GT SolarGTAT is an alternative energy companya leading global provider of production technology and materials for the solar, LED and other specialty markets that engaged us to provide a componentmanufacture production furnaces for its proprietarythe manufacturing of solar related product.panels and LED products. General Dynamics and BAE Systems is aare  global defense, security and aerospace companycompanies that engaged us to provide fabrication and machining services for military components constructed of large exotic alloy forgings and ancillary equipment. For each of these customers, manufacturing of the product and generation of revenue is based on purchase orders issued to us for completion of the different aspects of the projects. 

For the year ended March 31, 2011, wefiscal 2012, WCMC generated $148,891 in revenue from$4.6 million of our Chinese subsidiary, WCMC.total revenue. WCMC shipped its first production units to a customer in Asia in March 2011. We plan to increase ourincreased production activities in China during fiscal 2012 and expect WCMC to contribute a more significant portion of our consolidated revenues in future periods.

Competition

In the manufacture of metal fabricated and machined precision components and equipment we face competition from both domestic and foreign manufacturers. AsThe industry in which we compete is fragmented with no one company dominates the industry, wedominant player. We compete against companies that are both larger and smaller in size and capacity. Some competitors may be better known, withhave greater resources at their disposal, and somemay have lower production costs. For certain products, being a domestic manufacturer may play a role in determining whether we are awarded a certain contract. For other products, we may be competing against foreign manufacturers who have a lower cost of production. If a contracting party has a relationship with a vendor and is required to place a contract for bids, the preferred vendor may provide or assist in the development of the specification for the product which may be tailored to that vendor’s products. In such event, we would be at a disadvantage in seeking to obtain that contract. We believe that customers focus on such factors as the quality of work, the reputation of the vendor, the perception of the vendor’s ability to meet the required schedule, and the price in selecting a vendor for their products.

 

WCMC subsidiary was formed to serve existing customers who expressed a strong desire for a qualified supply chain within China to serve their Asian end markets. The ChineseChina’s manufacturing base is large and developed, and we believe that there are many domestic and international companies that could compete with us in China. However, we believe that our strategy of augmenting our China-based subcontractors with experienced fabrication and machining expertise from the United States stationed in China at WCMC enables us to better serve the precision manufacturing requirements of our customers within China, as compared to existing China manufacturers operating solely on their own.  We also believe that WCMC allows us to offer our customers global manufacturing solutions in North America and Asia that are not easily replicated by competitors operating exclusively only in either the United States or China.

Government Regulations

 

Our WCMC subsidiary in China hasoperates under a business license granted by the PRC.  Weappropriate government authorities in China. WCMC must operate under the terms and scope of that license in order to maintain ourits right to conduct business operations in China.

Environmental Compliance

 

We are subject to compliance with United States federal, state and local environmental laws and regulations that involve the use, disposal and cleanup of substances regulated by those laws and the filing of reports with environmental agencies, and we are subject to periodic inspections to monitor our compliance. We believe that we are currently in compliance with applicable environmental regulations. As part of our normal business practice we are required to develop and file reports and maintain logbooks that document all environmental issues within our organization. In this connection,such compliance and documentation, we may engage outside consultants to assist us in keeping current on developments in environmental regulations. We doExpenditures for environmental compliance purposes during fiscal 2012 were not believe that our cost of compliance on an annual basis will exceed $50,000.

Intellectual Property Rights

Presently, we have no patent rights and we do not believe that our business requires patent or similar protection. In the course of our business we develop know-how for use in the manufacturing process. Because of the nature of our business as a contract manufacturer, we do not believe that the lack of ownership of intellectual property will adversely affect our operations. In the course of our business we develop know-how for use in the manufacturing process. Although we have non-disclosure policies in place and in our contractual relations, we cannot assure you that we will be able to protect our intellectual property rights with respect to this know-how.

 

As of March 31, 2011,2012, we had approximately 171160 full-time employees, of whom 2450 are administrative, 11salaried and 110 are engineering and 136 are manufacturing personnel.hourly. Of those employees, 8 employees are located in China at our WCMC subsidiary. All of our employees are full time.WCMC. None of our employees is represented by a labor union, and we believe that our employee relations are good.union. 

As a smaller reportingresult of the cyclical nature of these markets, we have experienced, and in the future we may experience, significant fluctuations in our sales and operating income with respect to a substantial portion of our total product offering, and such fluctuations could be material and adverse to our overall financial condition, results of operations and liquidity.

As a publicly traded company in the U.S., our ongoing compliance with various rules and regulations, including the Sarbanes-Oxley Act of 2002, will increase our legal and finance compliance costs and will make some activities more time-consuming and costly.  These rules and requirements may be modified, supplemented or amended from time to time.  Implementing these changes may take a significant amount of time and may require specific compliance training of our personnel.  For example, Section 404 of the Sarbanes-Oxley Act requires that our management report on the effectiveness of our internal control over financial reporting in our annual reports filed with the SEC.  Section 404 compliance may divert internal resources and will take a significant amount of time and effort to complete.  If in the future our Chief Executive Officer, Chief Financial Officer or independent registered public accounting firm determines that our internal controls over financial reporting are not effective as defined under Section 404, we could be subject to sanctions or investigations by the SEC, or other regulatory authorities.  As a result, investor perceptions of our company may suffer, and this could cause a decline in the market price of our common stock.  Irrespective of compliance with these rules and regulations, including the requirements under the Sarbanes-Oxley Act, any failure of our internal controls could have electeda material adverse effect on our stated results of operations and harm our business and reputation.  If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial reporting, or financial results.

We have, in the past, 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.  For the year ended March 31, 2012 our largest customer accounted for 34% of our revenue and our three largest customers accounted for 53% of our revenue.  For the year ended March 31, 2011, our three largest customers accounted for approximately 75% of our revenue, with the largest accounting for 54% of our revenue.  In addition, as of March 31, 2012, we had a $22.4 million order backlog, of which $21.3 million was attributable to ten customers.  As a result, the default in payment by any of our major customers, the loss of existing orders or to the extent that we are unable to generate orders from new customers, we may have difficulty operating profitably.  Furthermore, to the extent that any one customer accounts for a large percentage of our revenue, the loss of that customer could materially affect our ability to operate profitably.  Since one customer, accounted for 34% of our revenue in the year ended March 31, 2012, the loss of this customer would have a material adverse effect upon our business and may impair our ability to operate profitably. We anticipate that our dependence on a limited number of customers in any given fiscal year will continue for the foreseeable future. There is a risk that existing customers will elect not to do business with us in the future or will experience financial difficulties.  Furthermore, certain of our customers are at an early stage and are dependent on the equity capital markets to finance their purchase of our products.  As a result, these customers could experience financial difficulties, business reversals or lose orders or anticipated orders which would reduce or eliminate the need for the products which they ordered from us, and as a result of which they could be unable or unwilling to fulfill their contracts with us.  There is also a risk that our customers will attempt to impose new or additional requirements on us that reduce the profitability of those customers for us.  Further, even if the orders are not changed, these orders may not generate margins equal to our recent historical or targeted results.  If we do not develop relationships with new customers, we may not be able to increase, or even maintain, our revenue, and our financial condition, results of operations, business and/or prospects may be materially adversely affected.

We may use stock options, stock grants and other equity-based incentives, to provide motivation and compensation to our officers, employees and key independent consultants.  The award of any such incentives will result in an immediate and potentially substantial dilution to our existing stockholders and could result in a decline in the information requiredvalue of our stock price.  The exercise of these options and the sale of the underlying shares of common stock and the sale of stock issued pursuant to stock grants may have an adverse effect upon the price of our stock.

In view of the cash requirements of our business, we expect to use any cash flow generated by our business to finance our operations and growth.  Further, we are prohibited from paying dividends on our common stock while the series A preferred stock is outstanding.

Although we do not make projections relating to our future operating results, our operating results may fall below the expectations of securities analysts and investors.  In this Item.event, the market price of our common stock would likely be materially adversely affected.

None.

 

On November 17, 2010, the Companywe entered into a lease agreement pursuant to which the Companywe leased approximately 3,200 square feet of office space in Center Valley, Pennsylvania now used as the Company’sour corporate headquarters.  We took possession of the property on April 1, 2011.  Under the Center Valley lease, our payment obligations arewere deferred until the fifth month after taking

On November 15, 2010, we entered into a lease for approximately 1,100 square feet of office space in Wuxi City, Jiangsu Province, China, which houses our WCMC subsidiary.WCMC.  The lease has a two yeartwo-year term and provides for rent of approximately $1,400$2,200 per month. We also lease apartment space for our expatriate employees who live and work in China. The annual leases cost approximately $3,500 per month.

Although our current facilities, taking into account the Westminster facility expansion, are adequate for present requirements, we may need to further expand our manufacturing facilities as our business grows.

 

We are not a party to any material legal proceedings.

PART II

 

Our common stock is traded on the Over the Counter (OTC) Bulletin Board under the symbol “TPCS”.  The following table sets forth the high and low bid quotations per share of our common stock as reported on the OTC Bulletin Board for the last two completed fiscal years. The quarterly high and low bid quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.  

 

 

Statement Regarding Forward Looking Disclosure

 

The following discussion of the results of our operations and financial condition should be read in conjunction with our audited consolidated financial statements and the related notes, which appear elsewhere in this annual report on Form 10K. This annual report on Form 10-K, 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, and probably will, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors. Those factors include those risks discussed in this Item 7 “Management’s Discussion1A “Risk Factors” and Analysis”elsewhere in this Form 10-K as well as and 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 our ability to generate business on an on-going business, to obtain any required financing, to receive contract awards from the competitive bidding process, maintain standards to enable us to manufacture products to exacting specifications, enter new markets for our services, market and customer acceptance, 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. 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 report, except as required by applicable law. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this report. Investors should evaluate any statements made by the Companyus 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 that involve cutting,(cutting, press and roll forming, assembly, welding, heat treating, blasting and painting;painting) and machining operations which includeincluding 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, manufacturability)manufacturing), quality control (inspection and testing), materials procurement, and 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.

 

The CompanyWe historically hashave experienced, and continuescontinue to experience, customer concentration. Our six largest customers collectively accounted for 77% of our revenue for fiscal 2012. For the fiscal year ended March 31,2012 and fiscal 2011, GT Advanced Technologies, our largest customer, GT Solar, accounted for 54% of our revenue and BAE Systems accounted for 15% of our revenue. In the year ended March 31, 2010, GT Solar and BAE Systems accounted for approximately 52%34% and 14%54% of our revenue,reported net sales, respectively.

 

Because our revenues are derived from the sale of goods manufactured pursuant to a contract, and we do not sell from inventory, it is necessary for us to constantly seek new contracts. There may be a time lag between our completion of one contract and commencement of work on another contract. During this period,such periods, we willmay continue to incur overhead expense but with lower revenue resulting in lower operating margins. Furthermore, changes in either the scope of aan existing contract or therelated delivery scheduleschedules 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 agencies of the United States government.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 theour services we provide.and products.

Growth Strategy

Our strategy is to leverage our core competence as a manufacturer of high-precision, large-scale metal fabrications and machined components to expand our business into areas that have shown increasing demand and which we believe could generate higher margins.   In November 2010, we announced the formation of our China subsidiary, WCMC.   This subsidiary was formed to respond to an existing customer’s desire to migrate their supply chain nearer to their end market within China.  Since the formation of WCMC, we have received numerous inquiries from existingcurrent and potential customers for precision, large scale fabricated and machined metal components and systems in Asia.  Based on the initial interest expressed, in our WCMC operation, we believe there are attractive opportunities to expand our WCMC operations.

We believe that rising energy demands along with increasing environmental concerns are likely to continue to drive demand in the alternativeAlternative energy industry, particularly the solar, wind and nuclear power industries. Because of our capabilities and the nature of the equipment required by companies in the alternative energy industries, we intendare uniquely qualified to focus ourdeliver services in this sector. We also expect to market our services for medical device applications where customer requirements demand strict tolerances and an ability to manufacture complex heavy equipment.

As a result of both the increased prices of oil and gas and the resulting greenhouse gas emissions, nuclear power may become an increasingly important source of energy. In January 2010, the Obama administration increased the level of government-backed debt guarantees from $18 billion to $56 billion as an incentive to support the construction of new nuclear plants in the U.S. While trendsThe 2011 nuclear tragedy in Japan has bolstered demand for advanced nuclear reactor designs with passive safety systems. Over the next 10 years, 26 nuclear power plants are scheduled to be built in China, six in the nuclear power industry through February 2011 were favorable, the nuclear power problemsUnited States and five in Japan and recent announcement that Germany will be exiting the nuclear power industry present emerging trends that may slow the pace of growthEurope (including three in the nuclear power industryUnited Kingdom). Because Ranor is one of the few facilities in the near future. Revenues derived fromUnited States that has the certifications required to produce the necessary components for these plants, this pipeline of new nuclear power industry were $0.2 million and $1.8 million for the years ended March 31, 2011 and 2010, respectively. Currently nuclear power related orders constitute approximately 7% of our backlog.projects creates a significant opportunity. Because of our manufacturing capabilities, our certification from the American Society of Mechanical Engineers and our historic relationships with suppliers in the nuclear power industry, we believe that we are well positioned to benefit from any increased activity in the nuclear sector. However, we cannot assure you that we will be able to develop any significant business from the nuclear industry.

We have been exploring potential business applications focused on the medical industry. These efforts include the development and fabrication of radioactive isotopes transportation/storage solutions for radioactive isotopes and the development and fabrication of critical components for proton beam therapy machines designed to be utilized in the treatment of cancer. We believe that bothIn March 2012, our radioactive isotope customer

received approval from the U.S. Nuclear Regulatory Commission, or NRC, to market its type B transportation customers andcontainers. Now that our radioactive isotope customer has received regulatory approval we hope to receive production volume orders during the 2012 calendar year as they launch their type B transportation containers in the market.

Liquidity and Capital Resources

During the year ended March 31, 2011 compared with a net $1.72012, we invested $2.7 million use of cashin property and equipment, primarily for the year ended March 31, 2010. Cash atpurchase of a new gantry mill machine and to expand our manufacturing facility in Westminster, MA. A bond financing arranged with the beginningState of Massachusetts and Sovereign Bank, in December 2010 provided financing capacity to fund the purchase of the period was $8.8 million.gantry mill as well as other qualifying manufacturing equipment and the 19,500 plant expansion. The bond financing also designated funds that could be utilized for the expansion of our Westminster, Massachusetts facility.

 

The securities purchase agreement pursuant to which we sold the Series A Convertible Preferred Stock to Barron Partners provides Barron Partners with a right of first refusal on future equity financings, which may affect our ability to raise funds from other sources if the need arises. In the event that we make an acquisition, we may require additional financing for the acquisition. We have no commitment from any party for additional funds, however, the terms of our agreement with Barron Partners, particularly the right of first refusal, may impair our ability to raise capital in the equity markets to the extent that potential investors would be reluctant to negotiate a financing when another party has a right to match the terms of the financing.

The following table setsets forth information as of March 31, 20112012 as to our contractual obligations (dollars in thousands):  obligations:

 

The financial statements begin on Page F-1.

 

As of March 31, 2011, weWe carried out an evaluation, under the supervision and with the participation of management, including our chief executive officerChief Executive Officer and chief financial officer,Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)).Act.

Disclosure controls and procedures are designed to ensure that information required to be disclosed is recorded, processed, summarized and reported, within the time periods specified in SECthe rules and forms.forms of the SEC or the Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure

Based upon that evaluation, our chief executive officerChief Executive Officer and chief financial officerChief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2011,2012, to provide reasonable assurance that information required to be disclosed by the Companyus in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’sSEC rules and forms and is accumulated and communicated to management, including our chief executive officerChief Executive Officer and chief financial officer,Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

 

Based on this evaluation, management concluded that our internal control over financial reporting was effective as of March 31, 20112012 based on those criteria. A control system, no matter how well conceiveddesigned and operated, can provide only reasonable, but not absolute, assurance that the objectives of the control system are met.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within us have been detected.

This annual report does not include an attestation report of the Company’sour registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’sour registered public accounting firm pursuant to temporarythe rules of the Securities and Exchange CommissionSEC that permit the Companyus to provide only management’s report in this annual report.

 

Not Applicable

PART III

 

The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference from the registrant’s definitive proxy statement relating to the Annual Meeting of Shareholders to be held in 2011,2012, which definitive proxy statement shall be filed with the Securities and Exchange CommissionSEC within 120 days after the end of the fiscal year to which this Report relates.

 

Information relating to Item 10 will be set forth in the Company’sour definitive Proxy Statement in connection with its Annual Meeting of Shareholders to be held in 2011.2012. Such information is incorporated herein by reference and will be filed within 120 days of March 31, 2011.2012.

 

Information relating to Item 11 will be set forth in the Company’sour definitive Proxy Statement in connection with its Annual Meeting of Shareholders to be held in 2011.2012. Such information is incorporated herein by reference and will be filed within 120 days of March 31, 2011.2012.

 

 

Information relating to Item 13 will be set forth in the Company’sour definitive Proxy Statement in connection with its Annual Meeting of Shareholders to be held in 2011.2012. Such information is incorporated herein by reference and will be filed within 120 days of March 31, 2011.2012.

 

Information relating to Item 14 will be set forth in the Company’sour definitive Proxy Statement in connection with its Annual Meeting of Shareholders to be held in 2011.2012. Such information is incorporated herein by reference and will be filed within 120 days of March 31, 2011.2012.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each person whose signature appears below hereby authorizes James S. Molinaro and Richard F. Fitzgerald or either of them acting in the absence of the others, as his or her true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution for him or her and in his or her name, place and stead, in any and all capacities to sign any and all amendments to this report, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MARCH 31, 20112012 AND 20102011

 

 

TECHPRECISION CORPORATION