See accompanying notes to the condensed consolidated financial statements.

 

 

See accompanying notes to the condensed consolidated financial statements.

 

TECHPRECISION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Continued)

 

Three Months Ended June 30, 2014

For the three months ended June 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 three months ended June 30, 2014, the Company recorded a liability of $219,359 (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.

 

 

TECHPRECISION CORPORATION

(Unaudited)

 

TechPrecision Corporation, or TechPrecision, is a custom manufacturerDelaware corporation organized in February 2005 under the name Lounsberry Holdings II, Inc. The name was changed to TechPrecision Corporation on March 6, 2006. TechPrecision is the parent company of Ranor, Inc., or Ranor, a Delaware corporation and Wuxi Critical Mechanical Components Co., Ltd., or WCMC, a wholly foreign owned enterprise (WFOE). TechPrecision, WCMC and Ranor are collectively referred to as the “Company”, “we”, “us” or “our”.

We manufacture large scale metal fabricated and machined precision components and equipment. 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.”

Liquidity and Capital Resources

At June 30, 2015, we had cash and cash equivalents of $1.5 million, of which $16,005 is located in China and may not be able to be repatriated for use in the United States without undue cost or expense, if at all. Net cash provided by operating activities was $379,309 for the three months ended June 30, 2015, which includes an advance payment of $507,835 received on April 17, 2015 under an Assignment of Claim Agreement described below. We continue to reduce our operating expenses to stay in line with current business conditions. Our profit margins have improved significantly for the three months ended June 30, 2015, when compared with the three months ended June 30, 2014. As a result, we recorded net income of $206,351 for the three months ended June 30, 2015 compared with a net loss of $1.3 million for the three months ended June 30, 2014.

We incurred an operating loss of $3.6 million for the year ended March 31, 2013,2015, or fiscal 2015. In fiscal 2014, we were notrecorded a provision for potential contract losses of $2.4 million in complianceconnection with the fixed chargesbankruptcy filing of GT Advanced Technologies, Inc., or GTAT, and filed a proof of claim with the bankruptcy court to recover all of our costs under the terms of a purchase agreement with GTAT. The claim is now considered an unsecured creditor claim within GTAT’s overall bankruptcy proceedings.

On April 17, 2015, the Company, through Ranor, entered into an Assignment of Claim Agreement, or the Assignment Agreement, with Citigroup Financial Products Inc., or Citigroup. Pursuant to the terms of the Assignment Agreement, Ranor agreed to sell, transfer, convey and assign to Citigroup all of Ranor’s right, title and interest coverage financial covenants under our Loanin and Securityto Ranor’s $3,740,956 unsecured claim against GTAT. Pursuant to the Assignment Agreement, Citigroup paid to Ranor an initial amount equal to $507,835. The Assignment Agreement provides for Citigroup to pay to Ranor up to an additional $614,452 upon either (A) receipt of written notice that Ranor’s claim (or any portion thereof) has been fully and finally allowed against GTAT as a non-contingent, liquidated, and undisputed general unsecured claim, been listed as non-contingent, liquidated, and undisputed on schedules filed by GTAT with the bankruptcy court, or appeared on the claims agent’s, or trustee’s or other estate representative’s records, or has otherwise been conclusively and finally treated in GTAT’s bankruptcy, as “allowed” or “accepted as filed”; or (B) the expiration of the time period during which any party (including GTAT) is permitted to file an objection, dispute or challenge with respect to Ranor’s claim without any such objection, dispute or challenge having been filed. If Ranor’s claim against GTAT is allowed in its entirety, then Citigroup will pay Ranor an additional $614,452. If the amount of Ranor’s claim that is allowed is greater than $1,692,782 but less than the full amount or Ranor’s claim, then Citigroup will pay Ranor an additional amount equal to $614,452 minus the product of 30% multiplied by the difference between Ranor and Santander Bank, or the Bank, dated February 24, 2006, as amended, or the Loan Agreement,total amount of Ranor’s claim and the Bank did not agreeamount of such claim that is actually allowed. If the total amount of Ranor’s claim against GTAT that is allowed is less than $1,692,782, then Ranor may be obligated repay to waive the non-compliance with the covenants. Since we were in default, the Bank had the right to accelerate paymentCitigroup 30% of the debtdifference between $1,692,782 and the amount of Ranor’s claim that is actually allowed plus interest at 7% per annum from April 21, 2015 through the date of the repurchase.

The Company cannot predict the amount of Ranor’s claim that will be finally allowed or admitted in full upon 60 days written notice.the GTAT bankruptcy proceeding and cannot guarantee that Ranor will receive any additional payment on its claim. The Company continues to vigorously pursue its legal remedies in respect to the case described above; however, an adverse decision in any proceeding could significantly harm our business and our consolidated financial position, results of operations and cash flows.

On May 30, 2014, TechPrecision and Ranor entered into a Loan and Security Agreement, or the LSA, with Utica Leasco, LLC, or Utica. Pursuant to the LSA, Utica agreed to loan $4.15 million to Ranor under a Credit Loan Note, which is collateralized by a first secured interest in certain machinery and equipment at Ranor.  Payments under the LSA and Credit Loan Note are due in monthly installments with an interest rate on the unpaid principal balance of the Credit Loan Note at an interest rate equal to 7.5% plus the greater of 3.3% andor 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 orbusiness; and (5) enter into any transaction that would materially or adversely affect the collateral or Ranor’s ability to repay the obligations under the LSA and the Credit Loan Note.  The restrictions ofcontained in these covenants are subject to certain exceptions specified in the LSA and in some cases may be waived by the written consent of Utica.  Any failure to comply with the covenants outlined in the LSA without waiver by Utica or certain other provisions in the LSA would beconstitute an event of default, pursuant to which Utica may accelerate the repayment of the loan.

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

On January 16,December 22, 2014, weRanor entered into a forbearanceTerm Loan and modification agreementSecurity Agreement, or TLSA, with Revere High Yield Fund, LP, or Revere. Pursuant to the Bank,TLSA, Revere agreed to loan an aggregate of $2.25 million to Ranor under a term loan note in the aggregate principal amount of $1.5 million, or the First ForbearanceLoan Note, and a term loan note in the aggregate principal amount of $750,000, or the Second Loan Note. The First Loan Note is collateralized by a secured interest in Ranor’s Massachusetts facility and certain machinery and equipment at Ranor. The Second Loan Note is collateralized by a secured interest in certain accounts, inventory and equipment of Ranor. Payments under the TLSA, the First Loan Note and the Second Loan Note are due as follows: (a) payments of interest only on advanced principal on a monthly basis on the first day of each month from February 1, 2015 until December 31, 2015 with an annual interest rate on the unpaid principal balance of the First Loan Note and the Second Loan Note equal to 12% per annum and (b) the principal balance plus accrued and unpaid interest payable on December 31, 2015. Ranor’s obligations under the TLSA, the First Loan Note and the Second Loan Note are guaranteed by TechPrecision pursuant to a Guaranty Agreement with Revere. Ranor utilized approximately $1.45 million of the proceeds of the First Loan Note and the Second Loan Note to repay in connection withfull loan obligations owed to the Bank, plus breakage fees on a related interest swap of $217,220 under the Loan Agreement. Underand Security Agreement with Santander Bank N.A. The remaining proceeds of the First Forbearance Agreement,Loan Note and the Bank agreedSecond Loan Note were retained by the Company to forbear from exercisingbe used for general corporate purposes. Pursuant to the TLSA, Ranor is subject to certain of its rights and remedies arising as a resultaffirmative covenants more fully described in Note 9 – Debt.

If we were to violate any of the Company’s non-compliance with certain financial covenants under the Loan Agreement until March 31, 2014.

At June 30, 2014,Our liquidity is highly dependent on our available financing facilities and our ability to improve our gross profit and operating income. Our TLSA with Revere expires on December 31, 2015, and must be extended or refinanced with another lender. If we hadsuccessfully secure additional acceptable financing facilities, execute on our business plans, improve gross profit and operating income, and reduce our operating costs, then we believe that our available cash and cash equivalents of $886,888, of which $11,356 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 of restricted cash with the Bank that may be used toward funding operating activities with the Bank’s approval. Approximately 36% 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. 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 losses 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 recoveringsufficient to fund our operations, capital expenditures and principal and interest payments under our debt obligations through the full amount of our losses.next twelve months.

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 useutilize 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 will reflect positive cash flows.capacity. We plan to closely monitor our expenses and, if required, will further reduce operating costs and capital spending to enhance liquidity. 

The condensed consolidated financial statements for the three months ended June 30, 20142015 and for the year ended March 31, 2014,2015, or fiscal 2014,2015, were prepared on the basis of a going concern which contemplates that we will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should we be required to liquidate assets. Our ability to satisfy our total current liabilities of $13.9$7.4 million at June 30, 20142015 and to continue as a going concern is dependent upon the availabilitysuccessful execution of our operating plan and our ability to timely secure additional long-term financing and the successful execution of an effective operating plan.financing. 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 June 30, 2014,2015, the condensed consolidated statements of operations and comprehensive lossincome (loss) for the three month periods ended June 30, 20142015 and 2013,2014, and the condensed consolidated statements of cash flows for the three months ended June 30, 20142015 and 20132014 are unaudited, but, in the opinion of management, include all adjustments that are necessary for a fair presentation of our financial statements for interim periods in accordance with U.S. Generally Accepted Accounting Principles, or U.S. GAAP. All adjustments are of a normal, recurring nature, except as otherwise disclosed. The results of operations for an interim period are not necessarily indicative of the results of operations to be expected for the fiscal year.

The Notes to Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC, for Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited financial statements and related notes should be read in conjunction with our consolidated financial statements included with our Annual Report on Form 10-K for the fiscal year ended March 31, 2015, or 2014the 2015 Form 10-K, filed with the SEC for the year ended March 31, 2014.on June 29, 2015.

Our significant accounting policies are set forth in detail in Note 2 to the 20142015 Form 10-K.

 

In June, 2014,February 2015, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update, or ASU No. 2014-12,2015-02, Compensation – Stock Compensation (Topic 718)- AccountingAmendments to the Consolidation Analysis. ASU 2015-02 is intended to improve targeted areas of consolidation guidance for Share-based Payments when Terms of an award Provide That a Performance Target Could be Achieved afterlegal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). ASU 2015-02 makes specific amendments to the Requisite Service Period.  The Amendments incurrent consolidation guidance and ends the deferral granted to investment companies from applying the variable interest entities guidance. ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-122015-02 is effective for interim and annual reporting periods beginning after December 15, 2015, with early2015. The Company does not expect the adoption permitted. We are currently evaluatingof ASU 2014-122015-02 to determine thehave a significant impact on the Company’s consolidated results of operations, financial position or cash flows.

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT, NET

Depreciation expense for the three months ended June 30, 2015 and 2014 was $197,228 and 2013 was $215,516, and $248,440, respectively.

Contract costs consist primarily of labor and materials and related overhead, to the extent that such costs are recoverable. Revenues associated with these contracts are recorded only when the amount of recovery can be estimated reliably and realization is probable. As of June 30, 20142015 and March 31, 2014,2015, we had deferred revenues totaling $651,923$714,551 and $1,461,689,$1,211,506, respectively. Deferred revenues represent customer prepayments on their contracts and completed contracts on which all revenue recognition criteria were not met.   We record provisions for losses within costs of sales in our condensed consolidated statement of operations and comprehensive loss.income (loss). We also receive advance billings and deposits representing down payments for acquisition of materials and progress payments on contracts. The contractsagreements with our customers allow us to offset the progress payments against the costs incurred.

NOTE 7 – OTHER NONCURRENT ASSETS

NOTE 8 –- ACCRUED EXPENSES

Our contract loss provision at both June 30, 2015 and March 31, 2015 includes approximately $2.4$0.5 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 continuedAs a result of the customer filing a voluntary bankruptcy claim, the demand is now considered an unsecured creditor claim within the customer’s overall bankruptcy proceedings. It is more likely than not that we will not be able to incur losses on customer projects at June 30, 2014. We have incurredrecover the full amount of our claim. As such, part of the total reduction in the liability reflects the netting of approximately $0.3$0.8 million of accumulated costs in new contract losseswork-in-progress and $1.1 million of accounts receivable with the loss provision. Accrued interest expense is for deferred interest costs accounted for under the effective interest method in our statement of operations forconnection with the three months ended June 30, 2014.Utica Credit Loan Note due November 2018.

NOTE 9 – DEBT

 

Loan and Security Agreement

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

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

Capital Lease:Lease

We entered into a new capital lease in April 2012 for certain office equipment. The lease has a term is forof 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 anothera 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 June 30, 20142015 and March 31, 20142015 was $43,473$31,889 and $46,420,$38,027, respectively.

NOTE 10 - INCOME TAXES

At June 30, 2014,March 31, 2015, our federal net operating loss carry-forward was approximately $6.0$10.0 million. If not utilized, the federal net operating loss carry-forward will begin to expire in 2025. Section 382 of the Internal Revenue Code, as amended, provides for a limitation on the annual use of net operating loss carryforwards following certain ownership changes that could limit our ability to utilize these carryforwards on a yearly basis due to an ownership change in connection with the acquisition of Ranor in 2006.

 

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$3,083 and $3,632,$2,678 for the three months ended June 30, 2015 and 2014, for the three months ended June 30, 2013, respectively.

Preferred Stock

We have 10,000,000 authorized shares of preferred stock and the Boardour board of Directorsdirectors has broad power to create one or more series of preferred stock and to designate the rights, preferences, privileges and limitationlimitations of the holders of such series. The BoardOur board of Directorsdirectors 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 wasbecame convertible into 1.3072 shares of common stock, with an effective conversion price of $0.218.  Based on the current conversion ratio, as of June 30, 2014 and March 31, 2014, there were 2,519,6381,743,409 and 3,238,5982,519,638  common shares respectively, underlying the Series A Convertible Preferred Stock. Stock as of June 30, 2015 and March 31, 2015, respectively.

Upon any liquidation, we would be required to pay $0.285 for each share of Series A Convertible Preferred Stock. The payment willwould 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.

Common Stock

 

We had 90,000,000 authorized common shares at June 30, 20142015 and March 31, 2014,2015.  There were 25,446,187 and there were 24,669,958 and 23,951,004 shares of common stock outstanding at June 30, 20142015 and March 31, 2015, respectively. For the three months ended June 30, 2015 we issued 776,229 shares of common stock in connection with conversions of Series A Convertible Preferred Stock. For the three months ended June 30, 2014, respectively.we issued 718,954 shares of common stock in connection with conversions of Series A Convertible Preferred Stock.

 

In 2006, our board of directors adopted, and our stockholders approved, the Company’s2006 long-term incentive plan, or the Plan, covering 1,000,000 shares of common stock. On August 5, 2010, the Plan was amended to increase the maximum number of shares of common stock that may be issued to an aggregate of 3,000,000 shares. On September 15, 2011, the directors adopted and the Company’s stockholdersshareholders approved an amendment to increase the 2006 TechPrecision Corporation Long-term Incentive Plan, or, as amended, the Plan.maximum number of shares of common stock that may be issued to an aggregate of 3,300,000 shares. The Plan provides for the grant of incentive and non-qualified options, stock grants, stock appreciation rights and other equity-based incentives to employees, including officers, and consultants. The Plan is to be administered by a committee of not less than two directors each of whom is to be an independent director. In the absence of a committee, the Plan is administered by the Boardour board of Directors.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, ana five-year option to purchase 50,000 shares of common stock at the market price on the date of his or her election.  In addition, the Plan provides for the annual grant of an option to purchase 10,000 shares of common stock on July 1st1 of each year following the third anniversary of the date of his or her first election.  

 

The fair value of the options we granted was estimated using the Black-Scholes option-pricing model based on the closing stock prices at the grant date and the weighted average assumptions specific to the underlying options. Expected volatility assumptions are based on the historical volatility of our common stock. The risk-free interest rate was selected based upon yields of five-year U.S. Treasury issues. We use the simplified method for all grants to estimate the expected term of the option. We assume that stock options will be exercised evenly over the period from vesting until the awards expire. As such, the assumed period for each vesting tranche is computed separately and then averaged together to determine the expected term for the award. Because of our limited stock exercise activity we did not rely on our historical exercise data. There were no options granted during the three months ended June 30, 2014. At June 30, 2014, 1,547,0062015, there were 1,832,006 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:periods presented below: 

At June 30, 2014,2015, there was $271,907$12,697 of total unrecognized compensation cost related to stock options. These costs are expected to be recognized over the next 33 months.two years. The total fair value of shares vested during the three months ended June 30, 20142015 was $178,685. $31,266.

The following table summarizes the activity of our stock options outstanding but not vested for the three months ended June 30, 2014:2015:  

NOTE 14 - CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

 

We maintain bank account balances, which, at times, may exceed Federal Deposit Insurance Corporation insured limits. We have not experienced any losses with these accounts and believe that we are not exposed to any significant credit risk on cash.

At June 30, 2014,2015, there were accounts receivable balances outstanding from threesix customers comprising 56%98% of the total receivables balance.

 

We have been dependent in each year on a small number of customers who generate a significant portion of our business, and these customers change from year to year. The following table sets forth information as to net sales from customers who accounted for more than 10% of our revenue for the three months ended:

NOTE 15 – SEGMENT INFORMATION

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

 

We have employment agreements with each of our executive officers. Such agreements provide for minimum salary levels, adjusted annually, as well as forcertain guaranteed bonuses, and incentive bonuses that are payable if specified company goals are attained. The aggregate annual commitment at June 30, 20142015 for future compensationexecutive salaries during the next twelve months, excludingincluding fiscal 2015 bonuses payable after March 31, 2015, was approximately $1,000,000, including $60,000 in connection with a Service, Separation$0.9 million. The aggregate commitment at June 30, 2015 was approximately $0.4 million for accrued payroll, vacation and Release Agreement (see Note 18)holiday pay for consulting services withthe remainder of our former President and General Manager of Ranor.employees.

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.convertible preferred stock, warrants, and stock options that would be dilutive. The following table provides a reconciliation of the numerators and denominators reflected in the basic and diluted lossearnings 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 month periodsmonths ended June 30, 2015, there were 2,693,909 of potential common share equivalents that were out-of-the-money and were not included in the EPS calculations above. For the three months ended June 30, 2014, and 2013, there were 2,192,220, and 506,500 shares, respectively, of potentially anti-dilutive stock options and convertible preferred stock, none of which were included in the EPS calculations above.  

 

 

 

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.

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 large governmental programs, we usually do not work directly for the government or its agencies. Rather, we perform our services for large governmental contractors and large utility companies. However, our business is dependent in part on the continuation of governmental programs that procurewhich require our services and products from our customers.products.

Our contracts are generated both through negotiation with the customer and from bids made pursuant to a request for proposal. Our ability to receive contract awards is dependent upon the contracting party’s perception of such factors as our ability to perform on time, our history of performance, including quality, our financial condition and our ability to price our services competitively.  Although some of our contracts contemplate the manufacture of one or a limited number of units, we are seeking more long-term projects with a more predictable revenue stream and cost structure.

We historically have experienced, and continue to experience, customer concentration. For the three months ended June 30, 2015 and 2014, our largest customer accounted for approximately 27% and 2013,30% of reported net sales, respectively, and our fiveten largest customers, accounted for approximately 80%99% and 74%96% of reported net sales.our revenue, respectively. Our sales order backlog at June 30, 20142015 was approximately $14.7$13.9 million compared with a backlog of $22.9$14.3 million at March 31, 2014. Our2015.

All of our sales recorded for the three months ended June 30, 2014 backlog includes approximately $1.0 million2015 are from our U.S. segment. There were no sales generated from WCMC, our subsidiary in China, during the first quarter of fiscal 2016. At June 30, 2015, we did not have any open customer orders for production furnaces.   

On May 30, 2014 the Company and the Bankon December 22, 2014 we entered into two new debt agreements with new lenders (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources”). The proceeds from these debt agreements ($6.4 million in total) were used to pay off amounts outstanding under a prior Loan Agreement and Mortgage Loan and Security Agreement, with Santander Bank, N.A. The proceeds from 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,new borrowings have allowed us to emerge from provisions we were in default of under our previous debt agreements. At June 30, 2015 and continue to beMarch 31, 2015, we were not in default under any of our debt agreements.

For the three months ended June 30, 2015, our net sales and net income were $4.4 million and $0.2 million, respectively, compared with net sales of $6.2 million and net loss of $1.3 million, respectively, for the Loan Agreementthree months ended June 30, 2014.  Our gross margins for the three months ended June 30, 2015 were 29.0% compared with gross margins of 3.5% for the Bank. The Bank hadthree months ended June 30, 2014. Gross margins for the right to accelerate paymentthree months ended June 30, 2015 improved as the number of units shipped or in production under certain loss contracts were significantly lower. Gross margins for 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 atthree months ended June 30, 2014 ($5.6 million)were negatively impacted by a large volume of lower margin production furnaces, under absorbed overhead of $1.0 million and approximately $0.4 million of new contract losses.

We incurred an operating loss of $3.6 million for the fiscal year ended March 31, 2015. During fiscal 2014, ($4.2 million).we recorded a provision for potential contract losses of approximately $2.4 million in connection with the bankruptcy filing of GTAT and filed a proof of claim with the bankruptcy court to recover all of our costs under the terms of a purchase agreement. The claim is now considered an unsecured creditor claim within GTAT’s overall bankruptcy proceedings.

On July 1, 2014,April 17, 2015, the Company, and the Bankthrough Ranor, entered into a third forbearance and modification agreement, or the Third Forbearance Agreement. Under the Third ForbearanceAssignment 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.

 

 

 

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.Resources” and Part II – Item 1A “Risk Factors.”

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 Quarterly Report on 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), commodity prices, macroeconomic factors, including the availability of capital that may be needed by our customers, and political, regulatory and legal conditions in the United States and foreign markets. Our order and revenue stream is uneven and reflects an irregular pattern of orders we receive from our customers as they gauge their customer’scustomers’ 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 relatedtiming of revenue recognition, delays in customer acceptances of our products, delays in deliveries of ordered products and our rate of progress in the fulfillment offulfilling 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 thatfiscal 2015, which has the immediate goal of realigning and stabilizing our cost structure so we can return to and sustain profitability, even at current lower revenue levels. WeIn connection with the execution of this business plan, we need to rebuild our backlog with orders from our key customers. 

Three Months Ended June 30, 20142015

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

 

Net Sales

Cost of Sales and Gross Margin

Our cost of sales for the three months ended June 30, 20142015 decreased by $0.7$2.9 million, or 10%, on lower sales volume.49%.  Gross margins during the three months ended June 30, 20142015 were 3.5%29.3% compared with 5.9%3.5% for the same three month period in fiscal 2013. Fiscal2014. Gross margins for the three months ended June 30, 2015 were higher because of decreased materials and labor costs, and the absence of contract losses on custom first article projects. Our product mix for the three months ended June 30, 2015 primarily included orders for recurring business from our customers. Gross margins for the three months ended June 30, 2014 were dampened bylower because of a heavy volume of low margin production furnaces shipped during the period, under absorbed overhead of $1.0 million, and new contract losses of $0.4 million. Fiscal 2014 margins were impacted by 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 in the three months ended June 30, 2014 and resulted in under absorbed overheads for the period.

Total selling, general and administrative expenses, or SG&A, for the three months ended June 30, 20142015 were $0.4$0.8 million or 25%40% lower when compared with the same period in fiscalthree months ended June 30, 2014. SG&A compensation expenses were lower due to reduced headcount at our holding company and in Chinathe United States ($0.30.2 million), lower outside advisory services ($0.2 million), and lower travelreduced rental and other business expensesoffice expense from our downsized corporate headquarters facility ($0.1 million). SG&A at our Ranor subsidiary was relatively unchanged year over year.

 

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

 

Interest expense for the three months ended June 30, 2015 is higher due to higher levels of debt and higher interest rates. Non–cash interest expense primarily reflects the amortization of deferred loan costs in connection with the Credit Loan Note, the First Loan Note and the Second Loan Note. Interest expense for the three months ended June 30, 2014 includes a breakage fee of $29,448 in connection with the Series B Bondan interest rate swap. Non–cash interest expense primarily reflectsswap on certain indebtedness of the amortization of deferred loan costs in connection with the Utica Credit Loan Note.Company that was repaid.

Income Taxes

For the three months ended June 30, 20142015 and 2013,2014, we recorded zero tax expense.  The zero tax expense recorded for the three months periods ended June 30, 2014 was the result of maintaining 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, ourwe had net income of $206,351, or $0.01 per share basic and fully diluted, for the three months ended June 30, 2015, as compared to net loss wasof $1.3 million, or $0.05 per share basic and fully diluted, for the three months ended June 30, 2014, as compared2014.

At June 30, 2015, we had cash and cash equivalents of $1.5 million, of which $16,004 is located in China and may not be able to net loss of $1.4 million,be repatriated for use in the United States without undue cost or $0.07 per share basic and fully diluted,expense, if at all. Net cash provided by operating activities was $379,309 for the three months ended June 30, 2013.2015, which includes an advance payment of $507,835 received under the Assignment Agreement with Citigroup. We continue to reduce our operating expenses to stay in line with current business conditions. Our profit margins have improved significantly for the three months ended June 30, 2015, when compared with the three months ended June 30, 2014. As a result, we recorded net income of $206,351 for the three months ended June 30, 2015 compared with a net loss of $1.3 million for the three months ended June 30, 2014.

 

 

 

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 orbusiness; and (5) enter into any transaction that would materially or adversely affect the collateral or Ranor’s ability to repay the obligations under the LSA and the Credit Loan Note.  The restrictions ofcontained in these covenants are subject to certain exceptions specified in the LSA and in some cases may be waived by the written consent of Utica.  Any failure to comply with the covenants outlined in the LSA without waiver by Utica or certain other provisions in the LSA would beconstitute an event of default, pursuant to which Utica may accelerate the repayment of the loan.

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

If we were to violate any of the Second Forbearance Agreement. The Bank agreed to allowcovenants under the Company to defer this forbearance fee to July 31, 2014. An additional forbearance fee of $30,000 is due toabove debt agreements, the Bank on or before the termination datelenders could demand full repayment of the Fourth Forbearance Agreement.

 

The condensed consolidated financial statements for the three months ended June 30, 2014,2015 and for the year ended March 31, 2014,2015 were prepared on the basis of a going concern which contemplates that we will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should we be required to liquidate assets. Our ability to satisfy our total current liabilities of $13.9$7.4 million at June 30, 20142015 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.

 

 

 

 

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

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

Operating activities

Cash used inprovided by operations for the three months ended June 30, 20142015 was $1.6 million$379,309 compared with cash used in operations of $0.4$1.6 million for the three months ended June 30, 2013.2014. For the three months ended June 30, 2015 we recorded net income of $206,351 compared with a net loss of $1.3 million for the three months ended June 30, 2014. 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 inprovided by operations for the three months ended June 30, 20142015 was higher when comparedaugmented by an advance payment of $507,835 received under the Assignment Agreement with the three months ended June 30, 2013 due to slower accounts receivable and work in progress throughput in fiscalCitigroup on April 17, 2015. At June 30, 2014, approximately 36% 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.2015. 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.

 

 

 

 

All of the above activity resulted in a net decreaseincrease in cash for the three months ended June 30, 20142015 of $0.2 million,$128,435, compared with a net decrease in cash of $0.6 million$199,813 for the three months ended June 30, 2013.2014. We have no off-balance sheet assets or liabilities.

Evaluation of Disclosure Controls and Procedures

As of June 30, 2014,2015, we carried out an evaluation, under the supervision and with the participation of management, including our  chief executive chairmanofficer 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.Act). Based on the evaluation, our chief executive chairmanofficer and chief financial officer have concluded that, as of June 30, 2014,2015, our disclosure controls and procedures and internal control over financial reporting were not effective because of the material weakness described in Item 9A of 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 20142015 Form 10-K.

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

We are making progress remediating the material weakness identified in the 20142015 Form 10-K which isas described in the next section. Notwithstanding thethis 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.

Changes in Internal Controls

Except as identified below, there has been no change to our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended June 30, 2014,2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. During the three months ended June 30, 20142015 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 20142015 Form 10-K, we will determine the appropriate complement of corporate and divisional accounting personnel required to consistently operate management review controls.

Item 1. Legal Proceedings

There have been no material changes to the legal proceedings discussed in Part I, "ItemItem 3. Legal“Legal Proceedings," in the 20142015 Form 10-K. 

Item 1A. Risk Factors

 

Except for the risk factor below, which supplements the risk factors discussed in Part I, "ItemItem 1A. Risk“Risk Factors," in the 20142015 Form 10-K, there have been no material changes to the risk factors discussed in Part I, "ItemItem 1A. Risk“Risk Factors," in the 20142015 Form 10-K.  You should carefully consider the risks described in this Quarterly Report on Form 10-Q and the 20142015 Form 10-K, which could materially affect our business, financial condition or future results.  The risks described in this Quarterly Report on Form 10-Q and the 20142015 Form 10-K, are not the only risks we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.  If any of thethese risks actually occur, our business, financial condition and/or results of operations could be negatively affected.

 

As of June 30, 2014,2015, we had $0.9$1.5 million of cash and cash equivalents. Cash provided by operations for the three months ended June 30, 2015 was $379,309 compared with cash used in operations of $1.6 million for the three months ended June 30, 2014. Cash provided by operations for the three months ended June 30, 2015 was augmented by an advance payment of $507,835 received under the Assignment Agreement with Citigroup on April 17, 2015.

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