UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2021
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-51378
TechPrecision Corporation
(Exact name of registrant as specified in its charter)
Delaware |
| 51-0539828 |
(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| Identification No.) |
1 Bella Drive |
|
|
Westminster, MA |
| 01473 |
(Address of principal executive offices) |
| (Zip Code) |
|
|
|
Registrant’s telephone number, including area code |
| (978) 874-0591 |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
| N/A |
|
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.
☒ | Yes | ☐ | No |
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).
☒ | Yes | ☐ | No |
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.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
Emerging growth company | ☐ |
|
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ | Yes | ☒ | No |
The number of shares outstanding of the registrant’s common stock as of February 8, 2022 was 34,287,450.
TABLE OF CONTENTS
Page | ||
3 | ||
3 | ||
3 | ||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME | 4 | |
5 | ||
6 | ||
8 | ||
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 22 | |
31 | ||
31 | ||
33 | ||
33 | ||
34 |
2
PART I
ITEM 1. FINANCIAL STATEMENTS
TECHPRECISION CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
| December 31, |
| March 31, | |||
2021 | 2021 | |||||
ASSETS |
|
| ||||
Current assets: |
|
|
|
| ||
Cash and cash equivalents | $ | 562,459 | $ | 2,130,711 | ||
Accounts receivable |
| 2,430,255 |
| 608,059 | ||
Contract assets |
| 10,234,353 |
| 5,532,408 | ||
Raw materials | 944,094 | 503,636 | ||||
Work-in-process | 776,314 | 767,520 | ||||
Other current assets |
| 467,458 |
| 379,437 | ||
Total current assets |
| 15,414,933 |
| 9,921,771 | ||
Property, plant and equipment, net |
| 12,071,530 |
| 4,063,209 | ||
Right of use asset, net | 6,526,862 | — | ||||
Deferred income taxes |
| 2,320,827 |
| 1,934,415 | ||
Goodwill | 930,759 | — | ||||
Other noncurrent assets, net |
| 121,256 |
| 84,624 | ||
Total assets | $ | 37,386,167 | $ | 16,004,019 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY: |
|
|
| |||
Current liabilities: |
|
|
| |||
Accounts payable | $ | 2,570,133 | $ | 500,848 | ||
Accrued expenses |
| 2,533,755 |
| 1,526,270 | ||
Contract liabilities |
| 1,792,887 |
| 218,152 | ||
Current portion lease liability | 539,670 | — | ||||
Current portion of long-term debt |
| 4,882,456 |
| 2,474,963 | ||
Total current liabilities |
| 12,318,901 |
| 4,720,233 | ||
Long-term debt, net |
| 3,210,468 |
| 1,341,938 | ||
Long-term lease liability | 6,026,848 | — | ||||
Total liabilities | 21,556,217 | 6,062,171 | ||||
Commitments and contingent liabilities (Note 14) |
|
|
| |||
Stockholders’ Equity: |
|
|
| |||
Common stock - par value $.0001 per share, 90,000,000 shares authorized, 34,287,450 and 29,498,662 shares issued and at and March 31, 2021 |
| 3,428 |
| 2,949 | ||
Additional paid in capital |
| 14,588,193 |
| 8,944,660 | ||
Accumulated other comprehensive income |
| 19,929 |
| 21,838 | ||
Retained earnings |
| 1,218,400 |
| 972,401 | ||
Total stockholders’ equity |
| 15,829,950 |
| 9,941,848 | ||
Total liabilities and stockholders’ equity | $ | 37,386,167 | $ | 16,004,019 | ||
See accompanying notes to the condensed consolidated financial statements.
3
TECHPRECISION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (unaudited)
Three Months Ended | Nine Months Ended | |||||||||||
December 31, | December 31, | |||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Net sales | $ | 6,511,325 | $ | 3,569,718 | $ | 14,720,964 | $ | 11,566,176 | ||||
Cost of sales |
| 6,033,267 |
| 2,864,274 |
| 12,479,531 |
| 9,034,858 | ||||
Gross profit |
| 478,058 |
| 705,444 |
| 2,241,433 |
| 2,531,318 | ||||
Selling, general and administrative |
| 1,623,883 |
| 716,361 |
| 3,530,179 |
| 2,205,739 | ||||
(Loss) income from operations |
| (1,145,825) |
| (10,917) |
| (1,288,746) |
| 325,579 | ||||
Other income |
| 1,999 |
| (219) |
| 13,390 |
| 1,237 | ||||
Interest expense |
| (94,721) |
| (50,405) |
| (181,494) |
| (159,885) | ||||
PPP loan forgiveness | — | — | 1,317,100 | — | ||||||||
Total other (expense) income |
| (92,722) |
| (50,624) |
| 1,148,996 |
| (158,648) | ||||
(Loss) income before income taxes |
| (1,238,547) |
| (61,541) |
| (139,750) |
| 166,931 | ||||
Income tax (benefit) expense |
| (333,867) |
| (13,369) |
| (385,749) |
| 60,573 | ||||
Net (loss) income | $ | (904,680) | $ | (48,172) | $ | 245,999 | $ | 106,358 | ||||
Other comprehensive (loss) income: |
|
|
|
| ||||||||
Foreign currency translation adjustments | $ | (810) | $ | 1,252 | $ | (1,909) | $ | 151 | ||||
Other comprehensive (loss) income | $ | (810) | $ | 1,252 | $ | (1,909) | $ | 151 | ||||
Comprehensive (loss) income | $ | (905,490) | $ | (46,920) | $ | 244,090 | $ | 106,509 | ||||
Net (loss) income per share basic | $ | (0.03) | $ | (0.00) | $ | 0.01 | $ | 0.00 | ||||
Net (loss) income per share diluted | $ | (0.03) | $ | (0.00) | $ | 0.01 | $ | 0.00 | ||||
Weighted average shares outstanding - basic | 34,286,580 | 29,498,662 | 31,716,353 | 29,430,206 | ||||||||
Weighted average shares outstanding - diluted | 34,286,580 | 29,498,662 | 33,395,123 | 31,021,384 | ||||||||
See accompanying notes to the condensed consolidated financial statements.
4
TECHPRECISION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)
|
|
|
| Accumulated |
|
| |||||||||||
Common | Additional | Other | Total | ||||||||||||||
Stock | Par | Paid in | Comprehensive | Retained | Stockholders’ | ||||||||||||
Outstanding | Value | Capital | Income | Earnings | Equity | ||||||||||||
Balance 3/31/2020 | 29,354,594 | $ | 2,935 | $ | 8,793,062 | $ | 21,688 | $ | 651,770 | $ | 9,469,455 | ||||||
Stock-based compensation | 55,500 | 55,500 | |||||||||||||||
Shares issued under LTIP |
| 44,068 |
| 4 |
| (4) |
|
| — | ||||||||
Net loss |
|
|
| (116,234) |
| (116,234) | |||||||||||
Foreign currency translation adjustment |
|
|
| (97) |
| (97) | |||||||||||
Balance 6/30/2020 |
| 29,398,662 | $ | 2,939 | $ | 8,848,558 | $ | 21,591 | $ | 535,536 | $ | 9,408,624 | |||||
Stock-based compensation | 57,417 | 57,417 | |||||||||||||||
Restricted stock award | 100,000 | 10 | (10) | — | |||||||||||||
Net income | 270,764 | 270,764 | |||||||||||||||
Foreign currency translation adjustment | (1,005) | (1,005) | |||||||||||||||
Balance 9/30/2020 | 29,498,662 | $ | 2,949 | $ | 8,905,965 | $ | 20,586 | $ | 806,300 | $ | 9,735,800 | ||||||
Stock-based compensation | 33,500 | 33,500 | |||||||||||||||
Taxes on exercised options | (28,305) | (28,305) | |||||||||||||||
Net loss | (48,172) | (48,172) | |||||||||||||||
Foreign currency translation adjustment | 1,252 | 1,252 | |||||||||||||||
Balance 12/31/2020 | 29,498,662 | $ | 2,949 | $ | 8,911,160 | $ | 21,838 | $ | 758,128 | $ | 9,694,075 | ||||||
Balance 3/31/2021 |
| 29,498,662 | $ | 2,949 | $ | 8,944,660 | $ | 21,838 | $ | 972,401 | $ | 9,941,848 | |||||
Stock-based compensation | 33,500 | 33,500 | |||||||||||||||
Net income |
|
|
|
| 1,371,092 |
| 1,371,092 | ||||||||||
Foreign currency translation adjustment |
|
|
| 42 |
|
| 42 | ||||||||||
Balance 6/30/2021 |
| 29,498,662 | $ | 2,949 | $ | 8,978,160 | $ | 21,880 | $ | 2,343,493 | $ | 11,346,482 | |||||
Restricted stock award | 100,000 | 10 | (10) | — | |||||||||||||
Common stock issued for acquired business | 1,466,061 | 147 | 2,268,853 | 2,269,000 | |||||||||||||
Proceeds from sale of common stock, net | 3,202,727 | 320 | 3,187,261 | 3,187,581 | |||||||||||||
Issuance of warrants | 46,256 | 46,256 | |||||||||||||||
Stock-based compensation | 28,566 | 28,566 | |||||||||||||||
Net loss | (220,413) | (220,413) | |||||||||||||||
Foreign currency translation adjustment | (1,141) | (1,141) | |||||||||||||||
Balance 9/30/2021 | 34,267,450 | $ | 3,426 | $ | 14,509,086 | $ | 20,739 | $ | 2,123,080 | $ | 16,656,331 | ||||||
Issuance of common stock | 20,000 | 2 | 34,998 | 35,000 | |||||||||||||
Stock-based compensation | 44,109 | 44,109 | |||||||||||||||
Net loss | (904,680) | (904,680) | |||||||||||||||
Foreign currency translation adjustment | (810) | (810) | |||||||||||||||
Balance 12/31/2021 | 34,287,450 | $ | 3,428 | $ | 14,588,193 | $ | 19,929 | $ | 1,218,400 | $ | 15,829,950 | ||||||
See accompanying notes to the condensed consolidated financial statements.
5
TECHPRECISION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended December 31, | ||||||
| 2021 |
| 2020 | |||
CASH FLOWS FROM OPERATING ACTIVITIES: |
| |||||
Net income | $ | 245,999 | $ | 106,358 | ||
Adjustments to reconcile net income to net cash used in operating activities: |
|
| ||||
Depreciation and amortization |
| 978,517 |
| 521,422 | ||
Amortization of debt issue costs |
| 34,588 |
| 45,099 | ||
Stock based compensation expense |
| 141,176 |
| 146,417 | ||
Change in contract loss provision |
| (66,232) |
| (175,365) | ||
Deferred income taxes |
| (386,413) |
| 60,573 | ||
PPP loan forgiveness | (1,317,100) | — | ||||
Changes in operating assets and liabilities: |
|
| ||||
Accounts receivable |
| (575,181) |
| (183,076) | ||
Contract assets |
| (871,339) |
| (810,032) | ||
Inventories | 477,936 | 19,129 | ||||
Other current assets |
| 215,334 |
| 164,127 | ||
Other noncurrent assets |
| (50,633) |
| 38,092 | ||
Accounts payable |
| (611,045) |
| 325,369 | ||
Accrued expenses |
| (1,282,269) |
| (101,028) | ||
Contract liabilities |
| 1,418,010 |
| (496,691) | ||
Net cash used in operating activities |
| (1,648,652) |
| (339,606) | ||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
| ||||
Business acquisition, net of cash acquired | (7,795,810) | — | ||||
Purchases of property, plant and equipment |
| (436,531) |
| (546,890) | ||
Net cash used in investing activities |
| (8,232,341) |
| (546,890) | ||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
| ||||
Proceeds from term loan | 4,000,000 | — | ||||
Closing costs related to common stock sale | (335,419) | — | ||||
Proceeds from sale of common stock | 3,523,000 | — | ||||
Debt issue costs |
| (116,511) |
| (24,610) | ||
Proceeds from payroll protection program loan | — | 1,317,100 | ||||
Revolver loan borrowings |
| 2,553,221 |
| 1,000,000 | ||
Revolver loan repayments | (575,000) | (1,000,000) | ||||
Principal payments for leases |
| (493,015) |
| — | ||
Repayments long-term debt | (243,510) | (81,352) | ||||
Net cash provided by financing activities |
| 8,312,766 |
| 1,211,138 | ||
Effect of exchange rate on cash and cash equivalents |
| (25) |
| (178) | ||
Net (decrease) increase in cash and cash equivalents |
| (1,568,252) |
| 324,464 | ||
Cash and cash equivalents, beginning of period |
| 2,130,711 |
| 930,856 | ||
Cash and cash equivalents, end of period | $ | 562,459 | $ | 1,255,320 | ||
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: |
|
| ||||
Cash paid for interest, net of amounts capitalized | $ | 152,498 | $ | 106,342 | ||
See accompanying notes to the condensed consolidated financial statements.
6
SUPPLEMENTAL INFORMATION – NONCASH INVESTING AND FINANCING TRANSACTIONS:
Nine months ended December 31, 2021 and 2020
On August 25, 2021, in exchange for the issuance of 1,466,061 shares of common stock and warrants, the Company acquired all of the issued and outstanding capital stock of Stadco, acquired certain other securities of Stadco and satisfied certain liabilities of Stadco. The fair value of the aggregate consideration transferred was $2,269,000 and based on the closing market price of the Company’s common stock on the closing date, August 25, 2021.
In connection with the Stadco acquisition, the Company became party to an amended and restated lease agreement to rent buildings and property at the Stadco manufacturing location, and recorded a right-of-use asset and liability of approximately $6.7 million.
On June 16, 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.
7
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, Westminster Credit Holdings, LLC, or WCH, Stadco New Acquisition, LLC, or Acquisition Sub, Stadco and Wuxi Critical Mechanical Components Co., Ltd., or WCMC, a wholly foreign owned enterprise. WCMC was dissolved and deregistered in November 2021, and has had no customers or operations for over five years. TechPrecision, Ranor, WCH, WCMC (until November 2021), Acquisition Sub and Stadco are collectively referred to as the “Company”, “we”, “us” or “our”.
On August 25, 2021, pursuant to the stock purchase agreement among TechPrecision, Acquisition Sub, Stadco and certain affiliates of Stadco, TechPrecision completed its previously announced acquisition of Stadco. Stadco is a company in the business of manufacturing high-precision parts, assemblies and tooling for aerospace, defense, research and industrial customers. See Note 3 below for more information regarding the Stadco acquisition.
The Company manufactures large-scale metal fabricated and machined precision components and equipment. These products are used in a variety of markets including defense, 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.
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, WCH, WCMC (until its dissolution), Acquisition Sub and Stadco. Intercompany transactions and balances have been eliminated in consolidation. The accompanying condensed consolidated balance sheets as of December 31, 2021, the condensed consolidated statements of operations and comprehensive (loss) income and stockholders’ equity for the three and nine months ended December 31, 2021 and 2020, and the condensed consolidated statements of cash flows for the nine months ended December 31, 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 business combinations, 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.
Accounting for Goodwill – The Company allocates the purchase price of an acquired company, including, when applicable, the acquisition date fair value of contingent consideration, between tangible and intangible assets acquired and liabilities assumed from the acquired business based on their estimated fair values, with the residual of the purchase price recorded as goodwill.
Goodwill of a reporting unit is not amortized, but tested for impairment at least annually, or on an interim basis whenever circumstances indicate that the carrying value of these assets may not be recoverable. A goodwill impairment charge would reflect the amount by which the carrying amount of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill.
8
The Company has not formed a conclusion on the issue of tax deductibility for goodwill. We are evaluating certain tax election options under the Stadco stock purchase agreement and will make a determination as soon as practicable.
NOTE 3 – BUSINESS COMBINATION
On August 25, 2021, the closing date, the Company completed its previously announced acquisition of Stadco, pursuant to that certain stock purchase agreement, dated as of October 16, 2020, or the SPA, among TechPrecision, Acquisition Sub, Stadco Acquisition, LLC, or Holdco, and each stockholder of Holdco. Stadco is a company in the business of manufacturing high-precision parts, assemblies and tooling for aerospace, defense, and industrial customers.
Also on the closing date, the Company completed its previously announced acquisition of certain indebtedness obligations of Stadco, pursuant to that certain Amended and Restated Loan Purchase and Sale Agreement, dated as of April 23, 2021, with Sunflower Bank, N.A., as amended by Amendment to Amended and Restated Loan Purchase and Sale Agreement, dated as of June 28, 2021, together, the Loan Purchase Agreement. On August 25, 2021, WCH, as assignee of Acquisition Sub, paid $7.9 million in the aggregate to Sunflower Bank, N.A., under the terms of the Loan Purchase Agreement, to purchase the indebtedness.
Pursuant to the SPA, and upon the terms and subject to the conditions therein, the Company acquired all of the issued and outstanding capital stock of Stadco in exchange for the issuance of 666,666 shares of the Company’s common stock to Holdco. In connection with the acquisition of Stadco, the Company reached an agreement with the holders of certain other non-bank indebtedness of Stadco, under which each such lender agreed to forgive such indebtedness in exchange for an aggregate of 199,395 shares of the Company’s common stock. In addition, the Company reached an agreement with a certain other security holder who agreed to sell its Stadco securities to the Company in exchange for the issuance by the Company of 600,000 shares of the Company’s common stock and a warrant to purchase 100,000 shares of the Company’s common stock. The fair value of the 1,466,061 shares of common stock issued as aggregate consideration was $2.3 million based on the closing market price of the Company’s common stock on the August 25, 2021 closing date.
On August 25, 2021, the Company entered into a Securities Purchase Agreement with a limited number of institutional and other accredited investors, pursuant to which investors committed to subscribe for and purchase 3,202,727 shares of the Company’s common stock at a purchase price of $1.10 per share. Costs directly attributable to this offering of securities totaled $0.3 million.
The accounting for a business combination is dependent upon obtaining valuations and other information for certain assets and liabilities which have not yet been completed or obtained to a point where definitive estimates can be made. The process for estimating the fair values of identified intangible assets, certain tangible assets and assumed liabilities require the use of judgment to determine the appropriate assumptions. Until the Company finalizes estimates of the fair value of assets acquired and liabilities assumed substantially all of the purchase price allocation for Stadco is provisional. Additional purchase price adjustments will be recorded during the measurement period not to exceed one year beyond the acquisition date. These adjustments may have a material impact on the Company’s results of operations and financial position.
Included in the total consideration transferred is $113,890 related to a contingent provision in the agreements that could require payment based on the difference between the TechPrecision stock price and contract target stock price. The contingent provision allows the issuer, TechPrecision, to settle the contingency with stock or cash, or a combination of each. If after one year following the closing of the acquisition, the fair value of the consideration stock is less than the target stock price stated in each agreement, TechPrecision will issue to the holder additional shares of consideration stock or cash, or some combination of stock and cash. The target stock price stated in the agreements are guaranteed and, only the number of shares issued can vary, with the final measurement date and amount to be determined on the one-year anniversary date. Since the contract does not specify a fixed maximum number of shares to be issued on the anniversary date, should the company determine to satisfy the contingent consideration with shares, then a number of shares higher than the amount currently authorized by the company’s certificate of incorporation may be required to be issued. In any case, the maximum value of the contingent consideration will be $2,269,000, whether paid in shares of common stock or in cash, or both. The estimated liability associated with the contingent consideration had a zero balance at December 31, 2021.
9
The table below presents the provisional estimated fair value of assets acquired and liabilities assumed on the acquisition date based on the best information it has received to date in accordance with Accounting Standards Codification, or ASC, 805. Acquisition related costs totaled approximately $320,000 and are included under general and administrative expenses in our statement of operations.
The preliminary fair values are substantially complete with the exception of certain current assets and liabilities, property, plant and equipment, income taxes and goodwill. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period, but no later than one year from the date of the acquisition. The Company will reflect measurement period adjustments, if any, in the period in which the adjustments are recognized. In the third quarter of fiscal 2022, the Company made measurement period adjustments to reflect the facts and circumstances in existence at the acquisition date. These adjustments included a decrease to goodwill and accrued expenses of $243,670.
Supplemental Pro Forma Information
The pro forma results presented below were prepared as if the acquisition had been consummated on April 1, 2020. The pro forma results have been prepared for comparative purposes only and do not necessarily represent what the revenue or results of operations would have been had the acquisition been completed on April 1, 2020. In addition, these results are not intended to be a projection of future operating results and do not reflect synergies that might be achieved from the acquisition.
The pro forma results include adjustments for the estimated purchase accounting impact, including, but not limited to, depreciation and amortization associated with the acquired tangible and intangible assets, and an adjustment for interest expense related to the new long-term debt, the alignment of accounting policies, and the elimination of transactions between TechPrecision and Stadco. Other adjustments reflected in the pro forma results are as follows:
| ● | For the three and nine months ended December 31, 2020, we excluded $0.2 million and $1.2 million, respectively, from cost of goods sold, the net change in depreciation and amortization resulting from a reversal of amortization for an asset deemed to have zero fair value based on revaluation of the Stadco intangible assets upon TechPrecision Corporation’s acquisition of Stadco. This amount was partially offset by depreciation and amortization resulting from a valuation adjustment to Stadco’s property, plant and equipment of $7.1 million plus the recognition of the right-of-use asset for Stadco’s property lease in the amount of $6.6 million against the reversal of historical rent expense |
| ● | For the nine months ended December 31, 2021, we excluded $0.7 million of management fees due to then-preferred stockholders of Stadco. For the three and nine months ended December 31, 2020, we excluded $0.3 million and $1.0 million, respectively, of management fees due to then-preferred stockholders of Stadco |
10
| ● | For the nine months ended December 31, 2021, we excluded interest expense of $0.5 million, reflecting a reduction of Stadco’s bank debt and interest rates. For the three and nine months ended December 31, 2020, we excluded interest expense of $0.4 million and $0.9 million, respectively, reflecting a reduction of Stadco’s bank debt and interest rates. |
| ● | For the nine months ended December 31, 2021, we excluded non-recurring expense of $0.3 million related to consulting, legal, diligence and bank fees, and nominal costs incurred TechPrecision Corporation and related to the acquisition of Stadco. |
The following table discloses the actual results of Stadco since the August 25, 2021 acquisition which are included in the Company’s condensed consolidated financial statements. Also presented in the table below are pro forma results for the combined entities, assuming the acquisition date had occurred on April 1, 2020, for the following periods:
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.
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:
Net Sales by contract type |
| Over-time |
| Point-in-time |
| Totals | |||
Three months ended December 31, 2021 | $ | 6,378,592 | $ | 132,733 | $ | 6,511,325 | |||
Three months ended December 31, 2020 | $ | 3,141,416 | $ | 428,302 | $ | 3,569,718 | |||
Nine months ended December 31, 2021 | $ | 13,259,229 | $ | 1,461,735 | $ | 14,720,964 | |||
Nine months ended December 31, 2020 | $ | 9,251,284 | $ | 2,314,892 |
| $ | 11,566,176 | ||
As of December 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.
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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.
*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 nine months ended December 31, 2021, we recognized revenue of $0.2 million related to our contract liabilities at April 1, 2021. At the following dates, contract assets were:
Progress | |||||||||
Contract Assets |
| Unbilled |
| payments |
| Total | |||
December 31, 2021 | $ | 14,853,999 | $ | (4,619,646) | $ | 10,234,353 | |||
March 31, 2021 | $ | 11,392,948 | $ | (5,860,540) | $ | 5,532,408 | |||
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 income tax benefit for the three and nine months ended December 31, 2021 was $333,867 and $385,749. The Company’s effective tax rate for the three months ended December 31, 2021 was approximately 27%. The Company’s effective tax rate for the nine months ended December 31, 2021 was higher due to the nontaxable loan forgiveness item of $1.3 million disclosed in the condensed consolidated statement of operations.
The valuation allowance on deferred tax assets was approximately $1.8 million at December 31, 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 earnings per share, or EPS, is computed by dividing reported earnings available to stockholders by the weighted average number of 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:
Three Months ended | Three Months ended | Nine Months ended | Nine Months ended | |||||||||
Basic EPS |
| December 31, 2021 |
| December 31, 2020 |
| December 31, 2021 |
| December 31, 2020 | ||||
Net (loss) income | $ | (904,680) | $ | (48,172) | $ | 245,999 | $ | 106,358 | ||||
Weighted average shares |
| 34,286,580 |
| 29,498,662 |
| 31,716,353 |
| 29,430,206 | ||||
Net (loss) income per share | $ | (0.03) | $ | (0.00) | $ | 0.01 | $ | 0.00 | ||||
Diluted EPS |
|
|
|
| ||||||||
Net (loss) income | $ | (904,680) | $ | (48,172) | $ | 245,999 | $ | 106,358 | ||||
Dilutive effect of stock options |
| — |
| — |
| 1,678,770 |
| 1,591,178 | ||||
Weighted average shares |
| 34,286,580 |
| 29,498,662 |
| 33,395,123 |
| 31,021,384 | ||||
Net (loss) income per share | $ | (0.03) | $ | (0.00) | $ | 0.01 | $ | 0.00 | ||||
All of the restricted and common stock issued in September and October 2021 is included in the weighted average basic and diluted shares calculation. 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 December 31, 2021 and 2020, there were 2,820,000 and 2,814,000 of potential common stock equivalents, none of which were included in the EPS calculations above.
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 Long-Term Incentive Plan, or the 2006 Plan, and applies to awards granted after the 2016 Plan’s adoption by the Company’s stockholders. The 2016 Plan was amended on February 14, 2022 to add an additional type of award that the Company is permitted to grant to eligible participants.
The 2016 Plan authorizes the award of incentive and non-qualified stock options, restricted stock awards, restricted stock units, and performance awards and fully vested stock 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 shares (inclusive of awards issued under 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.
On June 16, 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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At December 31, 2021, there were 1,370,000 shares available for grant under the 2016 Plan. The following table summarizes information about options granted during the most recently completed periods:
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 third 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 December 31,2021. This amount changes based on the fair market value of the Company’s common stock.
At December 31,2021, 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 December 31,2021 is as follows:
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 vested and ceased to be subject to forfeiture on September 1, 2021. Each grantee was required to have been 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 was not permitted to sell, transfer, pledge, assign or otherwise encumber the shares of restricted stock and if the grantee’s service with the Company had terminated prior to the vesting date, subject to certain exceptions, the grantee’s restricted stock was to have been forfeited automatically.
On September 17, 2021, 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 $175,000 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.
Total recognized compensation cost related to the restricted stock awards for the three and nine months ended December 31, 2021 was $44,109 and $106,176, respectively. At December 31, 2021 there was $124,658 of unrecognized compensation cost related only to the September 17, 2021 stock award.
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Warrants
On August 25, 2021, we issued warrants to purchase 100,000 shares of our common stock in connection with the Stadco acquisition. The warrants vested in full on the issue date, have a three year term and exercise price of $1.43 per share. The fair value of the warrants was $46,256 and estimated using the Black-Scholes option-pricing model based on the closing stock prices at the grant date and the weighted average assumptions specific to the grant. Expected volatility of 46.7% was based on the historical volatility of our common stock. The risk-free interest rate of 0.4% was selected based upon yields of three-year U.S. Treasury bond.
Nonemployee Stock Based Payment
On October 5, 2021, the Company issued 20,000 shares of common stock to a third-party consultant as payment of a finder’s fee in connection with the acquisition of Stadco. The estimated fair value of the award is $35,000 and was measured on the date of grant based on the number of shares issued and the quoted market price of the Company’s common stock.
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 December 31, 2021, there were trade accounts receivable balances outstanding from four customers comprising 76% 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:
December 31, 2021 | March 31, 2021 |
| |||||||||
Customer |
| Amount |
| Percent |
| Amount |
| Percent |
| ||
A | $ | 809,448 | 33 | % | $ | * | * | % | |||
B | $ | 559,214 |
| 23 | % | $ | * |
| * | % | |
C | $ | * |
| * | % | $ | 399,692 |
| 66 | % | |
D | $ | * | * | % | $ | 193,368 | 32 | % | |||
* less than 10% of total
NOTE 9 - OTHER CURRENT ASSETS
| December 31, 2021 |
| March 31, 2021 | |||
Supplier advances | $ | 18,283 | $ | 17,010 | ||
Prepaid insurance |
| 322,896 |
| 312,669 | ||
Prepaid subscriptions |
| 50,260 |
| 25,967 | ||
Employee advances |
| 5,798 |
| 16,526 | ||
Deposits | 21,100 | — | ||||
Prepaid taxes | 43,866 | — | ||||
Other |
| 5,255 |
| 7,265 | ||
Total | $ | 467,458 | $ | 379,437 | ||
NOTE 10 - PROPERTY, PLANT AND EQUIPMENT, NET
| December 31, 2021 |
| March 31, 2021 | |||
Land | $ | 110,113 | $ | 110,113 | ||
Building and improvements |
| 3,289,901 |
| 3,249,577 | ||
Machinery equipment |
| 18,477,075 |
| 10,113,670 | ||
Furniture, fixtures, auto equipment |
| 983,115 |
| 627,571 | ||
Total property, plant and equipment |
| 22,860,204 |
| 14,100,931 | ||
Less: accumulated depreciation |
| (10,788,674) |
| (10,037,722) | ||
Total property, plant and equipment, net | $ | 12,071,530 | $ | 4,063,209 | ||
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NOTE 11 - ACCRUED EXPENSES
| December 31, 2021 |
| March 31, 2021 | |||
Accrued compensation | $ | 942,304 | $ | 496,320 | ||
Provision for claims settlement | — | 495,000 | ||||
Provision for contract losses |
| 392,016 |
| 164,164 | ||
Accrued professional fees |
| 300,561 |
| 213,213 | ||
Accrued project costs |
| 609,111 |
| 114,611 | ||
Other |
| 289,763 |
| 42,962 | ||
Total | $ | 2,533,755 | $ | 1,526,270 | ||
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 provision are recorded in cost of sales. Accrued project costs are estimates for certain project expenses during the reporting period.
NOTE 12 – DEBT
| December 31, 2021 |
| March 31, 2021 | |||
Stadco Term Loan at 3.79% interest, due August 2028 | $ | 3,833,013 | $ | — | ||
Ranor Term Loan at 5.21% interest, due March 2022 | 2,389,885 | 2,466,408 | ||||
Revolver loan | 1,978,221 | — | ||||
SBA PPP loan at 1% interest, due May 2022 |
| — |
| 1,317,100 | ||
Finance lease liability |
| — |
| 45,663 | ||
Total debt | $ | 8,201,119 | $ | 3,829,171 | ||
Less: debt issue costs unamortized | $ | 108,195 | $ | 12,270 | ||
Total debt, net | $ | 8,092,924 | $ | 3,816,901 | ||
Less: Current portion of long-term debt | $ | 4,882,456 | $ | 2,474,963 | ||
Total long-term debt, net | $ | 3,210,468 | $ | 1,341,938 | ||
Amended and Restated Berkshire Loan Agreement
On August 25, 2021, the Company entered into an amended and restated loan agreement with Berkshire Bank, or the Loan Agreement. Under the Loan Agreement, Berkshire Bank will continue to provide the Ranor Term Loan (as defined below) and the revolving line of credit, or the Revolver Loan. In addition Berkshire Bank provided the Stadco Term Loan (as defined below) in the original amount of $4,000,000. The proceeds of the original Ranor Term Loan of $2,850,000 were previously used to refinance existing mortgage debt of Ranor. The proceeds of the Revolver Loan are used for working capital and general corporate purposes of the Company. The proceeds of the Stadco Term Loan were to be used to support the acquisition of Stadco and refinance existing indebtedness of Stadco. For purposes of the discussion of the Loan Agreement, Ranor and Stadco are referred to together as the “Borrowers.”
Stadco Term Loan
On August 25, 2021, the Company borrowed $4,000,000 from Berkshire Bank, or the Stadco Term Loan. Interest on the Stadco Term Loan is due on unpaid balances beginning on August 25, 2021 at a fixed rate per annum equal to the 7 year Federal Home Loan Bank of Boston Classic Advance Rate plus 2.25%. Since September 25, 2021 and on the 25th day of each month thereafter, Stadco shall make monthly payments of principal and interest in the amount of $54,390 each, with all outstanding principal and accrued interest due and payable on August 25, 2028. Interest shall be calculated on the basis of actual days elapsed and a 360-day year.
The Company shall pay a late charge in the amount of 5% of each payment due under the Stadco Term Loan (other than the balloon payment due at maturity) which is more than ten days in arrears. In addition, from and after the date on which the Stadco Term Loan becomes, or at Berkshire Bank’s option, could become due and payable (whether accelerated or not), at maturity, upon default or otherwise, interest shall accrue and shall be immediately due and payable at the default rate equal to 5% per annum greater than the interest rate otherwise in effect, but in no event higher than the maximum interest rate permitted by law.
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Ranor Term Loan
A term loan was made to Ranor by Berkshire Bank in 2016 in the amount of $2,850,000, or the Ranor Term Loan. Payments began on January 20, 2017 and are 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 was due on December 20, 2021 under the Term Loan. On December 17, 2021, Ranor and certain affiliates of the Company entered into a first amendment to the amended and restated loan agreement and to extend the maturity date of the Ranor Term Loan to March 18, 2022, to provide additional time to finalize the terms for refinancing and allow for completion of Berkshire Bank’s due diligence.
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.
Revolver Loan
In accordance with the amended loan agreement, the maximum amount that can now be borrowed under the Revolver loan is $5,000,000. Advances under the Revolver Loan are subject to a borrowing base equal to the lesser of (a) $5,000,000 or (b) the sum of (i)80% of the net outstanding amount of Base Accounts, plus (ii) the lesser of (x) 25% of Eligible Raw Material Inventory, and (y) $250,000, plus (iii) 80% of the Appraised Value of the Eligible Equipment, as such terms are defined in the Loan Agreement.
The Company agrees to pay to Berkshire Bank, as consideration for Berkshire Bank’s agreement to make the Revolver Loan available, a nonrefundable Revolver Loan fee equal to 0.25% per annum (computed on the basis of a year of 360 days and actual days elapsed) on the difference between the amount of: (a) $5,000,000, and (b) the average daily outstanding balance of the Revolver Loan during the quarterly period then ended. All Revolver Loan fees are payable quarterly in arrears on the first day of each January, April, July and October and on the Revolver Maturity Date, or upon acceleration of the Revolver Loan, if earlier.
Under the promissory note for the Revolver Loan, the Company can elect to pay interest at an adjusted LIBOR-based rate or an Adjusted Prime Rate. 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 is December 20, 2022. This agreement contains customary LIBOR replacement provisions.
There was $1,978,221 outstanding under the Revolver Loan at December 31, 2021. Interest payments made under the Revolver Loan were $10,602 for the nine months ended December 31, 2021. Unused borrowing capacity at December 31, 2021 and March 31, 2021 was approximately $2.1 million and $2.7 million, respectively.
The Ranor Term Loan, the Stadco Term Loan and the Revolver Loan, or together, the Berkshire Loans, may be accelerated upon the occurrence of an event of default as defined in the Berkshire Loan Agreement.
Pursuant to the Berkshire Loan Agreement, the Company agrees to maintain a ratio of the Cash Flow (as defined below) of the Company to the Total Debt Service (as defined below) of the Company of not less than 1.20 to 1.00, measured quarterly on the last day of each fiscal quarter-annual period of the Company on a trailing twelve (12) month basis, commencing with the fiscal quarter ending as of December 31, 2021. Calculations will be based on the audited (year-end) and unaudited (quarterly) consolidated financial statements of the Company. Quarterly tests will be measured based on the Form 10-Q reports within ninety (90) days of the end of each quarter, and annual tests will be measured based on Form 10-K reports within one hundred twenty days (120) after the end of each fiscal annual period. Cash Flow means an amount, without duplication, equal to the sum of net income of the Company plus (i) interest expense, plus (ii) taxes, plus (iii) depreciation and amortization, plus (iv) stock-based compensation expense taken by the Company, plus (v) non-cash losses and charges and one-time or non-recurring expenses at Berkshire Bank’s discretion, less (vi) the amount of cash distributions, if any, made to stockholders or owners of the Company, less (vii) cash taxes paid by the Company, all as determined in accordance with GAAP. Total Debt Service shall mean an amount, without duplication, equal to the sum of (i) all amounts of cash interest paid on liabilities, obligations and reserves of the Company paid by the Company, (ii) all amounts paid by the Company in connection with current maturities of long-term debt and preferred dividends, and (iii) all payments on account of capitalized leases, all as determined in accordance with GAAP.
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The Company agrees to cause its Balance Sheet Leverage to be less than or equal 2.50 to 1.00. Compliance with the foregoing shall be tested quarterly, as of the last day of each fiscal quarter of the Company, commencing with the fiscal quarter ending September 30, 2021. Balance Sheet Leverage means, at any date of determination, the ratio of Borrowers’ (a) Total Liabilities, less Subordinated Debt, to (b) Net Worth, plus Subordinated Debt.
The Borrowers agree to maintain a Loan to Value Ratio of not greater than 0.75 to 1.00. Loan to Value Ratio means the ratio of (a) the sum of the outstanding balance of the Ranor Term Loan and the Stadco Term Loan, to (b) the fair market value of the Company’s owned real property at Westminster MA, as determined by an appraisal obtained from time to time by Berkshire Bank, but not more frequently than one time during each 365 day period (provided that Berkshire Bank may obtain an appraisal at any time after either the Ranor Term Loan or the Stadco Term Loan has been accelerated), which appraisals shall be at the expense of the Borrowers.
The Borrowers agree that their combined annual capital expenditures shall not exceed $1,500,000. Compliance shall be tested annually, commencing with the fiscal year ending March 31, 2022.
The Company was in compliance with all of the financial covenants at December 31, 2021 and March 31, 2021.
Unamortized debt issue costs at December 31, 2021 and March 31, 2021 were $108,195 and $26,272, respectively.
Collateral securing the above obligations comprises all personal and real property of the Company, 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 PPP 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.
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 PPP 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 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.
NOTE 13 – LEASES
After we settled certain default amounts, Stadco became party to an amended building and property operating lease and recorded a right of use asset and liability of $6.6 million. Monthly base rent for the property is $78,233 per month, with a 20% discount through November 30, 2022. The term of the lease will expire on June 30, 2030. The lease contains customary default provisions allowing the Landlord to terminate the lease if the lessee fails to remedy a breach of its obligations under the lease within the time period specified
18
in the lease, or upon certain events of bankruptcy or seizure or attachment of the lessee’s assets or interest in the lease. The lease also contains other customary provisions for real property leases of this type.
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. We leased the office month-to-month until December 31, 2021, and have not renewed the lease.
The following table lists our right-of-use assets and lease liabilities in our condensed consolidated balance sheet at:
Other supplemental information regarding our leases are contained in the following tables:
Weighted average lease term and discount rate at: |
| December 31, 2021 |
| December 31, 2020 | |
Lease term (years) – operating lease | 8.50 | — | |||
Lease term (years) – finance leases |
| 2.85 | 1.25 | ||
Lease rate – operating lease | 4.5 | % | — | ||
Lease rate – finance leases |
| 3.9 | % | 8.0 | % |
Supplemental cash flow information related to leases for the nine months ended: |
| December 31, 2021 |
| December 31, 2020 | ||
Cash used in operating activities | $ | 181,525 | $ | 2,878 | ||
Cash used in financing activities | $ | 493,015 | $ | 8,798 | ||
Maturities of lease liabilities at December 31, 2021 for the next five years and thereafter:
2022 |
| $ | 816,665 |
2023 | 965,843 | ||
2024 | 957,060 | ||
2025 | 951,171 | ||
2026 | 941,276 | ||
Thereafter | 3,224,985 | ||
Total lease payments | $ | 7,857,000 | |
Less: imputed interest | 1,290,482 | ||
Total | $ | 6,566,518 |
NOTE 14 - COMMITMENTS
Employment Agreements
We have employment agreements with each of our executive officers. Such agreements provide for minimum salary levels, adjusted annually, and incentive bonuses that are payable if specified company goals are attained. The aggregate commitment at December 31,
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2021 for future executive salaries and bonus was approximately $1.2 million. The aggregate commitment at December 30, 2021 for accrued payroll, vacation and holiday pay was approximately $0.8 million for the remainder of our employees.
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 $22,063 and $65,303 for the three and nine months ended December 31, 2021.
NOTE 15 – ACCOUNTING STANDARDS UPDATE
New Accounting Standards Recently Adopted
In December 2019, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or 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 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.
Issued Standards Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers. Generally, this new guidance will result in the acquirer recognizing contract assets and contract liabilities at the same amounts recorded by the acquiree. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within these fiscal years. The Company is currently evaluating the impact that this new guidance may have on our financial statements and disclosures.
In May 2021, the FASB issued ASU 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. The FASB issued this update to clarify and reduce diversity in issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The amendments that relate to the recognition and measurement of EPS for certain modifications or exchanges of freestanding equity-classified written call options affect entities that present EPS in accordance with the guidance in Topic 260, Earnings Per Share. The Company is currently evaluating the impact that this new guidance may have on our financial statements and disclosures.
NOTE 16 – SUBSEQUENT EVENT
On January 24, 2022, or the Grant Date, the board of directors of TechPrecision, in recognition of their special efforts in completing the previously disclosed acquisition of Stadco, granted (a) shares of restricted stock under the Company’s 2016 Equity Incentive Plan and (b) a cash award of $35,000, to each of Alexander Shen, the Company’s chief executive officer, and Thomas Sammons, the Company’s chief financial officer. The shares of restricted stock fully vest and cease to be subject to forfeiture on January 24, 2023, or the vesting date, one year following the Grant Date. Each grantee must be serving as an executive officer 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, subject to certain exceptions.
On February 14, 2022, the Company’s board of directors approved an amendment, or the Plan Amendment, to the 2016 Plan. The Plan Amendment, which became effective upon its signature by an executive officer, amends the 2016 Plan to permit the Company to grant shares of fully vested common stock as a stock bonus award to eligible participants. Prior to the Plan Amendment, the 2016 Plan only permitted the board of directors to grant stock options, restricted stock, restricted stock units and performance-based awards. The
20
committee designated to administer the 2016 Plan, or in the absence of such a committee, the full board of directors, will determine the number of shares, the restrictions, if any, and any other terms in connection with a stock bonus award. The recipient of a stock bonus award shall not have any rights as a stockholder of the Company with respect to the shares subject to such stock bonus award until the shares are actually issued thereunder. Stock bonus awards may be paid in the form of cash, whole shares of common stock or a combination thereof.
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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:
| ● | 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 Stadco acquisition; |
| ● | unexpected costs, charges or expenses resulting from the acquisition and integration of Stadco; and |
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| ● | 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 SEC. |
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 our Ranor and Stadco 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.
On August 25, 2021, the Company completed its previously announced acquisition of Stadco, a company in the business of manufacturing high-precision parts, assemblies and tooling for aerospace, defense, research and commercial customers. We believe that the Stadco 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 in the 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 ended December 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 ended December 31, 2020. For the nine months ended December 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 $0.1 million, for the nine months ended December 31, 2020. Our financial statements for the three and nine months ended December 31, 2021 include the results of the Stadco operation from August 26, 2021 through December 31, 2021.
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. 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 our Goodwill policy, there were no significant changes to our critical accounting policies during the nine months ended December 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 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.
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Results of Operations
Three Months Ended December 31, 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:
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 ended December 31, 2021, changes in net sales were also significantly affected by the addition of revenue from our Stadco subsidiary acquired in August 2021. Net sales were $6.5 million for the three months ended December 31, 2021, or 82% higher when compared to net sales for the three months ended December 31, 2020.
Our defense backlog remains strong as new orders for components continue to flow down from prime defense contractors in connection with the U.S. Navy submarine programs, and new customers from our recent Stadco business acquisition. For the three months ended December 31, 2021, net sales to our defense markets increased by $3.5 million or 120% when compared to the three months ended December 31, 2020. The primary reason for the increase were new defense sales recorded for the first time with new customers from our recent Stadco business acquisition which accounted for approximately 57% of our net sales to defense industry customers during the three months ended December 31, 2021. With our recent Stadco 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 months December 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 ended December 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 ended December 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 ended December 31, 2021 was $6.0 million, or 111% higher when compared to the three months ended December 31, 2020. Gross margin was 7.3% for the three months ended December 31, 2021 and 19.8% for the three months ended December 31, 2020. Gross profit was $0.5 million for the three months ended December 31, 2021, or 32% lower, when compared to the three months ended December 31, 2020, primarily the result of higher labor and overhead costs.
This is the first quarterly period that includes the operations of our Stadco 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
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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 ended December 31, 2021 increased by 127%, or $0.9 million. The increase was primarily due to the inclusion of Stadco operations for the entire quarterly period ($0.5 million) and an increase in outside advisory fees ($0.3 million) in connection with the Stadco 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) | $ | (2,477) |
| (18) | % | |||
Interest expense was higher for the three months ended December 31, 2021. The increase in interest expense for the three months ended December 31, 2021 was due primarily to $37,520 of interest expense under the new Stadco 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 December 31, 2021 increased due to higher debt issue costs incurred for new loans.
Income Taxes
For the three months ended December 31, 2021 we recorded a tax benefit of $333,867 compared with tax benefit of $13,369 for the three months ended December 31, 2020.
Net (Loss) Income
As a result of the foregoing, for the three months ended December 31, 2021, we recorded a net loss of $904,680 compared to a net loss of $48,172 for the three months ended December 31, 2020.
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Nine Months Ended December 31, 2021 and 2020
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 $14.7 million for the nine months ended December 31, 2021, or 27% higher when compared to net sales for the nine months ended December 31, 2020.
Our defense backlog remains strong as new orders for components continue to flow down from prime defense contractors in connection with the U.S. Navy submarine programs, and new customers from our recent Stadco business acquisition. For the nine months ended December 31, 2021, net sales in our defense markets increased by $4.6 million or 49% when compared to the nine months ended December 31, 2020. The primary reason for the increase were new defense sales recorded for the first time by our Stadco subsidiary since August 25, 2021 which accounted for approximately 34% of our net sales to defense industry customers during the nine months ended December 31, 2021. With our recent Stadco 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 ended December 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 ended December 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 ended December 31, 2020.
Remaining performance obligations reflect future revenue that will be recorded in subsequent periods as projects in progress are completed. At December 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 new Stadco operation on-line in the month of September.
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Our cost of sales for the nine months ended December 31, 2021 was $12.5 million, higher by 38% when compared to the nine months ended December 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 ended December 31, 2021 and 21.9% for the nine months ended December 31, 2020. Gross profit for the nine month periods ended December 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 ended December 31, 2021 increased by $1.3 million, or 60%. The increase was primarily due to the inclusion of Stadco operations since August 25, 2021 ($0.6 million) and an increase in outside advisory fees ($0.5 million) in connection with the Stadco 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 December 31, 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.
Interest expense was higher for the nine months ended December 31, 2021. The increase in interest expense was due primarily to new borrowings under the new Stadco 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 ended December 31, 2020 due to higher closing costs in connection with modifications to the Berkshire loans in 2020.
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 nine months ended December 31, 2021 we recorded a tax benefit of $385,749, compared to a tax provision of $60,573 for the nine months ended December 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 ended December 31, 2021, we recorded net income of $0.2 million compared to net income of $0.1 million for the nine months December 31, 2020.
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Liquidity and Capital Resources
At December 31, 2021, we had cash and cash equivalents of $0.6 million and working capital of $3.1 million, a decrease when compared to March 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 in December 2022 and will not be available to provide liquidity unless it is renewed.
On August 25, 2021, we completed the acquisition of Stadco, closed on a private placement financing and closed on a new loan with Berkshire 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 satisfy Stadco’s indebtedness to its shareholders and certain other debt holders and acquired all outstanding shares of Stadco.
In addition, we purchased Stadco’s loan from Sunflower Bank, for a total amount of $7.9 million in cash. Concurrent with the closing of the Stadco acquisition, we entered into an amended and restated loan agreement with Berkshire 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 at December 31, 2021. There were no borrowed amounts outstanding under the revolver loan at March 31, 2021. Unused borrowing capacity at December 31, 2021 was approximately $2.1 million. The maturity date of the revolver loan is December 20, 2022.
There is a balloon payment of approximately $2.4 million due in March 2022 under the Ranor 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.
In addition to the cash commitments required under our financing arrangements with Berkshire 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:
The following table summarizes the primary components of cash flows for the nine months ended:
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Operating activities
Apart from our loan facilities, our primary sources of cash are from accounts receivable collections, customer advance payments and project progress payments. Our customers make advance payments and progress payments under the terms of each manufacturing contract. Our cash flows can fluctuate significantly from period to period as we mark progress with customer projects and the composition of our receivables collections mix changes between advance payments and customer payments made after shipment of finished goods.
Cash used in operating activities for the nine months ended December 31, 2021 was $1.7 million. Cash outlays for the nine months ended December 31, 2021 includes a payment of $0.5 million to plaintiffs for a court approved final class action settlement, and $0.7 million of cash used to pay past due rent on the Stadco property and buildings.
Overall, the first nine months of fiscal 2022 was marked by favorable project performance progress and delivery schedules. However, throughput slowed on certain projects during the third quarter as fewer hours were available due to calendar year end holiday schedules. Customers have been invoiced for these projects and others started in December 2021, so we anticipate higher available cash balances after January 1, 2022.
We used $0.3 million of cash in operating activities during the first nine months of fiscal 2021, as accounts receivable and contract assets increased and contract liabilities decreased due to a changing production mix.
Investing activities
We anticipate that we will spend approximately $0.8 million in new factory machinery and equipment during the remainder of fiscal 2022. Net cash used in investing activities for purchases of property, plant and equipment in the nine months ended December 31, 2021 was $0.4 million. In addition, we purchased Stadco’s outstanding debt from Sunflower Bank, for $7.9 million in cash.
Financing activities
We sourced $3.5 million of cash by selling 3,202,727 shares of common stock at $1.10 per share via a private placement financing and $4.0 million in new debt with Berkshire bank. In addition we drew down $2.6 million under the revolver loan used to fund the acquisition and operating activities since August 25, 2021 and repaid $0.6 million in the third quarter of fiscal 2022.
We used $0.5 million of cash to make periodic lease payments and pay off certain lease and debt obligations. We also used $0.7 million of cash to pay private placement closing costs, debt issue costs, and repay debt principal.
All of the above activity resulted in a net decrease in cash of $1.6 million for the nine months ended December 31, 2021 compared with a net increase in cash of $0.3 million for the nine months ended December 31, 2020.
Small Business Administration PPP Loan
On May 8, 2020, the Company, through its wholly owned subsidiary Ranor, Inc., issued a promissory note evidencing an unsecured PPP loan in the amount of $1,317,100 made to Ranor under the CARES Act. The PPP loan to Ranor was made through Berkshire Bank.
Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP, with such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment of payroll costs, certain group health care benefits and insurance premiums, and any payments of mortgage interest, rent, and utilities.
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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 PPP loan. The funds credited to the PPP loan paid this loan off in full. Loan forgiveness is recorded as a gain under other income and expense in the condensed consolidated statement of operations.
EBITDA Non-GAAP Financial Measure
To complement our condensed consolidated statements of operations and comprehensive (loss) income and condensed consolidated statements of cash flows, we use EBITDA, a non-GAAP financial measure. Net (loss) income is the financial measure calculated and presented in accordance with U.S. GAAP that is most directly comparable to EBITDA. We believe EBITDA provides our board of directors, management and investors with a helpful measure for comparing our operating performance with the performance of other companies that have different financing and capital structures or tax rates. We also believe that EBITDA is a measure frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry, and is a measure contained in our debt covenants. However, while we consider EBITDA to be an important measure of operating performance, EBITDA and other non-GAAP financial measures have limitations, and investors should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.
We define EBITDA as net (loss) income plus interest, income taxes, depreciation and amortization. The following table provides a reconciliation of EBITDA to net (loss) income, the most directly comparable GAAP measure reported in our condensed consolidated financial statements for the following periods:
(1) Includes amortization of debt issue costs.
Item 3.Quantitative and Qualitative Disclosure About Market Risk.
As a smaller reporting company, we have elected not to provide the information required by this Item.
Item 4.Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are controls and procedures that are designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and includes controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, an evaluation was carried out, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2021, our disclosure controls and procedures were effective at a reasonable assurance level.
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Inherent Limitations over Internal Controls
The Company’s internal control over financial reporting is designed under the supervision of our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods is subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
For the quarter ended December 31, 2021, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting. The Company continues to evaluate Stadco’s internal controls over financial reporting and integrating such with its own internal controls over financial reporting.
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PART II. Other Information.
Item 6.Exhibits.
Exhibit Index
Exhibit No. |
| Description |
10.1 | ||
31.1 |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 |
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 |
| |
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH | XBRL Taxonomy Extension Schema Document. | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |
104 | Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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Exhibit 31.1
CERTIFICATION
I, Alexander Shen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TechPrecision Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and,
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: February 17, 2022 | /s/ Alexander Shen |
| Alexander Shen |
| Chief Executive Officer |
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
I,Thomas Sammons, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TechPrecision Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and,
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: February 17, 2022 | /s/ Thomas Sammons |
| Thomas Sammons |
| Chief Financial Officer |
| (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report on Form 10-Q of TechPrecision Corporation (the “Company”) for the quarter ended December 31, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Alexander Shen, the Chief Executive Officer of the Company, and I, Thomas Sammons, the Chief Financial Officer of the Company, do hereby certify pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: February 17, 2022 | /s/ Alexander Shen |
| Alexander Shen |
| Chief Executive Officer |
| (Principal Executive Officer) |
|
|
Dated: February 17, 2022 | /s/ Thomas Sammons |
| Thomas Sammons |
| Chief Financial Officer (Principal Financial Officer) |