For the threesix months ended JuneSeptember 30, 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.

For the threesix months ended JuneSeptember 30, 2013, we recorded a liability of $278,645$271,168 (net of tax of $0) to reflect the fair value of an interest rate swap contract in connection with a tax exempt bond financing transaction.

See accompanying notes to the condensed consolidated financial statements.

 

TechPrecision Corporation, or TechPrecision, is a custom manufacturer of large scale metal fabricated and machined precision components and equipment. We offer a full range of services required to transform metallic raw materials into precise finished products. We sell these finished products to customers in three main industry groups: naval/maritime, energy and precision industrial. These products are used in a variety of markets including the alternative energy, medical, nuclear, defense, commercial, and aerospace industries. TechPrecision is the parent company of Ranor, Inc., or Ranor, a Delaware corporation. On November 4, 2010, TechPrecision announced it completed the formation of a wholly foreign owned enterprise (WFOE), under the laws of the People’s Republic of China, Wuxi Critical Mechanical Components Co., Ltd., or WCMC, to meet demand for local manufacturing of components in China. TechPrecision, WCMC and Ranor are collectively referred to as “the Company,” “we,” “us” or “our.”

At March 31, 2013, we were not in compliance with the fixed charges and interest coverage financial covenants under our Loan and Security Agreement between Ranor and Santander Bank, or the Bank, dated February 24, 2006, as amended, or the Loan Agreement, and the Bank did not agree to waive the non-compliance with the covenants. The Loan Agreement was amended by the Forbearance and Modification Agreement, dated January 16, 2014, or the First Forbearance Agreement. Under the First Forbearance Agreement, the Bank agreed to forbear from exercising certain of its rights and remedies arising as a result of the Company’s non-compliance with certain financial covenants under the Loan Agreement until March 31, 2014. The First Forbearance Agreement expired on March 31, 2014, and the Bank did not agree to waive the non-compliance with the covenants at March 31, 2014. Since we were in default, the Bank had the right to accelerate payment of the debt in full upon 60 days written notice. As a consequence, we classified all amounts under the Loan Agreement, $4.2 million at March 31, 2014 as a current liability.

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 interest on the unpaid principal balance of the Credit Loan Note at an interest rate equal to 7.5% plus the greater of 3.3% and 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 or (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 of 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 be 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 to pay off debt obligations owed to the Bank, under the Loan Agreement.  Additionally, the Company retained approximately $1.27 million for general corporate purposes.

On January 16, 2014, we entered into a forbearance and modification agreement with the Bank, or the First Forbearance Agreement, in connection with the Loan Agreement. Under the First Forbearance Agreement, the Bank agreed to forbear from exercising certain of its rights and remedies arising as a result of the Company’s non-compliance with certain financial covenants under the Loan Agreement until March 31, 2014.

On August 12, 2014, the Company and the Bank entered into a new forbearance and modification agreement, or the Fourth Forbearance Agreement, and collectively with the First Forbearance Agreement, the Second Forbearance Agreement and the Third Forbearance Agreement, the Forbearance Agreements. Under the Fourth Forbearance  Agreement, the Bank agreed to forbear from exercising certain of its rights and remedies arising as a result of the Company’s non-compliance with certain financial covenants under the Loan Agreement commencing on August 1, 2014 and extending until no later than September 30, 2014, or the Fourth Forbearance Period. Under the Fourth Forbearance Agreement we were required to retain a management consultant acceptable to the Bank who will have access to our operations in the U.S. We have continued and will continue to make principal and interest payments pursuant to the terms of the Loan Agreement, as amended by the Forbearance Agreements. We were not in compliance with the applicable leverage ratio covenant in the Loan Agreement, as amended by the Forbearance Agreements at JuneSeptember 30, 2014 or at March 31, 2014, as the actual leverage ratio was 4.34.4 to 1.0 and 3.8 to 1.0, respectively. The Second Forbearance Period was extended further subsequent to June 30, 2014 pursuant to an execution of

We have not entered into a new forbearance and modification agreements (see Note 18).

In the event that we fail to pay off, or complete a refinancing of, the current outstanding obligations by the completion of the SecondFourth  Forbearance Period, (as extended by the forbearance and modification agreements entered into subsequent to June 30, 2014 – see Note 18), the interest rate on outstanding obligations will convert to the default interest rate of 65% of the sum of one month LiborLIBOR plus 16%. If the Bank were to demand full repayment, we would be unable to pay the obligation as we do not have existing facilities or sufficient cash on hand to satisfy these obligations and would need to seek alternative financing.

At JuneSeptember 30, 2014, we had cash and cash equivalents of $886,888,$849,264, of which $11,356$15,613 is located in China and which we may not be able to repatriate for use in the U.S. without undue cost or expense, if at all. Our cash and cash equivalents total includes $505,000$180,000 of restricted cash with the Bank that may be used toward funding operating activities with the Bank’s approval. Approximately 36%55% and 24% of our accounts receivable wereand work-in-process, respectively, are at risk of not being paidconverted to cash in a timely manner due to a contract dispute with one of our customers. We have incurred an operating loss of $1.3 million for the three months ended June 30, 2014. Our financial results for the past three years were impacted by significant new contract losses. We have recorded a provision for potential contract losses of $2.7 million, and, in one case, filed a demand for arbitration under a customer’s purchase agreement to recover all of our costs under the contract terms. We cannot be certain that we will be successful in recovering the full amount of our losses. We have incurred an operating loss of $1.9 million for the six months ended September 30, 2014.

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 must secure long-term financing on terms consistent with our near-term business plans. In addition, we must increase our backlog and change 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 use our manufacturing capacity, and reduce our operating expenses to be in line with current business conditions in order to increase profit margins and decrease the amount of cash used in operations. If successful in changing the composition of revenue and reducing costs, we anticipate that the year ending March 31, 2015, or fiscal 2015, operating results willshould reflect positive cash flows. We plan to closely monitor our expenses and, if required, will further reduce operating costs to enhance liquidity. 

The condensed consolidated financial statements for the three and six months ended JuneSeptember 30, 2014 and the year ended March 31, 2014, or fiscal 2014, 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 $13.9$12.0 million at JuneSeptember 30, 2014 and to continue as a going concern is dependent upon the availability of and our ability to timely secure long-term financing and the successful execution of an effective operating plan. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

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 JuneSeptember 30, 2014, the condensed consolidated statements of operations and comprehensive loss for the three and six month periods ended JuneSeptember 30, 2014 and 2013, and the condensed consolidated statements of cash flows for the threesix months ended JuneSeptember 30, 2014 and 2013 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, or 2014 Form 10-K, filed with the SEC for the year ended March 31, 2014.

Our significant accounting policies are set forth in detail in Note 2 to the 2014 Form 10-K.

Depreciation expense for the three and six months ended JuneSeptember 30, 2014 and 2013 was $215,516$211,751 and $248,440,$427,267, and $220,604 and $469,044, respectively.

Our loss provision includes approximately $2.4 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. We continued to incur losses on customer projectsAccrued compensation at JuneSeptember 30, 2014. We have incurred approximately $0.3 million in new contract losses in our statement2014 includes $220,000 of operations for the three months ended June 30, 2014.unpaid Executive Chairman compensation and Board of Director fees.

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 interest on the unpaid principal balance of the Credit Loan Note at an interest rate 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 or (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 of 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 be an event of default, pursuant to which Utica may accelerate the repayment of the loan.

On January 16, 2014, we entered into a forbearance and modification agreement with the Bank, or the First Forbearance Agreement, in connection with the Loan Agreement. Under the First Forbearance Agreement, the Bank agreed to forbear from exercising certain of its rights and remedies arising as a result of the Company’s non-compliance with certain financial covenants under the Loan Agreement until March 31, 2014, or the First Forbearance Period.

In consideration for the granting of the First Forbearance Agreement, we agreed to :to: (i) have paid in full all interest and fees accrued under the Loan Agreement and other related documents through December 31, 2013 (at such interest rate and in accordance with the terms therein); (ii) reimburse the Bank for appraisal costs in the amount of $11,240; (iii) an increase in the interest rate of 2% for the Series A Bonds and the Series B Bonds to 6.1% and 5.6%, respectively, during the First Forbearance Period; (iv) the application of $394,329 and $445,671 of the Company’s restricted cash collateral deposit of $840,000 to pay off certain obligations under the Loan Agreement described above and the Series B Bonds, respectivelyrespectively; and (v) pay a forbearance fee of 3% of the net outstanding balance due from the Obligors to the Bank, which amounts to $128,433 due in installments during the First Forbearance Period.

On May 30, 2014, we and the Bank entered into a new forbearance and modification agreement, or the Second Forbearance Agreement. Under the Second Forbearance Agreement, the Bank has agreed to forbear from exercising certain of its rights and remedies arising as a result of the Company’s non-compliance with certain financial covenants under the Loan Agreement commencing retroactively on April 1, 2014 and extending until no later than June 30, 2014, or the Second Forbearance Period.

During the Second Forbearance Period, we agreed to comply with the terms, covenants and provisions in the Loan Agreement and related documents, as amended by the Second Forbearance Agreement.  The Second Forbearance Agreement amends the Loan Agreement to, among other things, prohibit the Company’s Leverage Ratio  (as such term is defined in the Loan Agreement) to be greater than 1.75 to 1.0.  We were not in compliance with the leverage ratio covenant at June 30, 2014 or March 31, 2014, as the actual leverage ratio was 4.3 to 1.0 and 3.8 to 1.0, respectively.

We haveOn July 1, 2014, the Company and the Bank entered into newa third forbearance and modification agreements subsequent to June 30, 2014, under whichagreement, or the Third Forbearance Agreement. Under the Third Forbearance Agreement, the Bank has agreed to forbear from exercising certain of its rights and remedies arising as a result of the Company’s non-compliance with certain financial covenants under the Loan Agreement commencing on July 1, 2014 and extending until no later than July 31, 2014, or the Third Forbearance Period.

On August 12, 2014, the Company and the Bank entered into a new forbearance and modification agreement, or the Fourth Forbearance Agreement. Under the Fourth Forbearance  Agreement, the Bank agreed to forbear from exercising certain of its rights and remedies arising as a result of the Company’s non-compliance with certain financial covenants under the Loan Agreement commencing on August 1, 2014 until no later than September 30, 2014, (see Note 18). The Company isor the Fourth Forbearance Period. Under the Fourth Forbearance Agreement we were required to retain a management consultant acceptable to the Bank who will have access to our operations in the U.S. We have continued and will continue to make principal and interest payments pursuant to the terms of the Loan Agreement, as amended by Forbearance Agreements. If the Bank were to demand full repayment of the amounts we owe the Bank, we would be unable to pay the obligation as we do not have existing facilities or sufficient cash on hand to satisfy these obligations and would need to seek alternative financing. We were not in compliance with the leverage ratio covenant at September 30, 2014 or March 31, 2014, as the actual leverage ratio was 4.4 to 1.0 and 3.8 to 1.0, respectively.

We are engaged in discussions with the Bank about extending the Fourth Forbearance Agreement. We are also engaged in discussions with potential alternative financing sources to secure additional financing to, among other things, payoff the remaining obligation under the Series A Bonds.

On December 30, 2010, we completed a $6.2 million tax exempt bond financing with the Massachusetts Development Finance Authority, or the MDFA, pursuant to which the MDFA sold to the Bank MDFA Revenue Bonds, Ranor Issue, Series 2010A in the original aggregate principal amount of $4.25 million, or Series A Bonds, and MDFA Revenue Bonds, Ranor Issue, Series 2010B in the original aggregate principal amount of $1.95 million, or Series B Bonds together with the Series A Bonds, the Bonds. The proceeds of such sales were loaned to us under the terms of a Mortgage Loan and Security Agreement, dated as of December 1, 2010, by and among us, MDFA and the Bank (as Bond owner and Disbursing Agent), or the MLSA.

In connection with the Bond financing, we and the Bank entered into the International Swap and Derivatives Association, Inc. 2002 Master Agreement, dated December 30, 2010, or ISDA Master Agreement, pursuant to which the variable interest rates applicable to the Bonds were swapped for fixed interest rates of 4.14% on the Series A Bonds. Under the ISDA Master Agreement, we and the Bank entered into the swap transaction on January 3, 2011. The notional amount of the outstanding fair value interest rate swaps totaled $3.5 and $4.6 million on June 30, 2014 and March 31, 2014, respectively.

Through June 30, 2014, we held two interest rate swap contracts, which arewere designated as cash flow hedges, are carriedto hedge our interest rate exposure on the underlying Series A and Series B Bonds under the MLSA. We recorded the fair value of the contracts in our consolidated balance sheet at fair value with the effective portion of the gain or loss on the derivative reported in stockholders’ equity as a component of accumulated other comprehensive loss and subsequently reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Because the critical terms of the interest rate swap changed following the execution of the LSA in the first quarter of Fiscal 2015 we terminated the Series B swap, and de-designated our Series A interest rate swap in the second quarter. As a result, in the second quarter of Fiscal 2015, we reclassified $248,464 from Accumulated Other Comprehensive Income to the statement of operations on the interest expense line. The outstanding fair value interest rate swap recorded in current liabilities on our balance sheet was $196,096 and $271,168 on September 30, 2014 and March 31, 2014, respectively. The Series A swaps will terminate on January 4, 2021. We intend to hold the Series A interest rate swap over the near term.

The fair value of the interest rate swaps contracts were measured using market based level 2 inputs. The method employed to calculate the values conforms to the industry convention for calculation of such values. The swap’s market value can be calculated any time by comparing the fixed rate set at the inception of the transaction and the “swap replacement rate,” which represents the market rate for an offsetting interest rate swap with the same Notional Amountsnotional amounts and final maturity date. The market value is then determined by calculating the present value interest differential between the contractual swap and the replacement swap. The termination value is the sum of the present value interest differential as described above plus the accrued interest due at termination.

We entered into a new capital lease in April 2012 for certain office equipment. The lease term is for 63 months, bears interest at 6.0% and requires monthly payments of principal and interest of $860. This lease was amended in fiscal 2014 when we purchased another replacement copier at Ranor. The revised lease term was extended by nine months and will expire in March 2018.2018 and the required monthly payments of principal and interest increased to $1,117. The amount of the lease recorded in property, plant and equipment, net as of JuneSeptember 30, 2014 and March 31, 2014 was $43,473$40,654 and $46,420, respectively.

Obligations under the Credit Loan Note, Series A Bonds and Capital Lease are guaranteed by TechPrecision and Ranor. Collateral securing the Credit Loan Note, Series A Bonds and Capital Lease comprises all personal property of TechPrecision and Ranor, including cash, accounts receivable, inventories, equipment, financial and intangible assets.

At the end of each interim period, we make an estimate of our annual U.S. and China expected effective tax rates. For the three and six months ended JuneSeptember 30, 2014 and 2013,, we recorded zero incomea tax expense.benefit of $152,792 as a result of the reclassification of a loss on an interest rate swap from other comprehensive income. The lack of aany other tax benefitbenefits for the threesix months ended JuneSeptember 30, 2014 was primarily the result of recording 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 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 JuneSeptember 30, 2014, our federal net operating loss carry-forwardcarryforward was approximately $6.0$7.6 million. If not utilized, the federal net operating loss carry-forwardcarryforward 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 some of these carryforwards on a yearly basis due to an ownership change in connection with the acquisition of Ranor in 2006.

 

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 $2,678$4,234 and $3,632,$10,703 for the threesix months ended JuneSeptember 30, 2014 for the three months ended June 30,and 2013, respectively.

We have 10,000,000 authorized shares of preferred stock and the Board of Directors has broad power to create one or more series of preferred stock and to designate the rights, preferences, privileges and limitation of the holders of such series. The 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, at December 31, 2009, each share of Series A Convertible Preferred Stock was convertible into 1.3072 shares of common stock, with an effective conversion price of $0.218.  Based on the current conversion ratio, as of JuneSeptember 30, 2014 and March 31, 2014, there were 2,519,638 and 3,238,598 common shares, respectively, underlying the Series A Convertible Preferred Stock. 

Upon any liquidation we would be required to pay $0.285 for each share of Series A Convertible Preferred Stock. The payment will be made before any payment to holders of any junior securities and after payment to holders of securities that are senior to the Series A Convertible Preferred Stock.  

During the threesix months ended JuneSeptember 30, 2014 there were 550,000 shares of Series A Convertible Preferred Stock converted into 718,954 shares of common stock. At JuneSeptember 30, 2014 and March 31, 2014, we had 1,927,508 and 2,477,508 shares, respectively, of Series A Convertible Preferred Stock outstanding.

 

We had 90,000,000 authorized common shares at JuneSeptember 30, 2014 and March 31, 2014, and there were 24,669,958 and 23,951,004 shares of common stock outstanding at JuneSeptember 30, 2014 and March 31, 2014, respectively.

 

In 2006, the Company’s directors adopted, and the Company’s stockholders approved, the 2006 TechPrecision Corporation Long-termLong-Term Incentive Plan, or, as amended, the Plan. 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 the Board of Directors. Independent directors are not eligible for discretionary options. The maximum number of shares of common stock that may be issued under the Plan is 3,300,000 shares.

Pursuant to the Plan, each newly elected independent director receives at the time of his or her election, an 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 1st of each year following the third anniversary of the date of his or her first election.  

The fair value 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 risk-free interest rate was selected based upon yields of five-year U.S. Treasury issues. The assumptions utilized for option grants during the period presented ranged from 125% to 134% for volatility and a risk free rate of 1.39% to 1.71% and an expected term of approximately six years.

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 exercise activity we did not rely on our historical exercise data. There were no50,000 options granted during the threesix months ended JuneSeptember 30, 2014. At JuneSeptember 30, 2014, 1,547,0061,697,006 shares of common stock were available for grant under the Plan. The following table summarizes information about options for the most recent annual income statements presented: 

We made a discretionary grant outside of the Plan on June 13, 2013 of 200,000 options at an exercise price of $0.67 per share, the fair market value on the date of grant, to our non-employee directors in recognition of their additional services while we seek a permanent chief executive officer. The options have a term of ten years and will vest in three equal installment amounts on each of the grant date and first anniversaries of the grants and are subject to continuous service as members of the board through the second anniversary of the grant date. Although the grants were made outside of the Plan, the terms of the options are the same as those issued under the Plan.

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 threesix months ended:

We operate our business under one segment, large scale fabricated and machined metal components and systems equipment. 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 net property, plant and equipment) by the country in which the legal subsidiary is domiciled and assets are located:  

We have employment agreements with our executive officers. Such agreements provide for minimum salary levels, adjusted annually, as well as for incentive bonuses that are payable if specified company goals are attained. The aggregate annual commitment at JuneSeptember 30, 2014 for future compensation during the next twelve months, excluding bonuses, was approximately $1,000,000, including $60,000 in connection with a Service, Separation and Release Agreement (see Note 18) for consulting services with our former President and General Manager of Ranor.$0.9 million.

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 shares. The following table provides a reconciliation of the numerators and denominators reflected in the basic and diluted loss 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. For the three and six month periods ended JuneSeptember 30, 2014, there were 2,105,467 and 2,491,658 shares, respectively, and for the three and six months ended September 30, 2013 there were 2,192,2205,011,341 and 506,5005,359,626 shares, respectively, of potentially anti-dilutive stock options, warrants and convertible preferred stock, none of which were included in the EPS calculations above.  

On July 1,October 6, 2014, the Company and the Bank entered into the Third Forbearance Agreement. Under the Third Forbearance  Agreement, the Bank agreed to forbear from exercisingGT Advanced Technologies, Inc., or GTAT, together with certain of its rightsdirect and remedies arisingindirect subsidiaries, commenced voluntary cases under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of New Hampshire.   GTAT’s bankruptcy filing causes an automatic stay in any arbitration proceedings in which GTAT is involved, including the arbitration proceeding with Ranor, Inc., or the Ranor arbitration, as previously described in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2014 and the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2014, filed with the Securities and Exchange Commission on July 15, 2014 and August 18, 2014, respectively.  The automatic stay results in the American Arbitration Association suspending administration of the Ranor Arbitration and the Company’s claim in the Ranor Arbitration is now considered an unsecured creditor claim within GTAT’s overall bankruptcy proceedings.

While any payments to the Company as a result of the Company’s non-compliance withclaim by Ranor were not certain financial covenants under the Loan Agreement commencing on July 1, 2014 and extending until no later than July 31, 2014. The Third Forbearance Agreement expired on its own terms on July 31, 2014.

 

 

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 herein.  This quarterly report on Form 10Q, including this section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” or MD&A, 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 2 “Management’s Discussion and Analysis”Analysis of Financial Condition and Results of Operations” in this Form 10-Q 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 recurring operating losses and the availability of appropriate financing facilities impacting our ability to continue as a going concern, to change the composition of our revenues and effectively reduce our operating expenses, our ability to generate business on an on-going basis, to obtain any required financing on favorable terms, 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, marketing 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 us in light of these important factors.

 

We are a contract manufacturer and we sell our services to customers in three industry groups: energy, naval/maritime, and precision industrial. Our strategy is to leverage our core competence as a manufacturer of high-precision, large-scale metal fabrications and machined components to optimize profitability of our current business and expand into markets that have shown increasing demand. We aim to establish our expertise in program and project management and develop and expand a repeatable customer business model in our strongest markets.

We offer a full range of services required to transform metallic 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 at Ranor 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.

Our Ranor subsidiary performs precision fabrication and machining in all three of the industry groups we serve, delivering turn-key  components to our customers stringent design specifications, quality and safety manufacturing standards. Our team at Ranor has successfully developed new, effective approaches to fabrication that continue to be utilized at their facility and at our customer’s own defense component manufacturing facilities. Defense components the Ranor team has delivered include critical sonar housings and fairings, vertical launch missile tubes, and magnetic motor system components. We have developed and built Tier 1 and Tier 2 relationships with our customers and will continue to seek opportunities where we have a Tier 1 or Tier 2 supplier relationship. We have endeavored to increase our business development efforts with large prime defense contractors.  Based upon these efforts, we believe there are additional opportunities to secure increased business with existing and new defense contractors who are actively looking to increase outsourced content on certain defense programs over the next several years.  We believe that the military quality certifications Ranor maintains and its ability to offer turn-key fabrication and manufacturing services at a single facility position it as an attractive outsourcing partner for prime contractors looking to increase outsourced production.

Because our revenues are derived from the sale of goods manufactured pursuant to a contract, and we do not sell from inventory, it is necessary for us to constantly seek new contracts. There may be a time lag between our completion of one contract and commencement of work on another contract. During such periods, we may continue to incur overhead expense but with lower revenue resulting in lower operating margins. Furthermore, changes in either the scope of an existing contract or related delivery schedules may impact the revenue we receive under the contract and the allocation of manpower. Although we provide manufacturing services for governmental programs, we usually do not work directly for the government or its agencies. However, our business is dependent in part on the continuation of governmental programs that procure services and products from our customers.

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 revenue stream and cost structure.

We historically have experienced, and continue to experience, customer concentration. For the threesix months ended JuneSeptember 30, 2014 and 2013, our five largest customers accounted for approximately 80%73% and 74%71% of reported net sales.  Our sales order backlog at JuneSeptember 30, 2014 was approximately $14.7$12.9 million compared with a backlog of $22.9 million at March 31, 2014. Our JuneSeptember 30, 2014 backlog includes approximately $1.0$0.8 million of orders for sapphire production furnaces.   

At March 31, 2014, we were not in compliance with our financial covenants in the Loan and Security Agreement between Ranor and Santander Bank, or the Bank, dated February 24, 2006, as amended, or the Loan Agreement, and the Bank did not agree to waive the non-compliance with the covenants. As a result, we were in default at March 31, 2014.

On January 16, 2014, we entered into a forbearance and modification agreement with the Bank, or the First Forbearance Agreement, in connection with the Loan Agreement. Under the First Forbearance Agreement, the Bank agreed to forbear from exercising certain of its rights and remedies arising as a result of the Company’s non-compliance with certain financial covenants under the Loan Agreement until March 31, 2014, or the First Forbearance Period.

On May 30, 2014, the Company and the Bank entered into the second forbearance and modification agreement, or the Second Forbearance Agreement, commencing retroactively on April 1, 2014 and extending until no later than June 30, 2014, or the Second Forbearance Period. At June 30, 2014, we were in default and continue to be in default with the Loan Agreement with the Bank. The Bank had the right to accelerate payment of the debt in full upon 60 days' written notice. As a consequence, all amounts under all of the Loan Agreement, the Series A Bonds, the Series B Bonds and the LSA, as applicable, are classified as a current liability at JuneSeptember 30, 2014 ($5.65.3 million) and March 31, 2014 ($4.2 million).

On July 1, 2014, the Company and the Bank entered into a third forbearance and modification agreement, or the Third Forbearance Agreement. Under the Third Forbearance Agreement, the Bank agreed to forbear from exercising certain of its rights and remedies arising as a result of the Company’s non-compliance with certain financial covenants under the Loan Agreement commencing on July 1, 2014 and extending until no later than July 31, 2014, or the Third Forbearance Period.

On August 12, 2014, the Company and the Bank entered into a fourth forbearance and modification agreement, or the Fourth Forbearance Agreement. Under the Fourth Forbearance  Agreement, the Bank agreed to forbear from exercising certain of its rights and remedies arising as a result of the Company’s non-compliance with certain financial covenants under the Loan Agreement commencing on August 1, 2014 and extending until no later than September 30, 2014, or the Fourth Forbearance Period. Under the Fourth Forbearance Agreement, we arewere required to retain a management consultant acceptable to the Bank who will have access to our operations in the U.S. We have continued and will continue to make principal and interest payments pursuant to the terms of the Loan Agreement and the Fourth Forbearance Agreement.

If the Bank were to demand full repayment before the expiration of the Fourth Forbearance Period,amounts we owe the Bank, we would be unable to pay the obligation as we do not have existing facilities or sufficient cash on hand to satisfy these obligations and would need to seek alternative financing.

These factors 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.”

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.

 

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

Our results of operations are affected by a number of external factors including the availability of raw materials, commodity prices (particularly steel), macroeconomic factors, including the availability of capital that may be needed by our customers, and political, regulatory and legal conditions in the United States and foreign markets. Our order and revenue stream is uneven and reflects an irregular pattern of orders we receive from our customers as they gauge their customer’s demand for new and existing products. Our results of operations are affected by our success in booking new contracts and when we are able to recognize the related revenue, delays in customer acceptances of our products, delays in deliveries of ordered products and our rate of progress in the fulfillment of 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 to the business plan we developed early in our first quarter that has the immediate goal of realigning and stabilizing our cost structure so we can return to profitability, even at current lower revenue levels. We need to rebuild our backlog with orders from our key customers. 

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

The following increases and decreasesWe have been unable to replace the delayed GTAT production units originally scheduled for the second quarter of fiscal 2015 with new orders in net sales reflect an irregular order flow from our customers as they measure theira timely manner. Additional shipments for sapphire production furnaces were delayed under a purchase agreement with GTAT, which has indicated a desire to reduce the number of units ordered under the contract. We have filed a demand for newarbitration under the terms of the agreement. Manufacturing activities and existing products.shipments under this contract have been suspended until a settlement can be reached among the parties. For the three months ended JuneSeptember 30, 2014, net sales decreased by $0.9$0.6 million, or 12%, to $6.2$4.6 million. By market sector, Net Sales 1) increased in orour naval/maritime group increased by $0.6 million or 24% on increased shipments of components todemand for products from our largest customer.  Net salesdefense customers, 2) decreased in our energy group decreased by $1.2$0.5 million asor 61% on delayed shipments of isotope transport casks were delayed. Net Salesand soft demand for products, and 3) decreased in our precision industrial group decreased by $0.3$0.7 million or 42% as lower sales for pressure vessels more than offset an increase in net sales of medical components and sapphire production furnaces. Sales of production furnaces increased significantly as Ranor made shipments as required under a certain customer purchase agreement from the U.S. and from our WCMC subsidiary in China. That same customer has indicated a desire to reduce the number of units ordered under the contract and we have filed a demand for arbitration under the terms of the agreement. Future manufacturing activities and shipments under this contract are at risk.

Actual production levels were lower than planned and resulted in under absorbed overheads for the period. Our cost of sales for the three months ended JuneSeptember 30, 2014 decreased by $0.7$0.8 million, or 10%17%, on lower sales volume.  Gross margins during the three months ended JuneSeptember 30, 2014 were 3.5%18.9% compared with 5.9%14.0% for the same period in fiscal 2013.2014. Fiscal 2015 margins were dampened by a heavy volume of low margin production furnaces shipped during the period, under absorbed overhead of $1.0 million, and new contract losses of $0.4approximately $1.9 million. Fiscal 2014 margins were impacted by low margin contracts, under absorbed overhead and new contract losses of $0.8 million on custom first article projects. Gross margin in any reporting period is impacted by the mix of services we provide on projects completed and in-process within that period. Actual production levels were lower than planned and resulted in under absorbed overheads for the period.

Total selling, general and administrative expenses, or SG&A, for the three months ended JuneSeptember 30, 2014 were $0.4$0.3 million or 25%18% lower when compared with the same period in fiscal 2014.  SG&A compensation expenses wereand administrative expense was $0.4 million lower due to reduced headcount at our holding company andheadcount. This decrease was offset in China ($0.3 million), and lower travel and other business expenses ($0.1 million). SG&A at our Ranor subsidiary was relatively unchanged year over year.part by a $0.1 million increase as we engaged outside advisors to help find alternative sources of financing.

 

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

We de-designated our Series A Bond interest rate swap hedge and reclassified the change in fair value from other comprehensive income to the statement of operations. We will record all future changes in fair value related to the interest rate swap in our statement of operations. Interest expense for the three months ended JuneSeptember 30, 2014 includes a breakage fee of $29,448 in connectionwas higher due to higher rates related to our new debt financing under an LSA with the Series B Bond interest rate swap.Utica. Non–cash interest expense primarily reflects thehigher amounts of amortization offor deferred loan costs in connection with the Utica Credit Loan Note.LSA.

For the three months ended JuneSeptember 30, 2014 and 2013, we recorded zeroa tax expense.  The zero tax expense recorded for the three months ended June 30, 2014 was the resultbenefit of maintaining$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.

As a result of the foregoing, our net loss was $1.3$0.6 million, or $0.05$0.03 per share basic and fully diluted, for the three months ended JuneSeptember 30, 2014, as compared to net loss of $1.4$0.8 million, or $0.07$0.04 per share basic and fully diluted, for the three months ended JuneSeptember 30, 2013.

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 the Credit Loan Note are due in monthly installments with interest on the unpaid principal balance of the Credit Loan Note at an interest rate 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 or (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 of 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 be 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 to pay off debt obligations owed to the Bank, under the Loan Agreement. Additionally, the Company retained approximately $1.27 million for general corporate purposes.

On January 16, 2014, we and the Bank entered into the First Forbearance Agreement, in connection with the Loan Agreement. Under the First Forbearance Agreement, the Bank agreed to forbear from exercising certain of its rights and remedies arising as a result of the Company’s non-compliance with certain financial covenants under the Loan Agreement until March 31, 2014.

On May 30, 2014, the Company and the Bank entered into the Second Forbearance Agreement. Under the Second Forbearance Agreement, the Bank agreed to forbear from exercising certain of its rights and remedies arising as a result of the Company’s non-compliance with certain financial covenants under the Loan Agreement commencing retroactively on April 1, 2014 and extending until no later than June 30, 2014.

During the Second Forbearance Period, we agreed to comply with the terms, covenants and provisions in the Loan Agreement and related documents, as amended by the Second Forbearance Agreement.  The Second Forbearance Agreement amends the Loan Agreement to, among other things, prohibit the Company’s Leverage Ratio  (as such term is defined in the Loan Agreement) to be greater than 1.75 to 1.0.  

We were not in compliance with the leverage ratio covenant at JuneSeptember 30, 2014 or at March 31, 2014, as the actual leverage ratio was 4.34.4 to 1.0 and 3.8 to 1.0, respectively. Subsequent to June 30, 2014, the Second Forbearance Period was extended further to September 30, 2014 pursuant to the execution of the Third Forbearance Agreement and the Fourth Forbearance Agreement. The Bank has the right to accelerate payment of the debt in full upon 60 days' written notice. As a consequence, we classified $4.4$5.3 million and $3.7$4.2 million under the Loan Agreement, the Series A Bonds, the Series B Bonds and the LSA, as applicable, as a current liability at JuneSeptember 30, 2014 and March 31, 2014, respectively. We were required to remit a forbearance fee of $30,000 on or before the termination date of the Second Forbearance Agreement. The Bank agreed to allow the Company to defer this forbearance fee to July 31, 2014. An additional forbearance fee of $30,000 is due to the Bank on or before the termination date of the Fourth Forbearance Agreement.

At JuneSeptember 30, 2014, we had cash and cash equivalents of $886,888,$849,264, of which $11,356$15,613 is located in China and which we may not be able to repatriatebe repatriated for use in the U.S. without undue cost or expense, if at all. Our cash and cash equivalents total includes $505,000$180,000 of restricted cash with the Bank that may be available toward funding operating activities with the Bank’s approval. We have incurred a net loss of $1.3$0.6 million and $1.9 million for the three months and six months ended JuneSeptember 30, 2014.2014, respectively.

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 must secure long-term financing on terms consistent with our business plans.  

The condensed consolidated financial statements for the three and six months ended JuneSeptember 30, 2014, and for the year ended March 31, 2014, 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 $13.9$12.0 million at JuneSeptember 30, 2014 and to continue as a going concern is dependent upon the availability of and our ability to timely secure long-term financing and the successful execution of our operating plan. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

In addition, we must increase our backlog and change the composition of our revenues to focus on recurring unit of delivery projects rather than custom first article and prototyping, which, in the past, were not an efficient use of our manufacturing capacity. Also, we must reduce our operating expenses to be in line with current business conditions in order to increase profit margins and decrease the amount of cash used in operations. If successful in changing the composition of revenue and reducing costs, we believe that fiscal 2015 operating results could begin to reflect positive operating cash flows. However, we plan to closely monitor our expenses and, if required, will further reduce operating costs and capital spending to enhance liquidity.

Our failure to 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 Fourth Forbearance Agreement. 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 levels which may result in substantial dilution to our investors that do not participate in the offering and a new low trading level for our common stock.

Our liquidity is highly dependent on our ability to improve our gross profit and operating income. If we successfully secure an acceptable financing facility and execute on our business plans, then we believe that our available cash, together with additional reductions in operating costs and capital expenditures, will be sufficient to fund our operations, capital expenditures and principal and interest payments under our debt obligations through the next twelve months.

At JuneSeptember 30, 2014 and March 31, 2014, we had negative working capital of $3.4$3.6 million and $2.0 million, respectively. Existing cash and proceeds from the LSA with Utica were used to fund operating and investing activities. The following table sets forth the principal changes in the components of our working capital: 

Cash used in operations for the threesix months ended JuneSeptember 30, 2014 was $1.6$1.2 million compared with cash used in operations of $0.4$0.6 million for the threesix months ended JuneSeptember 30, 2013. Our primary source of cash is from accounts receivable collections when we record net sales, customer advance payments for purchase of materials, and project progress payments. Cash used in operations for the threesix months ended JuneSeptember 30, 2014 was higher when compared with the threesix months ended JuneSeptember 30, 2013 primarily due to slower accounts receivable and worka decrease in progress throughput in fiscal 2015.customer advance payments. At JuneSeptember 30, 2014, approximately 36%55% of our accounts receivable were at risk of not being paid in a timely manner due to a contract dispute with one of our customers. There were no significant customer advance or project progress payments made on our projects in progress during the first quarter of fiscal 2015 period. 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.

The threesix month period ended JuneSeptember 30, 2014 and 2013 were marked by cash outflows for capital spending for new equipment of $54,093$54,096 and $56,424,$53,941, respectively.

On May 30, 2014, TechPrecision and Ranor entered into the LSA with Utica. 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.  In connection with the execution of the LSA, the Company paid approximately $2.65 million to pay off debt obligations owed to the Bank under the February 2006 Loan Agreement. The remaining proceeds from the debt were used to fund our operations and investing activities. For the threesix months ended JuneSeptember 30, 2013,2014, we used cash used in financing activities was $0.2of $0.38 million to make principal payments on our outstanding debt.debt and $0.1 million to make payments to outside advisors to help the Company raise new capital.

As of JuneSeptember 30, 2014, we carried out an evaluation, under the supervision and with the participation of management, including our  executive chairman 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 Exchange Act. Based on the evaluation, our executive chairman and chief financial officer have concluded that, as of JuneSeptember 30, 2014, our disclosure controls and procedures and internal control over financial reporting were not effective because of the material weakness described in Item 9A of our Annual Report on Form 10-K for the year ended March 31, 2014 as filed with the SEC on July 15, 2014, or the 2014 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 executive chairman and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

We are making progress remediating the material weakness identified in the 2014 Form 10-K which is described in the next section. Notwithstanding the material weakness described in Item 9A of the 2014 Form 10-K, 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.

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 threesix months ended JuneSeptember 30, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. During the threesix months ended JuneSeptember 30, 2014 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 above and in Item 9A of the 2014 Form 10-K, we will determine the appropriate complement of corporate and divisional accounting personnel required to consistently operate management review controls.