Techprecision Corp: Form 10-Q for the period ended Sep 30, 2024

(in thousands, except per share data)

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. As discussed below under “Liquidity and Capital Resources”, certain events and conditions, when examined in the aggregate, indicate substantial doubt about our ability to continue as a going concern for at least one year beyond the date of the financial statements. 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 revenue and effectively control operating expenses;
• external factors that may be outside of our control, including health emergencies, like epidemics or pandemics, California wildfires, the conflicts in Eastern Europe and the Middle East, price inflation, increasing interest rates, and supply-chain inefficiencies;
• 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,
• 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.

Overview

TechPrecision, through our wholly owned subsidiaries, is a manufacturer of large - scale metal fabricated and machined precision components and equipment. These components are used in a variety of markets, primarily defense and aerospace, and secondarily precision industrial. All our operations and customers are in the United States.

We work with our customers to manufacture components in accordance with the customers’ drawings and specifications. Our work complies with specific military specifications and standards as well as national and international codes and standards required by our customers. We believe that we have earned our reputation through outstanding technical expertise, attention to detail, and a total commitment to quality and excellence in customer service.

The manufacturing operations of our Ranor subsidiary are situated on approximately 65 acres in North Central Massachusetts. Leveraging our 145,000 square foot facilities, Ranor provides a full range of custom solutions to transform material into precision finished welded components and precision finished machined components up to 100 tons: manufacturing engineering, materials management and traceability, high-precision heavy fabrication (in-house fabrication operations include cutting, press and roll forming, welding, heat treating, assembly, blasting and painting), heavy high-precision machining (in-house machining operations include CNC programming, finishing, and assembly), QC inspection including portable CMM, NonDestructive Testing, and final packaging.

All manufacturing at Ranor is performed in accordance with customer requirements. Ranor is an ISO 9001:2015 certificate holder. Ranor is a US defense-centric company with over 95% of its revenue in the defense sector. Ranor is registered and compliant with ITAR.

The manufacturing operations of our Stadco subsidiary are situated in an industrial self-contained multi-building complex comprised of approximately 183,000 square feet under roof in Los Angeles, California. Stadco manufactures large mission-critical components on several high-profile military aircraft, military helicopter, and military space programs. Stadco has been a critical supplier to a blue-chip customer base that includes some of the largest OEMs and prime contractors in the defense and aerospace industries. Stadco also manufactures tooling, molds, fixtures, jigs and dies used in the production of defense-centric aircraft components.

Our Stadco subsidiary, similar to Ranor, provides a full range of custom solutions: manufacturing engineering, materials management and traceability, high-precision fabrication (in-house fabrication operations include waterjet cutting, press forming, welding, and assembly) and high-precision machining (in-house machining operations include CNC programming, finishing, and assembly), QC inspection including both fixed and portable CMM NonDestructive Testing, and final packaging. In addition, Stadco features a large electron beam welding cell, and two NonDestructive Testing work cells, a unique mission-critical technology set.

All manufacturing at Stadco is performed in accordance with customer requirements. Stadco is an AS 9100 D and ISO 9001:2015 certificate holder and a NADCAP NonDestructive Testing certificate holder. Stadco is a US defense-centric company with almost all of its revenue in the defense sector. Stadco is registered and compliant with ITAR.

Custom Manufacturing

We manufacture a variety of components in accordance with our internal core competencies and external customer needs and requirements. We also provide manufacturing engineering services to assist customers in optimizing their engineering designs for manufacturability. We do not design the components we manufacture; we custom manufacture according to customer “build-to-print” requirements and specifications. Accordingly, we do not distribute the components that we manufacture on the open market, and we do not market any products. We do not own the intellectual property rights to any proprietary marketed product, and we do not manufacture in anticipation of orders. Our custom manufacturing operations do not commence on any project before we receive and accept a customer’s purchase order. We only accept contracts that cover specific components within the capability of our resources.

We primarily target repeating custom programs with relatively mature and stable designs in order to provide long-term solutions for our customers. The multi-unit work is repeat work or a single product with multiple quantity releases. Secondarily, our activities include a variety of both multi-unit and one-off requirements. The one-off work is typically either a prototype or a unique, one-of-a-kind component.

Changes in regulations and market demand for our manufacturing expertise can be significant and sudden, and require us to adapt to the needs of the customers that we serve Understanding this dynamic, we focus on the defense industry in order to reliably pivot with our defense customers to jointly develop the capability to transform our workforce to manufacture components in accordance with our own and our external customers’ changing requirements.

We primarily serve customers in the defense and aerospace; secondarily in the nuclear, and precision industrial sectors. Within these sectors, we have manufactured custom components for US Navy submarines and aircraft carriers, USMC military helicopters, US defense and civilian aerospace programs, and components for nuclear power plants.

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.

All the Company’s operations, assets, and customers are located in the U.S.

Recent Developments

Termination of Votaw Acquisition

On November 22, 2023 we and the Seller, entered into the Purchase Agreement, pursuant to which, we would acquire all of the issued and outstanding common stock of Votaw Precision Technologies, Inc. (“Votaw”) and after giving effect to such purchase, Votaw was to become our wholly owned subsidiary.

Due to a change in certain conditions and events, it became probable that on March 31, 2024, the Company would be unable to close on the acquisition. On April 2, 2024, the Seller delivered to the Company written notice of its election to terminate the Purchase Agreement under Section 7.01(f) effective immediately. Pursuant to Section 7.01(f) of the Purchase Agreement, in the event that the Closing had not occurred by March 31, 2024, either we or the Seller had the right to terminate the Purchase Agreement, subject to the party terminating having complied with the other required closing conditions.

Since the Seller validly terminated the Purchase Agreement pursuant to Section 7.01(f), the Company was required to pay to the Seller the Stock Termination Fee. Under the Purchase Agreement, the Stock Termination Fee can increase by 48,000 additional shares of the Company’s common stock under certain conditions, including if the Company fails to use commercially reasonable efforts to cause a registration statement to effect the resale of the shares of common stock composing the Stock Termination Fee to be declared effective by the Securities and Exchange Commission as soon as practicable. Such registration was filed with the Securities and Exchange Commission on May 2, 2024, but cannot be declared effective until we have filed all of the required financial statements with the Securities and Exchange Commission, including our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2024.

On April 29, 2024, we issued 320,000 shares of our common stock as the Stock Termination Fee.

Amendments to Amended and Restated Loan Agreement and to Second Amended and Restated Promissory Note

On May 28, 2024, Ranor and the other Borrowers entered into an Eighth Amendment to Amended and Restated Loan Agreement and Fourth Amendment to Second Amended and Restated Promissory Note, or the “Eighth Amendment”, with Berkshire Bank. Effective May 24, 2024, the Eighth Amendment, among other things, (i) extends the maturity date of the Revolver Loan from May 24, 2024 to August 30, 2024; (ii) amends the maximum principal amount of the Revolver Loan from $5,000 to $4,500; and (iii) effective on June 1, 2024, increases the Term SOFR Margin (as defined in the Amendment) used to calculate the interest rate from 2.25% per annum to 2.50% per annum.

On September 4, 2024, Ranor and the other Borrowers entered into a Ninth Amendment to Amended and Restated Loan Agreement and Fifth Amendment to Second Amended and Restated Promissory Note, or the “Ninth Amendment”, with Berkshire Bank. Effective August 30, 2024, the Ninth Amendment, among other things, (i) extends the maturity date of the Revolver Loan from August 30, 2024 to January 15, 2025.

On December 19, 2024, Ranor and the other Borrowers entered into a Tenth Amendment to Amended and Restated Loan Agreement and Sixth Amendment to Second Amended and Restated Promissory Note, or the “Tenth Amendment”, with Berkshire Bank. The Tenth Amendment, among other things, extended the maturity date of the Revolver Loan from January 15, 2025 to April 30, 2025

Read about the Berkshire Bank Loans under the “Liquidity and Capital Resources” section below, for a discussion of the amended debt agreement and its impact on the Company’s liquidity and on-going operations.

July Private Placement

On July 3, 2024, the Company entered into a Securities Purchase Agreement with certain accredited investors, pursuant to which the Company sold 521,800 shares of the Company’s common stock, par value $0.0001 per share, and 521,800 common stock purchase warrants to purchase 521,800 shares of Common Stock in a private placement at an aggregate purchase price of $1,801.The combined purchase price for one share and one warrant was $3.45. The purpose of the private placement was to raise working capital for use by the Company. The closing of the offering occurred on July 8, 2024. Placement agent’s fees in connection with the offering totaled $123. In addition, the Company issued to the placement agent common stock purchase warrants to purchase up to 19,983 shares of common stock

Pursuant to the PIPE Agreement, we have agreed to have a registration statement registering for resale the PIPE Shares and the shares underlying the PIPE Warrants declared effective with 60 days of the PIPE Closing Date. If such registration statement is not declared effective in a timely manner, we will be subject to liquidated damages as described in the PIPE Agreement.

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, revenue and expenses, and related disclosures. 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 as one of our most critical accounting estimates. 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 is 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 such as labor hours expended. As a result, we review inputs and outputs and can estimate the remaining amounts of inputs needed to complete the work and therefore report an accurate amount of revenue each reporting period. The amount of revenue period-to-period will fluctuate based on project volume.

Our significant accounting policies are set forth in detail in Note 2 to the consolidated financial statements included in the 2024 Annual Report on Form 10-K. There were no significant changes to our critical accounting policies during the three months ended September 30, 2024.

New Accounting Standards

See Note 2, Basis of Presentation and Significant Accounting Policies, in the Notes to the Unaudited Condensed Consolidated Financial Statements under “Item 1. Financial Statements”, for a discussion of recently adopted new accounting guidance.

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 in general to complete. Units manufactured under the majority of our customer contracts have historically been delivered on time and with a positive gross margin. Our results of operations are also affected by our success in booking new contracts, the timing of revenue recognition, delays in customer acceptances of our products, delays in deliveries of ordered products and our rate of progress fulfilling obligations under our contracts. Delays in any of these items 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 revenue, operating profit, and certain key performance indicators. Segment operating profit excludes general corporate costs, which include executive and director compensation, stock-based compensation, certain retirement benefit costs, and other corporate facilities and administrative expenses not allocated to the segments.

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, 2024 and 2023

The following table presents revenue, cost of revenue and gross profit, consolidated and by reportable segment:

nm – not meaningful

Revenue

Consolidated – Revenue was $8,946 for the three months ended September 30, 2024, or 12% higher when compared to revenue of $7,970 for the three months ended September 30, 2023. Revenue increased at Stadco and Ranor by $617 and $295, respectively.

Ranor – Revenue was $4,790 for the three months ended September 30, 2024, an increase of $295 or 7%, on a favorable project mix.

Stadco – Revenue was $4,223 for the three months ended September 30, 2024, an increase of $617, or 17%, driven by an favorable project mix when compared the same period prior year.

Gross Profit and Gross Margin

Consolidated – Cost of revenue consists primarily of raw materials, parts, labor, overhead and subcontracting costs. Our cost of revenue for the three months ended September 30, 2024, was $7,932, or 14% higher when compared to the three months ended September 30, 2023. The increase in cost of revenue was primarily the result of higher production costs and under-absorbed overhead at Stadco. As a result, gross profit decreased by $21, or 2% when compared to the same period a year ago. Gross margin for the three months ended September 30, 2024 was 11% compared to 13% in the same period a year ago.

Ranor – Gross profit increased by $474, when compared to the same period a year ago. Cost of revenue was $179 lower, due to efficient production with higher absorbed overhead added to our work-in-progress when compared with the same period a year ago. Gross margin increased to 17% from 13% for the three months ended September 30, 2024 compared to the three months ended September 30, 2023.

Stadco – Gross profit was negative $504 for the three months ended September 30, 2024, as our losses increased by $495 when compared to the same period a year ago. Production issues remain as factory overhead was under absorbed, and repairs and maintenance and certain project losses increased year-over-year. Gross margin decreased to (6)% for the three months ended September 30, 2024 compared to 0% for the three months ended September 30, 2023. The Stadco projects executed had overall relatively higher contract values as compared with the same period a year ago. However, higher relative contracts prices do not necessarily have higher gross profit or gross margin.

Selling, General and Administrative (SG&A) Expenses

Consolidated – Total selling, general and administrative expenses decreased by $130, or 8%, primarily due to a decrease in spending for outside advisory services in connection with due diligence for the terminated Votaw acquisition a year ago.

Ranor – SG&A expense increased by $6 as an increase in compensation slightly offset a decrease in office costs when compared with the same period a year ago.

Stadco – SG&A expense increased by $7 due primarily to a slight increase in compensation when compared with the same period a year ago.

Corporate and unallocated – SG&A decreased by approximately $143, primarily on a reduction for outside advisory services in connection with due diligence for the terminated Votaw acquisition which was evident in the same period of the prior year.

Operating (loss) income

Consolidated – For the three months ended September 30, 2024, we reported an operating loss of $488, or $109 lower than the operating loss for the three months ended September 30, 2023. The change was primarily due to operating income at Ranor and lower corporate expenses which offset an operating loss at Stadco.

Ranor – Operating income increased by 70% due to a favorable three month period of operating execution and throughput.

Stadco – Operating loss increased by $502 as certain projects with production issues disrupted throughput for the three month period.

Corporate and unallocated – Operating loss decreased by $109, primarily on a reduction for outside advisory services in connection with due diligence for the terminated Votaw acquisition which was evident in the same period of the prior year.

Other Income (Expense), net

The following table presents other income (expense) for the three months ended:

Interest expense decreased by $38 when compared with the three months ended September 30, 2023, due primarily to a decrease in borrowings under the revolver loan. We also paid lower amounts of interest in connection with the term loans.

Amortization of debt issue costs for the three months ended September 30, 2024, was slightly higher when compared to three months ended September 30, 2023, according to the term loan periods.

Other income, net for the three months ended September 30, 2023 includes a gain from the disposal of fixed assets.

Income Tax expense (benefit)

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. 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. The assessment was based on the weight of negative evidence at the balance sheet date, our recent operating losses and unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels. In recognition of this risk, we continue to provide a valuation allowance on these items.

For the three months ended September 30, 2024, there has been no change in our judgment about the realizability of deferred tax assets in future years, and, therefore, no expense or benefit provided for income taxes. For the three months ended September 30, 2023, the Company recorded a tax benefit of $177.

Net Loss

As a result of the foregoing, for the three months ended September 30, 2024, we recorded a net loss of $601, or $0.06 per share basic and fully diluted, compared with a net loss of $528, or $0.06 per share basic and fully diluted for the three months ended September 30, 2023.

Six Months Ended September 30, 2024 and 2023

The following table presents revenue, cost of revenue and gross profit, consolidated and by reportable segment:

Revenue

Consolidated – Revenue was $16,932 for the six months ended September 30, 2024, or 10% higher when compared to revenue of $15,341 for the six months ended September 30, 2023. Revenue increased by $1,254 at Stadco and by $177 at Ranor. As explained below, we realized less direct labor hours at Stadco and Ranor on projects executed during the first six months of fiscal 2025 as compared with the same period a year ago, however, projects executed had overall relatively higher contract values. As described in the gross profit and gross margin section, higher relative contracts prices do not necessarily have higher gross profit or gross margin. Consolidated backlog was $48,641 as of September 30, 2024. Our project order flow from prime defense contactors remains strong.

Ranor – Revenue was $9,172 for the six months ended September 30, 2024, an increase of $177 or 2% higher when compared to the same period a year ago. We realized fewer direct labor hours during the first six months period of fiscal 2025, however, projects executed had overall relatively higher contract values when compared with the same period a year ago.

The backlog at Ranor remains strong as new orders continue to flow to us from our existing customer base of prime defense contractors. The backlog at Ranor on September 30, 2024 and 2023 was $21,714 and $19,125, respectively.

Stadco – Revenue was $7,827 for the six months ended September 30, 2024, compared with revenue of $6,573 for the six months ended September 30, 2023, an increase of $1,254, or 19%. Our project mix was favorable for the six month period, as projects executed on had overall relatively higher contract values during the first six months of fiscal 2025 as compared with the same period a year ago.

The backlog remains strong as new orders for components related to a variety of programs, including the U.S. Marine Corps heavy lift helicopter programs, continue to flow to us from our existing customer base of prime defense contractors. Stadco’s backlog was $26,927 and $25,543 as of September 30, 2024 and 2023, respectively.

Gross Profit and Gross Margin

Consolidated – Cost of revenue consists primarily of raw materials, parts, labor, overhead and subcontracting costs. Our cost of revenue for the six months ended September 30, 2024, was $15,679, or 15% higher when compared to the six months ended September 30, 2023. The increase in cost of revenue was primarily the result of higher production costs and under - absorbed overhead at Stadco. As a result, gross profit decreased by $476, or 28% when compared to the same period a year ago. Gross margin for the six months ended September 30, 2024 was 7% compared to 11% in the same period a year ago.

Ranor – Gross profit increased by $430, when compared to the same period a year ago. Cost of revenue decreased by $252, as an increase in material costs was more than offset by higher absorbed overhead added to our work - in - progress when compared with the same six - month period in the prior - year. Gross margin increased to 16% from 15% for the six months ended September 30, 2024 compared to the six months ended September 30, 2023.

Stadco – Gross profit was negative $1,502 for the six months ended September 30, 2024, as our losses increased when compared to the same period a year ago. Direct labor hours charged to projects were lower compared with the same prior year period a year ago. Factory overhead was under absorbed, and other production costs, repairs and maintenance and certain project losses increased year - over - year. Gross margin decreased to (9)% from (4)% for the six months ended September 30, 2024 compared to the six months ended September 30, 2023.

Selling, General and Administrative (SG&A) Expenses

Consolidated – Total selling, general and administrative expenses increased by $176, or 6%, primarily due to a $419 change in fair value to the accrual for the breakup fee in connection with the terminated Votaw acquisition, which more than offset a decrease in compensation and other outside advisory costs.

Ranor – SG&A expense decreased by $77 because of reduced compensation due to staff reductions and lower spending on travel.

Stadco – SG&A expense increased by $26. The SG&A expenses for outside advisory fees increased by $55 which offset a decrease in compensation and payroll taxes due to staff reductions.

Corporate and unallocated – SG&A increased by approximately $226, as a change in fair value to the accrual for the breakup fee in connection with the terminated Votaw acquisition offset reductions in compensation and outside advisory services.

Operating (loss) income

Consolidated – For the six months ended September 30, 2024, we reported an operating loss of $1,829, or 55% higher than the operating loss for the six months ended September 30, 2023. The change was primarily due to operating losses at Stadco and the change in fair value to the breakup fee in connection with the terminated Votaw acquisition.

Ranor – Operating income was higher by 33% when compared to the same period a year ago, due primarily to a favorable six-month period of execution and efficient throughput.

Stadco – Operating loss increased by $932 as certain projects with production issues disrupted throughput for the six months ended September 30, 2024.

Corporate and unallocated – Operating loss increased by $226, due primarily for a change in the fair value for the breakup fee in connection with the terminated Votaw acquisition.

Other Income (Expense), net

The following table presents other income (expense) for the six months ended:

Interest expense increased by $2 when compared with the six months ended September 30, 2023, due primarily to a slightly increase in interest expense for borrowings under the revolver loan.

Amortization of debt issue costs for the six months ended September 30, 2024, was slightly higher when compared to three months ended September 30, 2023.

Other income, net, in the table above, for the six months ended September 30, 2024, includes a vendor rebate for $11. Other income, net for the three months ended September 30, 2023 includes a gain from the disposal of fixed assets.

Income Tax expense (benefit)

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. 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. The assessment was based on the weight of negative evidence at the balance sheet date, our recent operating losses and unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels. In recognition of this risk, we continue to provide a valuation allowance on these items.

For the six months ended September 30, 2024, there has been no change in our judgment about the realizability of deferred tax assets in future years, and, therefore, no expense or benefit provided for income taxes. For the six months ended September 30, 2023, the Company recorded a tax benefit $323.

Net Loss

As a result of the foregoing, for the six months ended September 30, 2024, we recorded a net loss of $2,061, or $0.22 per share basic and fully diluted, compared with a net loss of $1,056, or $0.12 per share basic and fully diluted for the six months ended September 30, 2023.

Liquidity, Capital Resources and Going Concern

Our liquidity is highly dependent on the availability of financing facilities and our ability to generate positive operating cash flow.

As of September 30, 2024, we had approximately $1,275 in total available liquidity, consisting primarily of approximately $1,143 in undrawn capacity under our Revolver Loan and $132 of available cash. As of March 31, 2024, we had $677 in total available liquidity, consisting of $138 in cash and cash equivalents, and approximately $539 in undrawn capacity under our Revolver Loan.

There was $2,600 and $2,800 outstanding under the Revolver Loan at September 30, 2024 and March 31, 2024, respectively. The Company pays interest at an adjusted SOFR-based rate. Interest-only payments on advances made under the Revolver Loan will continue to be payable monthly in arrears. Interest paid and accrued on advances made under the Revolver Loan during the six months ended September 30, 2024, and 2023 totaled $90 and $84, respectively. The weighted average interest rate at September 30, 2024 and March 31, 2024 was 7.81% and 7.60%, respectively. The weighted average amount outstanding during the period ending September 30, 2024 was $2,286. Unused borrowing capacity as of September 30, 2024 and March 31, 2024 was approximately $1,143 and $539, respectively.

At September 30, 2024 and March 31, 2024 our working capital was negative in part because of the reclassification of our long-term debt from noncurrent to current in the condensed consolidated balance sheet. The table below presents selected liquidity and capital measures as of:

(dollars in thousands)

The next table summarizes changes in cash by primary component in the cash flows statements for the six months ended:

(dollars in thousands)

Operating activities

Apart from our loan facilities, our primary sources of cash are from customer revenue, customer contract advances, and associated accounts receivable collections. Many of our customers make advance payments and progress payments under the terms of each manufacturing contract. The composition of our accounts receivable collections mix changes between advance payments and customer payments made after shipment of finished goods. Our cash flows can fluctuate from period to period as we mark progress with customer project milestones and the timing of progress payments.

Cash used in operating activities for the six months ended September 30, 2024, was $425. Our net loss adjusted by our non-cash adjustments provided $28 of cash during the six months ended September 30, 2024, as compared to cash used of $288 to the same period a year ago. Working capital changes to our balance sheet used $453 of cash during the six months ended September 30, 2024, as compared to $1,546 used in the same period a year ago.

Investing activities

For the six months ended September 30, 2024, we invested $1,622 in new factory machinery and equipment and were reimbursed for $1,000 of certain purchases under a supplier development fund.

We are subject to certain financial debt covenants and may not spend more than $1,500 for new machinery and equipment during any single fiscal year, excluding supplier development funding, tested on an annual basis at the end of each fiscal year. We estimate that our spending on new machinery and equipment in fiscal 2025 will not exceed the spending limitation.

For the six months ended September 30, 2023, we invested $2,659 in new factory machinery and equipment.

Financing activities

We drew down $6,746 of proceeds under our Revolver Loan during the six months ended September 30, 2024, and repaid $6,931 during the same period. We also used $314 of cash to pay down debt principal and make periodic lease payments.

On July 3, 2024, the Company sold 521,800 shares of the Company’s common stock, par value $0.0001 per share, and 521,800 common stock purchase warrants to purchase 521,800 shares of Common Stock in a private placement at an aggregate purchase price of $1,801. Placement agent’s fees in connection with the offering totaled $213.

For the six months ended September 30, 2023 we drew down $6,710 of proceeds under the Revolver Loan and repaid $5,460 during the same period. We also used approximately $307 of cash to pay down debt principal and make periodic lease payments.

All of the above activity resulted in a net decrease in cash of $6 for the six months ended September 30, 2024 compared with a net decrease in cash of $396 for the six months ended September 30, 2023.

Berkshire Bank Loans

On August 25, 2021, the Company entered into an amended and restated loan agreement with Berkshire Bank (as amended to date, the “Loan Agreement”). Under the Loan Agreement, Berkshire Bank will continue to provide the Ranor Term Loan (as defined below) and the revolving line of credit, or the “Revolver Loan”. In addition, Berkshire Bank provided the Stadco Term Loan (as defined below) in the original amount of $4,000. The proceeds of the original Ranor Term Loan of $2,850 were previously used to refinance existing mortgage debt of Ranor. The proceeds of the Revolver Loan are used for working capital and general corporate purposes of the Company.

Payments for the original Ranor Term Loan began on January 20, 2017, and until the facility was amended in December 2022, the Company paid monthly installments of $19 each, inclusive of interest at a fixed rate of 5.21% per annum.

In addition, Berkshire Bank provided to Stadco a term loan in the original amount of $4,000, or the “Stadco Term Loan”. On August 25, 2021, Stadco borrowed $4,000 from Berkshire Bank under the Stadco Term Loan. The proceeds of the Stadco Term Loan were used to support the acquisition of Stadco and refinance existing indebtedness of Stadco. 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 each, with all outstanding principal and accrued interest due and payable on August 25, 2028.

On June 12, 2023, the Company and Berkshire Bank executed a waiver under which Berkshire Bank waived the Company’s noncompliance with the capital expenditure limit on March 31, 2023. The waiver document also contains an agreement by the parties to exclude from the calculation of capital expenditures for purposes of the Loan Agreement during the year ending March 31, 2024, any such expenditures made by the Company to the extent they are made using funds provided by customers of the Company for the purpose of making such capital expenditures.

On December 20, 2023, Ranor and certain affiliates of the Company entered into a Sixth Amendment to Amended and Restated Loan Agreement and Second Amendment to Second Amended and Restated Promissory Note, or the “Sixth Amendment”. The Sixth Amendment, among other things (i) extended the maturity date of the Revolver Loan from December 20, 2023 to March 20, 2024; (ii) limited the use of proceeds from the Revolver Loan by the Company or its affiliates to $1,000 in the aggregate for due diligence and related professional costs incurred on or prior to March 20, 2024 in connection with any acquisitions; and (iii) makes certain changes to the amount and methods of valuation of equipment securing repayment of the borrowed funds.

On March 20, 2024, Ranor and certain affiliates of the Company entered into a Seventh Amendment to Amended and Restated Loan Agreement and Third Amendment to Second Amended and Restated Promissory Note, or the “Seventh Amendment”. Effective March 20, 2024, the Seventh Amendment, among other things (i) extended the maturity date of the Revolver Loan from March 20, 2024 to May 20, 2024, and (ii) limited the use of proceeds from the Revolver Loan by the Company or its affiliates to $2,000 in the aggregate for due diligence and related professional costs incurred on or prior to May 10, 2024 in connection with any acquisitions.

On May 28, 2024, Ranor and the other Borrowers entered into an Eighth Amendment to Amended and Restated Loan Agreement and Fourth Amendment to Second Amended and Restated Promissory Note with Berkshire Bank. Effective May 24, 2024, the Eighth Amendment, among other things, (i) extended the maturity date of the Revolver Loan from May 24, 2024 to August 30, 2024; (ii) amended the maximum principal amount of the Revolver Loan from $5,000 to $4,500; and (iii) effective on June 1, 2024, increases the Term SOFR Margin (as defined in the Amendment) used to calculate the interest rate from 2.25% per annum to 2.50% per annum.

On September 4, 2024, Ranor and the other Borrowers entered into a Ninth Amendment to Amended and Restated Loan Agreement and Fifth Amendment to Second Amended and Restated Promissory Note, or the “Ninth Amendment”, with Berkshire Bank. Effective August 30, 2024, the Ninth Amendment, among other things, extended the maturity date of the Revolver Loan from August 30, 2024 to January 15, 2025.

On December 19, 2024, Ranor and the other Borrowers entered into a Tenth Amendment to Amended and Restated Loan Agreement and Sixth Amendment to Second Amended and Restated Promissory Note, or the “Tenth Amendment”, with Berkshire Bank. the Tenth Amendment, among other things, extended the maturity date of the Revolver Loan from January 15, 2025 to April 30, 2025.

As a result of Borrowers’ failure to satisfy the required minimum Debt Service Coverage Ratio for the twelve (12) month period ending March 31, 2024 and September 30, 2024, as set forth in the Loan Agreement, or the “Existing Default”, the borrowers acknowledge that a certain Event of Default has occurred and is continuing under the Loan Agreement. The borrowers further acknowledge that the sixth amendment to the Agreement constitutes written notice pursuant to the Loan Documents of such Existing Default. Regardless of entering into this Agreement or any discussions between Borrowers and Lender, the Lender expressly reserves any and all rights and remedies available to it under the Loan Documents, the Collateral Documents, and under applicable law, including, without limitation, its right to choose to accelerate and demand the outstanding indebtedness evidenced by the Loan Documents and seek immediate repayment in full, and institute the default rate of interest as of the date of the occurrence of the default or at any time thereafter, as a result of any default or event of default, including, without limitation, the Existing Default, that have arisen or may arise. No such discussions or the entering into of this Agreement shall imply any course of conduct or any agreement on the part of Lender to waive any of its rights and remedies or to forbear from taking any action authorized by the Loan Documents, the Collateral Documents, or by applicable law while discussions continue.

On March 31, 2023, the Company was in violation of the Loan Agreement as it exceeded the capital expenditure limit of $1,500 as defined in the agreement. On June 12, 2023, the Company and Berkshire Bank executed a waiver under which Berkshire Bank waived the Company’s noncompliance with the capital expenditure limit on March 31, 2023. The waiver document also contains an agreement by the parties to exclude from the calculation of capital expenditures for purposes of the Loan Agreement during the year ending March 31, 2024, any such expenditures made by the Company to the extent they are made using funds provided by customers of the Company for the purpose of making such capital expenditures.

There was $7,154 and $7,648 outstanding under the Loan Agreement on September 30, 2024 and March 31, 2024, respectively. Without a waiver, the lender has the right, but not the obligation, to demand repayment from the Company for noncompliance with the debt covenants. In addition, the bank retains the right to act on covenant violations that occur after the date of delivery of any waiver. The lender has not granted us a waiver. As such, we need to seek alternative financing to pay these obligations as the Company does not have existing facilities or sufficient cash on hand to satisfy these obligations. It is also probable that the Company will not be in compliance with the same debt covenants at subsequent measurement dates within the next twelve months. As a result of the above, all of our long-term debt has been classified as current in our condensed consolidated balance sheet.

The Company is exploring various means of strengthening its liquidity position and ensuring compliance with its debt financing covenants by making Stadco operations profitable, renewing our revolver loan, or entering into alternative debt facilities.

On July 3, 2024, the Company entered into the PIPE Agreement with certain accredited investors, pursuant to which the Company sold in a private placement at an aggregate purchase price of approximately $1,801, the PIPE Shares and Warrants. The combined purchase price for one PIPE Share and one PIPE Warrant was $3.45. The purpose of the sale of the PIPE Shares and Warrants under the PIPE Agreement is to raise working capital for use by the Company. The closing of the offering occurred on July 8, 2024.

In order for us to continue operations beyond the next twelve months from the date of issuance of the financial statements and to be able to discharge our liabilities and commitments in the normal course of business, we must renew our revolver loan or seek alternative financing by April 30, 2025. We must mitigate our recurring operating losses at our Stadco subsidiary, efficiently increase utilization of our manufacturing capacity at Stadco and improve the manufacturing process. We plan to closely monitor our expenses and, if required, will reduce operating costs to enhance liquidity.

The uncertainty associated with the recurring operating losses at Stadco, the revolver loan renewal, the need for alternative financing, and compliance with debt covenants at subsequent measurement dates raise substantial doubt about our ability to continue as a going concern for at least one-year after the date the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are issued.

Collateral securing all the above obligations comprises all personal and real property of the Company, including cash, accounts receivable, inventories, equipment, and financial assets.

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 as of September 30, 2024:

• Our debt obligations, including fixed and variable-rate debt, totaled $7,154, and, because of current debt covenant violations, are classified as current in the consolidated balance sheets.
• We enter into various commitments with suppliers for the purchase of raw materials and work supplies. Our outstanding unconditional contractual commitments, including for the purchase of raw materials and supplies goods, totaled approximately $5,911, all of it due to be paid within the next twelve months. These purchase commitments are in the normal course of business.
• Our operating lease obligations, including imputed interest, totaled $4,765 for buildings through 2030, with approximately $900 due annually for each of the next five years and $600 in year six.

There are no off-balance sheet arrangements as of September 30, 2024.

EBITDA Non-GAAP Financial Measure

To complement our condensed consolidated statements of operations and condensed consolidated statements of cash flows, we use EBITDA, a non-GAAP financial measure. Net loss is the financial measure calculated and presented in accordance with U.S. GAAP that is most directly comparable to EBITDA. We believe EBITDA provides our board of directors, management, and investors with a helpful measure for comparing our operating performance with the performance of other companies that have different financing and capital structures or tax rates. We also believe that EBITDA is a measure frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry, and is a measure contained in our debt covenants. However, while we consider EBITDA to be an important measure of operating performance, EBITDA and other non-GAAP financial measures have limitations, and investors should not consider them in isolation or as a substitute for analysis of our results as reported under U.S. GAAP.

We define EBITDA as net loss plus interest, income taxes, depreciation, and amortization. Net loss was $601 and $528 for the three months ended September 30, 2024 and 2023, and $2,061 and $1,056 for the six months ended September 30, 2024 and 2023. EBITDA, a non-GAAP financial measure, was negative for the six months ended September 30, 2024 and 2023. The following table provides a reconciliation of EBITDA to net income (loss), the most directly comparable U.S. GAAP measure reported in our condensed consolidated financial statements for the three and six months ended:

(dollars in thousands)

(1) Includes amortization of debt issue costs.

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, 2024, our disclosure controls and procedures were not effective due to the material weaknesses in our internal control over financial reporting described below.

Management’s Responsibility for 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. generally accepted accounting principles, or U.S. GAAP. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Inherent Limitations Over Internal Controls

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 Weaknesses

We identified three material weaknesses in our internal control over financial reporting as of March 31, 2024, which continues to exist at September 30, 2024. 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 for the Annual Report on Form 10-K, management identified the following material weaknesses:

(1) Purchase accounting – we did not maintain proper controls, processes and procedures over the initial purchase accounting and the fair value accounting associated with our acquisition of Stadco in the fiscal year ended March 31, 2022 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 fair value accounting associated with the Stadco acquisition;

(2) Tax accounting – during fiscal 2023 and fiscal 2024 we did not maintain a sufficient complement of tax accounting personnel necessary to perform management review controls related to activities for extracting information to determine the valuation allowance at Stadco on a timely basis. These conditions led to certain omissions in the assessment of the valuation allowance during the third and fourth quarter of fiscal 2024. Because of this material weakness in fiscal 2023, we made a late or post-closing adjustment to our valuation allowance while preparing the consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the period ended March 31, 2024;

(3) Stadco accounting – we did not maintain a sufficient complement of resources and expertise on the Stadco accounting staff necessary to consistently perform management review controls over financial information and complete account reconciliations on a timely basis, to ensure all transactions are accurately captured and recorded prior to closing the books. The demand on our accounting resources is significant due to the manual nature of controls necessary to maintain effective control over Stadco’s legacy system. As a result of this material weakness, we made several post-closing adjustments for percentage-of-completion (POC) revenue projects. The adjustment corrected inputs for project revenue and costs in progress at Stadco, as the initial and correcting journal entries were not reconciled and posted in a timely manner during the year end reporting cycle. Because of the foregoing reasons, extra time was required to complete certain items with respect to the financial statement preparation, closing and review process for the year ended March 31, 2024.

Notwithstanding the material weaknesses, management believes the 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.

Remediation of the Material Weaknesses

For the fiscal year ended March 31, 2024, we reviewed our entity level controls, staffing requirements and the cost/benefit for remediating our material weaknesses.

In fiscal 2024, our management, with the oversight of our audit committee, executed a plan to take measures to begin remediating the underlying causes of the material weaknesses through the development and implementation of a thorough review of our procedures, policies, processes, and review controls to gain additional assurance regarding the remediation our tax accounting, acquisition accounting procedures, and accounting closing cycle time at Stadco: (1) Purchase accounting - The Company enhanced its working framework with a memorandum that depicts a clear, explicit roadmap for the purchase accounting guidance at every step. We will follow that roadmap and will implement new controls in fiscal 2025. We engaged a third-party specialist in July 2023 with the requisite knowledge to perform all required valuations and accounting for business combinations. That specialist worked with the Company on all the pre-acquisition activities, or due diligence, in connection with the Votaw acquisition. The third-party specialist was hired primarily to assure that certain accounting issues that arose in the Stadco acquisition would not re-occur with the purchase accounting for the acquisition of Votaw; (2) Tax accounting - Management’s plan required that it utilize a tax specialist with the requisite knowledge and resources to perform the required basic and detailed tax calculations so that all the parties can make a timely assessment of the Company’s tax provision. The Company engaged a new tax specialist in July 2023, and that tax specialist now prepares our interim and annual tax provisions. We will implement new controls in fiscal 2025 to ensure a timely quarterly review of our deferred tax assets and liabilities and valuation allowance requirements as we facilitate remediation of the material weakness; (3) Stadco accounting - For the fiscal year ended March 31, 2024, we reviewed our entity level controls, staffing requirements and the cost/benefit for upgrading our legacy systems and accounting staff at Stadco. As a result of this review, we are transitioning accounting function to the office of the Chief Financial Officer in Massachusetts, where expert and experienced personnel are in-place to execute a plan to 1) improve the effectiveness and efficiency of the accounting operation, ensuring a timely closing cycle, 2) improve the reliability of financial reporting, and 3) continued compliance with generally accepted accounting principles and applicable laws and regulations. We began to implement these measures during fiscal 2024 and we will monitor progress during fiscal 2025 as we facilitate remediation of the material weakness.

Management believes that the above actions continue the process of remediation for the material weakness as disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2024. The material weaknesses will not be considered remediated, however, until the applicable controls operate for a sufficient period 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.

We are committed to continually improving our internal control process and will diligently review our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, we may decide that additional measures are necessary to address control deficiencies.

Changes in Internal Control over Financial Reporting

Except as disclosed under “Management’s Remediation Plan”, for the quarter ended September 30, 2024, 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.