TECHPRECISION CORP - Quarter Report: 2021 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

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(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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For the quarterly period ended June 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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For the transition period from                                  to                                 

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Commission File Number: 000-51378

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TechPrecision Corporation

(Exact name of registrant as specified in its charter)

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Securities registered pursuant to Section 12(b) of the Act:

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act.    ☐

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

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The number of shares outstanding of the registrant’s common stock as of August 6, 2021 was 29,498,662.

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PART I

ITEM 1. FINANCIAL STATEMENTS

TECHPRECISION CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

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See accompanying notes to the condensed consolidated financial statements.

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TECHPRECISION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (unaudited)

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See accompanying notes to the condensed consolidated financial statements.

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TECHPRECISION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

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See accompanying notes to the condensed consolidated financial statements.

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TECHPRECISION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

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See accompanying notes to the condensed consolidated financial statements.

SUPPLEMENTAL INFORMATION - NONCASH FINANCING TRANSACTIONS:

Three months ended June 30, 2020

On June 13, 2020, our executive officers exercised options to purchase 150,000 shares of the Company’s common stock, par value $0.0001 per share, in a cashless transaction, pursuant to option awards granted under the Company’s 2016 Long-Term Incentive Plan.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 - DESCRIPTION OF BUSINESS

TechPrecision Corporation, or TechPrecision, is a Delaware corporation organized in February 2005 under the name Lounsberry Holdings II, Inc. The name was changed to TechPrecision Corporation on March 6, 2006. TechPrecision is the parent company of Ranor, Inc., or Ranor, Stadco New Acquisition, LLC, and Wuxi Critical Mechanical Components Co., Ltd., or WCMC, a wholly foreign owned enterprise. WCMC has no customers or operations, and we have initiated a plan of termination to legally dissolve this subsidiary. TechPrecision, WCMC, Stadco New Acquisition, LLC, and Ranor are collectively referred to as the “Company”, “we”, “us” or “our”.

We manufacture large-scale metal fabricated and machined precision components and equipment. These products are used in a variety of markets including defense and aerospace, nuclear, medical, and precision industrial. We consider our business to consist of one segment - metal fabrication and precision machining. All of our operations and customers are located in the United States.

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NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation - The accompanying condensed consolidated financial statements include the accounts of TechPrecision, Ranor, Stadco New Acquisition, LLC, and WCMC. Intercompany transactions and balances have been eliminated in consolidation. The accompanying condensed consolidated balance sheets as of June 30, 2021 and March 31, 2021, the condensed consolidated statements of operations and comprehensive income (loss) and stockholders’ equity for the three months ended June 30, 2021 and 2020, and the condensed consolidated statements of cash flows for the three months ended June 30, 2021 and 2020 are unaudited, but, in the opinion of management, include all adjustments that are necessary for a fair presentation of our financial statements for interim periods in accordance with U.S. Generally Accepted Accounting Principles, or U.S. GAAP. All adjustments are of a normal, recurring nature, except as otherwise disclosed. The results of operations for an interim period are not necessarily indicative of the results of operations to be expected for the fiscal year.

These notes to the condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC, for Quarterly Reports on Form 10-Q. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited financial statements and related notes should be read in conjunction with the consolidated financial statements included with our Annual Report on Form 10-K for the fiscal year ended March 31, 2021, or the 2021 Form 10-K, filed with the SEC on June 10, 2021.

Use of Estimates in the Preparation of Financial Statements - In preparing the condensed consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and revenues and expenses during the reported period. We continually evaluate our estimates, including those related to contract accounting, accounts receivable, inventories, the recovery of long-lived assets, income taxes and the valuation of equity transactions. We base our estimates on historical and current experiences and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates.

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NOTE 3 - ACCOUNTING STANDARDS UPDATE

New Accounting Standards Recently Adopted

In December, 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, expected to reduce cost and complexity related to the accounting for income taxes. This ASU removes specific exceptions to the general principles in Topic 740 under U.S. GAAP and removes the limitation on the tax benefit recognized on pre-tax losses in interim periods. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020. The

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Company adopted ASU 2019-12 on April 1, 2021 and the amendments in this update did not have a significant impact on our financial statements and disclosures.

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NOTE 4 - REVENUE

The Company generates revenue primarily from performance obligations completed under contracts with customers in two main market sectors: defense and precision industrial. The period over which the Company performs its obligations can be between three and thirty-six months.

Revenue is recognized over-time or at a point-in-time given the terms and conditions of the related contracts. The Company utilizes an inputs methodology based on estimated labor hours to measure performance progress. This model best depicts the transfer of control to the customer.

The Company’s contract portfolio is comprised of fixed-price contracts and provide for product type sales only. The following table presents net sales on a disaggregated basis by market and contract type:

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As of June 30, 2021, the Company had $17.6 million of remaining performance obligations, of which $13.0 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.

We are dependent each year on a small number of customers who generate a significant portion of our business, and these customers change from year to year. The following table sets forth revenues from customers who accounted for more than 10% of our net sales for the three months ended:

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*Less than 10% of total

In our condensed consolidated balance sheet, contract assets and contract liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. For the three months ended June 30, 2021, we recognized revenue of less than $0.1 million related to our contract liabilities at April 1, 2021. Contract assets consisted of the following at:

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NOTE 5 - INCOME TAXES

The Company accounts for income taxes under ASC 740, Income Taxes. The tax provision for interim periods is determined using the estimated annual effective consolidated tax rate, based on the current estimate of full-year earnings before taxes, adjusted for the impact of discrete quarterly items. The provision for income taxes was $26,580 for the three months ended June 30, 2021 and the income tax benefit was $37,360 for the three months ended June 30, 2020. The Company’s effective tax rate for the three months ended June 30, 2021 was approximately 2%, due to the nontaxable PPP loan forgiveness item of $1.3 million disclosed in the condensed consolidated statement of operations.

The valuation allowance on deferred tax assets was approximately $1.7 million at June 30, 2021. We believe that it is more likely than not that the benefit from certain state and foreign net operating losses, or NOL, carryforwards and other deferred tax assets will not be realized. 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.

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NOTE 6 - EARNINGS PER SHARE

Basic EPS is computed by dividing reported earnings available to stockholders by the weighted average shares outstanding. Diluted EPS also includes the effect of stock options that would be dilutive. The following table provides a reconciliation of the numerators and denominators reflected in the basic and diluted earnings per share computations for the three months ended:

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All potential common stock equivalents that have an anti-dilutive effect (i.e. those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. For the three months ended June 30, 2020, there were 2,816,000 of potentially anti-dilutive stock options, none of which were included in the earnings per share calculations above.

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NOTE 7 – STOCK-BASED COMPENSATION

Our board of directors, upon the recommendation of the compensation committee of our board of directors, approved the 2016 TechPrecision Equity Incentive Plan, or the 2016 Plan, on November 10, 2016. Our stockholders approved the 2016 Plan at the Company’s Annual Meeting of Stockholders on December 8, 2016. The 2016 Plan succeeds the 2006 Plan and applies to awards granted after the 2016 Plan’s adoption by the Company’s stockholders. We have designed the 2016 Plan to reflect our commitment to having best practices in both compensation and corporate governance. The 2016 Plan provides for a share reserve of 5,000,000 shares of common stock.

The 2016 Plan authorizes the award of incentive and non-qualified stock options, restricted stock awards, restricted stock units, and performance awards to employees, directors, consultants, and other individuals who provide services to TechPrecision or its affiliates. The purpose of the 2016 Plan is to: (a) enable TechPrecision and its affiliated companies to recruit and retain highly qualified employees, directors and consultants; (b) provide those employees, directors and consultants with an incentive for productivity; and (c) provide those employees, directors and consultants with an opportunity to share in the growth and value of the Company. Subject to adjustment as provided in the 2016 Plan, the maximum number of shares of common stock that may be issued with respect to awards under the 2016 Plan is 5,000,000

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shares (inclusive of awards issued under the 2006 Long-Term Incentive Plan, or the 2006 Plan, that remained outstanding as of the effective date of the 2016 Plan). Shares of our common stock subject to awards that expire unexercised or are otherwise forfeited shall again be available for awards under the 2016 Plan.

At June 30, 2021, there were 1,470,000 shares available for grant under the 2016 Plan. The following table summarizes information about options granted during the most recently completed periods:

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The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the closing stock price on the last trading day of the first quarter of fiscal 2022 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30,2021. This amount changes based on the fair market value of the Company’s common stock.

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At June 30,2021, there was no remaining unrecognized compensation cost related to stock options. The maximum contractual term is ten years for option grants. Other information relating to stock options outstanding at June 30,2021 is as follows:

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Restricted Stock Awards

On September 1, 2020 we granted a total of 100,000 shares of restricted stock under the 2016 Plan to the board of directors. The stock-based compensation expense of $134,000 for service-based restricted stock was measured at fair value on the date of grant based on the number of shares expected to vest and the quoted market price of the Company’s common stock. The shares of restricted stock fully vest and cease to be subject to forfeiture on August 31, 2021, or twelve months following the grant date. Each grantee must be serving as a director on the vesting date and must have been continuously serving in such capacity from the grant date through the vesting date for the shares of restricted stock to vest. Prior to the vesting date, the grantee is not permitted to sell, transfer, pledge, assign or otherwise encumber the shares of restricted stock and if the grantee’s service with the Company terminates prior to the vesting date, the grantee’s restricted stock will be forfeited automatically. Total recognized compensation cost related to the restricted stock award for the three months ended June 30, 2021 was $33,500. At June 30, 2021 there was $22,333 of unrecognized compensation cost related to these restricted stock awards.

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NOTE 8 - CONCENTRATION OF CREDIT RISK

We maintain bank account balances, which, at times, may exceed insured limits. We have not experienced any losses with these accounts and believe that we are not exposed to any significant credit risk on cash.

At June 30, 2021, there were trade accounts receivable balances outstanding from three customers comprising 75% of the total trade receivables balance. The following table sets forth information as to trade accounts receivable from customers who accounted for more than 10% of our accounts receivable balance as of:

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NOTE 9 - OTHER CURRENT ASSETS

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NOTE 10 - PROPERTY, PLANT AND EQUIPMENT, NET

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NOTE 11 - ACCRUED EXPENSES

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Accrued compensation includes amounts for executive bonuses, payroll and vacation and holiday pay. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in the

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provision are recorded in cost of sales. Accrued project costs are estimates for certain project expenses during the reporting period.

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NOTE 12 – DEBT

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Berkshire Bank Loan Facility

On December 21, 2016, TechPrecision, through Ranor, closed on a Loan Agreement, or the Berkshire Loan Agreement, with Berkshire Bank. Pursuant to the Berkshire Loan Agreement, Berkshire Bank made a term loan to Ranor in the amount of $2,850,000, or the Term Loan, and made available to Ranor a revolving line of credit in the amount of $1,000,000, or the Revolver Loan, and together with the Term Loan, the Berkshire Loans. The Berkshire Loans are secured by a first lien on all personal and real property of Ranor. Payments on the Term Loan began on January 20, 2017 and will be made in 60 monthly installments of $19,260 each, inclusive of interest at a fixed rate of 5.21% per annum, with all outstanding principal and accrued interest due and payable on the maturity date. A balloon principal payment of approximately $2,400,000 is due on December 20, 2021 under the Term Loan. A prepayment penalty will apply during the loan term but will not apply if a prepayment is made from either casualty loss insurance proceeds or a condemnation award applicable to any collateral or if a full prepayment is made during the 45-day period immediately preceding the maturity date. Advances under the Revolver Loan were originally subject to a borrowing base equal to the lesser of (A) $1,000,000 and (B) the sum of (i) 80% of eligible accounts receivable, and (ii) the lesser of (a) 25% of eligible raw material inventory and (b) $250,000.

On December 23, 2019, TechPrecision, through Ranor, entered into a Third Modification to Loan Agreement, or the Third Modification, and an Amended and Restated Promissory Note with Berkshire Bank. Under the Third Modification, Ranor and Berkshire agreed to increase the maximum principal amount available under the Revolver Loan from $1,000,000 to $3,000,000. Advances under the Revolver Loan are now subject to a borrowing base equal to the lesser of (a) $3,000,000 or (b) the sum of (i) 80% of eligible accounts receivable, plus (ii) the lesser of (x) 25% of Eligible Raw Material Inventory, and (y) $250,000, plus (iii) 50% of the Appraised Value of the Eligible Equipment. The loan agreement is available for refinancing existing indebtedness and for working capital and general corporate purposes. Additionally, the parties agreed to lower the interest rate on advances made under the Revolver Loan at a variable rate equal to the one-month LIBOR plus 225 basis points. The Third Modification contains customary LIBOR replacement provisions. The Company pays, as consideration for the bank’s commitment to make advances under the Revolver Loan, a nonrefundable commitment fee equal to 0.25% per annum on the average daily difference between the amount of $3,000,000 and the aggregate amount of all advances made under the Revolver Loan as of each quarterly period. The Third Modification also excludes the balance of the Revolver Loan from the Loan-to-Value Ratio covenant calculations.

On December 18, 2020, TechPrecision, through Ranor, entered into a Fourth Modification to Loan Agreement and First Modification and Allonge to Amended and Restated Promissory Note, or the Fourth Modification, with Berkshire Bank. The Modification amends and modifies the Berkshire Loan Agreement. The Fourth Modification also amends the Amended and Restated Promissory Note dated December 23, 2019 made by Ranor in favor of Berkshire in the stated principal amount of $3,000,000. As of the date of the Fourth Modification, there were no amounts outstanding under the Revolver Loan.

Under the Fourth Modification, Ranor and Berkshire agreed to revise the minimum interest rate payable on the Revolver Loan. Under the promissory note for the Revolver Loan, the Company can elect to pay interest at an adjusted LIBOR-

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based rate or an Adjusted Prime Rate. Under the Fourth Modification, the minimum adjusted LIBOR-based rate is 2.75% and the Adjusted Prime Rate is the greater of (i) the Prime Rate minus 70 basis points or (ii) 2.75%. Interest-only payments on advances made under the Revolver Loan will continue to be payable monthly in arrears. The maturity date of the Revolver Loan was also extended to December 20, 2022. All other material terms of the Berkshire Loan Agreement and the promissory note for the Revolver Loan were unchanged.

There were no interest payments and no advances made under the Revolver Loan during the three months ended June 30, 2021. Unused borrowing capacity at June 30, 2021 and March 31, 2021 was $3.0 and $2.7 million, respectively. There were no borrowed amounts outstanding under the Revolver Loan at June 30, 2021 and March 31, 2021.

The Berkshire Loans may be accelerated upon the occurrence of an “Event of Default” (as defined in the Berkshire Loan Agreement). Events of Default include (i) the failure to pay any monthly installment payment before the tenth day following the due date of such payment; (ii) the failure of Ranor or TechPrecision to observe, perform or pay any obligations under the Berkshire Loan Agreement or any other obligation to Berkshire; (iii) the failure of Ranor or TechPrecision to pay any indebtedness in excess of $100,000 (other than the Berkshire Loans) when due; (iv) any representation or warranty of Ranor or TechPrecision in the Berkshire Loan Agreement and related documents, or the Loan Documents, being proven to have been incorrect, in any material respect, when made; (v) the failure of Ranor to discharge any attachment, levy or distraint on its property; (vi) any default by Ranor or TechPrecision under any of the collateral security documents executed in connection with the Berkshire Loan Agreement past any applicable grace period; (vii) the failure of Ranor or TechPrecision to file or pay taxes when due, unless such taxes are being contested in a manner permitted under the Loan Documents; (viii) a change in ownership or control of Ranor or change in management of Ranor where either the chief executive officer or chief financial officer as of December 21, 2016 is replaced without Berkshire Bank’s prior consent; (ix) Ranor or TechPrecision ceasing to do business as a going concern, making an assignment for the benefit of creditors, or commencing a bankruptcy or other similar insolvency proceeding; and (x) the entry of a judgment against Ranor or TechPrecision in excess of $150,000. Some of the Events of Default are subject to certain cure periods. Subject to the lapse of any applicable cure period, a default under the Berkshire Loans could cause the acceleration of all outstanding obligations under the Berkshire Loans.

Pursuant to the Berkshire Loan Agreement, the Company covenants to cause its balance sheet leverage to be less than or equal to 2.50 to 1.00 for the fiscal year ending March 31, 2019 and each fiscal year end thereafter. The Berkshire Loan Agreement also contains a covenant whereby the Company is required to maintain a debt service coverage ratio, or DSCR, of at least 1.2 to 1.0 during the term of the Berkshire Loans. The DSCR is measured at the end of each fiscal quarter of the Company. The Berkshire Loan Agreement contains an additional covenant whereby Ranor is required to maintain a loan-to-value ratio of not greater than 0.75 to 1.00, to be measured by appraisal not more frequently than one time during each 365-day period, and annual capital expenditures cannot exceed $1,500,000. The Company was in compliance with all of the financial covenants at June 30, 2021 and March 31, 2021.

Unamortized debt issue costs at June 30, 2021 and March 31, 2021 were $17,448 and $26,272, respectively.

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

The carrying value of short and long-term borrowings approximates their fair value. The Company’s short-term and long-term debt is all privately held with no public market for this debt and is considered to be Level 3 under the fair value hierarchy.

Small Business Administration Loan

On May 8, 2020, the Company, through its wholly owned subsidiary Ranor, issued a promissory note, or the Note, evidencing an unsecured loan in the amount of $1,317,100 made to Ranor 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 the U.S. Small Business Administration, or the SBA. The loan to Ranor was made through Berkshire Bank.

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Principal and accrued interest were set to be payable monthly in equal installments commencing in September 2021 and continuing through the maturity date, unless the Note was forgiven as described below.

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.

On June 5, 2020, the PPP was amended to give borrowers more time to spend loan proceeds and still obtain loan forgiveness. The amendments extended the length of the covered period as defined in the CARES Act from eight to twenty-four weeks, while allowing borrowers that received PPP loans before June 5, 2020 to elect to use the original eight-week covered period.

The Company applied for loan forgiveness with the SBA under the Paycheck Protection Program on March 26, 2021. On May 12, 2021, as authorized by Section 1106 of the CARES Act, 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 (PPP) loan. The funds credited to the bank 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.

Finance Lease

We leased certain office equipment during fiscal 2021 under an old finance lease that was cancelled in March 2021. We entered into a new finance lease on March 31, 2021 in the amount of $45,663 for certain office equipment. The lease term is for 60 months, bears interest at 3.2% and requires monthly payments of principal and interest of $825. The amount of the lease recorded as a right-of-use asset in property, plant and equipment was $45,663 as of March 31, 2021.

See Note 13 for more information regarding our obligations under the finance lease.

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NOTE 13 – LEASES

Leases that are economically similar to the purchase of an asset are classified as finance leases. The leased, or right-of-use assets in finance lease arrangements are reported in net property, plant and equipment on our condensed consolidated balance sheet. The following table lists our right-of-use assets and liabilities on our condensed consolidated balance sheet at:

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In December 2019, we signed a one-year operating lease for office space which expired in December 2020 and was amortized on a straight line basis. Since the expiration of the one-year term lease, we have continued to lease this office

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space on a month-to-month basis. Other supplemental information regarding our leases are contained in the following tables:

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NOTE 14 - COMMITMENTS

Retirement Benefits

Ranor has a defined contribution and savings plan that covers substantially all Ranor employees who have completed 90 days of service. Ranor retains the option to match employee contributions. The Company contributed $21,388 and $20,725 for the three months ended June 30, 2021 and 2020, respectively.

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NOTE 15 - SUBSEQUENT EVENTS

As previously disclosed, on October 16, 2020, the Company entered into a stock purchase agreement (as subsequently amended, the SPA) with Stadco New Acquisition, LLC, a wholly owned subsidiary of the Company, the Acquisition Sub, STADCO, Stadco Acquisition, LLC, or Holdco, and each stockholder of Holdco. The SPA provides for the Company, through Acquisition Sub, to acquire all of the issued and outstanding capital stock of STADCO from Holdco. STADCO, the operating subsidiary of Holdco, is a California corporation in the business of manufacturing high-precision parts, assemblies and tooling for aerospace, defense, research and commercial customers.

On July 23, 2021, the Company entered into the Third Amendment to Stock Purchase Agreement effective as of July 20, 2021, with Acquisition Sub, STADCO, Holdco and Douglas A. Paletz, as representative of the STADCO stockholders of Holdco. Under the terms of SPA, if the Acquisition was not closed by July 31, 2021, either the Company or Stadco could have terminated the SPA. The Third Amendment effected a change to this provision by extending until August 31, 2021 the date after which the parties may terminate if the Acquisition has not closed.

The Third Amendment also effected changes to the consideration payable for STADCO’s securities in the Acquisition. Previously, the SPA provided that the consideration payable by the Company for 100% of the shares of common stock of STADCO in the Acquisition would be 1,000,000 shares of the Company’s common stock. Under the Third Amendment, at the closing of the Acquisition, the Company will issue 666,666 shares of the Company’s common stock, or the Consideration Shares, as consideration for 100% of the shares of common stock of STADCO. However, if one year following the closing of the Acquisition, the Company’s stock price does not have an average closing price of at least $1.65 per share, then the Company must (i) issue additional shares to Holdco that have an aggregate market value equal to the difference between the market value of the Consideration Shares and the value of the Consideration Shares if they had traded at $1.65 per share, (ii) pay such difference in cash or (iii) undertake any combination of the foregoing. The Amendment also effected certain other minor changes to the SPA.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

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:

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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 ended June 30, 2021.

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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 with U.S. generally accepted accounting principles, or U.S. GAAP, we also utilize and present certain financial measures that are not based on or included in U.S. GAAP. We refer to these as Non-GAAP financial measures. Please see the section “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 June 30, 2021 and 2020

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:

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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 $3.4 million for the three months ended June 30, 2021, or 4% higher when compared to net sales for the three months ended June 30, 2020. For the three months ended June 30, 2021, net sales in our defense markets decreased by $0.1 million or 3% when compared to the three months ended June 30, 2020. Our defense backlog remains strong as new orders for components, including the U.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 ended June 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 ended June 30, 2021, revenue recognized over time was $3.1 million, an increase of 3% when compared to the three months ended June 30, 2020. Fiscal 2022 first quarter revenue recognized over time was generated by a favorable project mix with profitable gross margins.

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Remaining performance obligations reflect future revenue that will be recorded in subsequent periods as projects in progress are completed. At June 30, 2021 the Company had a backlog of $17.6 million, compared with a backlog of $18.6 million at March 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 ended June 30, 2021 was $2.6 million, slightly lower when compared to the three months ended June 30, 2020.

Project throughput was better for the three months ended June 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 ended June 30, 2021.

Gross margin was 24.2% for the three months ended June 30, 2021 and 21.2% for the three months ended June 30, 2020. Gross profit was $0.8 million for the three months ended June 30, 2021, or 20% higher when compared to the three months ended June 30, 2020, the result of higher revenue and lower cost of sales.

Selling, General and Administrative Expenses

Total selling, general and administrative expenses for the three months ended June 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:

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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 May 12, 2021, as authorized by Section 1106 of the CARES Act, the SBA remitted to Berkshire Bank, the lender of record, a payment of principal in the amount of $1,317,100, for forgiveness of the Company’s PPP loan. The funds credited to the PPP loan paid this loan off in full.

Income Taxes

For the three months ended June 30, 2021 we recorded a tax provision of $26,580, compared to a tax benefit of $37,360 for the three months ended June 30, 2020. This resulted from our generation of net income during the three months ended June 30, 2021, compared to a net loss during the three months ended June 30, 2020.

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Net Income (Loss)

As a result of the foregoing, for the three months ended June 30, 2021, we recorded net income of $1.4 million compared to a net loss of $0.1 million for the three months ended June 30, 2020.

Liquidity and Capital Resources

At June 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 of Stadco, 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 at June 30, 2021 and March 31, 2021. Unused borrowing capacity at June 30, 2021 was $3.0 million. The maturity date of the revolver loan is December 20, 2022.

The Company intends to refinance the term loan with Berkshire Bank. There is a balloon payment of $2.4 million due on December 20, 2021 under the term loan with Berkshire 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:

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