loan agreement, the unpaid principal amount of the Loans and the Notes together with accrued interest and all other obligations owing by the Borrowers to Berkshire Bank would become immediately due and payable without presentment, demand, protest, or further notice of any kind.
17
The Borrowers agree to maintain the ratio of the Cash Flow of TechPrecision to the Total Debt Service of TechPrecision of not less than
The Borrowers agree to cause their Balance Sheet Leverage to be less than or equal
The Borrowers agree that their combined annual capital expenditures shall not exceed $
The Borrowers agree to maintain a Loan-to-Value Ratio of not greater than
Berkshire Bank waived the Company’s noncompliance with certain of the financial and related covenants at September 30, 2022. The bank retains the right to act on covenant violations that occur after the date of delivery of the waiver. 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.
Collateral securing all the above obligations comprises all personal and real property of the Company, including cash, accounts receivable, inventories, equipment, and financial assets. The Company’s short-term and long-term debt is all privately held with no public market for this debt and is considered to be Level 3 under the fair value hierarchy.
NOTE 13 - OTHER NONCURRENT LIABILITY
The Company purchased new equipment in fiscal 2022 for contract project work with a certain customer. Under an addendum to the contract purchase orders, that customer agreed to reimburse the Company for the cost of the new equipment. We received the first payment in January 2022 and two additional payments in April 2022. In case of a contract breach, at the time of the breach, the customer may claw back the funds based on a prorated ten-year straight-line annual declining balance recovery period. Customer payments received of $
18
NOTE 14 – LEASES
Stadco became party to an amended building and property operating lease and recorded a right of use asset and liability of $
The following table lists our right-of-use assets and liabilities on our condensed consolidated balance sheets at:
|
| September 30, 2022 |
| March 31, 2022 | ||
Right of use asset – operating lease | | $ | | | $ | |
Right of use asset – finance leases | | | | | | |
Amortization | |
| ( | |
| ( |
Right of use asset, net | | $ | | | $ | |
Lease liability – operating lease | | $ | | | $ | |
Lease liability – finance leases | | | | | | |
Total lease liability | | $ | | | $ | |
Other supplemental information regarding our leases are contained in the following tables:
Components of lease expense for the six months ended: |
| September 30, 2022 |
| September 30, 2021 | ||
Operating lease amortization | | $ | | | $ | |
Finance lease amortization | | $ | | | $ | |
Finance lease interest | | $ | | | $ | |
Weighted average lease term and discount rate at: |
| September 30, 2022 |
| September 30, 2021 | |
Lease term (years) – finance | | | | ||
Lease term (years) – operating |
| | | ||
Lease rate - finance | | | % | | % |
Lease rate - operating |
| | % | | % |
| | | | | | |
Supplemental cash flow information related to leases for the six months ended: |
| September 30, 2022 |
| September 30, 2021 | ||
Cash used in operating activities | | $ | | | $ | |
Cash used in financing activities | | $ | | | $ | |
Maturities of lease liabilities as of September 30 for each of the next five years and thereafter:
2023 |
| $ | |
2024 | |
| |
2025 | |
| |
2026 | |
| |
2027 | |
| |
Thereafter | |
| |
Total lease payments | | $ | |
Less: imputed interest | |
| |
Total | | $ | |
19
NOTE 15 – COMMITMENTS
Employment Agreements
We have employment agreements with each of our executive officers. Such agreements provide for minimum salary levels, adjustable annually, and incentive bonuses that are payable if specified company goals are attained. The aggregate commitment at September 30, 2022 for future executive salaries and bonus was approximately $
Purchase Commitments
As of September 30, 2022, we had approximately $
Retirement Benefits
Ranor has a defined contribution and savings plan that covers substantially all Ranor employees who have completed 90 days of service. Ranor retains the option to match employee contributions. The Company contributed $
NOTE 16 – SEGMENT INFORMATION
The Company has
Each reportable segment focuses on the manufacture and assembly of specific components, primarily for defense, aerospace and other industrial customers. However, both segments have separate operating, engineering, and sales teams. The Chief Operating Decision Maker, or CODM, evaluates the performance of our segments based upon, among other things, segment net sales and operating profit. Segment operating profit excludes general corporate costs. Corporate costs include executive and director compensation, stock-based compensation, and other corporate and administrative expenses not allocated to the segments. The segment operating profit metric is what the CODM uses in evaluating our results of operations and the financial measure that provides insight into our overall performance and financial position.
20
The following table provides summarized financial information for our segments:
| | Three Months Ended | | Six Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Ranor | | $ | | | $ | | | $ | | | $ | |
Stadco | |
| | | | | | | | |
| |
Net sales from external customers | | | | | | | | | | | | |
Ranor | |
| | | | | | | | |
| |
Stadco | |
| ( | | | | | | ( | |
| |
Corporate and unallocated (1) | |
| ( | | | ( | | | ( | |
| ( |
Total operating loss | | | ( | | | ( | | | ( | | | ( |
ERTC refundable credits | |
| | | | — | | | | |
| — |
PPP loan forgiveness | |
| — | | | — | | | — | |
| |
Other income | | | | | | | | | | | | |
Interest expense | | | ( | | | ( | | | ( | | | ( |
Consolidated income (loss) before income taxes | | $ | | | $ | ( | | $ | ( | | $ | |
Depreciation and amortization: | |
| | | | | | | | |
| |
Ranor | |
| | | | | | $ | | | $ | |
Stadco | |
| | | | | | | | |
| |
Totals | | | | | | | | $ | | | $ | |
Capital expenditures | | | | | | | | | | |
| |
Ranor | | | | | | | | $ | | | $ | |
Stadco | | | | | | | | | | |
| |
Totals | | | | | | | | $ | | | $ | |
Prior period segment data is revised to reflect the new reportable segments.
| (1) | Corporate general costs include executive and director compensation, and other corporate administrative expenses not allocated to the segments. |
NOTE 17 – ACCOUNTING STANDARDS UPDATE
New Accounting Standards Recently Adopted
In November 2021, the FASB issued ASU No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities About Government Assistance. The amendments in this update require the following annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy: 1) information about the nature of the transactions and the related accounting policy used to account for the transactions, 2) the line items on the balance sheet and income statement that are affected by the transactions, and the amounts applicable to each financial statement line item, 3) significant terms and conditions of the transactions, including commitments and contingencies. The adoption of this ASU on April 1, 2022 did not have a significant impact on the Company’s financial statements and disclosures.
In May 2021, the FASB issued ASU 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. The FASB issued this update to clarify and reduce diversity in issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The amendments that relate to the recognition and measurement of EPS for certain modifications or exchanges of freestanding equity-classified written call options affect entities that present EPS in accordance with the guidance in Topic 260, Earnings Per Share. The adoption of these amendments on April 1, 2022 did not have a material impact on our financial statements and disclosures.
21
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Statement Regarding Forward Looking Disclosure
The following discussion of our financial condition and results of operations 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 forward-looking 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 that may be outside our control: including the Russia – Ukraine conflict, price inflation, interest rates increases, and supply chain inefficiencies; |
| ● | 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; |
| ● | restrictions in our ability to operate our business due to our outstanding indebtedness; |
| ● | government regulations and requirements; |
| ● | pricing and business development difficulties; |
| ● | changes in government spending on national defense; |
| ● | our ability to make acquisitions and successfully integrate those acquisitions with our business; |
| ● | our failure to maintain effective internal controls over financial reporting; |
| ● | general industry and market conditions and growth rates; |
| ● | unexpected costs, charges or expenses resulting from the recently completed acquisition of Stadco; and |
| ● | those risks discussed in “Item 1A. Risk Factors” and elsewhere in our 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.
22
Overview
Contract Manufacturing
Through our two wholly-owned subsidiaries, Ranor and Stadco (acquired on August 25, 2021), each of which is a reportable segment, 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. 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 contracts, 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 that require our services and products.
Our contracts are generated both through negotiation with the customer and from bids made pursuant to a request for proposal. Our ability to receive contract awards is dependent upon the contracting party’s perception of such factors as our ability to perform on time, our history of performance, including quality, our financial condition, and our ability to price our services competitively. Although some of our contracts contemplate the manufacture of one or a limited number of units, we continue to seek more long-term projects with predictable cost structures.
All the Company’s operations, assets, and customers are located in the U.S.
Impact of COVID-19 Pandemic
At the beginning of calendar year 2020, the novel strain of coronavirus known as COVID-19 spread worldwide, including to U.S jurisdictions where the Company does business, and became a global pandemic. The United States Government declared a national emergency and various state governments imposed “lockdown” and “shelter-in-place” orders intended to reduce the spread of COVID-19 that have severely restricted business, social activities and travel during the periods in which they were imposed. The Governors of the Commonwealth of Massachusetts and State of California, in which jurisdictions the Company’s manufacturing and executive offices are located, issued similar emergency orders in March 2020. Although the emergency order for Massachusetts has expired, the national emergency declaration was renewed on July 15, 2022 and the California emergency order remains in effect through February 2023. As a designated “COVID-19 Essential Service” we continued our operations throughout the pendency of the orders.
Our production facilities continue to operate as they had prior to the outbreak of the COVID-19 pandemic, other than the implementation of enhanced safety measures intended to prevent the spread of the virus. The remote working arrangements and travel restrictions imposed by applicable governmental authorities have not impaired our ability to maintain operations.
Our results of operations and cash flows during the six months ended September 30, 2022, and 2021 were not materially affected by the COVID-19 pandemic.However, given the speed and frequency of continuously evolving developments with respect to this pandemic, the extent to which COVID-19 may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects, we cannot reasonably estimate the magnitude of future impact on our financial condition and results of operations.
23
Critical Accounting Policies and Estimates
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 and income taxes. These estimates and assumptions require management’s most difficult, subjective or complex judgments. Actual results may vary under different assumptions or conditions.
We consider the principles and estimates applied for revenue recognition to be one of the most critical accounting estimates that we make. Our revenue can fluctuate from quarter-to-quarter as we measure revenue recognition over the duration of a project, or at the end of the project. The Company records most of its revenue over time as it completes performance obligations or at a point-in-time, for example, at the delivery date, when control of the promised goods are transferred to the customer. Project volume for revenue recognized at a point-in-time is generally smaller, can fluctuate from period to period, and is difficult to forecast.
We measure progress for performance obligations satisfied over time using input methods, for example, labor hours expended and time elapsed. As a result, assuming a steady flow of project volume and labor hours, we have the ability to deliver a fair and accurate flow of revenue over time. When project volume is higher or lower, we may report higher or lower amounts of revenue for those given quarterly periods.
Our significant accounting policies are set forth in detail in Note 2 to the consolidated financial statements included in the 2022 Annual Report on Form 10-K. There were no significant changes to our critical accounting policies during the six months ended September 30, 2022.
New Accounting Standards
See Note 17, Accounting Standards Update, in the Notes to the Unaudited Condensed Consolidated Financial Statements under “Item 1. Financial Statements”, for a discussion of recently adopted new accounting guidance and new accounting guidance not yet adopted.
Results of Operations
Our results of operations are affected by a number of external factors including the availability of raw materials, commodity prices (particularly steel), macroeconomic factors, including the availability of capital that may be needed by our customers, and political, regulatory and legal conditions in the United States and in foreign markets. It generally takes approximately twelve months or less to complete our manufacturing projects. However, contracts for larger complex components can take up to thirty-six months to complete. Units manufactured under the majority of our customer contracts have historically been delivered on time and with a positive gross margin, with some exceptions. 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.
We evaluate the performance of our segments based upon, among other things, segment net sales and operating profit. Segment operating profit excludes general corporate costs, which include executive and director compensation, stock-based compensation, certain pension and other retirement benefit costs, and other corporate facilities and administrative expenses not allocated to the segments. Also excluded are items that we consider not representative of ongoing operations, such as the unallocated PPP loan forgiveness and refundable employee retention tax credits.
24
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 titled “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.
Percentages in the following tables and throughout this “Results of Operations” section may reflect rounding adjustments.
Three Months Ended September 30, 2022 and 2021
The following table presents net sales, gross profit and gross margin, consolidated and by reportable segment:
| | September 30, 2022 | | September 30, 2021 | | Changes | | |||||||||
| | | | | Percent of | | | | | Percent of | | | | | Percent of | |
(dollars in thousands) |
| Amount |
| Net sales |
| Amount |
| Net sales |
| Amount |
| Net sales | | |||
Ranor |
| $ | 4,934 |
| 58 | % | $ | 3,538 |
| 74 | % | $ | 1,396 | | 39 | % |
Stadco | |
| 3,589 |
| 42 | % |
| 1,259 |
| 26 | % |
| 2,330 | | 185 | % |
Net sales | | $ | 8,523 |
| 100 | % | $ | 4,797 |
| 100 | % | $ | 3,726 | | 78 | % |
Ranor | | $ | 2,907 |
| 34 | % | $ | 2,806 |
| 59 | % | $ | 101 | | 4 | % |
Stadco | |
| 3,876 |
| 46 | % |
| 1,060 |
| 22 | % |
| 2,816 | | 266 | % |
Cost of sales | | $ | 6,783 |
| 80 | % | $ | 3,866 |
| 81 | % | $ | 2,917 | | 75 | % |
Ranor | | $ | 2,027 |
| 23 | % | $ | 733 |
| 17 | % | $ | 1,294 | | 177 | % |
Stadco | |
| (287) |
| (3) | % |
| 198 |
| 2 | % |
| (485) | | (245) | % |
Gross profit | | $ | 1,740 |
| 20 | % | $ | 931 |
| 19 | % | $ | 809 | | 87 | % |
Net Sales
Consolidated - Net sales for the three months ended September 30, 2022 were $8.5 million or $3.7 million higher when compared to the same period a year ago. Net sales in defense markets increased by $4.0 million, and net sales to precision industrial markets decreased by $0.3 million.
Ranor - Net sales were $4.9 million for the three months ended September 30, 2022, or $1.4 million and 39% higher when compared to the same prior year period. Net sales increased primarily on orders for repeat business. Net sales to defense customers increased by $1.8 million. The defense backlog for Ranor remains strong as new orders for components related to a variety of programs, including U.S. Navy submarine programs, continue to flow down from our existing customer base of prime defense contractors. Net sales to precision industrial markets decreased by $0.4 million due to lower project activity. We have repeat business in this sector, but the order flow can be uneven and difficult to forecast.
Stadco - Net sales were $3.6 million for the three months ended September 30, 2022. Net sales of $1.3 million for the same quarter a year ago included only five weeks of business activity from the Stadco acquisition closing date of August 25, 2021. Net sales in the second quarter of fiscal 2023 totaled $3.5 million to customers in the defense markets. Our defense backlog for Stadco is strong for new orders related to a variety of programs, including components for heavy lift helicopters.
Gross Profit and Gross Margin
Consolidated - 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, 2022 was $2.9 million higher when compared to the three months ended September 30, 2021. The increase in cost of sales was primarily the result of a full quarter (or 13 weeks) of business activity at our Stadco segment compared with only five weeks in the same period a year ago. Gross profit was $1.7 million, or 87% higher when compared to the three months ended September 30, 2021. Gross margin was 20.4% for the three months ended September 30, 2022 compared to 19.4% for the three months ended September 30, 2021.
25
Ranor - Gross profit and gross margin increased year over year on improved throughput and a favorable project mix. This set of conditions, along with accelerating project progress with better overhead absorption rates on higher revenue recognized over-time, began to take hold in the fourth quarter of fiscal 2022. We expect this trend to continue in fiscal 2023.
Stadco - The gross margin turned negative at the end of fiscal year 2022 and continued through the second quarter of fiscal 2023. Certain unprofitable projects and new project startups with associated production activities resulted in unfavorable throughput and under-absorbed overhead. We expect gradual improvements with throughput and gross margin for the remainder of fiscal 2023 as the new projects make progress toward completion.
Selling, General and Administrative (SG&A) Expenses
|
| September 30, 2022 |
| September 30, 2021 |
| Changes |
| |||||||||
| | | | | Percent of | | | | | Percent of | | | | | |
|
(dollars in thousands) | | Amount |
| Net Sales | | Amount |
| Net Sales | | Amount |
| Percent |
| |||
Ranor | | $ | 534 |
| 6 | % | $ | 353 |
| 7 | % | $ | 181 |
| 51 | % |
Stadco | |
| 468 |
| 5 | % |
| 157 |
| 3 | % |
| 311 |
| 198 | % |
Corporate and unallocated | |
| 825 |
| 10 | % |
| 664 |
| 14 | % |
| 161 |
| 24 | % |
Consolidated SG&A | | $ | 1,827 |
| 21 | % | $ | 1,174 |
| 24 | % | $ | 653 |
| 56 | % |
Consolidated - Total selling, general and administrative expenses for the three months ended September 30, 2022, increased by $0.7 million, or 56%, due to spending on outside advisory services and business travel which returned to pre-pandemic levels. SG&A also included a full quarter of Stadco expenses compared to the prior year’s quarter when only five weeks of activity was included.
Ranor – Advisory fees, travel expenses and other office costs increased by approximately $0.2 million due to a return to pre-pandemic travel and business activity.
Stadco - The increase was due primarily to the inclusion of a full quarter (or 13 weeks) of Stadco operations compared with only five weeks in the comparable prior year period. Expenses incurred during the period were slightly above monthly averages. Total SG&A was composed of compensation, outside advisory and other office costs.
Corporate and unallocated - Stock-based compensation in connection with a stock award grant to our board of directors increased year-over-year by approximately $0.1 million. Audit fees, travel expenses and other office costs increased by approximately $0.1 million due to a return to pre-pandemic travel and business activity.
Operating income (loss)
|
| September 30, 2022 |
| September 30, 2021 |
| Changes |
| |||||||||
| | | | | Percent of | | | | | Percent of | | | | | |
|
(dollars in thousands) | | Amount |
| net sales | | Amount |
| net sales | | Amount |
| Percent |
| |||
Ranor | | $ | 1,493 |
| 18 | % | $ | 380 |
| 8 | % | $ | 1,113 |
| 293 | % |
Stadco | |
| (755) |
| (9) | % |
| 41 |
| 1 | % |
| (796) |
| nm | % |
Corporate and unallocated | |
| (825) |
| (10) | % |
| (664) |
| (14) | % |
| (161) |
| (24) | % |
Operating loss | | $ | (87) |
| (1) | % | $ | (243) |
| (5) | % | $ | 156 |
| 64 | % |
nm – not meaningful
Consolidated - As a result of the foregoing, including the integration and reduced profitability at Stadco, we reported an operating loss of $0.1 million compared with an operating loss of $0.2 million for the three months ended September 30, 2021.
Ranor – Operating income was $1.1 million higher compared to same period prior year, due primarily to a favorable project mix and improved operating throughput.
Stadco – New project startups and related production issues, as well as certain poorly priced projects, resulted in unfavorable throughput and unabsorbed overhead that resulted in an operating loss of $0.8 million.
26
Corporate and unallocated - Corporate expenses were higher for the three months ended September 30, 2022, primarily due to an increase in stock-based compensation and outside services.
Other Income (Expense)
The following table presents other income (expense) for the three months ended September 30:
|
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||
Other income, net | | $ | 73,561 | | $ | 1,001 | | $ | 72,560 |
| nm | |
Interest expense | | $ | (70,382) | | $ | (48,341) | | $ | (22,041) |
| (46) | % |
Amortization of debt issue costs | | $ | (13,348) | | $ | (8,553) | | $ | (4,795) |
| (56) | % |
nm – not meaningful
Interest expense was higher for the three months ended September 30, 2022. The increase in interest expense was due primarily to borrowings under the new Stadco Term Loan and higher amounts borrowed under the Revolver Loan (each as defined below). We expect to see higher interest expense in fiscal 2023 due to higher interest rates and levels of debt incurred since the Stadco acquisition.
Amortization of debt issue costs were higher when compared to the three months ended September 30, 2021. New amortization periods commenced in fiscal 2022 for costs incurred for the Ranor Term Loan extension, and for the new Stadco Term Loan. As a result, we expect to see higher amortization expense for the remainder of fiscal 2023.
Other income, net, in the table above, includes the net change in fair value for contingent consideration of $96,909 and the fair value of the stock issued for $56,310 in connection with the Stadco acquisition, and other tax rebates for $33,223.
Other Income
The three months ended September 30, 2022 includes an accrual of $624,045 for a refundable Employee Retention Tax Credit authorized under the Coronavirus Aid Relief and Economic Security (“CARES”) Act for eligible employers with qualified wages.
Income Taxes
For the three months ended September 30, 2022, the Company recorded a tax expense of $135,509, primarily the result of higher taxable income from the ERTC refund. The Company recorded tax benefit of $78,462 in the three months ended September 30, 2021.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The valuation allowance on deferred tax assets at September 30, 2022 and March 31, 2022 was approximately $2.0 million. We believe that it is more likely than not that the benefit from certain state 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 three months ended September 30, 2022, we recorded net income of $0.4 million, compared with net loss of $0.2 million for the three months ended September 30, 2021.
27
Six Months Ended September 30, 2022 and 2021
The following table presents net sales, gross profit and gross margin, consolidated and by reportable segment:
|
| September 30, 2022 |
| September 30, 2021 |
| Changes |
| |||||||||
| | | | | Percent of | | | | | Percent of | | | | | Percent of | |
(dollars in thousands) |
| Amount |
| Net sales |
| Amount |
| Net sales |
| Amount |
| Net sales |
| |||
Ranor | | $ | 9,660 | | 62 | % | $ | 6,951 | | 85 | % | $ | 2,709 | | 39 | % |
Stadco |
| | 5,939 |
| 38 | % | | 1,258 |
| 15 | % | | 4,681 |
| 372 | % |
Net sales | | $ | 15,599 |
| 100 | % | $ | 8,209 |
| 100 | % | $ | 7,390 |
| 90 | % |
Ranor | | $ | 5,793 |
| 37 | % | $ | 5,386 |
| 66 | % | $ | 407 |
| 8 | % |
Stadco | |
| 7,249 |
| 47 | % |
| 1,060 |
| 13 | % |
| 6,189 |
| 584 | % |
Cost of sales | | $ | 13,042 |
| 84 | % | $ | 6,446 |
| 79 | % | $ | 6,596 |
| 102 | % |
Ranor | | $ | 3,867 |
| 25 | % | $ | 1,565 |
| 19 | % | $ | 2,302 |
| 147 | % |
Stadco | |
| (1,310) |
| (8) | % |
| 198 |
| 2 | % |
| (1,508) |
| (761) | % |
Gross profit | | $ | 2,557 |
| 16 | % | $ | 1,763 |
| 21 | % | $ | 794 |
| 45 | % |
Net Sales
Consolidated - Net sales were $15.6 million or $7.4 million higher when compared to consolidated net sales for the six months ended September 30, 2021. Net sales increased primarily due to $4.7 million of new revenue from our Stadco segment and $2.7 revenue increase at our Ranor segment.
Ranor - Net sales were $9.7 million for the six months ended September 30, 2022, or $2.7 million and 39% higher when compared to the same prior year period. Net sales increased primarily on new orders of repeat business. Net sales to defense customers increased by $3.3 million. The defense backlog for Ranor remains strong as new orders for components related to a variety of programs, including the U.S. Navy submarine programs, continue to flow down from our existing customer base of prime defense contractors. Net sales to precision industrial markets decreased by $0.6 million due to lower project activity. We have repeat business in this sector, but the order flow can be uneven and difficult to forecast.
Stadco - Net sales were $5.9 million for the six months ended September 30, 2022, with $5.7 million recorded for customers in the defense markets. Net sales for the six months ended September 30, 2021 were $1.3 million and only included five weeks of business activity. Our defense backlog for Stadco is strong as new orders for components related to a variety of programs, including components for heavy lift helicopters.
Gross Profit and Gross Margin
Consolidated - 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, 2022, was $6.6 million higher when compared to the six months ended September 30, 2021. The increase in cost of sales was primarily the result of a full twenty-six weeks of business activity for our Stadco segment when compared to only five weeks in the same period a year ago. In addition, cost of sales was impacted by an unfavorable production mix and under-absorbed factory overhead at Stadco. However, gross profit increased by $0.8 million, or 45% higher when compared to the six months ended September 30, 2021, following a strong operating performance at Ranor, which more than offset weak operating results at Stadco. Gross margin was 16.4% versus 21.5% year-over-year.
Ranor - The gross profit and gross margin significantly increased year over year with improved throughput on new orders of repeat business. This set of favorable conditions, accelerating project progress and better overhead absorption rates on higher revenue recognized over-time, began to take hold in the fourth quarter of fiscal 2022. We expect this trend to continue in fiscal 2023.
Stadco - The gross profit and gross margin turned negative at the end of fiscal year 2022 and continued through the second quarter of fiscal 2023. Certain unprofitable projects and new projects with associated startup activities resulted in unfavorable throughput and under-absorbed overhead. We expect a gradual improvement in gross margin as the new projects progress with better throughput for the remainder of fiscal 2023.
28
Selling, General and Administrative (SG&A) Expenses
|
| September 30, 2022 |
| September 30, 2021 |
| Changes |
| |||||||||
| | | | | Percent of | | | | | Percent of | | | | | | |
(dollars in thousands) |
| Amount |
| Net Sales |
| Amount |
| Net Sales |
| Amount |
| Percent |
| |||
Ranor | | $ | 1,120 | | 7 | % | $ | 735 | | 9 | % | $ | 385 | | 52 | % |
Stadco |
| | 904 |
| 6 | % | | 157 |
| 2 | % | | 747 |
| 476 | % |
Corporate and unallocated |
| | 1,178 |
| 8 | % | | 1,014 |
| 12 | % | | 164 |
| 16 | % |
Consolidated SG&A | | $ | 3,202 |
| 21 | % | $ | 1,906 |
| 23 | % | $ | 1,296 |
| 68 | % |
Consolidated - Total selling, general and administrative expenses for the six months ended September 30, 2022, increased by $1.3 million, or 68%, as spending on outside advisory services and business travel returned to pre-pandemic levels. Stadco SG&A for the full six months was higher as the comparable prior year period only included five weeks of activity.
Ranor – Advisory fees, travel expenses and other office costs increased by approximately $0.4 million due to a return to pre-pandemic travel and business activity.
Stadco – Expenses incurred during the period were in-line with monthly averages. SG&A for the first six months of fiscal 2023 was higher as the comparable prior year period only included five weeks of activity. The composition of SG&A expenses are compensation, outside advisory services, and other office costs.
Corporate and unallocated - Advisory fees, travel expenses and other office costs increased by approximately $0.2 million due to a return to pre-pandemic business activity.
Operating (loss) income
|
| September 30, 2022 |
| September 30, 2021 |
| Changes |
| |||||||||
| | | | | Percent of | | | | | Percent of | | | | | | |
(dollars in thousands) |
| Amount |
| net sales |
| Amount |
| net sales |
| Amount |
| Percent | | |||
Ranor | | $ | 2,746 | | 18 | % | $ | 830 | | 10 | % | $ | 1,916 | | 230 | % |
Stadco |
| | (2,214) |
| (14) | % | | 41 |
| — | % | | (2,255) |
| nm | % |
Corporate and unallocated |
| | (1,177) |
| (8) | % | | (1,014) |
| (12) | % | | (163) |
| (16) | % |
Operating (loss) income | | $ | (645) |
| (4) | % | $ | (143) |
| (2) | % | $ | (502) |
| (351) | % |
nm – not meaningful
Consolidated - As a result of the foregoing, including the integration and reduced profitability at Stadco, we reported an operating loss of $0.7 million compared to operating loss of $0.1 million for the six months ended September 30, 2021.
Ranor – Operating income was $2.3 million higher compared to same prior year period, due primarily to a profitable project mix and improved operating throughput.
Stadco – New project startups and related production activities resulted in unfavorable throughput, and unabsorbed overhead that resulted in an operating loss of $2.2 million.
Corporate and unallocated - Corporate expenses were higher for the six months ended September 30, 2022, primarily due to a return to pre-pandemic business activity for outside advisory services and stock-based compensation.
29
Other Income (Expense)
The following table presents other income (expense) income for the six months ended September 30:
|
| 2022 |
| 2021 |
| $Change |
| % Change |
| |||
Other income, net | | $ | 40,336 | | $ | 11,391 | | $ | 28,945 |
| 254 | % |
Interest expense | | $ | (140,628) | | $ | (68,676) | | $ | (71,952) |
| (105) | % |
Amortization of debt issue costs | | $ | (26,747) | | $ | (18,096) | | $ | (8,651) |
| (48) | % |
Interest expense was higher for the six months ended September 30, 2022. The increase in interest expense was due primarily to borrowings under the new Stadco Term Loan and higher amounts borrowed under the Revolver Loan. We expect to see higher interest expense in fiscal 2023 due to the higher interest rates and levels of debt incurred since the Stadco acquisition.
Amortization of debt issue costs were higher when compared to the six months ended September 30, 2021. New amortization periods commenced in fiscal 2022 for costs incurred for the Ranor Term Loan extension, and for the new Stadco Term Loan. As a result, we expect to see higher amortization expense in the remainder of fiscal 2023.
Other income, net, in the table above, includes the change in fair value for contingent consideration of $63,436 and the fair value of the stock issued for $56,310 in connection with the Stadco acquisition, and other tax rebates for $33,223. Other income for the six months ended September 30, 2021, includes a return of $10,000 for a retainer fee previously paid for outside advisory fees in connection with a class action settlement in March 2021.
Other Income
Other income for the six months ended September 30, 2022 includes an accrual of $624,045 for a refundable Employee Retention Tax Credit authorized under the CARES act for eligible employers with qualified wages.
PPP Loan Forgiveness
Included in the six months results ended September 30, 2021, as authorized by Section 1106 of the CARES Act, the Small Business Administration remitted to Berkshire Bank, the lender of record, a payment of principal in the amount of $1,317,100, for forgiveness of the Company’s PPP loan. The funds credited to the PPP loan paid this loan off in full.
Income Taxes
For the six months ended September 30, 2022, the Company recorded a tax benefit of $38,205, and for the six months ended September 30, 2021, the Company recorded a tax benefit of $51,882.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The valuation allowance on deferred tax assets at September 30, 2022 and March 31, 2022 was approximately $2.0 million. We believe that it is more likely than not that the benefit from certain state NOL carryforwards and other deferred tax assets will not be realized. In recognition of this risk, we continue to provide a valuation allowance on these items. In the event future taxable income is below management’s estimates or is generated in tax jurisdictions different than projected, the Company could be required to increase the valuation allowance for deferred tax assets. This would result in an increase in the Company’s effective tax rate.
Net (Loss) Income
As a result of the foregoing, for the six months ended September 30, 2022, we recorded a net loss of $110,221, compared with net income of $1.2 million for the six months ended September 30, 2021. The same period prior year included other income of $1.3 million for loan forgiveness under the payroll protection program.
30
Liquidity and Capital Resources
We reported a net loss of $0.1 million for the six months ended September 30, 2022. We reported a net loss of $0.3 million for the fiscal year ended March 31, 2022. Our liquidity is highly dependent on the availability of financing facilities and our ability to maintain our gross profit and operating income.
As of September 30, 2022, we had $3.8 million in total available liquidity, consisting of $0.2 million in cash and cash equivalents, and $3.6 million in undrawn capacity under our Revolver Loan. As of March 31, 2022, we had $3.9 million in total available liquidity, consisting of $1.1 million in cash and cash equivalents, and $2.8 million in undrawn capacity under our revolver loan.
On September 15, 2022, Ranor entered into a Fourth Amendment to Amended and Restated Loan Agreement and Fourth Amendment to Promissory Note to further extend the maturity date of the Ranor Term Loan to December 15, 2022. We intend to refinance the original term loan in the principal amount of $2.85 million (the “Ranor Term Loan”) made by Berkshire Bank, to Ranor by borrowing on terms similar to the current loan and using the proceeds to pay down certain existing debt obligations and lowering our debt levels and debt service requirements. The revolver loan maturity date is December 20, 2022 and will not be available to provide liquidity unless it is renewed. There can be no assurance that we will be successful in negotiating for these terms with Berkshire Bank or any other lender.
Our debt financing agreements limit our capital expenditures to $1.5 million annually and contain loan to value, balance sheet leverage, and debt service coverage ratio covenants.
Berkshire Bank waived the Company’s noncompliance with certain of the financial and related covenants at September 30, 2022. The bank retains the right to act on covenant violations that occur after the date of delivery of the waiver. 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.
We had cash and cash equivalents of $0.2 million and working capital of $3.3 million, an increase of $0.5 million when compared to March 31, 2022.
In order for us to continue operations beyond the next twelve months and be able to discharge our liabilities and commitments in the normal course of business, we must secure new long-term financing on terms consistent with our near-term business plans. Assuming we are successful refinancing the Ranor Term Loan and renewing the Revolver Loan, we believe our available cash, plus cash expected to be provided by operations, refundable Employee Retention Tax Credits, and borrowing capacity available under the Revolver Loan, will be sufficient to fund our operations, expected capital expenditures, and principal and interest payments under our lease and debt obligations through the next 12 months from the issuance date of our financial statements. The Company intends to renew the Revolver Loan. There was $0.3 million outstanding under the Revolver Loan at September 30, 2022, and $3.6 million of undrawn capacity.
The uncertainty associated with the refinancing of the Ranor Term Loan which is due on December 15, 2022, and the Revolver Loan, which is due on December 20, 2022, raises substantial doubt about our ability to continue as a going concern.
The condensed consolidated financial statements for the six months ended September 30, 2022 were prepared on the basis of a going concern which contemplates that we will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should we be required to liquidate assets. Our ability to satisfy our current liabilities and to continue as a going concern is dependent upon the timely availability of long-term financing and successful execution of our operating plan. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
31
The table below presents selected liquidity and capital measures at the period ended:
|
| September 30, |
| March 31, |
| Change | |||
(dollars in thousands) | | 2022 | | 2022 | | Amount | |||
Cash and cash equivalents | | $ | 235 | | $ | 1,052 | | $ | (817) |
Working capital | | $ | 3,337 | | $ | 2,753 | | $ | 584 |
Total debt | | $ | 6,034 | | $ | 7,356 | | $ | (1,322) |
Total stockholders’ equity | | $ | 15,453 | | $ | 15,264 | | $ | 189 |
The next table summarizes changes in cash by primary component in the cash flows statements for the six months ended:
|
| September 30, |
| September 30, |
| Change | |||
(dollars in thousands) | | 2022 | | 2021 | | Amount | |||
Operating activities | | $ | 1,623 | | $ | (1,066) | | $ | 2,689 |
Investing activities | |
| (1,073) | |
| (8,159) | |
| 7,086 |
Financing activities | |
| (1,367) | |
| 7,376 | |
| (8,743) |
Net decrease in cash | | $ | (817) | | $ | (1,849) | | $ | 1,032 |
Operating activities
Apart from our loan facilities, our primary sources of cash are from accounts receivable collections. 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 we mark progress with customer projects and the composition of our accounts receivable collections mix changes between advance and progress payments, and customer payments made after shipment of finished goods.
Our first six months of fiscal 2023 was generally marked by favorable project performance progress and delivery schedules that led to timely customer payments. Cash provided by operating activities for the six months ended September 30, 2022 was $1.6 million, as customer cash advances and collections exceeded cash outflows on both new and older projects in-progress. Cash used in operations for the six months ended September 30, 2021 was $1.1 million.
Investing activities
We invested approximately $1.1 million in new factory machinery and equipment for the first six months of fiscal 2023. We are limited by our financial debt covenants and may not spend more than $1.5 million for new machinery and equipment in the fiscal year. We paid $7.8 million to acquire the Stadco business in August 2021 and purchased $0.4 million of new equipment for the six months ended September 30, 2021.
Financing activities
During the six months ended September 30, 2022, we drew down $3.6 million of proceeds under our the Revolver Loan and repaid $4.6 million during the same period. We also used $0.4 million of cash to make periodic lease payments and pay off certain lease and debt obligations. For the six months ended September 30, 2021, we raised approximately $7.2 million from the sale of stock and new debt borrowings to finance the Stadco acquisition and related closing costs. In addition, we paid down principal of $0.6 million on our term debt and finance lease obligations.
All of the above activity resulted in a net decrease in cash of $0.8 million for the six months ended September 30, 2022, compared with a net decrease in cash of $1.8 million for the six months ended September 30, 2021.
Berkshire Bank Loans
On August 25, 2021, the Company entered into an amended and restated loan agreement with Berkshire Bank, or the “Loan Agreement”. Under the Loan Agreement, Berkshire Bank continues as lender of the Ranor Term Loan and the revolving line of credit, or the “Revolver Loan”. In addition, Berkshire Bank provided to Stadco a term loan in the original amount of $4.0 million, or the “Stadco Term Loan”. The proceeds of the original Ranor Term Loan of $2.85 million were previously used to refinance existing mortgage debt of Ranor. The
32
proceeds of the Revolver Loan are used for working capital and general corporate purposes of the Company. The proceeds of the Stadco Term Loan were to be used to support the acquisition of Stadco and refinance existing indebtedness of Stadco.
Payments for the original Ranor Term Loan began on January 20, 2017 and continue to be made in monthly installments of $19,260 each, inclusive of interest at a fixed rate of 5.21% per annum, with all outstanding principal and accrued interest due and payable on the maturity date. As amended, the Ranor Term Loan was to mature on September 16, 2022, with a balloon payment of approximately $2.3 million due under the terms of the Loan Agreement with Berkshire Bank. However, on September 15, 2022, Ranor and certain affiliates of the Company entered into a Fourth Amendment to Amended and Restated Loan Agreement and Fourth Amendment to Promissory Note to further extend the maturity date of the Ranor Term Loan to December 15, 2022. It is our intent to refinance the Ranor Term Loan with Berkshire Bank prior to the new maturity date.
Under the Loan Agreement, Berkshire Bank also makes available to Ranor a revolving line of credit with, following certain modifications, a maximum principal amount available of $5.0 million. The Company drew down $3.6 million under the Revolver Loan and repaid $4.6 million of principal during the six months ended September 30, 2022. There was $0.3 million outstanding under the Revolver Loan at September 30, 2022. Interest-only payments on advances made under the Revolver Loan during the six months ended September 30, 2022 totaled $5,600 at a weighted average interest rate of 2.75%. Unused borrowing capacity at September 30, 2022 was approximately $3.6 million.
On August 25, 2021, Stadco borrowed $4,000,000 from Berkshire Bank under the Stadco Term Loan. Interest on the Stadco Term Loan is due on unpaid balances beginning on August 25, 2021 at a fixed rate per annum equal to the 7 year Federal Home Loan Bank of Boston Classic Advance Rate plus 2.25%. Since September 25, 2021, and on the 25th day of each month thereafter, Stadco has made and will continue to make monthly payments of principal and interest in the amount of $54,390 each, with all outstanding principal and accrued interest due and payable on August 25, 2028.
Commitments and Contractual Obligations
The following contractual obligations associated with our normal business activities are expected to result in cash payments in future periods, and include the following material items at September 30, 2022:
| ● | We enter into various commitments with suppliers for the purchase of raw materials and work supplies. In accordance with U.S. GAAP, these purchase obligations are not reflected in the accompanying consolidated balance sheets. Our outstanding unconditional contractual commitments, including for the purchase of raw materials and supplies goods, totaled $7.2 million, all of it due to be paid within the next twelve months. These purchase commitments are in the normal course of business. |
| ● | Our long-term debt obligations, including fixed and variable-rate debt, totaled $6.0 million, with $3.1 million due over the next twelve months, and approximately $0.6 million due annually for each of the next five years. |
| ● | Our lease obligations, including imputed interest, totaled $7.2 million for buildings and equipment through 2030, with approximately $0.9 million due annually for each of the next eight years. |
In order for us to continue operations beyond the next twelve months and be able to discharge our liabilities and commitments in the normal course of business, we must secure new long-term financing on terms consistent with our near-term business plans. Assuming we are successful refinancing the Ranor Term Loan and renewing the Revolver Loan, we believe our available cash, plus cash expected to be provided by operations, refundable Employee Retention Tax Credits, and borrowing capacity available under the Revolver Loan, will be sufficient to fund our operations, expected capital expenditures, and principal and interest payments under our lease and debt obligations through the next 12 months from the issuance date of our financial statements. The Company intends to renew the Revolver Loan. There are no off-balance sheet arrangements as of September 30, 2022.
33
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 (loss) 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. 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 for periods ended:
| | Three Months ended September 30, |
| Six Months ended September 30, | ||||||||||||||
(dollars in thousands) |
| 2022 |
| 2021 |
| Change |
| 2022 |
| 2021 |
| Change | ||||||
Net income (loss) | | $ | 391 | | $ | (220) | | $ | 611 | | $ | (110) | | $ | 1,151 | | $ | (1,261) |
Income tax expense (benefit) | |
| 136 | |
| (79) | |
| 215 | |
| (38) | |
| (52) | |
| 14 |
Interest expense (1) | |
| 84 | |
| 57 | |
| 27 | |
| 167 | |
| 87 | |
| 80 |
Depreciation and amortization | |
| 532 | |
| 333 | |
| 199 | |
| 1,117 | |
| 516 | |
| 601 |
EBITDA | | $ | 1,143 | | $ | 91 | | $ | 1,052 | | $ | 1,136 | | $ | 1,702 | | $ | (566) |
(1) Includes amortization of debt issue costs.
Item 3.Quantitative and Qualitative Disclosure About Market Risk.
As a smaller reporting company, we have elected not to provide the information required by this Item.
Item 4.Controls and Procedures.
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, 2022, our disclosure controls and procedures were not effective due to the material weakness in our internal control over financial reporting described below.
34
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.
Material Weakness
We identified a material weakness in our internal control over financial reporting as of March 31, 2022, which still existed as of September 30, 2022. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the preparation of our financial statements in our Annual Report on Form 10-K, management identified the following material weakness: we did not maintain proper controls, processes and procedures over the initial purchase accounting and the continuing fair value accounting associated with our acquisition of Stadco that were adequately designed, documented and executed to support the accurate and timely reporting of our financial results regarding the initial purchase accounting and the continuing fair value accounting associated with the Stadco acquisition.
Notwithstanding the material weakness, management believes the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial condition, results of operations and cash flows as of and for the periods presented in accordance with U.S. GAAP.
Management’s Remediation Plan
Our management, with the oversight of our audit committee, has initiated steps and plans to take additional measures to remediate the underlying causes of the material weakness, which we currently believe will be primarily through the development and implementation of new procedures, policies, processes, including revising the precision level of management review controls and gaining additional assurance regarding timely completion of our quality control procedures. It is possible that we may determine that additional remediation steps will be necessary in the future.
The material weaknesses will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We can provide no assurance as to when the remediation of these material weaknesses will be completed to provide for an effective control environment.
Changes in Internal Control over Financial Reporting
Except as disclosed under “Management’s Remediation Plan”, for the quarter ended September 30, 2022, 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.
35
PART II. Other Information.
Item 6.Exhibits.
Exhibit Index
Exhibit No. |
| Description |
| Incorporated by |
| File |
| Date Filed |
| Exhibit No. |
| Filed |
3.1 | | | SB-2 | | 333-133509 | | August 28, 2006 | | 3.1 | | | |
3.2 | | | 8-K | | 000-51378 | | February 3, 2014 | | 3.1 | | | |
3.3 | | Certificate of Designation for Series A Convertible Preferred Stock of the Registrant | | 8-K | | 000-51378 | | March 3, 2006 | | 3.1 | | |
3.4 | | | 10-Q | | 000-51378 | | November 12, 2009 | | 3.5 | | | |
10.1 | | | 8-K | | 000-51378 | | September 19, 2022 | | 10.1 | | | |
31.1 |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | X |
31.2 |
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | X |
32.1 |
| | | | | | | | | | X | |
101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | | | | | | | X |
101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | | | | | X |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | | | X |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | | | X |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | | X |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | | X |
104 | | Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | | | X |
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| TechPrecision Corporation |
November 17, 2022 | By: | /s/ Thomas Sammons |
|
| Thomas Sammons |
|
| Chief Financial Officer |
37
Exhibit 31.1
CERTIFICATION
I, Alexander Shen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TechPrecision Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: November 17, 2022 | /s/ Alexander Shen |
| Alexander Shen |
| Chief Executive Officer |
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
I, Thomas Sammons, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TechPrecision Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and,
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: November 17, 2022 | /s/ Thomas Sammons |
| Thomas Sammons |
| Chief Financial Officer |
| (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report on Form 10-Q of TechPrecision Corporation (the “Company”) for the quarter ended September 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Alexander Shen, the Chief Executive Officer of the Company, and I, Thomas Sammons, the Chief Financial Officer of the Company, do hereby certify pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: November 17, 2022 | /s/ Alexander Shen |
| Alexander Shen |
| Chief Executive Officer |
| (Principal Executive Officer) |
|
|
Dated: November 17, 2022 | /s/ Thomas Sammons |
| Thomas Sammons |
| Chief Financial Officer (Principal Financial Officer) |