TECHPRECISION CORPORATION 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
?
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
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
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
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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 toU.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 theCommonwealth of Massachusetts andState of California , in which jurisdictions the Company's manufacturing and executive offices are located, issued similar emergency orders inMarch 2020 . Although the emergency order forMassachusetts has expired, the national emergency declaration was renewed onJuly 15, 2022 and theCalifornia emergency order remains in effect throughFebruary 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 endedSeptember 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
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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 endedSeptember 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 inthe 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 Table of Contents Key Performance Indicators
While we prepare our financial statements in accordance withU.S. generally accepted accounting principles, or "U.S. GAAP", we also utilize and present certain financial measures that are not based on or included inU.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 comparableU.S. GAAP financial measures.
Percentages in the following tables and throughout this "Results of Operations" section may reflect rounding adjustments.
Three Months Ended
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 endedSeptember 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 endedSeptember 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 forRanor remains strong as new orders for components related to a variety of programs, includingU.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 endedSeptember 30, 2022 . Net sales of$1.3 million for the same quarter a year ago included only five weeks of business activity from theStadco acquisition closing date ofAugust 25, 2021 . Net sales in the second quarter of fiscal 2023 totaled$3.5 million to customers in the defense markets. Our defense backlog forStadco 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 endedSeptember 30, 2022 was$2.9 million higher when compared to the three months endedSeptember 30, 2021 . The increase in cost of sales was primarily the result of a full quarter (or 13 weeks) of business activity at ourStadco 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 endedSeptember 30, 2021 . Gross margin was 20.4% for the three months endedSeptember 30, 2022 compared to 19.4% for the three months endedSeptember 30, 2021 . 25
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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
Stadco - The increase was due primarily to the inclusion of a full quarter (or 13 weeks) ofStadco 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
26
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Corporate and unallocated - Corporate expenses were higher for the three months
ended
Other Income (Expense)
The following table presents other income (expense) for the three months endedSeptember 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 endedSeptember 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 theStadco acquisition. Amortization of debt issue costs were higher when compared to the three months endedSeptember 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 theStadco acquisition, and other tax rebates for$33,223 . Other Income The three months endedSeptember 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 endedSeptember 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 endedSeptember 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 atSeptember 30, 2022 andMarch 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 endedSeptember 30, 2022 , we recorded net income of$0.4 million , compared with net loss of$0.2 million for the three months endedSeptember 30, 2021 . 27
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Six Months Ended
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 endedSeptember 30, 2022 , was$6.6 million higher when compared to the six months endedSeptember 30, 2021 . The increase in cost of sales was primarily the result of a full twenty-six weeks of business activity for ourStadco 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 atStadco . However, gross profit increased by$0.8 million , or 45% higher when compared to the six months endedSeptember 30, 2021 , following a strong operating performance atRanor , which more than offset weak operating results atStadco . 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
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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.
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 atStadco , we reported an operating loss of$0.7 million compared to operating loss of$0.1 million for the six months endedSeptember 30, 2021 .
Corporate and unallocated - Corporate expenses were higher for the six months endedSeptember 30, 2022 , primarily due to a return to pre-pandemic business activity for outside advisory services and stock-based compensation. 29 Table of Contents Other Income (Expense) The following table presents other income (expense) income for the six months endedSeptember 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 endedSeptember 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 theStadco acquisition. Amortization of debt issue costs were higher when compared to the six months endedSeptember 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 theStadco acquisition, and other tax rebates for$33,223 . Other income for the six months endedSeptember 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 inMarch 2021 .
Other Income
Other income for the six months endedSeptember 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 endedSeptember 30, 2021 , as authorized by Section 1106 of the CARES Act, theSmall Business Administration remitted toBerkshire 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
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 atSeptember 30, 2022 andMarch 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 endedSeptember 30, 2022 , we recorded a net loss of$110,221 , compared with net income of$1.2 million for the six months endedSeptember 30, 2021 . The same period prior year included other income of$1.3 million for loan forgiveness under the payroll protection program. 30 Table of Contents
Liquidity and Capital Resources
We reported a net loss of$0.1 million for the six months endedSeptember 30, 2022 . We reported a net loss of$0.3 million for the fiscal year endedMarch 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 ofSeptember 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 ofMarch 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. OnSeptember 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 toDecember 15, 2022 . We intend to refinance the original term loan in the principal amount of$2.85 million (the "Ranor Term Loan") made byBerkshire Bank , toRanor 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 isDecember 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 withBerkshire 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 atSeptember 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$0.3 million outstanding under the Revolver Loan atSeptember 30, 2022 , and$3.6 million of undrawn capacity. The uncertainty associated with the refinancing of the Ranor Term Loan which is due onDecember 15, 2022 , and the Revolver Loan, which is due onDecember 20, 2022 , raises substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements for the six months endedSeptember 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 Table of Contents 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 theStadco business inAugust 2021 and purchased$0.4 million of new equipment for the six months endedSeptember 30, 2021 .
Financing activities
During the six months endedSeptember 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 endedSeptember 30, 2021 , we raised approximately$7.2 million from the sale of stock and new debt borrowings to finance theStadco 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 endedSeptember 30, 2022 , compared with a net decrease in cash of$1.8 million for the six months endedSeptember 30, 2021 .
Berkshire Bank Loans
OnAugust 25, 2021 , the Company entered into an amended and restated loan agreement withBerkshire 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 toStadco 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 ofRanor .
The
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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
We enter into various commitments with suppliers for the purchase of raw
materials and work supplies. In accordance with
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
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
?
approximately
Our lease obligations, including imputed interest, totaled
? buildings and equipment through 2030, with approximately
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.
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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 withU.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 underU.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 comparableU.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)
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.
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