TECHPRECISION CORP - Quarter Report: 2008 December (Form 10-Q)

 

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Table of Contents

TECHPRECISION CORPORATION

 

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PART I		FINANCIAL INFORMATION
Item 1.		Financial Statements		1
		Consolidated Balance Sheets at December 31, 2008 (unaudited) and March 31, 2008		1
		Consolidated Statements of Income for the Three and Nine Months Ended December 31, 2008 and 2007 (unaudited)		2
		Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2008 and 2007 (unaudited)		3 - 4
		Notes to Consolidated Financial Statements		5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.		16
Item 4.		Controls and Procedures		29
PART II		OTHER INFORMATION
Item 6.		Exhibits		29
SIGNATURES				30

 

 

 

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TECHPRECISION CORPORATION
CONSOLIDATED BALANCE SHEET
		December 31,				March 31,
		2008 (unaudited)				2008 (audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	5,930,042			$	2,852,676
Accounts receivable, less allowance for doubtful accounts of $25,000			8,026,277				4,509,336
Costs incurred on uncompleted contracts, in excess of progress billings			3,566,624				4,298,683
Inventories- raw materials			347,279				195,506
Deferred Income taxes			24,587				-
Prepaid expenses			1,546,527				1,039,117
Total current assets			19,441,336				12,895,318
Property, plant and equipment, net			2,592,095				2,810,981
Deposit on fixed assets			854,096				240,000
Deferred  loan cost, net			109,354				121,692
Total Assets		$	22,996,881			$	16,067,991
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	1,243,289			$	990,533
Accrued expenses			2,083,881				1,480,507
Progress billings in excess of cost of uncompleted contracts			4,861,162				3,418,898
Current maturity of long-term debt			612,991				613,832
Total current liabilities			8,801,323				6,503,770
Notes payable- noncurrent			4,945,656				5,404,981
Total liabilities			13,746,979				11,908,751
STOCKHOLDERS’ EQUITY
Preferred stock- par value $.0001 per share, 10,000,000 shares authorized,
of which 9,000,000 are designated as Series A Preferred Stock,
with 6,295,508 shares issued and outstanding at December 31, 2008 and 7,018,064 at March 31, 2008			2,287,508				2,542,643
Common stock -par value $.0001 per share, authorized — 90,000,000 shares,
issued and outstanding —  13,907,513 shares at December 31, 2008 and 12,572,995 shares at March 31, 2008			1,393				1,259
Paid in capital			2,909,530				2,624,892
Retained earnings (accumulated deficit)			4,051,471				(1,009,554	)
Total stockholders’ equity			9,249,902				4,159,240
Total liabilities and shareholders’ equity		$	22,996,881			$	16,067,991

The accompanying notes are an integral part of the financial statements.

 

 

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TECHPRECISION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
		Three months ended								Nine months ended
		December 31,								December 31,
		2008				2007				2008				2007
Net sales		$	8,554,978			$	9,609,926			$	33,814,122			$	22,533,872
Cost of sales			5,932,505				7,029,905				22,798,518				16,779,229
Gross profit			2,622,473				2,580,021				11,015,604				5,754,643
Operating expenses:
Salaries and related expenses			330,701				293,752				1,087,831				885,536
Professional fees			63,847				73,737				184,316				303,105
Selling, general and administrative			144,825				134,812				433,959				285,601
Total operating expenses			539,373				502,301				1,706,106				1,474,242
Income from operations			2,083,100				2,077,720				9,309,498				4,280,401
Other income (expenses)
Interest expense			(111,052	)			(124,356	)			(344,923	)			(390,017	)
Interest income			-				11				-				(12,770	)
Finance costs			(4,257	)			(7,591	)			(12,770	)			477
Total other income (expense)			(115,309	)			(131,936	)			(357,693	)			(402,310	)
Income before income taxes			1,967,791				1,945,784				8,951,805				3,878,091
Provision for income taxes			(954,562	)			(568,754	)			(3,890,780	)			(1,214,988	)
Net income		$	1,013,229			$	1,377,030			$	5,061,025			$	2,663,103
Net income per share of common stock (basic)		$	0.07			$	0.12			$	0.37			$	0.26
Net income per share (fully diluted)		$	0.04			$	0.05			$	0.19			$	0.10
Weighted average number of shares outstanding (basic)			13,907,094				11,139,305				13,569,513				10,415,546
Weighted average number of shares outstanding (fully diluted)			24,418,115				28,623,308				26,335,421				27,899,549

 

The accompanying notes are an integral part of the financial statements.

 

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TECHPRECISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR NINE MONTHS ENDED DECEMBER 31, (unaudited)
		2008				2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	5,061,025			$	2,663,103
Non cash items included in net income:
Depreciation and amortization			415,127				366,021
Shares issued for services			-				731
Increase in deferred tax asset			(24,587	)			-
Changes in operating assets and liabilities:
Accounts receivable			(3,516,941	)			(2,429,603	)
Inventory			(151,773	)			(4,805	)
Costs incurred on uncompleted contracts			(1,543,141	)			(4,317,223	)
Prepaid expenses			(507,410	)			(679,845	)
Accounts payable and accrued expenses			856,128				1,589,241
Customer advances			3,717,463				3,568,498
Net cash provided by operating activities			4,305,891				756,118
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of property, plant and equipment			(183,901	)			(344,810	)
Deposits on equipment			(614,096	)			(346,316	)
Net cash used in investing activities			(797,997	)			(691,126	)
CASH FLOWS FROM FINANCING ACTIVITIES
Distribution of WM Realty equity			(140,422	)			(64,625	)
Exercise of warrants			170,060				658,436
Payment of notes			(460,166	)			(458,829	)
Loan from member of WM Realty			-				(60,000	)
Net cash provided by (used in) financing activities			(430,528	)			74,982
Net increase in cash and cash equivalents			3,077,366				139,974
CASH AND CASH EQUIVALENTS, beginning of period			2,852,676				1,446,998
CASH AND CASH EQUIVALENTS, end of period		$	5,930,042			$	1,586,972

The accompanying notes are an integral part of the financial statements.

 

 

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TECHPRECISION CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR NINE MONTHS ENDED DECEMBER 31,

(Continued)

	Years ended December 31,
	2008				2007
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid during the nine months ended December 31, 2008 for:
Interest expense		$	344,310			$	390,017
Income taxes		$	3,093,195			$	250,000

SUPPLEMENTAL INFORMATION - NONCASH TRANSACTIONS:

Nine months ended December 31, 2008

1.

During the nine months ended December 31, 2008, the Company issued 944,518 shares of common stock upon conversion of 722,556 shares of series A convertible preferred stock, based on a conversion ratio of 1.3072 shares of common stock for each share of series A preferred stock. The conversion price of each share of common stock was computed at $0.2180.

2.	During the nine months ended December 31, 2008, the Company issued 390,000 shares of common stock upon exercise of warrants having an exercise price of $.43605 per share.

 

The accompanying notes are an integral part of the financial statements.

 

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TECHPRECISION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1. DESCRIPTION OF BUSINESS

Techprecision Corporation (“Techprecision”, the “Company”) 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. (“Ranor”), a Delaware corporation. Techprecision and Ranor are collectively referred to as the “Company.”

The Company manufactures metal fabricated and machined precision components and equipment. These products are used in a variety of markets including the alternative energy, medical, nuclear, defense, industrial, and aerospace industries.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the nine month period ended December 31, 2008 are not necessarily indicative of the results that may be expected for the year ended March 31, 2009.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on form 10-KSB for the year ended March 31, 2008.

Consolidation

 

On February 24, 2006, Techprecision acquired all stock of Ranor in a transaction which is accounted for as a recapitalization (reverse acquisition), with Ranor being treated as the acquiring company for accounting purposes.

The accompanying consolidated financial statements include the accounts of the Company as well as a variable interest entity.  Intercompany transactions and balances have been eliminated in consolidation.

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Variable Interest Entity

 

The Company has consolidated WM Realty Management LLC (“WM Realty”), a variable interest entity that entered into a sale and leaseback contract with the Company in 2006, to conform to FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). The Company has also adopted the revision to FIN 46, FIN 46R, which clarified certain provisions of the original interpretation and exempted certain entities from its requirements.

Segment Information

 

In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (SFAS 131), and based on the nature of the Company’s products, technology, manufacturing processes, customers and regulatory environment, the Company operates in one industry segment – metal fabrication and precision machining.  All of the Company’s operations, assets and customers are located in the United States.

Use of Estimates in the Preparation of Financial Statements

 

In preparing financial statements in conformity with generally accepted accounting principles, 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 financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates.

New Accounting Pronouncements

 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (“SFAS 141(R)”). SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree and recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase. SFAS No. 141(R) also sets forth the disclosures required to be made in the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008. The effects of the adoption of this standard in 2009 will be prospective, commencing with the fiscal year ending March 31, 2010.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards that require that the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and to the non-controlling interest be clearly identified and presented on the face of the consolidated statement of income; and changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. SFAS No. 160 also requires that any retained non-controlling equity investment in the former subsidiary be initially measured at fair value when a subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure requirements to identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 160 does not have a material effect on the Company’s consolidated financial statements.

 

 

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In March 2008, the FASB issued Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). SFAS 161 requires enhanced disclosures about an entity's derivative and hedging activities and is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We do not expect the adoption of SFAS 161 to have a material effect on our consolidated financial statements.

In April 2008, the FASB issued FSP FAS 142-3, “Determination of Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS 142, “Goodwill and Other Intangible Assets.” FSP FAS 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. Earlier adoption is not permitted. We do not expect the adoption of this FSP to have a material effect on our consolidated financial statements.

In May 2008, the FASB issued Staff Position No. APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" (the "FSP"), which clarifies the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. The FSP requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer's nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. The FSP requires bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense in our consolidated statement of operations. The FSP requires retrospective application to the terms of instruments as they existed for all periods presented. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We do not expect the adoption of this FSP to have a material effect on our consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States (the GAAP hierarchy). The Company believes that this Statement will not have any impact on the Company’s consolidated financial statements.

 

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In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of this Statement is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of Statement 60. Accordingly, this Statement does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). This Statement also does not apply to financial guarantee insurance contracts that are derivative instruments included within the scope of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The Company believes that this Statement will not have any impact on the Company’s consolidated financial statements.

In June 2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF No. 07-5”). This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of Statement of Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF No.07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. Management is currently evaluating the impact of adoption of EITF No. 07-5 on the Company’s consolidated financial statements.

In June 2008, FASB issued EITF Issue No. 08-4, “Transition Guidance for Conforming Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No.08-4 is to provide transition guidance for conforming changes made to EITF No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Issue is effective for financial statements issued for fiscal years ending after December 15, 2008. Early application is permitted. Management is currently evaluating the impact of adoption of EITF No. 08-45, on the Company’s consolidated financial statements.

NOTE 3. COSTS INCURRED ON UNCOMPLETED CONTRACTS

The Company recognizes revenues based upon the units-of-delivery method. The advance billing and deposits include down payments for acquisition of materials and progress payments on contracts. The agreements with the buyers of the Company’s products allow the Company to offset the progress payments against the costs incurred.  The following table sets forth the reconciliation between costs incurred on uncompleted contracts and billings on uncompleted contracts at December 31, 2008:

 

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		December 31, 2008
Cost incurred on uncompleted contracts, beginning balance		$	10,633,862
Total cost incurred on contracts during the period			24,262,284
Less cost of sales on completed contracts, during the period			(22,719,143	)
Cost incurred on uncompleted contracts, ending balance		$	12,177,003
Billings on uncompleted contracts, beginning balance		$	6,335,179
Plus: Total billings incurred on contracts in progress			36,089,322
Less: Completed contracts recognized as revenues, during the period			(33,814,122	)
Billings on uncompleted contracts, ending balance		$	8,610,379
Cost incurred on uncompleted contracts, ending balance		$	12,177,003
Billings on uncompleted contracts, net of deferred revenue			8,610,379
Costs incurred on uncompleted contracts, in excess of progress billings		$	3,566,624

As of December 31, 2008, the Company had progress billings in excess of cost of uncompleted contracts (i.e. customer prepayments and deferred revenues) totaling $ 4,861,162.

NOTE 4. PREPAID EXPENSES

 

As of December 31, 2008 and March 31, 2008, the prepaid expenses included the following:

		December 31, 2008				March 31,  2008
Prepayments on materials		$	1,414,428			$	882,739
Insurance			98,868				145,338
Equipment maintenance			12,825				6,602
Miscellaneous			16,345				-
Real estate taxes			4,061				4,438
Total		$	1,546,527			$	1,039,117

 

The increase in prepayments on materials reflects cash payments to vendors for steel to be used in current contracts.

NOTE 5. LONG-TERM DEBT

The following debt obligations, outstanding on December 31, 2008 and March 31, 2008:

 

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		December 31, 2008				March 31, 2008
1. Long-term debt issued on February 24, 2006:
Sovereign Bank-Secured Term note payable- 72 month 9% variable term note with quarterly principal payments of $142,857 plus interest. Final payment due on March 1, 2013		$	2,428,571			$	2,857,142
2. Long-term mortgage loan issued on October 4, 2006:
Amalgamated Bank mortgage loan to WM Realty- 10 years, annual interest rate 6.75%, monthly interest and principal payment $20,955. The amortization is based on a 30- year term. WM Realty Management has the right to prepay the mortgage note upon payment of a prepayment premium of 5% of the amount prepaid if the prepayment is made during the first two years, and declining to 1% of the amount prepaid if the prepayment is made during the ninth or tenth year.			3,127,348				3,154,171
3. Automobile Loan:
Ford Motor Credit Company-Note payable secured by a vehicle - payable in monthly installments of $552 including interest of 4.9%, commencing July 20, 2003 through June 20, 2009			2,728				7,500
Total long-term debt			5,558,647				6,018,813
Principal payments due within one year			612,991				613,832
Principal payments due after one year		$	4,945,656			$	5,404,981

On February 24, 2006, Ranor entered into a loan and security agreement with Sovereign Bank.  Pursuant to the agreement, the bank has granted Ranor a term loan of $4,000,000 (“Term Note”) and extended Ranor a line of credit of $1,000,000, with an initial interest rate of 9%. Ranor and the bank entered into amendments which (i) reduced the interest rate from prime plus 1½% to prime plus 1% and increased the revolving credit line to $2,000,000 (“Revolving Note”) and (ii) provided Ranor with a capital expenditures facility of $3,000,000. Under this capital expenditures facility, Ranor is able to borrow up to $3,000,000 until November 30, 2009. The Company pays interest only on borrowings under the capital expenditures line until November 30, 2009, at which time the principal balance is amortized over five years, commencing December 31, 2009.  The interest on borrowings under the capital expenditure line is either equal to the prime plus ½% or the LIBOR rate plus 3%, as the Company may elect.  Any unpaid balance on the capital expenditures facility is to be paid on November 30, 2014.  As of December 31, 2008 and March 31, 2008, there were no borrowings outstanding under either the revolving line or the capital expenditure line.

 

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The Term Note is subject to covenants that include the following: the loan collateral comprises all personal property of Ranor, including cash, accounts receivable, inventories, equipment, financial and intangible assets owned when the loan is contracted or acquired thereafter; the amount of loan outstanding at all times is limited to a borrowing base amount of the Ranor’s qualified accounts receivable and inventory; there are prepayment penalties of 3%, 2% and 1% of the outstanding principal, in the first, second and third years following the issuance date, respectively. There are no prepayment penalties thereafter.  Since the Term Note was issued in February 2006, the prepayment penalty is currently 1% and will continue at that rate until February 24, 2009, at which time there will no longer be a prepayment penalty.  Ranor is prohibited from issuing any additional equity interest (except to Techprecision), or redeem, retire, purchase or otherwise acquire for value any equity interests; Ranor pays an unused credit line fee of 0.25% of the average unused credit line amount in previous month; the earnings available to cover fixed charges are required not to be less than 120% of fixed charges for the rolling four quarters, tested at the end of each fiscal quarter; and interest coverage ratio is required to be not less than 2:1 at the end of each fiscal quarter. Ranor’s obligations under the notes to the bank are guaranteed by Techprecision.

In connection with the Amalgamated Bank mortgage financing of the real estate owned by WM Realty Management LLC, Mr. Andrew Levy, the principal equity owner and manager of WM Realty and a major stockholder of Techprecision, executed a limited guarantee. Pursuant to the limited guaranty, Mr. Levy guaranteed the lender the payment of any loss resulting from WM realty’s fraud or misrepresentation in connection with the loan documents, misapplication of rent and insurance proceeds, failure to pay taxes and other defaults resulting from his or WM Realty Management’s misconduct.

As of December 31, 2008, the maturities of long-term debt were as follows:

Year ending December 31,

2009		$	612,991
2010			613,006
2011			615,943
2012			619,087
Due after 2012			3,097,620
Total		$	5,558,647

 

NOTE 6. CAPITAL STOCK

The Company had 13,907,513 shares of common stock outstanding at December 31, 2008 and 12,572,995 shares of common stock outstanding at March 31, 2008.

Series A Convertible Preferred Stock and Common Stock Purchase Warrants

In February 2006, the Company sold to an investor, for $2,200,000, (a) 7,719,250 shares of series A convertible preferred stock and (b) warrants to purchase 11,220,000 shares of common stock.

The Company had 6,295,508 and 7,018,064 shares of series A preferred stock outstanding at December 31, 2008 and March 31, 2008.  Each share of preferred stock is convertible into 1.3072 shares of common stock, subject to adjustment.  During the nine months ended December 31, 2008, 722,556 shares of series A preferred stock were converted into 944,518 shares of common stock.

 

 

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The warrants are exercisable, in part or full, at any time from February 24, 2006 until February 24, 2011.

If, prior to February 24, 2009, the Company issues common stock at a price, or options, warrants or other convertible securities with a conversion or exercise price less than the conversion price of the Series A Preferred Stock or the applicable exercise prices of the warrants, with certain specified exceptions, the conversion price of the Series A Preferred Stock and the exercise price of the warrants is reduced to reflect an exercise price equal to the lower price.  This adjustment does not affect the number of shares of common stock issuable upon exercise of the warrants.

During the nine months ended December 31, 2008, the Company issued 390,000 shares of common stock upon exercise of warrants having an exercise price of $.43605 per share.  At December 31, 2008, there were outstanding warrants to purchase 9,320,000 shares of common stock.

Stock options

During the nine months ended December 31, 2008, no stock options were granted and no stock options were exercised.  As of December 31, 2008 and March 31, 2008, stock options to purchase 484,159 shares of common stock were outstanding.

NOTE 7. EARNINGS PER SHARE OF COMMON STOCK

Basic net income per share of common stock is computed by dividing net income by the weighted average number of shares outstanding during the year. Diluted net income per share of common stock is computed on the basis of the weighted-average number of common shares outstanding plus the effect of convertible preferred stock, preferred shareholders and other warrants and share-based compensation using the treasury stock method.

 

 

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		Three months ended								Nine months ended
		December 31,								December 31,
		2008				2007				2008				2007
Net income		$	1,013,229			$	1,377,030			$	5,061,025			$	2,663,103
Weighted average number of shares outstanding (basic)			13,907,094				11,139,305				13,569,513				10,415,546
Effect of dilutive stock options, warrants and preferred stock			10,511,021				17,415,159				12,765,907				17,484,003
Weighted average number of shares outstanding (fully diluted)			24,418,115				28,554,464				26,335,421				27,899,549
Net income per share of common stock (basic)		$	0.07			$	0.12			$	0.37			$	0.26
Net income per share (fully diluted)		$	0.04			$	0.05			$	0.19			$	0.10

NOTE 8. INCOME TAXES

The Company uses the asset and liability method of financial accounting and reporting for income taxes required by statement of Financial Accounting Standards No. 109 (“FAS 109”), “Accounting for Income Taxes.” Under FAS 109, deferred income taxes reflect the tax impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes. Temporary differences giving rise to deferred income taxes consist primarily of the reporting of losses on uncompleted contracts, the excess of depreciation for tax purposes over the amount for financial reporting purposes, and accrued expenses accounted for differently for financial reporting and tax purposes and net operating loss carry forwards.

We estimate whether recoverability of our deferred tax assets is “more likely than not” based on forecasts of taxable income in the related tax jurisdictions.  In this estimate, we use historical results, projected future operating results based upon approved business plans, eligible carry forward periods, tax planning opportunities and other relevant considerations.  We review the likelihood that we will be able to realize the benefit of our deferred tax assets on a quarterly basis or whenever events indicate that a review is required.

We reviewed the likelihood that we would be able to realize the benefit of our U.S. deferred tax assets as of December 31, 2008, based on the revised near-term projected future operating results.  We concluded that it is “more likely than not” that we will realize our short term net deferred tax assets and thus recorded an income tax benefit in the nine months ended December 31, 2008 of $24,587 to establish a provision for these assets.

If, in the future, we do not generate taxable income in the U.S. on a sustained basis, our current estimate of the recoverability of our deferred tax assets could change and result in the increase of the valuation allowance.

 

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Income tax expense was $3,890,780 in the nine months ended December 31, 2008 as compared with $1,214,988 in the nine months ended December 31, 2007.  The Company’s estimated effective income tax rate was 43.4% in the nine months ended December 31, 2008 as compared with 31.3% in the nine months ended December 31, 2007.     The effective tax rate in the nine months ended December 31, 2008 includes the recognition of a net deferred tax asset of $24,587.  This deferred tax asset reflects the impact of recording an income tax benefit for the current portion of net operating loss carry forwards subject to Internal Revenue Code Section 382 and related state statutory limitations, and an income tax benefit related to accrued compensation benefits, and the current portion of deferred tax liability arising from timing differences in depreciation.

NOTE 9.  CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

The Company maintains bank account balances, which, at times, may exceed insured limits. The Company has not experienced any losses with these accounts and believes that it is not exposed to any significant credit risk on cash.

The Company has been dependent in each year on a small number of customers who generate a significant portion of our business, and these customers change from year to year. To the extent that the Company is unable to generate orders from new customers, it may have difficulty operating profitably. 

The following table sets forth information as to sales from those customers that accounted for more than 10% of our revenue in the nine months ended December 31, 2008 and 2007:

 

		December 31								December 31
		2008								2007
Customer		Dollars				Percent				Dollars				Percent
Customer with highest sales		$	20,821,102				62%				10,140,043				45%
Customer with next highest sales			3,879,514				11%				4,324,183				19%

 

 

Critical Accounting Policies

The preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States requires our management to make assumptions, estimates and judgments that effect the amounts reported in the financial statements, including all notes thereto, and related disclosures of commitments and contingencies, if any. We rely on historical experience and other assumptions we believe to be reasonable in making our estimates. Actual financial results of the operations could differ materially from such estimates. There have been no significant changes in the assumptions, estimates and judgments used in the preparation of our financial statements for the quarter ended December 31, 2008 from the assumptions, estimates and judgments used in the preparation of our audited financial statements, for the year ended March 31, 2008.

Revenue Recognition and Costs Incurred

We derive revenues from (i) the fabrication of large metal components for our customers; (ii) the precision machining of such large metal components, including incidental engineering services; and (iii) the installation of such components at the customers’ locations when the scope of the project requires such installations.

Sales and cost of sales are recognized on the units of delivery method. This method recognizes as revenue the contract price of units of the product delivered during each period and the costs allocable to the delivered units as the cost of earned revenue. When the sales agreements provide for separate billing of engineering services, the revenues for those services are recognized when the services are completed. Costs allocable to undelivered units are reported in the balance sheet as costs incurred on uncompleted contracts. Amounts in excess of agreed upon contract price for customer directed changes, constructive changes, customer delays or other causes of additional contract costs are recognized in contract value if it is probable that a claim for such amounts will result in additional revenue and the amounts can be reasonably estimated. Revisions in cost and profit estimates are reflected in the period in which the facts requiring the revision become known and are estimable. The unit of delivery method requires the existence of a contract to provide the persuasive evidence of an arrangement and determinable seller’s price, delivery of the product and reasonable collection prospects. The Company receives written purchase orders from the customers that specify contract prices and delivery terms. The Company recognizes revenues only when the collection prospects are reasonable.

Adjustments to cost estimates are made periodically, and losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined and are reflected as reductions of the carrying value of the costs incurred on uncompleted contracts. Costs incurred on uncompleted contracts consist of labor, overhead, and materials. Work in process is stated at the lower of cost or market and reflects accrued losses, if required, on uncompleted contracts.

 

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Variable Interest Entity

We have consolidated WM Realty Management, a variable interest entity from which we lease our real estate, to conform to FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). We have also adopted the revision to FIN 46, FIN 46 (R), which clarified certain provisions of the original interpretation and exempted certain entities from its requirements.  

Income Taxes

We provide for federal and state income taxes currently payable, as well as those deferred because of temporary differences between reporting income and expenses for financial statement purposes versus tax purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recoverable.  The effect of the change in the tax rates is recognized as income or expense in the period of the change. A valuation allowance is established, when necessary, to reduce deferred income taxes to the amount that is more likely than not to be realized.  As a result of the change in ownership resulting from the acquisition of Ranor in February 2006, our annual usage of the tax benefit of the tax loss-carry forward pursuant to Section 382 of the Internal Revenue Code and the treasury regulations is limited to approximately $88,662.

New Accounting Pronouncements

See Note 2 of Notes to Consolidated Financial Statements for information relating to new accounting pronouncements.

 

Results of Operations (amounts in thousands, except per share amounts)

Three months Ended December, 2008 and 2007

The following table sets forth information from our statements of operations for the quarters ended December 31, 2008 and 2007, in dollars and as a percentage of sales:

 

 

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																		Change from Quarter
		Quarter Ended December 31																Ended December 31, 2007
		2008								2007								to December 31, 2008
		Amount				Percent				Amount				Percent				Amount				Percent
Net sales			8,555				100.0	%			9,610				100.0	%			(1,055	)			(11.0	)%
Cost of sales			5,933				69.3	%			7,030				73.2	%			(1,097	)			(15.6	)%
Gross profit			2,622				30.7	%			2,580				26.8	%			42				1.6	%
Operating expenses:
Salaries and related expenses			331				3.9	%			294				3.0	%			37				12.6	%
Professional fees			63				0.7	%			74				0.8	%			(11	)			(14.9	)%
Selling, general and administrative			145				1.7	%			135				1.4	%			10				7.4	%
Total operating expenses			539				6.3	%			503				5.2	%			36				7.2	%
Income from operations			2,083				24.4	%			2,077				21.6	%			6				0.3	%
Other income (expenses)
Interest expense			(111	)			(1.3	)%			(124	)			(1.3	)%			13				(10.5	)%
Finance costs			(4	)			0.0	%			(8	)			(0.1	)%			4				(50.0	)%
Total other income (expense)			(115	)			(1.3	)%			(132	)			(1.4	)%			17				(12.9	)%
Income before income taxes			1,968				23.0	%			1,945				20.2	%			23				1.2	%
Provision for income taxes			(955	)			(11.2	)%			(568	)			(5.9	)%			(387	)			68.1	%
Net income			1,013				11.8	%			1,377				14.3	%			(364	)			(26.4	)%

Sales decreased by $1,055, or 11%, from $9,610 for the quarter ended December 31, 2007 (the “December 2007 Quarter”) to $8,555 for the quarter ended December 31, 2008 (the “December 2008 Quarter”).  The decrease in sales was primarily the result of capital goods market uncertainty due to economic recession.

As a result of decrease in sales, our cost of sales for the December 2008 Quarter decreased by $1,097 to $5,933, a decrease of 15.6%, from $7,030 during the December 2007 Quarter. The greater decrease in cost of sales as compared to sales revenues reflected the sale of scrap and the efficiencies gained on production work. Sale of scrap metal was $118 for the December 2008 Quarter, as compared to $73 for the December 2007 Quarter.  Since the carrying value of the scrap metal was nominal, substantially all of the revenue from the sale of scrap metal is reflected in gross profit. As a consequence, our gross margin increased from 26.8% to 30.7%.

Our payroll and related costs were $331 for the December 2008 Quarter as compared with $294 for the December 2007 Quarter.  The $37 (12.6%) rise in payroll was attributable to increase in both executive compensation and office salaries.

 

Professional fees decreased by $11 from $74 in the December 2007 Quarter to $63 in December 2008 Quarter as a result of the reduced regulatory filings.

 

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Selling, administrative and other expenses for the December 2008 Quarter were $145 as compared with $135 for December 2007 Quarter, an increase of $10 or 7.4%.  This increase reflected primarily increased marketing costs.

Interest expense and amortization of deferred loan costs for the December 2008 Quarter was $111 as compared with $124 for the December 2007 Quarter. The reduction of $13 (10.5%) is a result of the repayment of the principal and decrease in the amount of the long-term debt of Ranor.

As a result of the factors described above, our income before income taxes increased $23, or 1.2%, from $1,945 to $1,968, notwithstanding the decline in net sales.

Income tax expense was $955 in the December 2008 Quarter as compared with $568 in the December 2007 Quarter. Our effective income tax rate, inclusive of federal and state taxes, was 48.5% in the December 2008 Quarter as compared to 29.2% in the December 2007 Quarter. The increase in effective income tax rate was primarily due to the application of higher statutory marginal tax rates.

As a result of the foregoing, our net income decreased by $364 or (26.4)%. The net income was $1,013, or $ 0.07 per share (basic), and $0.04 per share (diluted) for the December 2008 Quarter, as compared with net income of $1,377, or $0.12 per share (basic) and $0.05 per share (diluted) for December 2007 Quarter.

Nine months Ended December 31, 2008 and 2007

The following table sets forth information from our statements of operations for the nine months ended December 31, 2008 and 2007, in dollars and as a percentage of sales:

 

 

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																		Change from Nine months
		Nine months Ended December 31																Ended December 31, 2007
		2008								2007								to December 31, 2008
		Amount				Percent				Amount				Percent				Amount				Percent
		(dollars in thousands except per share amounts)
Net sales			33,814				100.0	%			22,534				100.0	%			11,280				50.1	%
Cost of sales			22,799				67.4	%			16,779				74.5	%			6,020				35.9	%
Gross profit			11,015				32.6	%			5,755				25.5	%			5,260				91.4	%
Operating expenses:
Salaries and related expenses			1,088				3.2	%			885				3.9	%			203				22.9	%
Professional fees			184				0.5	%			303				1.3	%			(119	)			(39.3	)%
Selling, general and administrative			434				1.3	%			286				1.3	%			148				51.7	%
Total operating expenses			1,706				5.0	%			1,474				6.5	%			232				15.7	%
Income from operations			9,309				27.5	%			4,281				19.0	%			5,028				117.4	%
Other income (expenses)
Interest expense			(345	)			(1.0	)%			(389	)			(1.7	)%			44				(11.3	)%
Finance costs			(13	)			0.0	%			(13	)			(0.1	)%							0.0	%
Total other income (expense)			(358	)			(1.1	)%			(402	)			(1.8	)%			44				(10.9	)%
Income before income taxes			8,951				26.5	%			3,879				17.2	%			5,072				130.8	%
Provision for income taxes			(3,891	)			(11.5	)%			(1,215	)			(5.4	)%			(2,676	)			220.2	%
Net income			5,060				15.0	%			2,664				11.8	%			2,396				89.9	%

 

Sales increased by $11,280 or 50.1%, from $22,534 for the nine months ended December 31, 2007 (the “December 2007 Period”) to $33,814 for the nine months ended December 31, 2008 (the “December 2008 Period”). The increase in sales was primarily the result of an increase of $10,681, or 105%, in sales to GT Solar from $10,140 in the nine months ended December, 2007 as compared to $20,821 in 2008.

Along with increased sales, our cost of sales increased by $6,020 to $22,799 an increase of 35.9%, from $16,799 for the nine months ended December 31, 2008 as compared to 2007.  The increase in cost of sales was not at the same rate as the increase in sales reflecting the effects of the sale of approximately $715 of scrap, as compared with $174 for the December 2007 Period, and the reversal of an accrual of $120 on a contract that was taken in a prior period and efficiencies gained on production work. Since the carrying value of the scrap metal was nominal, substantially all of the revenue from the sale of the scrap metal is reflected in gross profit.  As a result, our gross margin improved from 25.5% in the December 2007 Period to 32.6% in the December 2008 Period.

 

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Our payroll and related costs were $1,088 for the December 2008 Period, as compared with $885 for the December 2007 Period. The $203 (22.8%) increase in payroll was increase in payroll was attributable to the increased compensation of the officers ($124) and office personnel ($44).

Professional fees decreased by $119 (39.3%) from $303 in the December 2007 Period to $184 in the December 2008 Period.  This decrease was attributable to reduced fees related to regulatory filings.

Total selling, administrative and other expenses were $434 for the nine months ended December 31, 2008 as compared to $286 for the December 2007 Period, an increase of $148, or 51.7%. This increase reflected in part additional costs which we incurred as a public company, following the commencement of trading in November 2007, as well as additional expense incurred as a result of the overall increase in our business and increased marketing costs.

Interest expense for the December 2008 Period was $345 as compared with $389 for the December 2007 period. The decrease of $44 (11.3%) is due to reduction in interest on the long-term note payable of Ranor to the Sovereign Bank.

As a result of the factors described above, our income before income taxes increased $5,072, or 130.8%, from $3,879 to $8,951.

Income tax expense was $3,891 in the December 2008 Period as compared with $1,215 in the December 2007 Period.  Our effective income tax rate was 43.5% in the December 2008 Period as compared to 31.3% in the December 2007 Period.    The increase is a result of increased profitability and positive earnings estimates for the current period.  The effective tax rate in the December 2008 Period includes the recognition of a net deferred tax asset of $25.  This deferred tax asset reflects the impact of recording an income tax benefit for the current portion of net operating loss carry forwards subject to Internal Revenue Code Section 382 and related state statutory limitations in the amount of $38 and an income tax benefit of $64 related to accrued compensation benefits.  The deferred tax asset reflected on the balance sheet is net of the current portion deferred tax liability arising from timing differences in depreciation in the amount of $77. The increase in effective income tax rate was primarily due to the application of higher statutory marginal tax rates.  

 

 

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As a result of the foregoing, our net income increased by $2,396 or 89.9%.  The net income was $5,060 ($ 0.37 per share basic and $0.19 per share diluted) for the December 2008 Period, as compared with $2,664 ($0.26 per share basic and $0.10 per share diluted) for December 2007 Period.

Liquidity and Capital Resources

At December 31, 2008, we had net working capital of $10,641 as compared with $6,391, at March 31, 2008.  The increase of $4,250 (66.5%) reflects the increased profitability of our business.  The following table sets forth information as to the principal changes in the components of our working capital.

Category		December 31,				March 31,				March 31 to December 31, 2008
		2008				2008				Change				Percent Change
Current Assets
Cash and cash equivalents		$	5,930			$	2,853			$	3,077				107.9	%
Accounts receivable, net			8,026				4,509				3,517				78.0	%
Costs Incurred on uncompleted contracts			3,567				4,299				(732	)			(17.0	)%
Inventories			347				196				151				77.0	%
Deferred tax asset			25				-				25				-
Prepaid expenses			1,547				1,039				508				48.9	%
Accounts payable			1,243				991				252				25.4	%
Accrued expenses			2,084				1,481				603				40.7	%
Progress billings in excess of
cost of uncompleted contracts			4,861				3,419				1,442				42.2	%
Current maturity of long-term debt			613				614				(1	)			(0.2	)%
Net Working Capital
Total current assets			19,442				12,896				6,546				50.8	%
Less:  total current liabilities			8,801				6,505				2,296				35.3	%
Net working capital		$	10,641			$	6,391			$	4,250				66.5	%

The cash flow from operations was $4,306 for December 2008 Period as compared with $756 in the December 2007 Period.  The increase in cash flows from operations of $3,500, or 469%, was the net effect of an increase in the net profits and decrease in costs incurred on uncompleted contracts.

The net cash used in financing activities was $431 for the December 2008 Period as compared with cash used in operations of $75 for the December 2007 Period.  The increase in cash used in financing activities reflects the receipt of $170 from the exercise of warrants, a $60 loan to WM Realty from the principal member of WM Realty in the December 2007 which was not incurred in the December 2008 period, and an increase in distribution of WM Realty equity of $75, reflecting a distribution of $140 as compared with a distribution of $65 in 2007.  Because our financial statements include the operations of WM Realty, the cash flows from WM Realty are included in our consolidated financial statements.

We invested $798 and $691 in property plant and equipment during the nine months ended December 31, 2008 and 2007, respectively.  Our capital expenditure in the December 2008 Period includes a deposit of $614 with manufacturers to acquire additional equipment.

 

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As a result of cash flows from operations, our cash balance increased by $3,077 (107.9%) from $2,853 on March 31, 2008 to $5,930, on December 31, 2008.

During the December 2008 Period, WM Realty had a net income of $92.  The accumulated deficit of WM Realty was $272, as of December 31, 2008.

With the rapid expansion of operations our need for operating and investing cash flows has substantially increased.  In addition to the costs of uncompleted contracts, our current available cash balance will be used to acquire equipment having a cost of more than $1,000 that is currently on order and or which delivery and payment are expected to be due this fiscal year.

We have a loan and security agreement with Sovereign Bank, pursuant to which we borrowed $4.0 million on a term loan basis in connection with the acquisition of Ranor.  As a result of amendments to the loan and security agreement, we have a $2.0 million revolving credit facility and a $3.0 million capital expenditure facility, which is available to us until November 30, 2009, at which time any amounts borrowed under the line are to be amortized over a five year period. Pursuant to the agreement, Ranor is required to maintain a ratio of earnings available for fixed charges to fixed charges of at least 1.2 to 1, and an interest coverage ratio of at least 2 to 1. At December 31, 2008, we were in compliance with both of these ratios, with our ratio of earnings available for fixed charges to fixed charges being  9 to 1 and our interest coverage ratio being  50.5 to 1.

The term note is due on March 1, 2013, and is payable in quarterly installments of $143. The note bears interest at 9% per annum through December 31, 2010 and at prime plus 1½% thereafter.  At December 31, 2008 the principal balance due on our term loan to Sovereign Bank was approximately $2,381.   The revolving note bears interest at prime plus ½%, and we have the right to borrow at a LIBOR rate plus 300 basis points. We may borrow, subject to the borrowing formula at any time prior to June 30, 2009. Any advances under the revolving note become due on June 30, 2009. The maximum borrowing under the revolving note is the lesser of (i) $2.0 million or (ii) the sum of 70% of eligible accounts receivable and 40% of eligible inventory. At December 31, 2008, there were no borrowings under the line and maximum available under the borrowing formula was $2.0 million.

Ranor has a $3,000,000 capital expenditures facility pursuant to which Ranor is able to borrow up to $3,000,000 until November 30, 2009. We pay interest only on borrowings under the capital expenditures line until November 30, 2009, at which time the principal balance is amortized over five years, commencing December 31, 2009.  The interest on borrowings under the capital expenditure line is either equal to the prime plus ½% or the LIBOR rate plus 3%, as the Company may elect.  Any unpaid balance on the capital expenditures facility is to be paid on November 30, 2014.  As of December 31, 2008 and March 31, 2008, there were no borrowings outstanding under either the revolving line or the capital expenditure line.

Any borrowings under the capital expenditures line are amortized over five years, commencing December 31, 2009.  The interest on the capital expenditure loans is either equal to the prime plus ½% or the LIBO rate plus 3%.  The interest rate is chosen by the Company prior to each advance and may be changed at any time during the term of the loan repayment. The Company is required to pay interest only on advances until November 30, 2009. The total principal sum, or any amount thereof outstanding together with any accrued but unpaid interest shall be due and payable in full on November 30, 2014.  As of December 31, 2008 and March 31, 2008, there were no borrowings outstanding under either the revolving line or the capital expenditure line. Any outstanding principal or accrued interest has to be paid off on or before November 2013, the maturity date.

 

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The securities purchase agreement pursuant to which we sold the series A preferred stock and warrants to Barron Partners provides Barron Partners with a right of first refusal on future equity financings, which may affect our ability to raise funds from other sources if the need arises.

While we believe that the $2.0 million revolving credit facility, which remained unused as of December 31, 2008 and terminates in June 2009, our $3.0 million capital expenditure facility and our cash flow from operations should be sufficient to enable us to satisfy our cash requirements at least through the end of fiscal 2009, it is possible that we may require additional funds to the extent that we expand our facilities. In the event that we make an acquisition, we may require additional financing for the acquisition. However, we do not have any current plans for any acquisition, and we cannot give any assurance that we will make any acquisition. We have no commitment from any party for additional funds; however, the terms of our agreement with Barron Partners, particularly Barron Partners’ right of first refusal, may impair our ability to raise capital in the equity markets since potential investors are often reluctant to negotiate a financing when another party has a right to match the terms of the financing.

In December 2007, Ranor acquired all the equipment Vertex Tool and Die, Inc for $150 and assumed Vertex’s real property lease obligation.  The current lease expires on February 28, 2009, and Ranor has the option to extend the lease for an additional term of five years.  We have the option to purchase the leased property at market price.  However we have decided to relocate the equipment from the Fitchburg location to the Westminster facility and not renew the lease as of the end of February 2009.

We contemplate that we will expand our facilities during the next twelve months. Although we may use the bank facilities for this purpose, we may require additional financing as well.  We can give no assurance that the necessary financing will be available.

The following table set forth information as of December 31, 2008 as to our contractual obligations (dollars in thousands).

 

		Payments due by period
Contractual obligations		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Long-term debt obligations		$	5,559			$	613			$	1,229			$	813			$	2,904
Capital lease obligations			0				0				0				0				0
Operating lease obligations			5,933				458				900				900				3,675
Purchase obligations			412				412				0				0				0
Total			11,904				1,483				2,129				1,713				6,579

We have no off-balance sheet assets or liabilities

 

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ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of December 31, 2008, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)).

Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2008, to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Controls

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934) that occurred during the quarter ended December 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION