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;
? 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;
? our potential failure to successfully integrate and realize the expected
benefits of the
? unexpected costs, charges or expenses resulting from the acquisition and
integration ofStadco ; and 22 Table of Contents
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.
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 endedDecember 31, 2021 , we recorded net sales and net loss of$6.5 million and$0.9 million , compared with net sales of$3.6 million and net loss of$48,172 , for the three months endedDecember 31, 2020 . For the nine months endedDecember 31, 2021 , we recorded net sales and net income of$14.7 million and$0.2 million , compared with net sales of$11.6 million and net
income
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of
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 business combinations, 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 nine months endedDecember 31, 2021 . 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 comparable
U.S. GAAP financial measures. 24 Table of Contents Results of Operations
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:
Three months ended December 31,
2021 2020 Changes
(dollars in thousands) Amount Percent Amount Percent Amount Percent
Net sales $ 6,511 100 % $ 3,569 100 % $ 2,942 82 %
Cost of sales 6,033 93 % 2,864 80 % 3,169 111 %
Gross profit 478 7 % 705 20 % (227) (32) %Selling, general and administrative 1,624 25 % 716
20 % 908 127 %
Operating loss (1,146) (18) % (11) - % (1,135) nm %
Other expense, net (93) (1) % (50) (1) % (43) (86) %
Loss before taxes (1,239) (19) % (61) (2) % (1,178) nm %Income tax (benefit) expense (334) (5) % (13)
(1) % (321) nm %
Net loss $ (905) (14) % $ (48) (1) % $ (857) 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. For the three months endedDecember 31, 2021 , changes in net sales were also significantly affected by the addition of revenue from ourStadco subsidiary acquired inAugust 2021 . Net sales were$6.5 million for the three months endedDecember 31, 2021 , or 82% higher when compared to net sales for the three months endedDecember 31, 2020 . Our defense backlog remains strong as new orders for components continue to flow down from prime defense contractors in connection with theU.S. Navy submarine programs, and new customers from our recentStadco business acquisition. For the three months endedDecember 31, 2021 , net sales to our defense markets increased by$3.5 million or 120% when compared to the three months endedDecember 31, 2020 . The primary reason for the increase were new defense sales recorded for the first time with new customers from our recentStadco business acquisition which accounted for approximately 57% of our net sales to defense industry customers during the three months endedDecember 31, 2021 . With our recentStadco business acquisition now complete, we anticipate reporting higher revenues in future quarters. Net sales to industrial markets decreased by$0.5 million , or 78%, when compared to the three monthsDecember 31, 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 three months endedDecember 31, 2021 , revenue recognized over time and at a point in time was$6.4 and$0.1 million , respectively, compared to revenue recognized over time and at a point in time of$3.1 and$0.4 million , respectively, for the three months endedDecember 31, 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 endedDecember 31, 2021 was$6.0 million , or 111% higher when compared to the three months endedDecember 31, 2020 . Gross margin was 7.3% for the three months endedDecember 31, 2021 and 19.8% for the three months endedDecember 31, 2020 . Gross profit was$0.5 million for the three months endedDecember 31, 2021 , or 32% lower, when compared to the three months endedDecember 31, 2020 , primarily the result of higher labor and overhead costs. This is the first quarterly period that includes the operations of ourStadco business for the entire quarterly period. We also recorded higher labor costs and under-absorbed factory overhead during the third quarter because of a lower number of available production hours 25
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due to calendar year-end scheduling. This led to a slower changeover from completed projects to new projects and resulted in an unfavorable production mix that depressed profit margins for the third quarter. We expect an improvement with our production mix in the final quarter of fiscal 2022.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses for the three months endedDecember 31, 2021 increased by 127%, or$0.9 million . The increase was primarily due to the inclusion ofStadco operations for the entire quarterly period ($0.5 million ) and an increase in outside advisory fees ($0.3 million ) in connection with theStadco acquisition. Other travel expense and office costs ($0.1 million ) made up the balance of the increase.
Other Expense, net
The following table reflects interest expense, amortization of debt issue costs and other income, net for the three months ended:
December 31, 2021 December 31, 2020 $ Change % Change
Other income, net $ 1,999 $ (219) $ 2,218 nm
Interest expense $ (78,230) $ (36,391) $ (41,839) (115) %
Amortization of debt issue costs $ (16,491) $
(14,014)
Interest expense was higher for the three months endedDecember 31, 2021 . The increase in interest expense for the three months endedDecember 31, 2021 was due primarily to$37,520 of interest expense under the newStadco term loan, and$9,901 of interest expense on amounts borrowed under the revolver loan. We may record higher interest expense in future periods due to the borrowings under our new Berkshire revolver and term loans.
Amortization of debt issue costs for the three months ended
Income Taxes
For the three months ended
Net (Loss) Income
As a result of the foregoing, for the three months endedDecember 31, 2021 , we recorded a net loss of$904,680 compared to a net loss of$48,172 for the three months endedDecember 31, 2020 . 26
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Nine Months Ended
The following table sets forth information from our condensed consolidated
statements of operations and comprehensive income, in dollars and as a
percentage of revenue:
Nine Months Ended December 31,
2021 2020 Changes
(dollars in thousands) Amount Percent Amount Percent Amount Percent
Net sales $ 14,721 100 % $ 11,566 100 % $ 3,155 27 %
Cost of sales 12,480 85 % 9,035 78 % 3,445 38 %
Gross profit 2,241 15 % 2,531 22 % (290) (11) %Selling, general and administrative 3,530 24 % 2,206
19 % 1,324 60 %
Operating (loss) income (1,289) (9) % 325 3 % (1,614) (497) %
Other expense, net (168) (1) % (159) (1) % (9) (6) %
PPP loan forgiveness 1,317 9 % - - % 1,317 nm %
(Loss) income before taxes (140) (1) % 166 2 % 306 (184) %Income tax (benefit) expense (386) (3) % 60
1 % (446) (743) %
Net income $ 246 2 % $ 106 1 % $ 140 131 %
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
Our defense backlog remains strong as new orders for components continue to flow down from prime defense contractors in connection with theU.S. Navy submarine programs, and new customers from our recentStadco business acquisition. For the nine months endedDecember 31, 2021 , net sales in our defense markets increased by$4.6 million or 49% when compared to the nine months endedDecember 31, 2020 . The primary reason for the increase were new defense sales recorded for the first time by ourStadco subsidiary sinceAugust 25, 2021 which accounted for approximately 34% of our net sales to defense industry customers during the nine months endedDecember 31, 2021 . With our recentStadco acquisition now complete, we anticipate higher revenues in fiscal 2022. Net sales to industrial markets decreased by$1.4 million , or 62% when compared to the nine months endedDecember 31, 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 nine months endedDecember 31, 2021 , revenue recognized over time and at a point in time was$13.3 and$1.5 million , respectively, compared to revenue recognized over time and at a point in time of$9.3 and$2.3 million , respectively, for the nine months endedDecember 31, 2020 . Remaining performance obligations reflect future revenue that will be recorded in subsequent periods as projects in progress are completed. AtDecember 31, 2021 , the Company had$35.2 million of remaining performance obligations, of which$22.3 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 run normally during the period, albeit with higher cost of sales which dampened gross margin for the first nine months of fiscal 2022, as we brought our newStadco operation on-line in the month of September. 27
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Our cost of sales for the nine months endedDecember 31, 2021 was$12.5 million , higher by 38% when compared to the nine months endedDecember 31, 2020 , primarily the result of higher labor and overhead costs which more than offset lower material costs. Gross margin was 15.2% for the nine months endedDecember 31, 2021 and 21.9% for the nine months endedDecember 31, 2020 . Gross profit for the nine month periods endedDecember 31, 2021 and 2020 was$2.2 million and$2.5 million , respectively. We have experienced a period of slowly rising labor costs and under absorbed overhead since the first month of the fiscal year which was amplified by an unfavorable production mix as discussed in our third quarter results. This set of conditions has put pressure on our gross margins. We expect an improvement with our production mix in the final quarter of fiscal 2022.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses for the three months endedDecember 31, 2021 increased by$1.3 million , or 60%. The increase was primarily due to the inclusion ofStadco operations sinceAugust 25, 2021 ($0.6 million ) and an increase in outside advisory fees ($0.5 million ) in connection with theStadco acquisition. Increase in travel expenses and other office costs ($0.2 million ) made up the balance of the increase.
Other Expense, net
The following table reflects interest expense, amortization of debt issue costs and other income, net for the nine months ended:
December 31, 2021 December 31, 2020 $ Change % Change
Other income, net $ 13,390 $ 1,237 $ 12,153 nm
Interest expense $ (146,906) $ (114,786) $ (32,120) (28) %
Amortization of debt issue costs $ (34,588) $ (45,099)$ 10,511 23 % nm - not meaningful
Other income for the nine months ended
Interest expense was higher for the nine months endedDecember 31, 2021 . The increase in interest expense was due primarily to new borrowings under the newStadco term loan and amounts outstanding under the revolver loan. During the prior-year period, there were no borrowings outstanding under the revolver loan. We expect to record higher interest expense in future periods due to the higher debt load under our new term loan and revolver loan. Amortization of debt issue costs were higher in the nine months endedDecember 31, 2020 due to higher closing costs in connection with modifications to the Berkshire loans in 2020. PPP Loan Forgiveness
On
Income Taxes
For the nine months endedDecember 31, 2021 we recorded a tax benefit of$385,749 , compared to a tax provision of$60,573 for the nine months endedDecember 31, 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 nine months endedDecember 31, 2021 , we recorded net income of$0.2 million compared to net income of$0.1 million for the nine monthsDecember 31, 2020 . 28
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Liquidity and Capital Resources
AtDecember 31, 2021 , we had cash and cash equivalents of$0.6 million and working capital of$3.1 million , a decrease when compared toMarch 31, 2021 . We believe our available cash, plus cash expected to be provided by operations and borrowing capacity available under the revolver loan, will be sufficient to fund our operations, expected capital expenditures, and principal and interest payments under our debt obligations through the next 12 months from the issuance date of our financial statements. Our revolver loan matures inDecember 2022 and will not be available to provide liquidity unless it is renewed. OnAugust 25, 2021 , we completed the acquisition ofStadco , closed on a private placement financing and closed on a new loan withBerkshire Bank . In connection with the acquisition, 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$2.0 million outstanding under the revolver loan atDecember 31, 2021 . There were no borrowed amounts outstanding under the revolver loan atMarch 31, 2021 . Unused borrowing capacity atDecember 31, 2021 was approximately$2.1 million . The maturity date of the revolver loan isDecember 20, 2022 . There is a balloon payment of approximately$2.4 million due inMarch 2022 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. In addition to the cash commitments required under our financing arrangements withBerkshire Bank , we also anticipate that we will spend approximately$0.8 million in new factory machinery and equipment during the remainder of fiscal 2022.
The table below presents selected liquidity and capital measures at:
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