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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failure to successfully integrate and realize the expected benefits of the
?
condition and results of operations, and may adversely affect the Company's
common stock price;
?risks related to diverting management's attention from the Company's ongoing business operations; ?unexpected costs, charges or expenses resulting from the 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 Through ourRanor andStadco subsidiaries, we offer a full range of services required to transform raw materials into precision finished products. Our manufacturing capabilities include: fabrication operations (cutting, press and roll forming, assembly, welding, heat treating, blasting and painting) and machining operations including CNC (computer numerical controlled) horizontal and vertical milling centers. We also provide support services to our manufacturing capabilities: manufacturing engineering (planning, fixture and tooling development, manufacturing), quality control (inspection and testing), materials procurement, production control (scheduling, project management and expediting) and final assembly. All manufacturing is done in accordance with our written quality assurance program, which meets specific national and international codes, standards, and specifications. The standards used are specific to the customers' needs, and our manufacturing operations are conducted in accordance with these standards. Because our revenues are derived from the sale of goods manufactured pursuant to contracts, and we do not sell from inventory, it is necessary for us to constantly seek new contracts. There may be a time lag between our completion of one contract and commencement of work on another contract. During such periods, we may continue to incur overhead expense but with lower revenue resulting in lower operating margins. Furthermore, changes in either the scope of an existing contract or related delivery schedules may impact the revenue we receive under the contract and the allocation of manpower. Although we provide manufacturing services for large governmental programs, we usually do not work directly for the government or its agencies. Rather, we perform our services for large governmental contractors. Our business is dependent in part on the continuation of governmental programs that require our services and products. Our contracts are generated both through negotiation with the customer and from bids made pursuant to a request for proposal. Our ability to receive contract awards is dependent upon the contracting party's perception of such factors as our ability to perform on time, our history of performance, including quality, our financial condition and our ability to price our services competitively. Although some of our contracts contemplate the manufacture of one or a limited number of units, we continue to seek more long-term projects with predictable cost structures. OnAugust 25, 2021 , the Company completed its previously announced acquisition ofStadco , a company in the business of manufacturing high-precision parts, assemblies and tooling for aerospace, defense, research and commercial customers. We believe that theStadco operation fits our primary defense focus and brings a complementary customer list for our defense and industrial markets. 23 Table of Contents 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 inthe United States and in foreign markets. Generally, our projects are made up of 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 endedSeptember 30, 2021 , we recorded net sales and net loss of$4.8 million and$0.2 million , compared with net sales of$4.7 million and net income of$0.3 million , for the three months endedSeptember 30, 2020 . For the six months endedSeptember 30, 2021 , we recorded net sales and net income of$8.2 million and$1.2 million , compared with net sales of$8.0 million and net income of$0.2 million , for the six months endedSeptember 30, 2020 . Our financial statements for the three and six months endedSeptember 30, 2021 include the results of theStadco operation fromAugust 26, 2021 throughSeptember 30, 2021 . OnMay 12, 2021 , as authorized by Section 1106 of the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, theSmall Business Administration , or 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 Paycheck Protection Program loan, or PPP loan. 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. Except for the addition of ourGoodwill policy, there were no significant changes to our critical accounting policies during the six months endedSeptember 30, 2021 . 24 Table of Contents New Accounting Standards
See Note 15, 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:
September 30, 2021 September 30, 2020 Changes
(dollars in thousands) Amount Percent Amount Percent Amount Percent
Net sales $ 4,797 100 % $ 4,714 100 % $ 83 2 %
Cost of sales 3,866 80 % 3,585 76 % 281 8 %
Gross profit 931 20 % 1,129 24 % (198) (18) %
Selling, general and administrative 1,174 24 % 696 15 % 478 69 %
Operating income (loss) (243) (5) % 433 9 % (676) (156) %
Other expense, net (56) (1) % (51) (1) % (5) (10) %
Income (loss) before taxes (299) (6) % 382 8 % (681) (178) %
Income tax provision (benefit) (79) (2) % 111 2 % (190) (170) %
Net income (loss) $ (220) (5) % $ 271 6 % $ (491) (181) %
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$4.8 million for the three months endedSeptember 30, 2021 , or 2% higher when compared to net sales for the three months endedSeptember 30, 2020 . Our defense backlog remains strong as new orders for components continue to flow down from prime defense contractors, including in connection with theU.S. Navy submarine programs. We saw a near dollar-for-dollar offset change between defense and precision industrial sales when compared to the same quarter in fiscal 2021. For the three months endedSeptember 30, 2021 , net sales to our defense markets increased by$1.2 million or 37% when compared to the three months endedSeptember 30, 2020 . The primary reason for the increase were new defense sales recorded for the first time by ourStadco subsidiary over the last 36 days of the quarter. With our recent acquisition ofStadco now complete, we expect to report higher revenues in future periods. Net sales to industrial markets decreased by$1.1 million , or 73%, when compared to the three monthsSeptember 30, 2020 , due to lower project activity as the Company replenishes its industrial market backlog following a period of above normal revenue for the last three quarters of fiscal 2021. We have repeat business in this sector, but the order flow can be uneven and difficult to
forecast.
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For the three months endedSeptember 30, 2021 , revenue recognized over time and at a point in time was$3.8 and$1.0 million , respectively, compared to revenue recognized over time and at a point in time of$3.1 and$1.6 million , respectively, for the three months endedSeptember 30, 2020 .
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 endedSeptember 30, 2021 was$3.9 million , or 8% higher when compared to the three months endedSeptember 30, 2020 . Gross margin was 19.4% for the three months endedSeptember 30, 2021 and 24.0% for the three months endedSeptember 30, 2020 . Gross profit was$0.9 million for the three months endedSeptember 30, 2021 , or 18% lower, when compared to the three months endedSeptember 30, 2020 , primarily the result of higher labor and overhead costs which more than offset lower material costs. These higher costs dampened our margin during the final month of the quarter when we included our newStadco operation for the first time. We anticipate that the inclusion ofStadco's operations in future periods will result in increased cost of sales in future periods.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses for the three months endedSeptember 30, 2021 increased by 69% or$0.5 million . The increase was primarily due to an increase in compensation, insurance costs, office costs, and outside advisory fees in connection with theStadco acquisition.
Other Expense, net
The following table reflects interest expense, amortization of debt issue costs and other income, net for the three months ended:
September 30, 2021 September 30, 2020 $ Change % Change
Other income, net $ 1,001 $ 804 $ 197 25 %
Interest expense $ (48,341) $ (35,975) $ (12,366) (34) %Amortization of debt issue costs $ (8,553) $
(15,607)$ 7,054 45 %
Interest expense was higher for the three months endedSeptember 30, 2021 . The increase in interest expense for the three months endedSeptember 30, 2021 was due primarily to$15,138 for interest under the new Berkshire term loan, net of capitalized interest booked in the same period. Amortization of debt issue costs for the three months endedSeptember 30, 2020 were higher because of higher debt issue costs incurred for the third Berkshire loan modification. We expect to record higher interest expense in the future due to new borrowings under our new Berkshire revolver and term loans.
Income Taxes
For the three months ended
Net Income (Loss)
As a result of the foregoing, for the three months endedSeptember 30, 2021 , we recorded a net loss of$220,413 compared to net income of$270,764 for the three months endedSeptember 30, 2020 . 26
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Six 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:
September 30, 2021 September 30, 2020 Changes
(dollars in thousands) Amount Percent Amount Percent Amount Percent
Net sales $ 8,209 100 % $ 7,996 100 % $ 213 3 %
Cost of sales 6,446 78 % 6,170 77 % 276 4 %
Gross profit 1,763 22 % 1,826 23 % (63) (3) %Selling, general and administrative 1,906 23 % 1,489
19 % 417 28 %
Operating income (loss) (143) (1) % 337 4 % (480) (142) %
Other expense, net (75) (1) % (108) (1) % 33 31 %
PPP loan forgiveness 1,317 16 % - - % 1,317 nm %
Income before taxes 1,099 13 % 229 3 % 870 380 %Income tax provision (benefit) (52) (1) % 74
1 % (126) (170) %
Net income (loss) $ 1,151 14 % $ 155 2 % $ 996 643 %
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$8.2 million for the six months endedSeptember 30, 2021 , or 3% higher when compared to net sales for the six months endedSeptember 30, 2020 . Our defense backlog remains strong as new orders for components continue to flow down from prime defense contractors, including in connection with theU.S. Navy submarine programs and new customer projects from our recent business combination. For the six months endedSeptember 30, 2021 , net sales in our defense markets increased by$1.1 million or 17% when compared to the six months endedSeptember 30, 2020 . The primary reason for the increase were new defense sales recorded for the first time by ourStadco subsidiary over the last 36 days of the second quarter. With our recent acquisition ofStadco now complete, we expect to report higher revenues in future periods. Net sales to industrial markets decreased by$0.9 million or 55% when compared to the six months endedSeptember 30, 2020 , due to lower project activity as the Company replenishes its industrial market backlog following a period of above normal revenue for the last three quarters of fiscal 2021. We have repeat business in this sector, but the order flow can be uneven and difficult to forecast. For the six months endedSeptember 30, 2021 , revenue recognized over time and at a point in time was$6.9 and$1.3 million , respectively, compared to revenue recognized over time and at a point in time of$6.1 and$1.9 million , respectively, for the six months endedSeptember 30, 2020 . Remaining performance obligations reflect future revenue that will be recorded in subsequent periods as projects in progress are completed. AtSeptember 30, 2021 , the Company had$17.3 million of remaining performance obligations, of which$13.3 million were less than 50% complete. The Company expects to recognize all of its remaining performance obligations as revenue within the next thirty-six months.
Cost of Sales and Gross Margin
Cost of sales consists primarily of raw materials, parts, labor, overhead and subcontracting costs. Our manufacturing operations continued to execute effectively with project throughput, notwithstanding higher cost of sales which dampened gross margin for the first six months of fiscal 2022, as we brought our newStadco operations on-line in the month of September. 27
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Our cost of sales for the six months endedSeptember 30, 2021 was$6.4 million , higher by 4% when compared to the six months endedSeptember 30, 2020 , primarily the result of higher labor and overhead costs which more than offset lower material costs. Gross margin was 21.5% for the six months endedSeptember 30, 2021 and 22.8% for the six months endedSeptember 30, 2020 . Gross profit was$1.8 million for both six month periods endedSeptember 30, 2021 and 2020.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses for the six months endedSeptember 30, 2021 increased by$0.4 million or 28% when compared with the six months endedSeptember 30, 2020 . The increase was primarily due to an increase in compensation, insurance costs, office costs, and outside advisory fees in connection with theStadco acquisition.
Other Expense, net
The following table reflects interest expense, amortization of debt issue costs and other income, net for the six months ended:
September 30, 2021 September 30, 2020 $ Change % Change
Other income, net $ 11,391 $ 1,456 $ 9,935 nm
Interest expense $ (68,676) $ (78,394) $ 9,718 12 %Amortization of debt issue costs $ (18,096) $
(31,086)$ 12,990 42 % nm - not meaningful
Other income for the six months ended
Interest expense for the six months endedSeptember 30, 2021 was lower when compared to the six months endedSeptember 30, 2020 . The decrease was due to 1) the reversal of accrued interest for$11,692 for the PPP loan, which was forgiven inMay 2021 , and 2) lower accruals for interest expense on lower average levels of debt when compared to the same prior year period. These decreases were offset in part by interest expense accrued on new borrowings in connection with theStadco acquisition in the month ofSeptember 2021 . Amortization of debt issue costs for the six months endedSeptember 30, 2021 were lower when compared to the six months endedSeptember 30, 2020 . The six months endedSeptember 30, 2020 included higher amortization amounts related to higher debt issue costs related to the third revolver loan modification in 2019.
PPP Loan Forgiveness
On
Income Taxes
For the six months endedSeptember 30, 2021 we recorded a tax benefit of$51,882 , compared to a tax provision of$73,942 for the six months endedSeptember 30, 2020 . The tax benefit is the result of operating pretax losses. The gain from the forgiveness of the Company's PPP loan is a discrete nontaxable event. Net Income
As a result of the foregoing, for the six months endedSeptember 30, 2021 , we recorded net income of$1.2 million compared to net income of$0.2 million for the six monthsSeptember 30, 2020 . 28
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Liquidity and Capital Resources
AtSeptember 30, 2021 , we had cash and cash equivalents of$0.3 million and working capital of$4.0 million , a significant decrease when compared toMarch 31, 2021 . 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. OnAugust 25, 2021 , we completed the acquisition ofStadco , closed on a private placement financing and closed on a new loan withBerkshire Bank . We raised$3.5 million of cash by selling 3,202,727 shares of common stock at$1.10 per share via a private placement financing, sourced$4.0 million in new debt with Berkshire bank, drew down$0.1 million under the revolver loan, and sourced$1.8 million from available cash. We issued 1.5 million shares of our common stock and warrants to satisfyStadco's indebtedness to its shareholders and certain other debt holders and acquired all outstanding shares ofStadco . In addition, we purchasedStadco's loan fromSunflower Bank , for a total amount of$7.9 million in cash. Concurrent with the closing of theStadco acquisition, we entered into an amended and restated loan agreement withBerkshire Bank . Under the amended facility, our term loan in the original principal amount of$2.85 million , of which$2.4 million remains outstanding, will remain, and we will have access to a revolving line of credit of up to$5.0 million , and borrowed$4.0 million under a new term loan with Berkshire bank. There was$865,049 outstanding under the revolver loan atSeptember 30, 2021 . There were no borrowed amounts outstanding under the revolver loan atMarch 31, 2021 . Unused borrowing capacity atSeptember 30, 2021 was approximately$3.5 million . The maturity date of the revolver loan isDecember 20, 2022 . There is a balloon payment of approximately$2.4 million due onDecember 20, 2021 under theRanor 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 at:
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