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;
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· 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; · 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 theSEC .
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
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 theAmerican Society of Mechanical Engineers and theNational 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 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 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 inthe 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. 14
At the end ofMarch 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 theU.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 theU.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 endedJune 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 endedJune 30, 2019 . Our gross margin for the three months endedJune 30, 2020 and 2019 was 21.2% and 25.6%, respectively. We used$0.4 million of cash in operations for the three months endedJune 30, 2020 and had a cash balance of$1.8 million atJune 30, 2020 .
For the three months endedJune 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 endedJune 30, 2020 , we had four customers which accounted for approximately 80% of our revenue, in the aggregate. Our sales order backlog atJune 30, 2020 andMarch 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
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 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 comparable
U.S. GAAP financial measures.
Three Months Ended
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 )%
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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 endedJune 30, 2020 , or 24% lower when compared to net sales for the three months endedJune 30, 2019 of$4.3 million . For the three months endedJune 30, 2020 , net sales in our defense markets decreased by$0.2 million when compared to the three months endedJune 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 endedJune 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 endedJune 30, 2020 were$2.6 million compared to$3.2 million for the three months endedJune 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 endedJune 30, 2020 and 25.6% for the three months endedJune 30, 2019 . Gross profit was$0.7 million for the three months endedJune 30, 2020 , or 37% lower when compared to the three months endedJune 30, 2019 .
Selling, General and Administrative Expenses
Total selling, general and administrative expenses for the three months endedJune 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 endedJune 30, 2019 . Other Expense, net Interest expense was lower for the three months endedJune 30, 2020 when compared to the three months endedJune 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 endedJune 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 16 Income Taxes For the three months endedJune 30, 2020 we recorded a tax benefit of$37,360 compared to tax expense of$90,218 for the three months endedJune 30, 2019 . Tax benefit for the three months endedJune 30, 2020 was the result of an operating loss. The valuation allowance on deferred tax assets atJune 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
Liquidity and Capital Resources
OnMay 8, 2020 , the Company, through its wholly owned subsidiaryRanor, Inc. , issued a promissory note, or the Note, evidencing an unsecured loan in the amount of$1,317,100 made toRanor 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 theU.S. Small Business Administration , or the SBA. The loan toRanor was made throughBerkshire 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 beforeFebruary 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 withBerkshire Bank available as a resource, if necessary. The Company borrowed$1.0 million under the Revolver Loan onApril 3, 2020 and repaid that principal onJune 30, 2020 . There were no borrowed amounts outstanding under the Revolver Loan atJune 30, 2020 andMarch 31, 2020 . Interest-only payments on advances made under the Revolver Loan during the three months endedJune 30, 2020 totaled$5,986 at a weighted average interest rate of 2.76%. Unused borrowing capacity atJune 30, 2020 was$3.0 million . The maturity date of the Revolver Loan isDecember 20, 2020 . AtJune 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 ended: Change (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 ) 17 The following table summarizes the primary components of cash flows for the three months ended: Change (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 endedJune 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 endedJune 30, 2020 and 2019 totaled$41,768 and$10,200 , respectively. Financing activities OnMay 8, 2020 we borrowed$1.3 million under the CARES Act payroll protection program. OnApril 3, 2020 we borrowed$1.0 million under our Revolver loan, then paid down$1.0 million in principal onJune 30, 2020 .
For the three months ended
All of the above activity resulted in a net increase in cash of$0.9 million for the three months endedJune 30, 2020 compared with a increase in cash of$1.5 million for the three months endedJune 30, 2019 .
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 (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 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. 18 We define EBITDA as net (loss) income plus interest, income taxes, depreciation and amortization. Net loss was$0.1 million for the three months endedJune 30, 2020 , as compared to net income of$0.2 million for the three months endedJune 30, 2019 . EBITDA, a non-GAAP financial measure, was$0.1 million for the three months endedJune 30, 2020 , as compared to$0.6 million for the three months endedJune 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: Change (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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