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TECHPRECISION : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/13/2020 | 04:24pm EDT

Statement Regarding Forward Looking Disclosure

The following discussion of the results of our operations and financial
condition should be read in conjunction with our condensed consolidated
financial statements and the related notes, which appear elsewhere in this
Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q, including
this section titled "Management's Discussion and Analysis of Financial Condition
and Results of Operations," may contain predictive or "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All statements other than statements of current or historical fact
contained in this quarterly report, including statements that express our
intentions, plans, objectives, beliefs, expectations, strategies, predictions or
any other statements relating to our future activities or other future events or
conditions are forward-looking statements. The words "anticipate," "believe,"
"continue," "could," "estimate," "expect," "intend," "may," "plan," "predict,"
"project," "will," "should," "would" and similar expressions, as they relate to
us, are intended to identify forward-looking statements.

These statements are based on current expectations, estimates and projections
made by management about our business, our industry and other conditions
affecting our financial condition, results of operations or business prospects.
These statements are not guarantees of future performance and involve risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in, or implied by, the forward-looking statements due to numerous risks and
uncertainties. Factors that could cause such outcomes and results to differ
include, but are not limited to, risks and uncertainties arising from:

· our reliance on individual purchase orders, rather than long-term contracts,

to generate revenue; · our ability to balance the composition of our revenues and effectively control

operating expenses; · external factors, including the COVID-19 pandemic, that may be outside of our


· the impacts of the COVID-19 pandemic and government-imposed lockdowns in

response thereto; · the availability of appropriate financing facilities impacting our operations,

  financial condition and/or liquidity;
· our ability to receive contract awards through competitive bidding processes;
· our ability to maintain standards to enable us to manufacture products to

exacting specifications; · our ability to enter new markets for our services; · our reliance on a small number of customers for a significant percentage of

  our business;


· competitive pressures in the markets we serve;
· changes in the availability or cost of raw materials and energy for our
  production facilities;
· operating in a single geographic location;
· restrictions in our ability to operate our business due to our outstanding


· government regulations and requirements;
· pricing and business development difficulties;
· changes in government spending on national defense;
· our ability to make acquisitions and successfully integrate those acquisitions
  with our business;
· general industry and market conditions and growth rates;
· general economic conditions; and
· those risks discussed in "Item 1A. Risk Factors" and elsewhere in our 2020

Annual Report on Form 10-K, as well as those described in any other filings

  which we make with the SEC.

Any forward-looking statements speak only as of the date on which they are made,
and we undertake no obligation to publicly update or revise any forward-looking
statements to reflect events or circumstances that may arise after the date of
this Quarterly Report on Form 10-Q, except as required by applicable law.
Investors should evaluate any statements made by us in light of these important


We offer a full range of services required to transform raw materials into
precision finished products. Our manufacturing capabilities include: fabrication
operations (cutting, press and roll forming, assembly, welding, heat treating,
blasting and painting) and machining operations including CNC (computer
numerical controlled) horizontal and vertical milling centers. We also provide
support services to our manufacturing capabilities: manufacturing engineering
(planning, fixture and tooling development, manufacturing), quality control
(inspection and testing), materials procurement, production control (scheduling,
project management and expediting) and final assembly.

All manufacturing is done in accordance with our written quality assurance
program, which meets specific national and international codes, standards, and
specifications. Ranor holds several certificates of authorization issued by the
American Society of Mechanical Engineers and the National Board of Boiler and
Pressure Vessel Inspectors. The standards used are specific to the customers'
needs, and our manufacturing operations are conducted in accordance with these

Because our revenues are derived from the sale of goods manufactured pursuant to
a contract, and we do not sell from inventory, it is necessary for us to
constantly seek new contracts. There may be a time lag between our completion of
one contract and commencement of work on another contract. During such periods,
we may continue to incur overhead expense but with lower revenue resulting in
lower operating margins. Furthermore, changes in either the scope of an existing
contract or related delivery schedules may impact the revenue we receive under
the contract and the allocation of manpower. Although we provide manufacturing
services for large governmental programs, we usually do not work directly for
the government or its agencies. Rather, we perform our services for large
governmental contractors. Our business is dependent in part on the continuation
of governmental programs which require our services and products.

Our contracts are generated both through negotiation with the customer and from
bids made pursuant to a request for proposal. Our ability to receive contract
awards is dependent upon the contracting party's perception of such factors as
our ability to perform on time, our history of performance, including quality,
our financial condition and our ability to price our services
competitively. Although some of our contracts contemplate the manufacture of one
or a limited number of units, we continue to seek more long-term projects with
predictable cost structures.

Our results of operations are affected by a number of external factors including
the availability of raw materials, commodity prices (particularly steel),
macroeconomic factors, including the availability of capital that may be needed
by our customers, and political, regulatory and legal conditions in the United
States and in foreign markets. Generally, our projects are made up of short-term
contracts with a production timeline of less than twelve months. However, some
projects can take up to thirty-six months to complete. Units manufactured under
the majority of our customer contracts are delivered on time and with a positive
gross margin. Our results of operations for any specific period are also
affected by our success in booking new contracts, the timing of revenue
recognition, delays in customer acceptances of our products, delays in
deliveries of ordered products and our rate of progress fulfilling obligations
under our contracts. A delay in deliveries or cancellations of orders could have
an unfavorable impact on liquidity, cause us to have inventories in excess of
our short-term needs, and delay our ability to recognize, or prevent us from
recognizing, revenue on contracts in our order backlog.


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

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

For the three months ended June 30, 2020, our net sales and net loss were $3.3
million and $0.1 million, respectively, compared with net sales of $4.3 million
and net income of $0.2 million for the three months ended June 30, 2019. Our
gross margin for the three months ended June 30, 2020 and 2019 was 21.2% and
25.6%, respectively. We used $0.4 million of cash in operations for the three
months ended June 30, 2020 and had a cash balance of $1.8 million at June 30,

For the three months ended June 30, 2020 and 2019, our largest customer in each
period accounted for approximately 31% and 29% of reported net sales,
respectively. For the three months ended June 30, 2020, we had four customers
which accounted for approximately 80% of our revenue, in the aggregate. Our
sales order backlog at June 30, 2020 and March 31, 2020 was approximately $14.4
million and $16.8 million, respectively.

Critical Accounting Policies

The preparation of the condensed consolidated financial statements requires that
we make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. We base our estimates on historical experience and various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. We continually evaluate our estimates, including those related to
revenue recognition, inventories, recovery of long-lived assets, income taxes
and the valuation of equity transactions. These estimates and assumptions
require management's most difficult, subjective or complex judgments. Actual
results may differ under different assumptions or conditions.

Our significant accounting policies are set forth in detail in Note 2 to the consolidated financial statements included in the 2020 Annual Report on Form 10-K.We consider the policies relating to revenue recognition to be a critical accounting policy. There have been no significant changes to our critical accounting policies during the three months ended June 30, 2020.

Accounting Pronouncements

New Accounting Standards

See Note 3, Accounting Standards Update, in the Notes to the condensed consolidated financial statements in "Item 1. Financial Statements" for a discussion of recently adopted new accounting guidance and new accounting guidance not yet adopted.

Key Performance Indicators

While we prepare our financial statements in accordance with U.S. generally
accepted accounting principles, or U.S. GAAP, we also utilize and present
certain financial measures that are not based on or included in U.S. GAAP. We
refer to these as Non-GAAP financial measures.  Please see the section "EBITDA
Non-GAAP financial measure" below for further discussion of these financial
measures, including the reasons why we use such financial measures and
reconciliations of such financial measures to the most directly comparable
GAAP financial measures.

Three Months Ended June 30, 2020 and 2019

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

                                    2020                            2019                          Changes
(dollars in thousands)     Amount         Percent          Amount         Percent          Amount         Percent
Net sales                $    3,283             100 %    $    4,334             100 %    $   (1,051 )           (24 )%
Cost of sales                 2,586              79 %         3,224              74 %          (638 )           (20 )%
Gross profit                    697              21 %         1,110              26 %          (413 )           (37 )%
Selling, general and
administrative                  793              24 %           742              17 %            51               7 %
Operating (loss)
income                          (96 )            (3 )%          368               8 %          (464 )          (126 )%
Other expense, net              (57 )            (2 )%          (57 )            (1 )%           --              -- %
(Loss) income before
taxes                          (153 )            (5 )%          311               7 %          (464 )          (149 )%
Income tax (benefit)
expense                         (37 )            (1 )%           90               2 %          (127 )          (141 )%
Net (loss) income        $     (116 )            (4 )%   $      221               5 %    $     (337 )          (152 )%


Net Sales

Changes in net sales generally reflect a different product mix and project
volume when comparing the current and prior periods. Net sales were $3.3 million
for the three months ended June 30, 2020, or 24% lower when compared to net
sales for the three months ended June 30, 2019 of $4.3 million. For the three
months ended June 30, 2020, net sales in our defense markets decreased by $0.2
million when compared to the three months ended June 30, 2019. However, our
defense backlog remains strong as new orders for components continue to flow
down from our prime defense contractors.

The Company records most of its revenue over time as it completes performance
obligations. We measure progress for performance obligations satisfied over time
using input methods (e.g., labor hours expended and time elapsed). Our fiscal
2021 first quarter revenues were impacted by a product mix that included certain
projects with low margins which consumed a higher number of actual labor hours
than originally estimated to complete. The higher actual labor hours had the
effect of consuming more available hours, which could have been allocated to
higher margin projects. This set of conditions resulted in lower revenue
recognition in our defense markets during fiscal 2021 first quarter. Projects
in-progress, with little or no margin, can slow turnover and result in lower
revenue until they are completed.

Net sales to industrial markets decreased by $0.8 million when compared to the
three months ended June 30, 2019. We have repeat business in this sector, but
the order flow is uneven and difficult to forecast. Based on our current
backlog, we anticipate higher revenue during the remainder of the fiscal year.

Cost of Sales and Gross Margin

Cost of sales consists primarily of raw materials, parts, labor, overhead and
subcontracting costs. Our cost of sales for the three months ended June 30, 2020
were $2.6 million compared to $3.2 million for the three months ended June 30,
2019. Despite the decrease in dollars, our labor costs and factory overhead were
higher as a percentage of revenue, due to the lower turnover. In addition, more
labor hours were used on low margin projects during the period.

Gross margin was 21.2% for the three months ended June 30, 2020 and 25.6% for
the three months ended June 30, 2019. Gross profit was $0.7 million for the
three months ended June 30, 2020, or 37% lower when compared to the three months
ended June 30, 2019.

Selling, General and Administrative Expenses

Total selling, general and administrative expenses for the three months ended
June 30, 2020 increased by $51,949 due to an increase in salaries, stock-based
compensation and outside advisory services which more than offset a decrease in
travel expenses when compared to the three months ended June 30, 2019.

Other Expense, net

Interest expense was lower for the three months ended June 30, 2020 when
compared to the three months ended June 30, 2019, and should continue to
decrease as we amortize debt principal to maturity, barring any additional
borrowings for working capital purposes under our revolving credit facility.
Debt issue costs increased as the Company began to amortize costs associated
with increasing the borrowing limit under the Revolver loan with Berkshire bank
and borrowings under the payroll protection program, or PPP.

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

                                       June 30, 2020       June 30, 2019       $ Change       % Change
Other income, net                     $           652     $        19,430     $  (18,778 )            nm
Interest expense                      $       (42,757 )   $       (65,782 )   $   23,025              35 %
Amortization of debt issue costs      $       (15,141 )   $       (10,741 )
  $   (4,400 )           (41 )%

nm - not meaningful


Income Taxes

For the three months ended June 30, 2020 we recorded a tax benefit of $37,360
compared to tax expense of $90,218 for the three months ended June 30, 2019. Tax
benefit for the three months ended June 30, 2020 was the result of an operating

The valuation allowance on deferred tax assets at June 30, 2020 was
approximately $1.8 million. We believe that it is more likely than not that the
benefit from certain state and foreign NOL carryforwards and other deferred tax
assets will not be realized. In recognition of this risk, we continue to provide
a valuation allowance on these items. In the event future taxable income is
below management's estimates or is generated in tax jurisdictions different than
projected, the Company could be required to increase the valuation allowance for
deferred tax assets. This would result in an increase in the Company's effective
tax rate.

Net (Loss) Income

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

Liquidity and Capital Resources

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

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

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

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

At June 30, 2020, we had cash and cash equivalents of $1.8 million and working
capital of $6.4 million. We believe our available cash plus cash expected to be
provided by operations during fiscal 2021, and borrowing capacity available
under the Revolver Loan will be sufficient to fund our operations, capital
expenditures and principal and interest payments under our debt obligations
through the 12 months from the issuance date of our financial statements.

The table below presents selected liquidity and capital measures for the period

(dollars in thousands)        June 30, 2020       March 31, 2020      Amount
Cash and cash equivalents    $         1,802     $            931     $   871
Working capital              $         6,410     $          5,595     $   815
Total debt                   $         3,877     $          2,587     $ 1,290
Total stockholders' equity   $         9,409     $          9,469     $   (60 )


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

(dollars in thousands)               June 30, 2020       June 30, 2019       Amount
Cash flows provided by (used in):
Operating activities                $          (369 )   $         1,703     $ (2,072 )
Investing activities                            (42 )               (10 )        (32 )
Financing activities                          1,282                (199 )      1,481
Net increase in cash                $           871     $         1,494     $   (623 )

Operating activities

Our primary sources of cash are from accounts receivable collections, customer
advance payments and project progress payments. Our customers make advance
payments and progress payments under the terms of each manufacturing contract.
Our cash flows can fluctuate significantly from period to period as the
composition of our receivables collections mix changes between advance payments
and customer payments made after shipment of finished goods. Cash used in
operations for the three months ended June 30, 2020 was $0.4 million compared
with cash provided by operations of $1.7 million for fiscal 2020, a decrease of
$2.1 million.

During our first quarter of fiscal 2021 we encountered some delayed inspections,
deliveries, and disrupted supply chain, due to travel restrictions in connection
with the COVID-19 pandemic. In addition, we expended more direct labor hours on
low margin projects. All of these events resulted in lower turnover when
compared to the same quarter a year ago. Our first quarter of fiscal 2020 was
marked by favorable timing with project completions and customer delivery
schedules which generated higher amounts of cash.

Investing activities

We anticipate that we will spend approximately $0.5 million in new factory
machinery and equipment during the remainder of fiscal 2021. Net cash used in
investing activities for purchases of property, plant and equipment in the three
months ended June 30, 2020 and 2019 totaled $41,768 and $10,200, respectively.

Financing activities

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

For the three months ended June 30, 2020 and 2019 we made monthly principal payments of $26,618 and $199,533 in connection with our term debt and finance lease obligations.

All of the above activity resulted in a net increase in cash of $0.9 million for
the three months ended June 30, 2020 compared with a increase in cash of $1.5
million for the three months ended June 30, 2019.

Off-Balance Sheet Arrangements

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

EBITDA Non-GAAP Financial Measure

To complement our condensed consolidated statements of operations and
comprehensive (loss) income 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


We define EBITDA as net (loss) income plus interest, income taxes, depreciation
and amortization. Net loss was $0.1 million for the three months ended June 30,
2020, as compared to net income of $0.2 million for the three months ended
June 30, 2019. EBITDA, a non-GAAP financial measure, was $0.1 million for the
three months ended June 30, 2020, as compared to $0.6 million for the three
months ended June 30, 2019. The following table provides a reconciliation of
EBITDA to net (loss) income, the most directly comparable GAAP measure reported
in our condensed consolidated financial statements for the three months ended:

(dollars in thousands)          June 30, 2020       June 30, 2019      Amount
Net (loss) income              $          (116 )   $           221     $  (337 )
Income tax (benefit) expense               (37 )                90        (127 )
Interest expense (1)                        58                  76         (18 )
Depreciation                               169                 190         (21 )
EBITDA                         $            74     $           577     $  (503 )

(1) Includes amortization of debt issue costs.

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Financials (USD)
Sales 2021 15,6 M - -
Net income 2021 0,32 M - -
Net Debt 2021 1,69 M - -
P/E ratio 2021 127x
Yield 2021 -
Capitalization 41,3 M 41,3 M -
EV / Sales 2020 2,42x
EV / Sales 2021 2,51x
Nbr of Employees 93
Free-Float 87,5%
Duration : Period :
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Income Statement Evolution
Managers and Directors
Alexander Shen Chief Executive Officer
Thomas C. Sammons Chief Financial Officer
Richard S. McGowan Non-Executive Chairman
Andrew A. Levy Independent Director
Robert A. Crisafulli Independent Director
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