TECHPRECISION CORP - Quarter Report: 2015 December (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

For the transition period from             to           

 

Commission File Number 000-51378

 

TECHPRECISION CORPORATION

(Exact name of registrant as specified in its charter)

 

 

(978) 874-0591

(Registrant's telephone number, including area code)

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.    

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 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).  

The number of shares of the Registrant's common stock, par value $0.0001 per share, issued and outstanding at February 5, 2016 was 27,324,593.

 

 

 

TABLE OF CONTENTS

 

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 TECHPRECISION CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

 

 

 

TECHPRECISION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

 

 

2

 

 

TECHPRECISION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

 

 

 

 

TECHPRECISION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Continued)

 

 

 

SUPPLEMENTAL INFORMATION – NONCASH INVESTING AND FINANCING TRANSACTIONS:

Nine Months Ended December 31, 2015

For the nine months ended December 31, 2015, the Company issued 2,519,634 shares of common stock in connection with the conversion of 1,927,508 shares of Series A Convertible Preferred Stock. The stock conversions increased Common Stock and Additional Paid in Capital by $252 and $523,956, respectively.

Nine Months Ended December 31, 2014

For the nine months ended December 31, 2014, the Company issued $279,297 of trade notes payable in connection with the conversion of certain vendor trade accounts payables for the purchased of goods and services used in the ordinary course of business.

For the nine months ended December 31, 2014, the Company issued 718,954 shares of common stock in connection with the conversion of 550,000 shares of Series A Convertible Preferred Stock. The stock conversions increased Common Stock and Additional Paid in Capital by $72 and $119,828, respectively.

See accompanying notes to the condensed consolidated financial statements.

 

 

 

 

TECHPRECISION CORPORATION

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. Our name was changed to TechPrecision Corporation on March 6, 2006. TechPrecision is the parent company of Ranor, Inc., or Ranor, a Delaware corporation and Wuxi Critical Mechanical Components Co., Ltd., or WCMC, a wholly foreign owned enterprise (WFOE). TechPrecision, WCMC and Ranor are collectively referred to as the "Company", "we", "us" or "our".

 

We manufacture large scale metal fabricated and machined precision components and equipment. These products are used in a variety of markets including the aerospace, commercial, defense, medical, and nuclear industries.

 

Liquidity and Capital Resources

On January 22, 2016, the Company and Ranor entered into the Note and Other Loan Documents Modification Agreement No. 2 with Revere, or the Second Modification Agreement, which further amends the TLSA. In connection with the Second Modification Agreement, Ranor executed an Amended and Restated Term Loan Note in the aggregate principal amount of $1.5 million, or the Amended and Restated First Loan Note, and an Amended and Restated Term Loan Note in the aggregate principal amount of $750,000, or the Restated Second Loan Note, and together with the Amended and Restated First Loan Note, the Amended and Restated Notes, each in favor of Revere and each dated January 22, 2016. The Second Modification Agreement extends the maturity date of the term loans made pursuant to the TLSA to January 22, 2018. The terms of the Second Modification Agreement are more fully described in Note 18 - Subsequent Events.

At December 31, 2015, we had cash and cash equivalents of $816,301, of which $17,269 is located in China and may not be able to be repatriated for use in the United States without undue cost or expense, if at all. Net cash provided by operating activities was $373,278 for the nine months ended December 31, 2015, which includes an advance payment of $507,835 received on April 17, 2015 under an Assignment of Claim Agreement described below. We have reduced our operating expenses to stay in line with current business conditions. Our profit margins have improved significantly for the nine months ended December 31, 2015, when compared with the nine months ended December 31, 2014. As a result, we recorded net income of $472,960 for the nine months ended December 31, 2015 compared with a net loss of $2.9 million for the nine months ended December 31, 2014.

We incurred an operating loss of $3.6 million for the year ended March 31, 2015, or fiscal 2015. In the year ended March 31, 2014, or fiscal 2014, we recorded a provision for potential contract losses of $2.4 million in connection with the bankruptcy filing of GT Advanced Technologies, Inc., or GTAT, and filed a proof of claim with the bankruptcy court to recover all of our costs under the terms of a purchase agreement with GTAT. The claim is now considered an unsecured creditor claim within GTAT's overall bankruptcy proceedings.

On April 17, 2015, the Company, through Ranor, entered into an Assignment of Claim Agreement, or the Assignment Agreement, with Citigroup Financial Products Inc., or Citigroup. Pursuant to the terms of the Assignment Agreement, Ranor agreed to sell, transfer, convey and assign to Citigroup all of Ranor's right, title and interest in and to Ranor's $3,740,956 unsecured claim against GTAT. Pursuant to the Assignment Agreement, Citigroup paid to Ranor an initial amount equal to $507,835, which amount is classified as a current liability in our balance sheet. The Assignment Agreement provides for Citigroup to pay to Ranor up to an additional $614,452 upon either (A) receipt of written notice that Ranor's claim (or any portion thereof) has been fully and finally allowed against GTAT as a non-contingent, liquidated, and undisputed general unsecured claim, been listed as non-contingent, liquidated, and undisputed on schedules filed by GTAT with the bankruptcy court, or appeared on the claims agent's, or trustee's or other estate representative's records, or has otherwise been conclusively and finally treated in GTAT's bankruptcy, as "allowed" or "accepted as filed" or (B) the expiration of the time period during which any party (including GTAT) is permitted to file an objection, dispute or challenge with respect to Ranor's claim without any such objection, dispute or challenge having been filed. If Ranor's claim against GTAT is allowed in its entirety, then Citigroup will pay Ranor an additional $614,452. If the amount of Ranor's claim that is allowed is greater than $1,692,782 but less than the full amount or Ranor's claim, then Citigroup will pay Ranor an additional amount equal to $614,452 minus the product of 30% multiplied by the difference between the total amount of Ranor's claim and the amount of such claim that is actually allowed. If the total amount of Ranor's claim against GTAT that is allowed is less than $1,692,782, then Ranor may be obligated to repay Citigroup 30% of the difference between $1,692,782 and the amount of Ranor's claim that is actually allowed plus interest at 7% per annum from April 21, 2015 through the date of the repayment.

 

 

 

The Company cannot predict the amount of Ranor's claim that will be finally allowed or admitted in the GTAT bankruptcy proceeding and cannot guarantee that Ranor will receive any additional payment on its claim. The Company continues to vigorously pursue its legal remedies in respect to the case described above; however, an adverse decision in any proceeding could significantly harm our business and our consolidated financial position, results of operations and cash flows.

On May 30, 2014, TechPrecision and Ranor entered into a Loan and Security Agreement, or the LSA, with Utica Leasco, LLC, or Utica. Pursuant to the LSA, Utica agreed to loan $4.15 million to Ranor under a Credit Loan Note, which is collateralized by a first secured interest in certain machinery and equipment at Ranor.  Payments under the LSA and Credit Loan Note are due in monthly installments with an interest rate on the unpaid principal balance of the Credit Loan Note equal to 7.5% plus the greater of 3.3% or the six-month LIBOR interest rate, as described in the Credit Loan Note. Ranor's obligations under the LSA and the Credit Loan Note are guaranteed by TechPrecision.

Pursuant to the LSA, Ranor is subject to certain restrictive covenants which, among other things, restrict Ranor's ability to (1) declare or pay any dividend or other distribution on its equity, purchase or retire any of its equity, or alter its capital structure; (2) make any loan or guaranty or assume any obligation or liability; (3) default in payment of any debt in excess of $5,000 to any person; (4) sell any of the collateral outside the normal course of business; and (5) enter into any transaction that would materially or adversely affect the collateral or Ranor's ability to repay the obligations under the LSA and the Credit Loan Note.  The restrictions contained in these covenants are subject to certain exceptions specified in the LSA and in some cases may be waived by the written consent of Utica.  Any failure to comply with the covenants outlined in the LSA without waiver by Utica or certain other provisions in the LSA would constitute an event of default, pursuant to which Utica may accelerate the repayment of the loan.

 

In connection with the execution of the LSA, we paid approximately $0.24 million in fees and associated costs and utilized approximately $2.65 million of the proceeds of the Credit Loan Note to pay off debt obligations owed to Santander Bank N.A. under a Loan and Security Agreement.  Additionally, the Company retained approximately $1.27 million of the proceeds of the Credit Loan Note for general corporate purposes.

  

If we were to violate any of the covenants under the above debt agreements, the lenders could demand full repayment of the amounts we owe. As such, we would need to seek alternative financing to pay these obligations as we do not have existing facilities or sufficient cash on hand to satisfy these obligations, and there is no guarantee that we would be able to obtain such alternative financing.

We were successful in amending the TLSA with Revere to extend its maturity date. The TLSA was to expire on December 31, 2015 and was amended in January 2016, with the term of the TLSA extended to January 22, 2018. Our LSA with Utica matures on November 30, 2018. We believe that we will have sufficient cash to fund our operations, capital expenditures and principal and interest payments under our debt obligations through the next twelve months. Our liquidity is highly dependent on our available financing facilities and our ability to sustain our gross profit margins. If we do not execute on our business plans, improve gross profit and operating income, and reduce our operating costs, then our available cash may not be sufficient to fund our operations, capital expenditures and principal and interest payments under our debt obligations through the next twelve months. We may need to secure additional acceptable financing facilities before 2018.

These factors raise substantial doubt about our ability to continue as a going concern. In order for us to continue operations beyond the next twelve months and be able to discharge our liabilities and commitments in the normal course of business, we may need to secure additional financing on terms consistent with our near-term business plans. We have increased our backlog and changed the composition of our revenues to focus on recurring unit of delivery projects rather than custom first article and prototyping projects, which do not efficiently utilize our manufacturing capacity. We plan to closely monitor our expenses and, if required, will further reduce operating costs and capital spending to enhance liquidity. 

The condensed consolidated financial statements for the three and nine months ended December 31, 2015 and for the year ended March 31, 2015, or fiscal 2015, were prepared on the basis of a going concern which contemplates that we will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should we be required to liquidate assets. Our ability to satisfy our total current liabilities of $5.4 million at December 31, 2015 and to continue as a going concern is dependent upon the successful execution of our operating plan and our ability to timely secure long-term financing on favorable terms. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

NOTE 2 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

 

The accompanying condensed consolidated financial statements include the accounts of TechPrecision, WCMC and Ranor. Intercompany transactions and balances have been eliminated in consolidation. The accompanying condensed consolidated balance sheet as of December 31, 2015, the condensed consolidated statements of operations and comprehensive income (loss) for the three and nine month periods ended December 31, 2015 and 2014, and the condensed consolidated statements of cash flows for the nine months ended December 31, 2015 and 2014 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.

 

 

 

The notes to condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC, for Quarterly Reports on Form 10-Q. Certain information and note 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 our consolidated financial statements included with our Annual Report on Form 10-K for the fiscal year ended March 31, 2015, or the 2015 Form 10-K, filed with the SEC on June 29, 2015.

Significant Accounting Policies

Our significant accounting policies are set forth in detail in Note 2 to the 2015 Form 10-K.

 

NOTE 3 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In November 2015, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update No. 2015-17, or ASU No. 2015-17, Income Taxes (Topic 740), Balance sheet Classification of Deferred Taxes, or Topic 740. Topic 740 requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Deferred tax liabilities and assets are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. Deferred tax liabilities and assets that are not related to an asset or liability for financial reporting are classified according to the expected reversal date of the temporary difference. To simplify the presentation of deferred taxes, the amendments in ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in ASU No. 2015-17 apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by these amendments. ASU No. 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company does not expect the adoption of ASU 2015-17 to have a significant impact on the Company's consolidated results of operations, financial position or cash flows.

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consisted of the following as of: 

Depreciation expense for the three and nine months ended December 31, 2015 and 2014 was $187,908 and $582,628, and $206,475 and $633,741, respectively.

 

 

 

 

NOTE 5 - COSTS INCURRED ON UNCOMPLETED CONTRACTS

 

The following table sets forth information as to costs incurred on uncompleted contracts as of:

 

Contract costs consist primarily of labor and materials and related overhead, to the extent that such costs are recoverable. Revenues associated with these contracts are recorded only when the amount of recovery can be estimated reliably and realization is probable. As of December 31, 2015 and March 31, 2015, we had deferred revenues totaling $1,087,179 and $1,211,506, respectively. Deferred revenues represent customer prepayments on contracts and completed contracts on which revenue cannot yet be recognized. We also receive advance billings and deposits representing down payments for acquisition of materials and progress payments on contracts. The agreements with our customers allow us to offset the progress payments against the costs incurred. We record provisions for losses within costs of sales in our condensed consolidated statement of operations and comprehensive income (loss).

NOTE 6 – OTHER CURRENT ASSETS

 

  

NOTE 7 – OTHER NONCURRENT ASSETS

 

NOTE 8 - ACCRUED EXPENSES

 

 

Our contract loss provision at both December 31, 2015 and March 31, 2015 includes approximately $0.4 million for estimated contract losses in connection with a certain customer purchase agreement. We filed a demand for arbitration under the contract to recover damages, together with attorney's fees, interest and costs, subsequent to the customer's request to reduce the number of units ordered under the purchase agreement. As a result of the customer filing a voluntary bankruptcy claim, the demand is now considered an unsecured creditor claim within the customer's overall bankruptcy proceedings. It is more likely than not that we will not be able to recover the full amount of our claim. As such, part of the total reduction in the liability reflects the netting of approximately $0.8 million of accumulated costs in work-in-progress and $1.1 million of accounts receivable with the loss provision. Accrued interest expense includes deferred interest costs accounted for under the effective interest method in connection with the Utica Credit Loan Note due November 2018.

 

 

 

NOTE 9 – DEBT

 

Term Loan and Security Agreement

On December 22, 2014, Ranor entered into the TLSA with Revere. Pursuant to the TLSA, Revere agreed to loan an aggregate of $2.25 million to Ranor under the First Loan Note in the aggregate principal amount of $1.5 million and the Second Loan Note in the aggregate principal amount of $750,000. The First Loan Note is collateralized by a secured interest in Ranor's Massachusetts facility and certain machinery and equipment at Ranor. The Second Loan Note is collateralized by a secured interest in certain accounts, inventory and equipment of Ranor. Payments under the TLSA, the First Loan Note and the Second Loan Note were due as follows: (a) payments of interest only on advanced principal on a monthly basis on the first day of each month from February 1, 2015 until December 31, 2015 with an annual interest rate on the unpaid principal balance of the First Loan Note and the Second Loan Note equal to 12% per annum and (b) the principal balance plus accrued and unpaid interest payable on December 31, 2015. Ranor's obligations under the TLSA, the First Loan Note and the Second Loan Note are guaranteed by TechPrecision pursuant to a Guaranty Agreement with Revere. Ranor utilized approximately $1.45 million of the proceeds of the First Loan Note and Second Loan Note to pay off bond obligations owed to Santander Bank N.A. plus breakage fees on a related interest swap of $217,220 under the Loan and Security Agreement with Santander Bank N.A. The remaining proceeds of the First Loan Note and the Second Loan Note were retained by the Company for general corporate purposes. Pursuant to the TLSA, Ranor was subject to certain affirmative and negative covenants, including a cash covenant, which requires that we maintain minimum month end cash balances that range from $400,000 to $820,000. We were required to maintain a cash balance of $789,000 and $500,000 at December 31, 2015 and March 31, 2015, respectively. We were in compliance with all covenants under the TLSA at December 31, 2015 and March 31, 2015.

On December 31, 2015, the Company, Ranor and Revere entered into the Modification Agreement to the TLSA. The Modification Agreement extended the maturity date of the TLSA and the Notes from December 31, 2015 to January 22, 2016 and provided that Ranor agreed to waive its right to extend the maturity date of the TLSA and the Notes by six months as set forth in the TLSA.

On January 22, 2016, the Company, Ranor and Revere entered into the Second Modification Agreement which further amends the TLSA. In connection with the Second Modification Agreement, Ranor executed the Amended and Restated Notes in favor of Revere. The Second Modification Agreement extends the maturity date of the term loans made pursuant to the TLSA to January 22, 2018. The terms of the Second Modification Agreement are more fully described in Note 18 - Subsequent Events.

Ranor was not in violation of any of the covenants included in the Notes at their maturity date of December 31, 2015 or when it issued its financial statements. As such, noncurrent classification is required as of December 31, 2015 because the Company was able to demonstrate its ability to consummate long-term refinancing by issuing a long-term obligation after its balance sheet date but before the issuance of its balance sheet.

Loan and Security Agreement

On May 30, 2014, TechPrecision and Ranor entered into the LSA with Utica. Pursuant to the LSA, Utica agreed to loan $4.15 million to Ranor under a Credit Loan Note, which is collateralized by a first secured interest in certain machinery and equipment at Ranor.  Payments under the LSA and the Credit Loan Note are due in monthly installments with an interest rate on the unpaid principal balance of the Credit Loan Note equal to 7.5% plus the greater of 3.3% or the six-month LIBOR interest rate, as described in the Credit Loan Note. At December 31, 2015, the rate of interest on the debt under the LSA was 10.8%. In addition, if the obligations under the LSA and the Credit Loan Note are paid in full at or before the maturity date, Ranor will be required to pay Utica deferred interest in an amount ranging from $166,000 during the first twelve months of the term of the loan to $498,000 at any time after the forty-eighth month of the term of the loan. Ranor's obligations under the LSA and the Credit Loan Note are guaranteed by TechPrecision.

 

 

 

 

Pursuant to the LSA, Ranor is subject to certain restrictive covenants which, among other things, restrict Ranor's ability to (1) declare or pay any dividend or other distribution on its equity, purchase or retire any of its equity, or alter its capital structure; (2) make any loan or guaranty or assume any obligation or liability; (3) default in payment of any debt in excess of $5,000 to any person; (4) sell any of the collateral outside the normal course of business; and (5) enter into any transaction that would materially or adversely affect the collateral or Ranor's ability to repay the obligations under the LSA and the Credit Loan Note.  The restrictions contained in these covenants are subject to certain exceptions specified in the LSA and in some cases may be waived by written consent of Utica.  Any failure to comply with the covenants outlined in the LSA without waiver by Utica or certain other provisions in the LSA would constitute an event of default, pursuant to which Utica may accelerate the repayment of the loan. In connection with the execution of the LSA, the Company paid approximately $0.24 million in fees and associated costs and utilized approximately $2.65 million of the proceeds of the Credit Loan Note to pay off, or complete a refinancing of, debt obligations owed to Santander Bank N.A. under a Loan and Security Agreement. We paid a breakage fee of $29,448 for early termination of the interest rate swap for certain bonds and recorded the amount as interest expense in our statement of operations. We retained approximately $1.27 million of the proceeds of the Credit Loan Note for general corporate purposes.

 

Capital Lease

We entered into a new capital lease in April 2012 for certain office equipment. The lease has a term of 63 months, bears interest at 6.0% and requires monthly payments of principal and interest of $1,136. This lease was amended in fiscal 2014 when we purchased a replacement copier at Ranor. The revised lease term was extended by nine months and will expire in September 2018. The amount of the lease recorded in property, plant and equipment, net as of December 31, 2015 and March 31, 2015 was $26,045 and $38,027, respectively.

NOTE 10 - INCOME TAXES

We account for income taxes under the provisions of FASB ASC 740, Income Taxes.  At the end of each interim period, we make an estimate of our annual expected effective tax rates in both the United States and China. For the three and nine months ended December 31, 2015 we recorded zero income tax expense. The lack of tax expense or benefit for the three and nine months ended December 31, 2015 was primarily the result of recording a full valuation allowance on our net deferred tax assets. For the nine months ended December 31, 2014, we recorded a tax benefit of $152,792 as we reclassified losses on an interest rate swap to our statement of operations. A valuation allowance must be established for deferred tax assets when it is more likely than not that they will not be realized. The assessment was based on the weight of negative evidence at the balance sheet date, our recent operating losses and unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels. We have determined that it is more likely than not that certain future tax benefits may not be realized.  A change in the estimates used to make this determination could require an increase in deferred tax assets if they become realizable.

At March 31, 2015, our federal net operating loss carry-forward was approximately $10.0 million. If not utilized, the federal net operating loss carry-forward will begin to expire in 2025. Section 382 of the Internal Revenue Code, as amended, provides for a limitation on the annual use of net operating loss carryforwards following certain ownership changes that could limit our ability to utilize these carryforwards on a yearly basis due to an ownership change in connection with the acquisition of Ranor in 2006.

We file income tax returns in the U.S. federal jurisdiction, and various state jurisdictions. Our foreign subsidiary files separate income tax returns in China, the foreign jurisdiction in which it is located.  Tax years 2012 and forward remain open for examination.  We recognize interest and penalties accrued related to income tax liabilities in selling, general and administrative expense in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

 

NOTE 11 - PROFIT SHARING PLAN

 

Ranor has a 401(k) profit sharing plan that covers substantially all Ranor employees who have completed 90 days of service. Ranor retains the option to match employee contributions. Our contributions were $36,784 and $38,375 for the nine months ended December 31, 2015 and 2014, respectively.

NOTE 12 - CAPITAL STOCK

Preferred Stock

 

We have 10,000,000 authorized shares of preferred stock and our board of directors has broad power to create one or more series of preferred stock and to designate the rights, preferences, privileges and limitations of the holders of such series. Our board of directors has created one series of preferred stock - the Series A Convertible Preferred Stock.

 

Each share of Series A Convertible Preferred Stock was initially convertible into one share of common stock. As a result of our failure to meet certain levels of earnings before interest, taxes, depreciation and amortization for the years ended March 31, 2006 and 2007, the conversion rate changed, and each share of Series A Convertible Preferred Stock became convertible into 1.3072 shares of common stock, with an effective conversion price of $0.218.  

 

 

 

 

During the nine months ended December 31, 2015 and 2014, 1,927,508 and 550,000 shares of Series A Convertible Preferred Stock were converted into 2,519,634 and 718,954 shares of common stock, respectively. There were no shares of Series A Convertible Preferred Stock outstanding at December 31, 2015, as the last outstanding shares of Series A Convertible Preferred Stock were converted into shares of common stock on September 24, 2015. There were 1,927,508 shares of Series A Convertible Preferred Stock outstanding at March 31, 2015. Based on the most recent conversion ratio, there were zero and 2,519,634 common shares underlying the Series A Convertible Preferred Stock as of December 31, 2015 and March 31, 2015, respectively.

Common Stock

 

We had 90,000,000 authorized shares of common stock at December 31, 2015 and March 31, 2015.  There were 27,324,593 and 24,669,958 shares of common stock outstanding at December 31, 2015 and March 31, 2015, respectively. For the nine months ended December 31, 2015 we issued 2,519,634 shares of common stock in connection with conversions of Series A Convertible Preferred Stock. For the nine months ended December 31, 2014, we issued 718,954 shares of common stock in connection with conversions of Series A Convertible Preferred Stock.

 

NOTE 13 - STOCK BASED COMPENSATION

 

In 2006, our board of directors adopted, and our stockholders approved, the 2006 long-term incentive plan, or the Plan, covering 1,000,000 shares of common stock. On August 5, 2010, the Plan was amended to increase the maximum number of shares of common stock that may be issued to an aggregate of 3,000,000 shares. On September 15, 2011, the directors adopted and our stockholders approved an amendment to increase the maximum number of shares of common stock that may be issued pursuant to the Plan to an aggregate of 3,300,000 shares. The Plan provides for the grant of incentive and non-qualified options, stock grants, stock appreciation rights and other equity-based incentives to employees, including officers, and consultants. The Plan is to be administered by a committee of not less than two directors each of whom is to be an independent director. In the absence of a committee, the Plan is administered by our board of directors. Independent directors are not eligible for discretionary options.

Pursuant to the Plan, each newly elected independent director receives, at the time of election, a five-year option to purchase 50,000 shares of common stock at the market price on the date of his or her election.  In addition, the Plan provides for the annual grant of an option to purchase 10,000 shares of common stock on July 1 of each year following the third anniversary of the date of election.  

 

On July 1, 2015, we granted stock options to members of our board of directors to collectively purchase 30,000 shares of common stock at an exercise price of $0.10 per share, the fair market value on the date of grant. Fifty percent of the options will vest upon the six month anniversary of the grant date while the remaining fifty percent of the options will vest upon the eighteen month anniversary of the grant date.

On August 12, 2015, we granted stock options to our chief executive officer to purchase in total 1,000,000 shares of common stock at an exercise price of $0.08 per share, the fair market value on the date of grant. One third of the options vested on the date of the grant, one third of the options will vest on the first anniversary of the grant date, and the final one third of the options will vest on the second anniversary of the grant date.

The fair value of the options we granted was 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 underlying options. Expected volatility assumptions are based on the historical volatility of our common stock. The average dividend yield over the historical period for which volatility was computed is zero. The risk-free interest rate was selected based upon yields of five-year U.S. Treasury issues. We use the simplified method for all grants to estimate the expected term of the option. We assume that stock options will be exercised evenly over the period from vesting until the awards expire. As such, the assumed period for each vesting tranche is computed separately and then averaged together to determine the expected term for the award. Because of our limited stock option exercise activity we did not rely on our historical exercise data. The assumptions utilized for option grants during the period presented were as follows: a range from  119.5% to 120.8% for volatility, a range of 1.62% to 1.70% for the risk free interest rate, and approximately six years for the expected term. At December 31, 2015, there were 792,006 shares of common stock available for grant under the Plan. The following table summarizes information about options for the periods presented below: 

 

 

 

 

At December 31, 2015 there was $40,646 of total unrecognized compensation cost related to stock options. These costs are expected to be recognized over the next two years. The total fair value of shares vested during the nine months ended December 31, 2015 was $67,183. The following table summarizes the activity of our stock options outstanding but not vested for the nine months ended December 31, 2015:  

NOTE 14 - CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

 

We maintain bank account balances, which, at times, may exceed Federal Deposit Insurance Corporation 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, 2015, there were accounts receivable balances outstanding from four customers comprising 83% of the total receivables balance. The following table sets forth information as to accounts receivable from customers who accounted for more than 10% of our accounts receivable balance as of: 

 *less than 10% of total

 

We have 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. The following table sets forth information as to net sales from customers who accounted for more than 10% of our revenue for the three and nine months ended:

 

 

 

 

*less than 10% of total

NOTE 15 – SEGMENT INFORMATION

We consider our business to consist of one segment - metal fabrication and precision machining. A significant amount of our operations, assets and customers are located in the United States. The following table presents our geographic information (net sales and property, plant and equipment, net) by the country in which the legal subsidiary is domiciled and assets are located: 

 

NOTE 16 – COMMITMENTS

Leases

New Lease

On June 1, 2015 we entered into a new office lease with GPX Wayne Office Properties, L.P., or GPX Wayne, pursuant to which the Company leases approximately 1,100 square feet located at 992 Old Eagle School Road, Wayne, Pennsylvania, or the Wayne Property. The Company assumed possession of the Wayne Property on June 16, 2015. The initial term of this lease will expire on June 30, 2016, unless terminated sooner in accordance with the terms of the lease. The Company's base rent for the Wayne Property is $1,838 per month plus payments for electricity (on a proportionate ratio basis for the entire building), certain contributions for leasehold improvements, and certain other additional rent items (including certain taxes, insurance premiums and operating expenses). Other than as described above, there is no relationship between the Company and GPX Wayne.

Termination of Lease

On June 4, 2015, the Company entered into a lease termination agreement with CLA Building Associates, L.P., or CLA, pursuant to which the Company and CLA agreed to terminate the lease between the Company and CLA with respect to certain office space in Newtown Square, Pennsylvania, or the Newtown Square Property. Pursuant to the lease termination agreement, the lease with respect to the Newtown Square Property was terminated and the Company vacated the Newtown Square Property on June 16, 2015. The lease termination agreement provides that CLA will retain the Company's security deposit of $2,400.

Employment Agreements

We have employment agreements with each of our executive officers. Such agreements provide for minimum salary levels, adjusted annually, and bonuses that are payable if specified company goals are attained. The aggregate commitment at December 31, 2015 for future executive salaries during the next twelve months, including fiscal 2015 bonuses payable after March 31, 2015, was approximately $0.7 million. The aggregate commitment at December 31, 2015 was approximately $0.2 million for accrued payroll, severance, vacation and holiday pay for the remainder of our employees.

 

NOTE 17 - EARNINGS PER SHARE (EPS)

Basic EPS is computed by dividing reported earnings available to stockholders by the weighted average shares outstanding. Diluted EPS also includes the effect of dilutive potential common share equivalents, which consist of convertible preferred stock and stock options. The following table provides a reconciliation of the numerators and denominators reflected in the basic and diluted earnings per share computations, as required under FASB ASC 260. 

 

 

  

All potential common share 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. There were 900,500 potential common share equivalents that were out-of-the-money and were not included in the EPS calculations above for both the three and nine month periods ended December 31, 2015. For the three and nine months ended December 31, 2014, there were, respectively, 3,288,008 and 2,277,951 anti-dilutive potential common share equivalents, which were not included in the EPS calculations above.  

NOTE 18 – SUBSEQUENT EVENTS

On January 22, 2016, the Company, Ranor and Revere entered into the Second Modification Agreement, which amends the TLSA. In connection with the Second Modification Agreement, Ranor executed the Amended and Restated Notes in favor of Revere.

The Second Modification Agreement (a) extends the maturity date of the term loans made pursuant to the TLSA to January 22, 2018, (b) amends the amortization schedule such that payments under the TLSA and Amended and Restated Notes are due as follows: (i) payments of interest only on advanced principal on a monthly basis on the first day of each month from March 1, 2016 until January 1, 2017 and (ii) payments of $9,375 in principal plus accrued interest on a monthly basis on the first day of each month from February 1, 2017 until January 22, 2018, (c) reduces the annual interest rate on the unpaid principal balance of the loans to 10% per annum, or the Interest Rate, from 12% per annum, (d) amends the definition of the Minimum Guaranteed Interest payable by Ranor to Revere on the earlier of prepayment in full of the loans or payment in full of the loans on the maturity date to the greater of (i) twelve (12) months interest at the Interest Rate on the amount outstanding on the loans or (ii) interest due on any amount advanced under the TLSA at the Interest Rate, (e) adds a restrictive covenant whereby Ranor must maintain monthly minimum cash balances, with failure to comply with such restrictive covenant an event of default pursuant to which Revere may accelerate the repayment of the loans, and (f) includes a reaffirmation of the Company's guarantee of Ranor's obligations under the TLSA and the Amended and Restated Notes pursuant to a Guaranty Agreement between the Company and Revere.

Other than as so amended by the Modification Agreement and the Second Modification Agreement, the terms and conditions of the TLSA remain in full force and effect.

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 entitled "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.  Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions.  These statements are based on current expectations, estimates and projections about our business based in part on assumptions made by management.  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 the forward-looking statements due to numerous factors.  Those factors include those risks discussed in Part II – Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and those discussed in Item 1A "Risk Factors" in the 2015 Form 10-K for the year ended March 31, 2015, as well as those described in any other filings which we make with the SEC.  In addition, such statements could be affected by risks and uncertainties related to recurring operating losses and the availability of appropriate financing facilities impacting our ability to continue as a going concern, our ability to change the composition of our revenues and effectively reduce our operating expenses, 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, marketing and customer acceptance of our products, our reliance on a small number of customers for a significant percentage of our business, competition, government regulations and requirements, pricing and development difficulties, our ability to make acquisitions and successfully integrate those acquisitions with our business, as well as general industry and market conditions and growth rates, and general economic conditions.  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

We offer a full range of services required to transform raw materials into precise 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 U.S. manufacturing is done in accordance with our written quality assurance program, which meets specific national and international codes, standards, and specifications. Ranor holds several certificates of authorization issued by the American Society of Mechanical Engineers and the National Board of Boiler and Pressure Vessel Inspectors. The standards used are specific to the customers' needs, and our manufacturing operations are conducted in accordance with these standards.

Because our revenues are derived from the sale of goods manufactured pursuant to a contract, and we do not sell from inventory, it is necessary for us to constantly seek new contracts. There may be a time lag between the 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 and large utility companies. However, our business is dependent in part on the continuation of governmental programs which 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 are seeking more long-term projects with a more predictable cost structure.

We historically have experienced, and continue to experience, customer concentration. For the nine months ended December 31, 2015 and 2014, our largest customer (who was different in each period) accounted for approximately 26% and 22% of reported net sales, respectively, and our ten largest customers accounted for approximately more than 97% and 88% of our revenue, respectively. Our sales order backlog at December 31, 2015 was approximately $20.5 million compared with a backlog of $14.3 million at March 31, 2015. New orders for maritime and medical components have rebounded significantly during the nine months ended December 31, 2015.

All of our sales recorded for the nine months ended December 31, 2015 are from our U.S. segment. There were no sales generated from WCMC, our subsidiary in China, during the nine months ended December 31, 2015. At December 31, 2015, we did not have any open customer orders for WCMC in our backlog. We are evaluating how to utilize the WCMC entity moving forward.

For the nine months ended December 31, 2015, our net sales and net income were $12.0 million and $0.5 million, respectively, compared with net sales of $14.3 million and net loss of $2.9 million, respectively, for the nine months ended December 31, 2014.  Our gross margins for the nine months ended December 31, 2015 were 31.4% compared with gross margins of 10.0% for the nine months ended December 31, 2014.

On January 22, 2016, the Company, Ranor and Revere entered into the Second Modification Agreement, which amends the TLSA. In connection with the Second Modification Agreement, Ranor executed the Amended and Restated Notes in favor of Revere. The Second Modification Agreement extends the maturity date of the terms loans made pursuant to the TLSA to January 22, 2018.

We incurred an operating loss of $3.6 million for the fiscal year ended March 31, 2015. During fiscal 2014, we recorded a provision for potential contract losses of approximately $2.4 million in connection with the bankruptcy filing of GTAT and filed a proof of claim with the bankruptcy court to recover all of our costs under the terms of a purchase agreement. The claim is now considered an unsecured creditor claim within GTAT's overall bankruptcy proceedings.

On April 17, 2015, the Company, through Ranor, entered into the Assignment Agreement with Citigroup. Pursuant to the terms of the Assignment Agreement, Ranor agreed to sell, transfer, convey and assign to Citigroup all of Ranor's right, title and interest in and to Ranor's $3,740,956 unsecured claim against GTAT. Pursuant to the Assignment Agreement, Citigroup paid to Ranor an initial amount equal to $507,835. The Assignment Agreement provides for Citigroup to pay to Ranor up to an additional $614,452 upon either (A) receipt of written notice that Ranor's claim (or any portion thereof) has been fully and finally allowed against GTAT as a non-contingent, liquidated, and undisputed general unsecured claim, been listed as non-contingent, liquidated, and undisputed on schedules filed by GTAT with the bankruptcy court, or appeared on the claims agent's, or trustee's or other estate representative's records, or has otherwise been conclusively and finally treated in GTAT's bankruptcy proceedings, as "allowed" or "accepted as filed" or (B) the expiration of the time period during which any party (including GTAT) is permitted to file an objection, dispute or challenge with respect to Ranor's claim without any such objection, dispute or challenge having been filed. If Ranor's claim against GTAT is allowed in its entirety, then Citigroup will pay Ranor an additional $614,452. If the amount of Ranor's claim that is allowed is greater than $1,692,782 but less than the full amount or Ranor's claim, then Citigroup will pay Ranor an additional amount equal to $614,452 minus the product of 30% multiplied by the difference between the total amount of Ranor's claim and the amount of such claim that is actually allowed. If the total amount of Ranor's claim against GTAT that is allowed is less than $1,692,782, then Ranor may be obligated to repay to Citigroup 30% of the difference between $1,692,782 and the amount of Ranor's claim that is actually allowed, plus interest at 7% per annum from April 21, 2015 through the date of the repayment.

 

 

 

 

The Company cannot predict the amount of Ranor's claim that will be finally allowed or admitted in the GTAT bankruptcy proceeding and cannot guarantee that Ranor will receive any additional payment on its claim. The Company continues to vigorously pursue its legal remedies in respect to the case described above; however, an adverse decision in any proceeding could significantly harm our business and our consolidated financial position, results of operations and cash flows.

At December 31, 2015, we had cash and cash equivalents of $816,301, of which $17,269 is located in China and may not be able to be repatriated for use in the United States without undue cost or expense, if at all. Net cash provided by operating activities was $373,278 for the nine months ended December 31, 2015, which includes an advance payment of $507,835 received under the Assignment Agreement.

Recurring operating losses and negative cash flows from operating activities in prior years have caused working capital deficiencies and raise substantial doubt regarding our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. See "Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources" and Part II – Item 1A "Risk Factors."

Critical Accounting Policies and Estimates

The preparation of the unaudited 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 contract accounting, 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 differ under different assumptions or conditions.

Our significant accounting policies are set forth in detail in Note 2 to the consolidated financial statements included in the 2015 Form 10-K. There were no significant changes in the critical accounting policies during the nine months ended December 31, 2015, nor did we make any changes to our accounting policies that would have changed these critical accounting policies.

New Accounting Pronouncements

 

See Note 3 – Recently Issued and Adopted Accounting Pronouncements to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of recently adopted accounting guidance and other new accounting guidance.

 

Results of Operations

Our results of operations are affected by a number of external factors including the availability of raw materials (particularly steel), commodity prices, 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 foreign markets. Our revenue stream can be uneven and reflects an irregular pattern of orders we receive from our customers as they gauge their customers' demand for new and existing products. Our results of operations are 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 our obligations under our contracts. A delay in deliveries or cancellations of orders would cause us to have inventories in excess of our short-term needs, and may delay our ability to recognize, or prevent us from recognizing, revenue on contracts in our order backlog. We continue to execute the business plan we developed in fiscal 2015, which has the immediate goal of realigning and stabilizing our cost structure so we can return to and sustain profitability, even at current lower revenue levels. In connection with the execution of this business plan, we need to rebuild our backlog with orders from our key customers. 

 

 

 

Three Months Ended December 31, 2015 and 2014

The following table sets forth information from our statements of operations in dollars and as a percentage of revenue: 

 

nm- not meaningful

  

Net Sales

The following increases and decreases in net sales reflect changes in order flows among our key customers as they gauge market demand for their new and existing products. Our net sales for the three months ended December 31, 2015 were relatively unchanged when compared with the same prior year period. For the three months ended December 31, 2015, net sales decreased by $4,282, or 0.1%, to $3.5 million, compared to the three months ended December 31, 2014.  Net sales to our key defense customers, our largest market group, increased by $1.8 million on higher shipments of maritime components. Net sales in our energy group decreased by $0.5 million on lower volume. Net sales to our precision industrial group decreased by $1.3 million on lower volume for medical components.

Cost of Sales and Gross Margin

Cost of sales consists primarily of raw materials, labor, overhead, depreciation and subcontracting costs. Our cost of sales for the three months ended December 31, 2015 decreased by $0.7 million, or 23%, compared to the three months ended December 31, 2014.  Gross profit increased by $0.7 million for the three months ended December 31, 2015 compared to the same prior year period. Gross margins for the three months ended December 31, 2015 were 30.5% compared with 9.7% for the three months ended December 31, 2014. Gross margins for the three months ended December 31, 2015 were higher because of improved throughput, lower material and labor costs, and the absence of low margin contracts. Gross margins for the three months ended December 31, 2014 were dampened by higher labor costs and under absorbed overhead. Gross margin in any reporting period is impacted by the mix of services we provide on projects completed and in-process within that period.

Selling, General and Administrative Expenses

Total selling, general and administrative expenses for the three months ended December 31, 2015 were higher by $63,161 when compared with the same period in fiscal 2015.  During the three months ended December 31, 2014, in order to conserve cash, our board elected not to pay accrued board fees and executive chairman compensation. As a result, we reversed approximately $0.3 million of accrued board fees and executive chairman compensation.

 

 

 

Other Income (Expense)

 

The following table reflects other income (expense) and interest expense for the three months ended:

nm- not meaningful

For the three months ended December 31, 2015, cash paid for interest expense increased by 88% when compared with the three months ended December 31, 2014 primarily due to the payment of a $67,500 exit fee to Revere. The remaining increase is due to higher interest cost because of higher rates of interest on outstanding debt. Non-cash interest expense was lower and reflects deferred interest cost and the amortization of deferred loan costs in connection with the Credit Loan Note, the First Loan Note and the Second Loan Note. For the three months ended December 31, 2014, we incurred certain cash and non-cash charges in connection with the termination of our Series A Bond interest rate swap hedge. We reclassified the change in fair value from other comprehensive income to the statement of operations. All subsequent changes in fair value related to the interest rate swap were recorded in our statement of operations.

Income Taxes

For the three months ended December 31, 2015 and 2014, we recorded zero tax expense, as a result of maintaining a full valuation allowance on our net deferred tax assets. We maintain a full valuation allowance on our net deferred tax assets. A valuation allowance must be established for deferred tax assets when it is more likely than not that they will not be realized. The assessment was based on the weight of negative evidence at the balance sheet date, our recent operating losses and unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels. We regularly assess the effects resulting from these factors to determine the adequacy of our provision for income taxes. Our future effective tax rate would be affected if earnings were lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof.

Net Income (Loss)

 

As a result of the foregoing, our net income was $12,003, or $0.00 per share basic and fully diluted, for the three months ended December 31, 2015, compared with a net loss of $945,718, or $0.04 per share basic and fully diluted, for the three months ended December 31, 2014. 

 

 

 

 

Nine Months Ended December 31, 2015 and 2014

The following table sets forth information from our statements of operations for the nine months ended December 31, 2015 and 2014, in dollars and as a percentage of revenue:   

 

nm- not meaningful

 

Net Sales

The following increases and decreases in net sales reflect changes in product mix as our customers gauge their demand for their new and existing products. Our shipments for the nine months ended December 31, 2015 primarily included orders for new and repeat business from existing key customers. For the nine months ended December 31, 2015, net sales decreased by $2.3 million, or 16%, to $12.0 million.  Net sales to our defense market group, increased by $1.5 million, primarily on higher shipments of maritime components to key defense customers.  Net sales in our energy group increased by $0.7 million as a result of increased demand for nuclear components. Net sales in our precision industrial group decreased by $4.5 million, primarily on lower volume for medical components, production furnaces, and certain prototypes. Net sales for medical components were lower by $1.9 million as orders slowed in the nine months ended December 31, 2015. We shipped $1.8 million of production furnace components for the nine months ended December 31, 2014 as required under a purchase agreement with GTAT. GTAT significantly reduced the number of units ordered under the contract and we filed a demand for arbitration under the terms of the agreement.  We recorded a provision for potential contract losses in connection with GTAT's subsequent bankruptcy filing and filed a proof of claim with the bankruptcy court to recover all of our costs under the contract terms. The claim is now considered an unsecured creditor claim within the customer's overall bankruptcy proceedings. We have entered into the Assignment Agreement with Citigroup whereby we assigned our unsecured claim to Citigroup, but we cannot predict the amount of the claim that will be recovered in GTAT's bankruptcy proceeding or the amount that will be received pursuant to the Assignment Agreement.

 

Cost of Sales and Gross Margin

Cost of sales consists primarily of raw materials, labor, overhead, depreciation and subcontracting costs. Our cost of sales for the nine months ended December 31, 2015 decreased by $4.7 million to $8.2 million, primarily as a result of lower sales volume and lower labor costs. Gross margins were 31.4% and 10.0% for the same comparable periods, respectively. Gross profit was $3.8 million, or $2.3 million higher in the nine months ended December 31, 2015 when compared with the nine month period ended December 31, 2014. Gross margin in the nine months ended December 31, 2015 was impacted favorably by improved throughput and the product mix within this reporting period. Certain low margin projects, contract losses, and under absorbed overhead of $1.0 million dampened our gross profit in the nine months ended December 31, 2014.

Selling, General and Administrative Expenses

 

SG&A expenses for the nine months ended December 31, 2015 were $2.5 million compared to $3.2 million for nine months ended December 31, 2014, representing a decrease of $0.8 million or 23%.  The primary drivers of this decrease in SG&A expenses were a $0.2 million decrease in share-based compensation, a $0.5 million reduction of outside advisory fees, and a $0.1 million decrease in rent and related office and administrative costs.

 

 

 

 

Other Income (Expense)

 

The following table reflects other income (expense) and interest expense for the nine months ended:

nm- not meaningful

For the nine months ended December 31, 2015, interest expense increased by 38% when compared to the nine months ended December 31, 2014 due to the payment of an exit fee of $67,500 to Revere and higher rates of interest on outstanding debt. Non-cash interest expense reflects lower amortization amounts for debt issue costs and deferred interest expense. For the nine months ended December 31, 2015 and 2014, we recorded deferred interest cost of $62,825 and $362,862, respectively. During the nine months ended December 31, 2014, we terminated our Series A Bond interest rate swap and recorded a breakage fee of $217,220.

Income Taxes

We recorded zero tax expense for the nine months ended December 31, 2015, as a result of maintaining a full valuation allowance on our net deferred tax assets. For the nine months ended December 31, 2014 we recorded a tax benefit of $152,792 as we reclassified losses on an interest rate swap to our statement of operations. We maintain a full valuation allowance on our net deferred tax assets. A valuation allowance must be established for deferred tax assets when it is more likely than not that they will not be realized. The assessment was based on the weight of negative evidence at the balance sheet date, our recent operating losses and unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels. We regularly assess the effects resulting from these factors to determine the adequacy of our provision for income taxes.

 

Our future effective tax rate would be affected if earnings were lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof.

Net Income (Loss)

 

As a result of the factors described above, our net income was $472,960, or $0.02 per share basic and fully diluted for the nine months ended December 31, 2015. For the nine months ended December 31, 2014 our net loss was $2.9 million, or $0.12 per share basic and fully diluted.

Liquidity and Capital Resources

On December 22, 2014, Ranor entered into the TLSA with Revere. Pursuant to the TLSA, Revere agreed to loan an aggregate of $2.25 million to Ranor under the First Loan Note in the aggregate principal amount of $1.5 million and the Second Loan Note in the aggregate principal amount of $750,000. The First Loan Note is collateralized by a secured interest in Ranor's Massachusetts facility and certain machinery and equipment at Ranor. The Second Loan Note is collateralized by a secured interest in certain accounts, inventory and equipment of Ranor. Payments under the TLSA, the First Loan Note and the Second Loan Note are due as follows: (a) payments of interest only on advanced principal on a monthly basis on the first day of each month from February 1, 2015 until December 31, 2015 with an annual interest rate on the unpaid principal balance of the First Loan Note and the Second Loan Note equal to 12% per annum and (b) the principal balance plus accrued and unpaid interest payable on December 31, 2015. Ranor's obligations under the TLSA, the First Loan Note and the Second Loan Note are guaranteed by TechPrecision pursuant to a Guaranty Agreement with Revere. Ranor utilized approximately $1.45 million of the proceeds of the First Loan Note and the Second Loan Note to repay in full loan obligations owed to Santander Bank N.A., plus breakage fees on a related interest swap of $217,220 under a Loan and Security Agreement with Santander Bank N.A. The remaining proceeds of the First Loan Note and the Second Loan Note were retained by the Company to be used for general corporate purposes. Pursuant to the TLSA, Ranor is subject to certain affirmative and negative covenants, including a cash covenant, which requires that we maintain minimum month end cash balances that range from $400,000 to $820,000. We were required to maintain a cash balance of $789,000 and $500,000 at December 31, 2015 and March 31, 2015, respectively. We were in compliance with all covenants under the TLSA at December 31, 2015 and March 31, 2015.

On December 31, 2015, the Company, Ranor and Revere entered into the Modification Agreement to the TLSA. The Modification Agreement extended the maturity date of the TLSA and the Notes from December 31, 2015 to January 22, 2016 and provided that Ranor agreed to waive its right to extend the maturity date of the Loan Agreement and the Notes by six months as set forth in the TLSA. 

 

 

 

On January 22, 2016, the Company, Ranor and Revere entered into the Second Modification Agreement, which further amends the TLSA. In connection with the Second Modification Agreement, Ranor executed the Amended and Restated Notes in favor of Revere.

The Second Modification Agreement (a) extends the maturity date of the term loans made pursuant to the TLSA to January 22, 2018, (b) amends the amortization schedule such that payments under the TLSA and Amended and Restated Notes are due as follows: (i) payments of interest only on advanced principal on a monthly basis on the first day of each month from March 1, 2016 until January 1, 2017 and (ii) payments of $9,375 in principal plus accrued interest on a monthly basis on the first day of each month from February 1, 2017 until January 22, 2018, (c) reduces the annual interest rate on the unpaid principal balance of the loans to 10% per annum, or the Interest Rate, from 12% per annum, (d) amends the definition of the Minimum Guaranteed Interest payable by Ranor to Revere on the earlier of prepayment in full of the loans or payment in full of the loans on the maturity date to the greater of (i) twelve (12) months interest at the Interest Rate on the amount outstanding on the loans or (ii) interest due on any amount advanced under the TLSA at the Interest Rate, (e) adds a restrictive covenant whereby Ranor must maintain monthly minimum cash balances, with failure to comply with such restrictive covenant an event of default pursuant to which Revere may accelerate the repayment of the loans, and (f) includes a reaffirmation of the Company's guarantee of Ranor's obligations under the TLSA and the Amended and Restated Notes pursuant to a Guaranty Agreement between the Company and Revere.

Other than as so amended by the Modification Agreement and the Second Modification Agreement, the terms and conditions of the TLSA remain in full force and effect.

At December 31, 2015, we had cash and cash equivalents of $816,301, of which $17,269 is located in China and may not be able to be repatriated for use in the United States without undue cost or expense, if at all. Net cash provided by operating activities was $373,278 for the nine months ended December 31, 2015, which includes an advance payment of $507,835 received under the Assignment Agreement with Citigroup. We have reduced our operating expenses to stay in line with current business conditions. Our profit margins have improved significantly for the nine months ended December 31, 2015, when compared with the nine months ended December 31, 2014. As a result, we recorded net income of $472,960 for the nine months ended December 31, 2015 compared with a net loss of $2.9 million for the nine months ended December 31, 2014.

 

We incurred an operating loss of $3.6 million for the year ended March 31, 2015. During fiscal 2014, we recorded a provision for potential contract losses of $2.4 million in connection with the bankruptcy filing and filed a proof of claim with the bankruptcy court to recover all of our costs under the terms of a purchase agreement with GTAT. The claim is now considered an unsecured creditor claim within GTAT's overall bankruptcy proceedings.

On April 17, 2015, the Company, through Ranor, entered into the Assignment Agreement with Citigroup. Pursuant to the terms of the Assignment Agreement, Ranor agreed to sell, transfer, convey and assign to Citigroup all of Ranor's right, title and interest in and to Ranor's $3,740,956 unsecured claim against GTAT. Pursuant to the Assignment Agreement, Citigroup paid to Ranor an initial amount equal to $507,835. The Assignment Agreement provides for Citigroup to pay to Ranor up to an additional $614,452 upon either (A) receipt of written notice that Ranor's claim (or any portion thereof) has been fully and finally allowed against GTAT as a non-contingent, liquidated, and undisputed general unsecured claim, been listed as non-contingent, liquidated, and undisputed on schedules filed by GTAT with the bankruptcy court, or appeared on the claims agent's, or trustee's or other estate representative's records, or has otherwise been conclusively and finally treated in GTAT's bankruptcy, as "allowed" or "accepted as filed" or (B) the expiration of the time period during which any party (including GTAT) is permitted to file an objection, dispute or challenge with respect to Ranor's claim without any such objection, dispute or challenge having been filed. If Ranor's claim against GTAT is allowed in its entirety, then Citigroup will pay Ranor an additional $614,452. If the amount of Ranor's claim that is allowed is greater than $1,692,782 but less than the full amount or Ranor's claim, then Citigroup will pay Ranor an additional amount equal to $614,452 minus the product of 30% multiplied by the difference between the total amount of Ranor's claim and the amount of such claim that is actually allowed. If the total amount of Ranor's claim against GTAT that is allowed is less than $1,692,782, then Ranor may be obligated repay to Citigroup 30% of the difference between $1,692,782 and the amount of Ranor's claim that is actually allowed plus interest at 7% per annum from April 21, 2015 through the date of the repayment.

The Company cannot predict the amount of Ranor's claim that will be finally allowed or admitted in the GTAT bankruptcy proceeding and cannot guarantee that Ranor will receive any additional payment on its claim. The Company continues to vigorously pursue its legal remedies in respect to the case described above, however, an adverse decision in any proceeding could significantly harm our business and our consolidated financial position, results of operations and cash flows.

On May 30, 2014, TechPrecision and Ranor entered into the LSA with Utica. Pursuant to the LSA, Utica agreed to loan $4.15 million to Ranor under a Credit Loan Note, which is collateralized by a first secured interest in certain machinery and equipment at Ranor.  Payments under the LSA and Credit Loan Note are due in monthly installments with an interest rate on the unpaid principal balance of the Credit Loan Note equal to 7.5% plus the greater of 3.3% or the six-month LIBOR interest rate, as described in the Credit Loan Note. Ranor's obligations under the LSA and the Credit Loan Note are guaranteed by TechPrecision.

Pursuant to the LSA, Ranor is subject to certain restrictive covenants which, among other things, restrict Ranor's ability to (1) declare or pay any dividend or other distribution on its equity, purchase or retire any of its equity, or alter its capital structure; (2) make any loan or guaranty or assume any obligation or liability; (3) default in payment of any debt in excess of $5,000 to any person; (4) sell any of the collateral outside the normal course of business; and (5) enter into any transaction that would materially or adversely affect the collateral or Ranor's ability to repay the obligations under the LSA and the Credit Loan Note.  The restrictions contained in these covenants are subject to certain exceptions specified in the LSA and in some cases may be waived by the written consent of Utica.  Any failure to comply with the covenants outlined in the LSA without waiver by Utica or certain other provisions in the LSA would constitute an event of default, pursuant to which Utica may accelerate the repayment of the loan.

 

 

 

In connection with the execution of the LSA, we paid approximately $0.24 million in fees and associated costs and utilized approximately $2.65 million of the proceeds of the Credit Loan Note to pay off debt obligations owed to Santander Bank N.A. under a Loan and Security Agreement.  Additionally, the Company retained approximately $1.27 million of the proceeds of the Credit Loan Note for general corporate purposes.

  

If we were to violate any of the covenants under the above debt agreements, the lenders could demand full repayment of the amounts we owe. As such, we would need to seek alternative financing to pay these obligation as we do not have existing facilities or sufficient cash on hand to satisfy these obligations, and there is no guarantee that we would be able to obtain such alternative financing.

 

We were successful in amending the TLSA with Revere to extend its maturity date. The TLSA was to expire on December 31, 2015 and was amended in January 2016, with the term of the TLSA extended to January 22, 2018. Our LSA with Utica matures on November 30, 2018. We believe that we will have sufficient cash to fund our operations, capital expenditures and principal and interest payments under our debt obligations through the next twelve months. Our liquidity is highly dependent on our available financing facilities and our ability to improve our gross profit and operating income. If we do not execute on our business plans, improve gross profit and operating income, and reduce our operating costs, then our available cash may not be sufficient to fund our operations, capital expenditures and principal and interest payments under our debt obligations through the next twelve months. We may need to secure additional acceptable financing facilities before 2018.

These factors raise substantial doubt about our ability to continue as a going concern. In order for us to continue operations beyond the next twelve months and be able to discharge our liabilities and commitments in the normal course of business, we may need to secure additional financing on terms consistent with our near-term business plans.  We have increased our backlog and changed the composition of our revenues to focus on recurring unit of delivery projects rather than custom first article and prototyping projects, which do not efficiently utilize our manufacturing capacity. We plan to closely monitor our expenses and, if required, will further reduce operating costs and capital spending to enhance liquidity.

The condensed consolidated financial statements for the three and nine months ended December 31, 2015 and for the year ended March 31, 2015 were prepared on the basis of a going concern which contemplates that we will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should we be required to liquidate assets. Our ability to satisfy our total current liabilities of $5.4 million at December 31, 2015 and to continue as a going concern is dependent upon the successful execution of our operating plan and our ability to timely secure long-term financing on favorable terms. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Our failure to service our current debt and obtain new or additional financing could impair our ability to both serve our existing customer base and develop new customers and could result in our failure to continue to operate as a going concern. To the extent that we require new or additional financing, we cannot assure you that we will be able to get such financing on terms equal to or better than the terms of the LSA or the TLSA. If we are unable to raise funds through a credit facility, it may be necessary for us to conduct an offering of debt and/or equity securities on terms which may be disadvantageous to us or have a negative impact on our outstanding securities and the holders of such securities.  In the event of an equity offering, it may be necessary that we offer such securities at a price that is significantly below our current trading price which may result in substantial dilution to our investors that do not participate in the offering and a new lower trading price for our common stock.

 

 

 

 

At December 31, 2015 we had positive working capital of $0.4 million, and at March 31, 2015 we had negative working capital of $2.1 million, respectively. The following table sets forth the changes in our current assets and current liabilities: 

The following table summarizes our primary cash flows for the periods presented: 

Operating activities

Our primary sources of cash are from accounts receivable collections, customer advance payments, and project progress payments. Our customers continue to make advance payments and progress payments under the terms of each manufacturing contract. Our cash flows can fluctuate significantly from period to period as the composition of our receivables collections mix changes between advance payments and customer payments made after shipment of finished goods. Cash provided by operations for the nine months ended December 31, 2015 was $373,278 compared with cash used in operations of $1.3 million for the nine months ended December 31, 2014. Cash provided by operations for the nine months ended December 31, 2015 was augmented by an advance payment of $507,835 received under the Assignment Agreement with Citigroup on April 17, 2015. For the nine months ended December 31, 2015 we recorded net income of $472,960 compared to a net loss of $2.9 million for the nine months ended December 31, 2014.

 

Investing activities

The nine month periods ended December 31, 2015 and 2014 were marked by cash outflows for capital spending for building improvements and equipment of $192,215 and $54,096, respectively. In the third quarter of fiscal 2016 we began a project to replace all the fluorescent lighting in our fabrication and machine shops with LED lighting. The project qualifies for incentive payments if the project is completed as planned in accordance with the applicable terms and conditions.

Financing activities

For the nine months ended December 31, 2015, we used cash in financing activities of $0.7 million to make principal payments on our outstanding debt. For the nine months ended December 31, 2014 we refinanced all of our outstanding debt with Revere and Utica, pursuant to which the lenders agreed to loan an aggregate of $6.4 million to Ranor. We used approximately $4.6 million of these proceeds to pay off debt obligations owed to Santander Bank N.A. under a Loan and Security Agreement, while the remaining proceeds were used to fund our operations and investing activities.

All of the above activity resulted in a net decrease in cash for the nine months ended December 31, 2015 of $520,024, compared with a net increase in cash of $191,966 for the nine months ended December 31, 2014. We have no off-balance sheet assets or liabilities.

 

 

 

 

A table summarizing the amounts and estimated timing of future cash payments from commitments and contractual obligations was provided in the 2015 Form 10-K. During the nine months ended December 31, 2015 there were no material changes to our commitments and contractual obligations.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of December 31, 2015, 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 our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act). Based on the evaluation, our chief executive officer and chief financial officer have concluded that, as of December 31, 2015, our disclosure controls and procedures and internal control over financial reporting were not effective because of the material weakness described in Item 9A of the 2015 Form 10-K.

Disclosure controls and procedures are designed with the objective of ensuring that (i) information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

We are making progress remediating the material weakness identified in the 2015 Form 10-K as described in the next section. Notwithstanding this material weakness, we believe our condensed consolidated statements presented in this Quarterly Report on Form 10-Q fairly represent, in all material respects, our financial position, results of operations and cash flows for all periods presented herein.

Changes in Internal Controls

Except as identified below, there has been no change to our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. During the quarter ended December 31, 2015 we continued to monitor our control environment and improve manual controls that support our financial reporting process by providing guidelines for account reconciliations and enhancing documentation to support sub-ledger account reconciliations. As we continue to remediate the material weakness described in Item 9A of the 2015 Form 10-K, we will determine the appropriate complement of corporate and divisional accounting personnel required to consistently operate management review controls.

 

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material changes to the legal proceedings discussed in Item 3. "Legal Proceedings," in the 2015 Form 10-K. 

Item 1A. Risk Factors

 

Except for the risk factor below, which supplements the risk factors discussed in Item 1A. "Risk Factors," in the 2015 Form 10-K, there have been no material changes to the risk factors discussed in Item 1A. "Risk Factors," in the 2015 Form 10-K.  You should carefully consider the risks described in this Quarterly Report on Form 10-Q and the 2015 Form 10-K, which could materially affect our business, financial condition or future results.  The risks described in this Quarterly Report on Form 10-Q and the 2015 Form 10-K are not the only risks we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.  If any of these risks actually occur, our business, financial condition and/or results of operations could be negatively affected.

 

We may require additional capital to fund our operations. In the event that we determine that we are unable to secure additional funding when required, we may need to downsize or wind down our operations through liquidation, bankruptcy or a sale of our assets.

As of December 31, 2015, we had $0.8 million of cash and cash equivalents. Cash provided by operations for the nine months ended December 31, 2015 was $373,278 compared with cash used in operations of $1.3 million for the nine months ended December 31, 2014. Cash provided by operations for the nine months ended December 31, 2015 was augmented by an advance payment of $507,835 received under the Assignment Agreement with Citigroup on April 17, 2015.

We may require additional capital to fund our operations. If we do not successfully secure additional acceptable financing facilities, execute on our business plans, improve gross profit and operating income, and reduce our operating costs, then our available cash may not be sufficient to fund our operations, capital expenditures and principal and interest payments under our debt obligations through the next twelve months.

 

 

 

Our cash flows can fluctuate significantly from period to period as the composition of our receivables collections mix changes between advance payments for materials and customer payments made after shipment of finished goods. If no additional debt or equity financing is consummated, it is possible that our existing cash and cash equivalents and expected revenue from operations may not be sufficient to meet our operating and capital requirements through the near-term, and changes in our business, whether or not initiated by us, may cause us to deplete such cash and cash equivalents available to us at a quicker rate. We must obtain additional financing in order to continue our operations beyond the near-term. There are no assurances that funding will be available when we need it on terms that we find favorable, if at all. If we are unable to secure additional financing on terms acceptable to us and on a timely basis, we may seek stockholder approval to dissolve or we may file for, or be forced to resort to, bankruptcy protection. Any decision to seek stockholder approval to dissolve or to file for, or be forced to resort to bankruptcy protection, may occur at any point during the near-term. In addition, if we raise additional capital by issuing equity securities, our existing stockholders' percentage ownership will be reduced and they may experience substantial dilution. We may also issue equity securities that provide for rights, preferences and privileges senior to those of our common stock. If we raise additional funds by issuing debt securities, these debt securities would have rights, preferences, and privileges senior to those of our common stock, and the terms of such debt securities could impose significant restrictions on our operations. If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations, take advantage of opportunities, and otherwise respond to competitive pressures could be significantly delayed or limited, and we may need to downsize or halt our operations.

Item 6. Exhibits

 † Management contract or compensatory arrangement or plan.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

EXHIBIT INDEX

 

 † Management contract or compensatory arrangement or plan.