TECHPRECISION CORPORATION 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
control;
?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
indebtedness;
?government regulations and requirements;
?pricing and business development difficulties;
?changes in government spending on national defense;
?our ability to make acquisitions and successfully integrate those acquisitions
with our business;
?general industry and market conditions and growth rates;
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the risk that the proposed acquisition of
? timely manner or at all, which may adversely affect the Company's business and
the price of Company's common stock;
the failure of either party to satisfy any of the conditions to the
? consummation of the proposed acquisition of
timing of the consummation of the proposed acquisition;
the occurrence of any event, change or other circumstance that could give rise
? to the termination of the securities purchase agreement governing the proposed
acquisition of
the effect of the announcement or pendency of the proposed acquisition of
?
generally;
?risks related to diverting management's attention from the Company's ongoing business operations; ?unexpected costs, charges or expenses resulting from the proposed acquisition ofStadco ; and
those risks discussed in "Item 1A. Risk Factors" and elsewhere in our Annual
? Report on Form 10-K, as well as those described in any other filings which we
make with the
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 Contract Manufacturing
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
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 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.
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Financial Results
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 that can range from three to as much as
thirty-six months. 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.
For the three months ended June 30, 2021 , we recorded net sales and net income
of $3.4 million and $1.4 million , compared with net sales of $3.3 million and
net loss of $0.1 million , for the three months ended June 30, 2020 . Our gross
margin for the three months ended June 30, 2021 was 24.4% compared with gross
margin of 21.2% for the three months ended June 30, 2020 .
On May 12, 2021 , as authorized by Section 1106 of the Coronavirus Aid, Relief,
and Economic Security Act, or the CARES Act, the Small Business Administration ,
or the SBA, remitted to Berkshire Bank , the lender of record, a payment of
principal and interest in the amount of $1,317,100 and $13,207 , respectively,
for forgiveness of the Company's Paycheck Protection Program loan or PPP loan.
The funds credited to the bank paid this loan off in full. Loan forgiveness is
recorded as a gain in the condensed consolidated statement of operations.
Critical Accounting 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, 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 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 2021 Annual Report on Form 10-K. There have been no significant changes to our critical accounting policies during the three months endedJune 30, 2021 . 18 Table of Contents 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.
Key Performance Indicators
While we prepare our financial statements in accordance withU.S. generally accepted accounting principles, orU.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 "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.
Three Months Ended
The following table sets forth information from our condensed consolidated
statements of operations and comprehensive income (loss), in dollars and as a
percentage of revenue:
June 30, 2021 June 30, 2020 Changes
(dollars in thousands) Amount Percent Amount Percent Amount Percent
Net sales $ 3,412 100 % $ 3,283 100 % $ 129 4 %
Cost of sales 2,579 76 % 2,586 79 % (7) - %
Gross profit 833 24 % 697 21 % 136 20 %Selling, general and administrative 733 21 % 793 24 % (60) (8) % Operating income (loss) 100 3 % (96)
(3) % 196 204 % Other income, net 11 - % 1 - % 10 nm % Interest expense (30) (1) % (58) (2) % 28 48 % PPP loan forgiveness 1,317 39 % - - % 1,317 nm %
Income (loss) before taxes 1,398 41 % (153) (5) % 1,551 nm % Income tax provision (benefit) 27 1 % (37)
(1) % 64 173 % Net income (loss)$ 1,371 40 %$ (116) (4) %$ 1,487 nm % nm - not meaningful 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$3.4 million for the three months endedJune 30, 2021 , or 4% higher when compared to net sales for the three months endedJune 30, 2020 . For the three months endedJune 30, 2021 , net sales in our defense markets decreased by$0.1 million or 3% when compared to the three months endedJune 30, 2020 . Our defense backlog remains strong as new orders for components, including theU.S Navy submarine programs, continue to flow down from our prime defense contractors as these submarine-building programs accelerate. Net sales to industrial markets increased by$0.2 million when compared to the three months endedJune 30, 2020 , due primarily to a higher level of project volume. We have repeat business in this sector, but the order flow can be uneven and difficult to forecast. For the three months endedJune 30, 2021 , revenue recognized over time was$3.1 million , an increase of 3% when compared to the three months endedJune 30, 2020 . Fiscal 2022 first quarter revenue recognized over time was generated by a favorable project mix with profitable gross margins. 19
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Remaining performance obligations reflect future revenue that will be recorded in subsequent periods as projects in progress are completed. AtJune 30, 2021 the Company had a backlog of$17.6 million , compared with a backlog of$18.6 million atMarch 31, 2021 .
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 endedJune 30, 2021 was$2.6 million , slightly lower when compared to the three months endedJune 30, 2020 . Project throughput was better for the three months endedJune 30, 2021 than the same quarter a year ago. Decreases in labor costs and factory overhead, more than offset higher material costs for the three months endedJune 30, 2021 .
Gross margin was 24.2% for the three months ended
Selling, General and Administrative Expenses
Total selling, general and administrative expenses for the three months endedJune 30, 2021 decreased by$60,754 due to lower compensation and benefit costs, and lower spending for outside advisory services. These decreases more than offset an increase in travel and office costs as coronavirus travel restrictions began to subside in the first quarter of fiscal 2022.
Other Expense, net
The following table reflects interest expense, amortization of debt issue costs and other income, net for the three months ended:
June 30, 2021 June 30, 2020 $Change % Change
Other income, net $ 10,390 $ 652 $ 9,738 nm
Interest expense $ (21,054) $ (42,757) $ 21,703 51 %
Amortization of debt issue costs $ (8,824) $ (15,141) $ 6,317 42 %
nm - not meaningful
Interest expense and amortized debt issue costs were lower for the three months
ended June 30, 2021 , due to lower levels of debt, when compared to the three
months ended June 30, 2020 . The interest expense line includes a reversal of
accrued interest of $11,692 for the PPP loan, which was forgiven in May 2021 .
Also, the three months ended June 30, 2020 included $6,664 of interest expense
for borrowings under the revolver loan. There were no amounts outstanding under
the revolver loan during the three months ended June 30, 2021 . Other income for
the three months ended June 30, 2021 includes a return of $10,000 for a retainer
fee previously paid for outside advisory fees in connection with a class action
settlement in March 2021 .
PPP Loan Forgiveness
On
Income Taxes
For the three months endedJune 30, 2021 we recorded a tax provision of$26,580 , compared to a tax benefit of$37,360 for the three months endedJune 30, 2020 . This resulted from our generation of net income during the three months endedJune 30, 2021 , compared to a net loss during the three months endedJune 30, 2020 . 20 Table of Contents Net Income (Loss)
As a result of the foregoing, for the three months ended
Liquidity and Capital Resources
AtJune 30, 2021 , we had cash and cash equivalents of$2.2 million and working capital of$5.5 million . We believe our available cash plus cash expected to be provided by operations during fiscal 2022, and borrowing capacity available under the revolver loan will be sufficient to fund expected capital expenditures for our business as it exists today and principal and interest payments under our debt obligations through the 12 months from the issuance date of our financial statements. However, following the closing of the potential acquisition ofStadco , or in connection therewith, we expect our financing needs to increase in light of the significant changes we expect to the combined Company's capital resource needs. As a result, we expect to seek new debt and/or equity financing. There were no borrowed amounts outstanding under the revolver loan atJune 30, 2021 andMarch 31, 2021 . Unused borrowing capacity atJune 30, 2021 was$3.0 million . The maturity date of the revolver loan isDecember 20, 2022 . The Company intends to refinance the term loan withBerkshire Bank . There is a balloon payment of$2.4 million due onDecember 20, 2021 under the term loan withBerkshire Bank . We expect to refinance this debt with the bank before the maturity date. Until then, the Company will continue to pay down principal and make interest payments in the ordinary course. The table below presents selected liquidity and capital measures for the period ended: Change (dollars in thousands) June 30, 2021 March 31, 2021 Amount Cash and cash equivalents $ 2,236 $ 2,131$ 105 Working capital $ 5,501 $ 5,202$ 299 Total debt $ 2,485 $ 3,829$ (1,344) Total stockholders' equity$ 11,346 $ 9,942$ 1,404 The following table summarizes the primary components of cash flows for the three months ended: Change (dollars in thousands) June 30, 2021 June 30, 2020 Amount Cash flows provided by (used in): Operating activities $ 137 $ (369)$ 506 Investing activities (4) (42) 38 Financing activities (27) 1,282 (1,309) Net increase in cash and cash equivalents $ 106
$ 871$ (765) 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 provided by operations for the three months endedJune 30, 2021 was$0.1 million compared with cash used in operations of$0.4 million for the three months endedJune 30, 2020 . Cash outlays for the three months endedJune 30, 2021 includes a payment of$0.5 million to plaintiffs for a court approved final class action settlement. The first quarter of fiscal 2022 was marked by favorable project performance progress and delivery schedules which generated higher amounts of cash, compared to the same quarter of fiscal 2021. During our first quarter of fiscal 2021
we
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encountered some delayed inspections, delayed 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 a slower payment flow from customers during the first
quarter of fiscal 2021.
Investing activities
We anticipate that we will spend approximately$1.1 million in new factory machinery and equipment forRanor during the remainder of fiscal 2022. Net cash used in investing activities for purchases of property, plant and equipment in the three months endedJune 30, 2021 and 2020 was$4,198 and$41,768 , respectively.
Financing activities
For the three months ended
On
All of the above activity resulted in a net increase in cash of$0.1 million for the three months endedJune 30, 2021 compared with a net increase in cash of$0.9 million for the three months endedJune 30, 2020 .
Small Business Administration PPP Loan
OnMay 8, 2020 , the Company, through its wholly owned subsidiaryRanor, Inc. , issued a promissory note evidencing an unsecured PPP loan in the amount of$1,317,100 made toRanor under the CARES Act. The PPP loan toRanor was made throughBerkshire Bank . Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans 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 Company applied for loan forgiveness with the SBA under the Paycheck Protection Program onMarch 26, 2021 . OnMay 12, 2021 , as authorized by Section 1106 of the CARES Act, the SBA remitted toBerkshire Bank , the lender of record, a payment of principal and interest in the amount of$1,317,100 and$13,207 , respectively, for forgiveness of the Company's PPP loan. The funds credited to the PPP loan paid this loan off in full. Loan forgiveness is recorded as a gain under other income and expense in the condensed consolidated statement of operations.
Off-Balance Sheet Arrangements
We do not currently have, and have not had, any off-balance sheet assets,
liabilities or arrangements at
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 income (loss) 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 under
GAAP.
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We define EBITDA as net income (loss) plus interest, income taxes, depreciation
and amortization. Net income was $1.4 million for the three months ended
June 30, 2021 , as compared to net loss of $0.1 million for the three months
ended June 30, 2020 . EBITDA, a non-GAAP financial measure, was $1.6 million for
the three months ended June 30, 2021 , as compared to $0.1 million for the three
months ended June 30, 2020 . The following table provides a reconciliation of
EBITDA to net income (loss), the most directly comparable GAAP measure reported
in our condensed consolidated financial statements for the three months ended:
Change
(dollars in thousands) June 30, 2021 June 30, 2020 Amount
Net income (loss) $ 1,371 $ (116) $ 1,487 Income tax provision (benefit) 27 (37)
64 Interest expense (1) 30 58 (28) Depreciation 183 169 14 EBITDA $ 1,611 $ 74$ 1,537
(1) Includes amortization of debt issue costs.
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