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EX-31.2 - EXHIBIT 31.2 - TECHPRECISION CORPex31-2.htm
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EX-23.1 - EXHIBIT 23.1 - TECHPRECISION CORPex23-1.htm
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934      
 
For the fiscal year ended March 31, 2015
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________________ to __________________
 
Commission File Number: 000-51378
 
TechPrecision Corporation

(Exact name of registrant as specified in its charter)
 
Delaware
 
51-0539828
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
992 Old Eagle School Road
Suite 909
Wayne, PA
 
 
19087
(Address of principal executive offices)
 
(Zip Code)
     
Registrant’s telephone number, including area code
 
(484) 693-1700
 
 
Securities registered under Section 12(b) of the Exchange Act:   None
 
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $.0001 per share
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o
Yes
x
No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.   
o
Yes
x
No
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x
Yes
o
No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   
x
Yes
o
No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
 
 
 
 
 

 
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer   o
Accelerated filer   o
Non-accelerated filer   o (Do not check if a smaller reporting company)
Smaller reporting company   x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o
Yes
x
No
 
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of September 30, 2014, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $16.1 million.
 
The number of shares outstanding of the registrant’s common stock as of June 22, 2015 was 24,669,958.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the proxy statement for registrant’s 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year are incorporated by reference in Part III of this Form 10-K.
 
 
 
 
 
 

 
 
 
TABLE OF CONTENTS
 
 
Page
   
PART I
 
 
Item 1. Business
 
Item 1A. Risk Factors
 
Item IB. Unresolved Staff Comments
 
Item 2. Property
 
Item 3. Legal Proceedings
 
Item 4. Mine Safety Disclosures 
 
Item 4A. Executive Officers of the Registrant
   
PART II  
 
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Item 6. Selected Financial Data
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
 
Item 8. Financial Statements and Supplementary Data
 
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
Item 9A. Controls and Procedures
 
Item 9B. Other Information
   
   
PART III
 
 
Item 10. Directors, Executive Officers, and Corporate Governance
 
Item 11. Executive Compensation
   
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Item 13.  Certain Relationships and Related Transactions and Director Independence
 
Item 14. Principal Accountant Fees and Services
 
 PART IV
 
 
Item 15. Exhibits and Financial Statement Schedules
 
 
 
 
 
 
 

 
 

PART I
 
Item 1. Business.
 
Our Business
 
We are a global manufacturer of precision, large-scale fabricated and machined metal components and systems. 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: Defense, Energy and Precision Industrial. The finished products are used in a variety of markets including: alternative energy, medical, nuclear, defense, industrial, and aerospace. Our mission is to be the leading end-to-end global service provider to our markets by furnishing custom, fully integrated "turn-key" solutions for complete products that require custom fabrication, precision machining, assembly, integration, inspection, non-destructive evaluation and testing.
 
We work with our customers to manufacture products in accordance with the customers’ drawings and specifications. Our work complies with specific national and international codes and standards applicable to our industry. We believe that we have earned our reputation through outstanding technical expertise, attention to detail, and a total commitment to quality and excellence in customer service.
 
About Us
 
We are a Delaware corporation, organized in 2005 under the name Lounsberry Holdings II, Inc. On February 24, 2006, we acquired all of the issued and outstanding capital stock of our wholly-owned subsidiary Ranor, Inc., or Ranor. Ranor, together with its predecessors, has been in continuous operation since 1956. Since February 24, 2006, our primary business has been the business of Ranor. On March 6, 2006, following the acquisition of Ranor, we changed our corporate name to TechPrecision Corporation. Our acquisition of Ranor was accounted for as a reverse acquisition.

Wuxi Critical Mechanical Components Co., Ltd., or WCMC, a limited company organized under the laws of the People’s Republic of China, or China, located in Wuxi City, Jiangsu Province, China, is another of our wholly-owned subsidiaries out of which we manufacture and service products for our customers in Asia.

Our executive offices are located at 992 Old Eagle School Road, Wayne, Pennsylvania 19087, in the western suburbs of Philadelphia, PA and our telephone number is (484) 693-1700. Our website is www.techprecision.com. Information on our website, or any other website, is not incorporated by reference in this annual report.
 
References in this annual report to “the Company,” “we,” “us,” “our” and similar words refer to TechPrecision Corporation and its subsidiaries, Ranor and WCMC, unless the context indicates otherwise.  
 
General
 
Our manufacturing operations within the U.S. are situated on approximately 65 acres in North Central Massachusetts. Our 145,000 square foot facility is the home for state-of-the-art equipment which gives us the capability to manufacture products as large as 100 tons. We offer a full range of services required to transform raw material 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, and manufacturing), quality control (inspection and testing), materials procurement and production control (scheduling, project management and expediting) and final assembly.
 
All U.S. based manufacturing is done in accordance with our written quality assurance program, which meets specific national and international codes, standards, and specifications. Ranor holds several certificates of authorization issued by the American Society of Mechanical Engineers and the National Board of Boiler and Pressure Vessel Inspectors. The standards used are specific to the customer’s needs, and we have implemented such standards into our manufacturing operations. 

Our operations in China are conducted through WCMC. WCMC, through its subcontractors, provides large-scale precision component fabrication and machining solutions in Asia. WCMC is positioned to provide our customers in Asia with quality, durable, and efficient current and next-generation components that address industry-specific needs. WCMC is licensed in China as a trading company, allowing it to contract freely with multiple manufacturers within China to source the manufacturing capacity and expertise required by our customers and their product designs. In February 2012, WCMC received certification that its Quality Management Systems comply with the requirements of ISO 9001: 2008 indicating that WCMC operates to this international standard. At March 31, 2015, we did not have any open customer orders for WCMC in our backlog. We are evaluating how we utilize the WCMC entity moving forward.
 
 
 
 
1

 


Products
 
We manufacture a wide variety of products pursuant to customer contracts and based on individual customer needs. We also provide manufacturing engineering services to assist customers in optimizing their engineering designs for manufacturing efficiency.  Generally, we do not design the products we manufacture, but rather manufacture according to “build-to-print” requirements specified by our customers. Accordingly, we do not distribute the products that we manufacture on the open market and we do not market any specific products on an on-going basis. We do not own the intellectual property rights to any proprietary marketed product, and we do not manufacture products in anticipation of orders. Manufacturing operations do not commence on any project before we receive a customer’s purchase order. All contracts cover specific products within the capability of our resources.

Although our focus is to provide long-term integrated solutions to our customers on continuous production programs, our activities include a variety of both custom-based and production-based requirements. The custom-based work is typically either a prototype or unique, one-of-a-kind product. The production-based work is repeat work or a single product with multiple quantity releases. To the greatest extent possible, we seek opportunities where we are in a Tier 1 or Tier 2 supplier relationship with our customers.

Changes in market demand for our manufacturing expertise can be significant and sudden and require us to be able to adapt to the collective needs of the customers and industries that we serve. Understanding this dynamic, we have developed the capability to transform our workforce to manufacture products for customers across different industries.

In addition to manufacturing services, WCMC has provided field service repairs for our customers who have their proprietary equipment deployed and operating at their customer locations within Asia.
 
Examples of the industries we serve and products we have manufactured within such industries during recent years include, but are not limited to:
 
Defense:
Aircraft carrier steam accumulator tanks
DDX destroyer prototype propulsion equipment, gun and weapons handling equipment
Submarine sonar system components, primary shield tank heads and foundations
Delta rocket precision-machined fuel tank bulkheads
F-15 special equipment pods
Various other components, fixtures and tooling
 
Energy:
Commercial nuclear reactor internal components and temporary heads
Spent nuclear fuel storage and transportation canisters and casks
Material handling equipment
Radioactive isotope transportation casks

Precision Industrial:
Components and major assemblies for proton beam accelerators for cancer treatment
Production chambers to manufacture multi-crystalline and mono-crystalline solar panels
Polysilicon production chambers
Production chambers for sapphire growth systems
Wind turbine components
Vacuum chambers
Food processing equipment
Chemical processing equipment
Pressure vessels 

Source of Supply
 
Manufacturing operations are partly dependent on the availability of raw materials. Raw material requirements vary with each contract and are dependent upon customer requirements and specifications. We have established relationships with numerous suppliers. We consistently seek to initiate new contacts in order to establish alternate sources of material supply to reduce our dependency on any one supplier. The purchase of raw material is subject to the customer’s purchase order requirements, and is not based on speculation or long-term contract awards. Some contracts require the use of customer-supplied raw materials in the manufacture of their product.

Our projects include the manufacturing of products from various traditional as well as specialty metal alloys. These materials may include, but are not limited to: inconel, titanium, stainless steel, high strength steel and other alloys. Certain of these materials are subject to long-lead time delivery schedules. In the fiscal year ended March 31, 2015, or fiscal 2015, a single supplier, Steel Industries, Inc., accounted for approximately 12% of our purchased material. In the fiscal year ended March 31, 2014, or fiscal 2014, a single supplier, Scot Forge, accounted for approximately 10% of our purchased material. There was no other single supplier that provided 10% or more of purchased raw materials in fiscal 2015 or fiscal 2014.
 
 
 
 
 
2

 

 
Marketing
 
While we have had significant customer concentration over the past three years, we endeavor to broaden our customer base as well as the industries we serve. We market to our existing customer base and also initiate contacts with new potential customers through various sources including personal contacts, customer referrals, and trade show participation. A significant portion of our business is the result of competitive bidding processes and a significant portion of our business is from contract negotiation. We believe that the reputation we have developed with our current customers represents an important part of our marketing effort.
 
Requests for quotations received from customers are reviewed to determine the specific requirements and our ability to meet such requirements. Quotations are prepared by estimating the material and labor costs and assessing our current backlog to determine our delivery commitments. Competitive bid quotations are submitted to the customer for review and award of contract. Negotiation bids typically require the submission of additional information to substantiate the quotation. The bidding process can range from several weeks for a competitive bid, to several months for a negotiation bid before the customer awards a contract.
 
Research and Product Development

Many of our customers generate drawings illustrating their projected unit design and technology requirements. Our research and product development activities are limited and focused on delivering robust production solutions to such projected unit design and technology requirements. We follow this product development methodology in all our major product lines. We incurred no expenses for research and development in fiscal 2015 and fiscal 2014.

Principal Customers
 
A significant portion of our business is generated by a small number of major customers. The balance of our business consists of discrete projects for numerous other customers. As industry and market demand changes, our major customers may also change. Our top seven customers generated approximately 79% and 72% of our total revenue in fiscal 2015 and fiscal 2014, respectively. Our group of largest customers can change from year to year. Our largest customer in fiscal 2015 and fiscal 2014, a large prime defense contractor, accounted for 19% of our net sales during both fiscal 2014 and fiscal 2015 and is engaged in the development, delivery and support of advanced defense, security and aerospace systems. Our second largest customer in fiscal 2015 was Mevion Medical Systems, Inc., or Mevion, which accounted for 16% of our net sales. Mevion is a radiation therapy company dedicated to advancing the treatment of cancer. We build components and major assemblies for Mevion’s Proton Therapy Systems which are being installed at certain institutions throughout North America.

We historically have experienced, and continue to experience, customer concentration. A significant loss of business from our largest customer or a combination of several of our significant customers could result in lower operating profitability and/or operating losses if we are unable to replace such lost revenue from other sources.  Our customer base consists of many businesses in the markets identified above.  

The revenue derived from all of our customers in the designated industry groups during fiscal 2015 and fiscal 2014 are highlighted within the table below (dollars in thousands):

For the year ended March 31,
 
2015
   
2014
 
Net Sales
 
Amount
   
Percent
   
Amount
   
Percent
 
Defense
 
$
9,929
     
55
%
 
$
9,680
     
46
%
Energy
 
2,253
     
12
%
 
$
4,193
     
20
%
Precision Industrial
 
6,051
     
33
%
 
$
7,195
     
34
%

The following table sets forth the revenue, both in dollars and as a percentage of total revenue, generated by individual customers in their specific markets that accounted for 10% or more of our revenue in either fiscal 2015 or fiscal 2014 (dollars in thousands):

For the year ended March 31,
 
2015
   
2014
 
Net Sales
 
Amount
   
Percent
   
Amount
   
Percent
 
Defense
 
$
3,526
     
19
%
 
$
3,984
     
19
%
Energy
 
*
     
*
%
 
$
*
     
*
%
Precision Industrial Customer 1
 
*
     
*
%
 
$
2,955
     
14
%
Precision Industrial Customer 2 
 
$
 2,958
     
16
%
 
$
 2,069
     
10
%
* Revenue from the customer in this market was less than 10% of our total revenue during the period.
 
At March 31, 2015, we had a backlog of orders totaling approximately $14.3 million. We expect to deliver the backlog over the course of the next two fiscal years. As of May 31, 2015, our backlog was $12.1 million. The comparable backlog at the end of fiscal 2014 was $22.9 million. Included in the March 31, 2014 backlog was $5.5 million which has been cancelled pending the outcome of a bankruptcy filing by one of our customers. For fiscal 2015 and fiscal 2014, WCMC generated $0.8 million and $0.2 million of our total revenue, respectively. A downturn in demand for alternative energy components and a transfer of manufacturing back to the United States by WCMC’s largest customer has limited our ability to scale larger order volumes for WCMC in China.
 
 
 
 
 
3

 

 
Competition

We face competition from both domestic and foreign manufacturers in the manufacture of metal fabricated and machined precision components and equipment. The industry in which we compete is fragmented with no one dominant player. We compete against companies that are both larger and smaller in size and capacity. Some competitors may be better known, have greater resources at their disposal, and have lower production costs. For certain products, being a domestic manufacturer may play a role in determining whether we are awarded a certain contract. For other products, we may be competing against foreign manufacturers who have a lower cost of production. If a contracting party has a relationship with a vendor and is required to place a contract for bids, the preferred vendor may provide or assist in the development of the specification for the product which may be tailored to that vendor’s products. In such event, we would be at a disadvantage in seeking to obtain that contract. We believe that customers focus on such factors as the quality of work, the reputation of the vendor, the perception of the vendor’s ability to meet the required schedule, and price in selecting a vendor for their products. 
 
WCMC was formed to serve existing customers who expressed a strong desire for a qualified supply chain within China to serve their Asian end markets. China’s manufacturing base is large and developed, and we believe that there are many domestic and international companies that could compete with us in China. However, we believe that our strategy of augmenting our China-based subcontractors with experienced fabrication and machining expertise from the United States at WCMC enables us to better serve the precision manufacturing requirements of our customers within China, as compared to existing China manufacturers operating solely on their own.  

Government Regulations
 
Although we have a limited number of contracts with government agencies, a significant portion of our manufacturing services are provided as a subcontractor to prime government contractors. Such prime government contractors are subject to government procurement and acquisition regulations which give the government the right to termination for convenience, certain renegotiation rights, and rights of inspection. Any government action which affects our customers who are prime government contractors would affect us.  
 
Because of the nature and use of our products, we are subject to compliance with quality assurance programs, compliance with which is a condition for our ability to bid on government contracts and subcontracts. We believe we are in compliance with all of these programs.
  
We are also subject to laws applicable to manufacturing regulations, such as federal and state occupational health and safety laws, and environmental laws, which are discussed in more detail below under “Environmental Compliance.” WCMC operates under a business license granted by the appropriate government authorities in China. WCMC must operate under the terms and scope of that license in order to maintain its right to conduct business operations in China.

Environmental Compliance
 
We are subject to compliance with United States federal, state and local environmental laws and regulations that involve the use, disposal and cleanup of substances regulated by those laws and the filing of reports with environmental agencies, and we are subject to periodic inspections to monitor our compliance. We believe that we are currently in compliance with applicable environmental regulations. As part of our normal business practice we are required to develop and file reports and maintain logbooks that document all environmental issues within our organization. We may engage outside consultants to assist us in keeping current on developments in environmental regulations. Expenditures for environmental compliance purposes during fiscal 2015 and 2014 were not material.

Intellectual Property Rights

Presently, we have no registered intellectual property rights other than certain trademarks for our name and other business and marketing materials In the course of our business we develop know-how for use in the manufacturing process. Although we have non-disclosure policies in place with respect to our personnel and in our contractual relationships, we cannot assure you that we will be able to protect our intellectual property rights with respect to this know-how.
 
Personnel
 
As of March 31, 2015, we had approximately 109 full-time employees, of whom 29 are salaried and 80 are hourly. Of those employees, two employees are located in China at WCMC, and two are located at our executive office in Wayne, Pennsylvania. None of our employees is represented by a labor union. 
 
 
 
 
4

 
 
 
We believe the following are the most significant risks related to our business that could cause actual results to differ materially from those contained in any forward-looking statements.
 
We have a significant amount of outstanding debt and have incurred operating losses for the past three years. These and other factors raise substantial doubt about our ability to continue as a going concern.

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

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

In connection with the execution of the LSA, we paid approximately $0.24 million in fees and associated costs and utilized approximately $2.65 million of the proceeds of the Credit Loan Note to pay off debt obligations owed to the Bank, under the Loan Agreement.  Additionally, the Company retained approximately $1.27 million of the proceeds of the Credit Loan Note for general corporate purposes.
  
On December 22, 2014, Ranor entered into a Term Loan and Security Agreement, or TLSA, with Revere High Yield Fund, LP, or Revere. Pursuant to the 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 Loan 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 full certain debt that was then outstanding as well as to pay certain fees associated with the repayment of such debt. The remaining proceeds of the First Loan Note and the Second Loan Note were retained by the Company to be used for general corporate purposes. Pursuant to the TLSA, Ranor is subject to certain affirmative covenants more fully described in Note 8 – Debt to our consolidated financial statements included in this Annual Report on Form 10-K.

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

We incurred operating losses of $3.6 million and $7.1 million for the periods ended March 31, 2015 and 2014, respectively. At March 31, 2015, we had cash and cash equivalents of $1.3 million. Approximately $14,000 is located in China which we may not be able to repatriate for use in the United States without undue cost or expense, if at all.

The consolidated financial statements for the fiscal years ended March 31, 2015 and 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 current liabilities of $7.7 million at March 31, 2015 and to continue as a going concern is dependent upon the timely availability of long-term financing and successful execution of our operating plan. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
 
Our liquidity is highly dependent on our available financing facilities and ability to improve our gross profit and operating income.  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 our LSA and 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 levels which may result in substantial dilution to our investors that do not participate in the offering, as well as a lower trading level for our common stock.
 
 
 
 
 
5

 

 
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 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 utilize 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.

Doubts about our ability to continue as a going concern may have an adverse effect on our customer and supplier relationships.

Our relationships with our customers and suppliers are predicated on the belief that we will continue to operate as a going concern. Certain of our customers may not enter into sales contracts with us if there is uncertainty regarding our ability to continue as a going concern. This may have an adverse effect on our ability to grow our revenues and increase our backlog, which is a key component of our plan to continue as a going concern. Current and future suppliers may be less likely to grant us credit, resulting in a negative impact on our working capital and cash flows. While management has developed plans to continue to operate as a going concern, in the event such adverse consequences should occur, we cannot provide assurance that we will successfully execute these plans.
 
Our operating results may fluctuate significantly from quarter to quarter and may fall below expectations in any particular fiscal quarter.

We have recorded net losses in each of the last three fiscal years, and we cannot be certain that we will regain profitability in the future.

Our operating results historically have been difficult to predict and have at times significantly fluctuated from quarter to quarter due to a variety of factors, many of which are outside of our control. As a result of these factors, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. If our revenue or operating results fall below the expectations of investors or any securities analysts that follow our company in any period, the trading price of our common stock would likely decline. Our operating expenses do not always vary directly with revenue and may be difficult to adjust in the short term. As a result, if revenue for a particular quarter is below our expectations, we may not be able to proportionately reduce operating expenses for that quarter, and therefore such a revenue shortfall would have a disproportionate effect on our operating results for that quarter.

We are limited in our inability to use a short form registration statement on Form S-3 may affect our ability to access the capital markets, if needed.

A Registration Statement on Form S-3 permits an eligible issuer to incorporate by reference its past and future filings and reports made under the Exchange Act. In addition, Form S-3 enables eligible issuers to conduct primary offerings “off the shelf” under Rule 415 of the Securities Act of 1933, as amended, or the Securities Act. The shelf registration process under Form S-3 combined with the ability to incorporate information on a forward basis, allows issuers to avoid additional delays and interruptions in the offering process and to access the capital markets in a more expeditious and efficient manner than raising capital in a standard offering on Form S-1.

To be eligible to use Form S-3 for a registered offering of our securities to investors, either (1) the aggregate market value of our common stock held by non-affiliates would have to exceed $75 million or (2) our common stock would have to be listed and registered on a national securities exchange. Currently, we do not meet either of those eligibility requirements and are therefore precluded from using a Form S-3 in connection with a registered offering of our securities to investors.

Due to our present inability to use Form S-3, if we wanted to conduct a registered offering of securities to investors, we will be required to use long form registration and may experience delays. In addition, our ability to undertake certain types of financing transactions may be limited or unavailable to us without the ability to use Form S-3. Furthermore, because of the delay associated with long form registration and the limitations on the financing transactions we may undertake, the terms of any financing transaction we are able to conduct may not be advantageous to us or may cause us not to obtain capital in a timely fashion to execute our business strategies and continue to operate as a going concern.
 
The terms of certain of our financing arrangements may impair our ability to raise capital.

The securities purchase agreement pursuant to which we sold our Series A Convertible Preferred Stock to Barron Partners provides the holders of our Series A Convertible Preferred Stock with certain rights, particularly a right of first refusal on certain future equity financings, that may impair our ability to raise capital in the equity markets.

Our indebtedness could adversely affect our ability to raise additional capital to fund our operations and limit our ability to pursue our growth strategy or to react to changes in the economy or our industry, and our debt obligations include restrictive covenants which may restrict our operations or otherwise adversely affect us.
 
 
 
 
 
6

 
 
 
Our current credit facilities contain, and any future credit facilities will likely contain, restrictive covenants and other provisions that could have important negative consequences to our business, including, without limitation:
 
·
increasing our vulnerability to general economic and industry conditions because our debt payment obligations may limit our ability to use our cash to respond to or defend against changes in the industry or the economy;
·
requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;
·
limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes;
·
limiting our ability to pursue our growth strategy, including restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; and
·
placing us at a disadvantage compared to our competitors who are less leveraged and may be better able to use their cash flow to fund competitive responses to changing industry, market or economic conditions.
 
In particular, the TLSA contains a cash covenant that requires that we maintain minimum month-end cash balances that range from $400,000 to $820,000. We were required to maintain a cash balance of $500,000 at March 31, 2015. We may have to raise capital in the future for the purpose of meeting the cash covenant contained in the TLSA, and, if we are able to raise capital in the future, this covenant may serve to restrict how we can use this capital. If we refinance our credit facilities, we cannot guarantee that any new credit facility will not contain similar covenants and restrictions.

We have identified a material weakness in our internal control over financial reporting, and if we fail to remediate this material weakness and maintain proper and effective internal control over financial reporting, our ability to produce accurate and timely financial statements could be impaired and may lead investors and other users to lose confidence in our published financial data.
 
Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial statements. In evaluating the effectiveness of our internal control over financial reporting as of March 31, 2015, management identified a material weakness in the Company's internal control over financial reporting. Specifically, we did not maintain a sufficient complement of corporate accounting personnel or Ranor accounting staff necessary to consistently perform management review controls over financial information and complete account reconciliations on a timely basis to ensure all transactions were accurately captured and recorded in the proper period. The demand on the corporate accounting resources is significant due to the manual nature of controls necessary to maintain effective control over our legacy system. As a result of this material weakness, we made certain post-closing adjustments to work-in-process and cost of sales. The adjustments corrected inputs for certain project costs related to losses on future sales commitments at our Ranor subsidiary. The adjustments were made after our first general ledger closing at year end and were not reconciled in a timely manner.
 
During fiscal 2014 we have formalized our accounting policies and implemented a proper account reconciliation process. For fiscal 2015, we will review our compensating controls, staffing requirements and the cost/benefit for upgrading our legacy systems.

We believe that the measures described above will facilitate remediation of the material weakness we have identified and will continue to strengthen our internal control over financial reporting. We are committed to continually improving our internal control process and will diligently review our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, we may decide that additional measures are necessary to address control deficiencies. 

We face strong competition in our markets.
 
We face competitive pressures from both domestic and foreign manufacturers in each of the markets we serve.  No one company dominates the industry in which we operate.  Our competitors include international, national, and local manufacturers, some of whom may have greater financial, manufacturing, marketing and technical resources than we do, or greater penetration in or familiarity with a particular geographic market than we have.  

Some competitors may be better known, with greater resources at their disposal, and some may have lower production costs.  For certain products, being a domestic manufacturer may play a role in determining whether we are awarded a certain contract.  For other products, we may be competing against foreign manufacturers who have a lower cost of production.  If a contracting party has a relationship with a vendor and is required to place a contract for bids, the preferred vendor may provide or assist in the development of the specification for the product which may be tailored to that vendor’s products.  In such event, we would be at a disadvantage in seeking to obtain that contract.  We believe that customers focus on such factors as quality of work, reputation of the vendor, perception of the vendor’s ability to meet the required schedule, and price in selecting a vendor for their products.  Some of our customers have moved manufacturing operations or product sourcing overseas, which can negatively impact our sales.  To remain competitive, we will need to invest continuously in manufacturing, product development and customer service, and we may need to reduce our prices, particularly with respect to customers in industries that are experiencing downturns.  We cannot provide assurance that we will be able to maintain our competitive position in each of the markets that we serve.

Demand in our end-use markets can be cyclical, impacting the demand for the products we produce.
 
 
 
 
 
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Demand in our end-use markets, including companies in the renewable energy (solar and wind), medical, nuclear, defense, industrial, and aerospace industries, can be cyclical in nature and sensitive to general economic conditions, competitive influences and fluctuations in inventory levels throughout the supply chain.  Our sales are sensitive to the market conditions present in the industries in which the ultimate consumers of our products operate, which in some cases have been highly cyclical and subject to substantial downturns.
 
As a result of the cyclical nature of these markets, we have experienced, and in the future we may experience, significant fluctuations in our sales and results of operations with respect to a substantial portion of our total product offering, and such fluctuations could be material and adverse to our overall financial condition, results of operations and liquidity.
 
We rely on third parties to supply certain raw materials that are critical to the manufacture of our products and we may not be able to access alternative sources of these raw materials if the suppliers are unwilling or unable to meet our demand.
 
Costs of certain critical raw materials, such as inconel, titanium, stainless steel, high strength steel and other alloys, among others, have been volatile due to factors beyond our control.  Raw material costs are included in our contracts with customers but in some cases we are exposed to changes in raw material costs from the time purchase orders are placed to when we purchase the raw materials for production.  Changes in business conditions could adversely affect our ability to recover rapid increases in raw material costs and may adversely affect our results of operations.

In addition, the availability of these critical raw materials is subject to factors that are not within our control.  In some cases, these critical raw materials are purchased from suppliers operating in countries that may be subject to unstable political and economic conditions.  At any given time, we may be unable to obtain an adequate supply of these critical raw materials on a timely basis, at prices and other terms acceptable to us, or at all.

If suppliers increase the price of critical raw materials or are unwilling or unable to meet our demand, we may not have alternative sources of supply.  In addition, to the extent that we have quoted prices to customers and accepted customer orders for products prior to purchasing the necessary raw materials, or have existing contracts, we may be unable to raise the price of products to cover all or part of the increased cost of the raw materials.

The manufacture of some of our products is a complex process and requires long lead times.  As a result, we may experience delays or shortages in the supply of raw materials.  If unable to obtain adequate and timely deliveries of required raw materials, we may be unable to timely manufacture sufficient quantities of products.  This could cause us to lose sales, incur additional costs, delay new product introductions or suffer harm to our reputation.
 
Our manufacturing processes are complex and depend upon critical, high cost equipment for which there may be only limited or no production alternatives.

It is possible that we could experience prolonged periods of reduced production due to unplanned equipment failures, and we could incur significant repair or replacement costs in the event of those failures.  It is also possible that operations could be disrupted due to other unforeseen circumstances such as power outages, explosions, fires, floods, accidents and severe weather conditions.  

We must make regular capital investments and changes to our manufacturing processes to lower production costs, improve productivity, manufacture new or improved products and remain competitive.  We may not be in a position to take advantage of business opportunities or respond to competitive pressures if we fail to update, replace or make additions to our equipment or our manufacturing processes in a timely manner.  The cost to repair or replace much of our equipment or facilities would be significant.  We cannot be certain that we will have sufficient internally generated cash or acceptable external financing to make necessary capital expenditures in the future.

Failure to obtain and retain skilled technical personnel could adversely affect our operations.

Our production facilities in both the U.S. and China require skilled personnel to operate and provide technical services and support for our business. Competition for the personnel required for our business intensifies as activity increases. In periods of high utilization, it may become more difficult to find and retain qualified individuals. This could increase our costs or have other adverse effects on our operations.

A significant portion of our manufacturing and production facilities are situated in only a few locations around the world, which increases our exposure to significant disruption to our business as a result of unforeseeable developments in a single geographic area.
 
We operate manufacturing and production facilities in Wuxi, China and Westminster, Massachusetts. It is possible that we could experience prolonged periods of reduced production due to unforeseen catastrophic events occurring in or around these manufacturing and production facilities.  As a result, we may be unable to shift manufacturing capabilities to alternate locations, accept materials from suppliers, meet customer shipment needs or address other severe consequences that may be encountered.  Our financial condition and results of our operations could be materially adversely affected were such events to occur.

Our production facilities are energy-intensive and we rely on third parties to supply energy consumed at our production facilities.
 
 
 
 
 
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The prices for and availability of electricity, natural gas, oil and other energy resources are subject to volatile market conditions.  These market conditions often are affected by political and economic factors beyond our control.  Disruptions or lack of availability in the supply of energy resources could temporarily impair the ability to operate our production facilities.  Further, increases in energy costs, or changes in costs relative to energy costs paid by competitors, may adversely affect our profitability.  To the extent that these uncertainties cause suppliers and customers to be more cost sensitive, increased energy prices may have an adverse effect on our results of operations and financial condition.

Laws and regulations governing international operations may require us to develop and implement costly compliance programs and the failure to comply with such laws may result in substantial penalties.
 
We must comply with laws and regulations relating to international business operations.  The creation and implementation of international business practices compliance programs is costly and such programs are difficult to enforce, particularly where reliance on third parties is required.
 
The Foreign Corrupt Practices Act, or FCPA, prohibits any U.S. individual or business from paying, offering, or authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, for the purpose of influencing any act or decision of the foreign official in order to assist the individual or business in obtaining or retaining business.  The FCPA also obligates companies whose securities are listed in the United States to comply with certain accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations.  The anti-bribery provisions of the FCPA are enforced primarily by the U.S. Department of Justice.  

Compliance with the FCPA is expensive and difficult, particularly in countries in which corruption is a recognized problem.  The failure to comply with laws governing international business practices may result in substantial penalties, including suspension or debarment from government contracting.  Violation of the FCPA can result in significant civil and criminal penalties.  Indictment alone under the FCPA can lead to suspension of the right to do business with the U.S. government until the pending claims are resolved.  Conviction of a violation of the FCPA can result in long term disqualification as a government contractor.  
 
The termination of a government contract or customer relationship as a result of our failure to satisfy any of our obligations under laws governing international business practices would have a negative impact on our operations and harm our reputation and ability to procure government contracts.  The Securities and Exchange Commission, or SEC, also may suspend or bar issuers from trading securities on U.S. exchanges for violations of the FCPA’s accounting provisions.

Additionally, we, through our WCMC subsidiary, are subject to other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business.  We have operations, agreements with third parties, and sell most of our WCMC manufactured products in China.  China also strictly prohibits bribery of government officials.  Our activities in China create the risk of unauthorized payments or offers of payments by our employees, consultants, sales agents, or distributors, even though they may not always be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees, consultants, sales agents, or distributors.  However, our existing safeguards and any future improvements may prove to be less than effective, and our employees, consultants, sales agents, or distributors may engage in conduct for which we might be held responsible.  Violations of Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition.

Our business, financial condition and results of operations could be adversely affected by the political and economic conditions in China.
 
We have operations located in China.  A number of factors relating to having operations in China could have a material adverse effect on our business, financial condition, and results of operations.  These factors include:
 
·
changes in political, regulatory, legal or economic conditions;
·
governmental actions, such as restrictions on the transfer or repatriation of funds and foreign investments;
·
civil disturbances, including terrorism or war;
·
political instability;
·
public health emergencies;
·
changes in employment practices and labor standards;
·
local business and cultural factors that differ from our customary standards and practices; and
·
changes in tax laws.

In addition, the Chinese economy may differ favorably or unfavorably from other economies in several respects, including the growth rate of GDP, the rate of inflation, resource self-sufficiency and balance of payments position.  The Chinese government has traditionally exercised and continues to exercise a significant influence over many aspects of the Chinese economy.  Further actions or changes in policy, including taxation, of the Chinese central government or the respective Chinese provincial or local governments could have a significant effect on the Chinese economy, which could adversely affect private sector companies, market conditions, and the success of our operations.
 
 
 
 
 
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U.S. and Chinese transfer pricing regulations require that any international transactions involving associated enterprises are undertaken at an arm’s length price.  Applicable income tax authorities review our tax returns and if they determine that the transfer prices we have applied are not appropriate, we may incur increased tax liabilities, including accrued interest and penalties, which would cause our tax expense to increase, possibly materially, thereby reducing our profitability and cash flows.
 
We have limited insurance coverage in China.

We do not have any business liability, interruption or litigation insurance coverage for our operations in China. While business interruption insurance and other types of insurance are available to a limited extent in China, we have determined that the risks of interruption, the cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Therefore, our existing insurance coverage may not be sufficient to cover all risks associated with our business. As a result, we may be required to pay for financial and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect on our business, financial condition and results of operations.

Fluctuations in exchange rates could adversely affect our business and the value of our securities.
 
The value of our common stock will be indirectly affected by the foreign exchange rate between the U.S. dollar and Chinese yuan renminbi, or RMB, and between those currencies and other currencies in which our sales may be denominated.  Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend WCMC issues to the Company that will be exchanged into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.

Since July 2005, the RMB has no longer been pegged to the U.S. dollar.  Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term.  Moreover, it is possible that in the future Chinese authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
 
Very limited hedging transactions are available in China to reduce exposure to exchange rate fluctuations.  To date, we have not entered into any hedging transactions.  While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all.  In addition, our foreign currency exchange losses may be magnified by Chinese exchange control regulations that restrict our ability to convert RMB into foreign currencies.

Restrictions on currency exchange may limit our ability to receive and use revenue generated by WCMC effectively.

The majority of WCMC’s sales will be settled in RMB, and any restrictions on currency exchanges may limit our ability to use revenue generated in RMB to fund any business activities outside China or to make dividends or other payments in U.S. dollars.  Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including primarily the restriction that foreign enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China authorized to conduct foreign exchange business.  In addition, conversion of RMB for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items.  We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB.
 
Future inflation in China may inhibit our ability to conduct business in China.
 
In recent years, the Chinese economy has experienced periods of rapid expansion and fluctuating rates of inflation.  These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation.  High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products and our company.
 
As a publicly traded company, we are subject to certain regulatory compliance requirements, including Section 404 of the Sarbanes-Oxley Act of 2002. If we fail to maintain an effective system of internal controls, our reputation and our business could be harmed.
 
 
 
 
 
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As a publicly traded company in the United States, our ongoing compliance with various rules and regulations, including the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, will increase our legal and finance compliance costs and will make some activities more time-consuming and costly. These rules and requirements may be modified, supplemented or amended from time to time. Implementing these changes may take a significant amount of time and may require specific compliance training of our personnel. For example, Section 404 of the Sarbanes-Oxley Act requires that our management report on the effectiveness of our internal control over financial reporting in our annual reports filed with the SEC. Section 404 compliance may divert internal resources and will take a significant amount of time and effort to complete. If in the future our Chief Executive Officer, Chief Financial Officer or independent registered public accounting firm determines that our internal controls over financial reporting are not effective as defined under Section 404, we could be subject to sanctions or investigations by the SEC, or other regulatory authorities. As a result, investor perceptions of our company may suffer, and this could cause a decline in the market price of our common stock. Irrespective of compliance with these rules and regulations, including the requirements under the Sarbanes-Oxley Act, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our business and reputation. If we are unable to comply with the applicable regulatory compliance requirements, it could harm our operations, financial reporting, or financial results.

We are subject to new regulations related to conflict minerals which could adversely impact our business.

The SEC has promulgated final rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, regarding disclosure of the use of tin, tantalum, tungsten, gold and certain other minerals, known as conflict minerals, in products manufactured by public companies. The Dodd-Frank Act requires that public companies conduct due diligence to determine whether such minerals originated from the Democratic Republic of Congo, or the DRC, or an adjoining country and whether such minerals helped finance the armed conflict in the DRC. These rules require ongoing due diligence efforts, along with annual conflict minerals reports. There may be costs associated with complying with these disclosure requirements, including costs to determine the origin of conflict minerals used in our products.
 
In addition, the implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers offering conflict-free minerals, we cannot be sure that we will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices. Also, we may face reputational challenges if the due diligence procedures we implement do not enable us to verify the origins for all conflict minerals or to determine that such minerals are DRC conflict-free. We may also encounter challenges to satisfy customers that may require all of the components of products purchased to be certified as DRC conflict-free because our supply chain is complex. If we are not able to meet customer requirements, customers may choose to disqualify us as a supplier.

We currently do not use any conflict minerals in the production of our products, but from time to time we may receive a customer order necessitating the use of conflict minerals. In the event we produce any products utilizing conflict minerals, we will be required to comply with the rules discussed above.
 
Because most of our contracts are individual purchase orders and not long-term agreements, the results of our operations can vary significantly from quarter to quarter.

We currently have only one long-term contract with our customers, and major contracts with a small number of customers account for a significant percentage of our revenue.  We must bid or negotiate each contract separately, and when we complete a contract, there is generally no continuing source of revenue under that contract.  As a result, we cannot assure you that we have a continuing stream of revenue from any contract.  Our failure to generate new business on an ongoing basis would materially impair our ability to operate profitably.  Because a significant portion of our revenue is derived from services rendered for the alternative energy, nuclear, medical, defense, industrial, aerospace and related industries, our operating results may suffer from conditions affecting these industries, including any budgeting, economic or other trends that have the effect of reducing the requirements for our services.
 
Because of our dependence on a limited number of customers, our failure to generate major contracts from a small number of customers may impair our ability to operate profitably.
 
We have, in the past, been dependent in each year on a small number of customers who generate a significant portion of our business, and these customers change from year to year.  For the year ended March 31, 2015, our two largest customers accounted for approximately 35% of our revenue, with the largest accounting for 19% of our revenue.  For the year ended March 31, 2014 our largest customer accounted for 19% of our revenue and our three largest customers accounted for approximately 43% of our revenue. In addition, as of March 31, 2015, we had a $14.3 million order backlog, of which $12.6 million was attributable to seven customers. Our backlog at March 31, 2014 was $22.9 million, of which $18.6 million was attributable to six customers and $5.5 million was subsequently cancelled.     

As a result, we may have difficulty operating profitably if there is a default in payment by any of our major customers, we lose an existing order, or we are unable to generate orders from new customers.  Furthermore, to the extent that any one customer accounts for a large percentage of our revenue, the loss of that customer could materially affect our ability to operate profitably.  Since one customer accounted for 19% of our revenue in the fiscal year ended March 31, 2015, the loss of this customer could have a material adverse effect upon our business and may impair our ability to operate profitably. We anticipate that our dependence on a limited number of customers in any given fiscal year will continue for the foreseeable future. There is a risk that existing customers will elect not to do business with us in the future or will experience financial difficulties.  Furthermore, certain of our customers are at an early stage and are dependent on the equity capital markets to finance their purchase of our products.  
 
 
 
 
 
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As a result, these customers could experience financial difficulties, business reversals or lose orders or anticipated orders which would reduce or eliminate the need for the products which they ordered from us, and as a result they could be unable or unwilling to fulfill their contracts with us.  There is also a risk that our customers will attempt to impose new or additional requirements on us that reduce the profitability of the orders placed by those customers with us.  Further, even if the orders are not changed, these orders may not generate margins equal to our recent historical or targeted results.  If we do not develop relationships with new customers, we may not be able to increase, or even maintain, our revenue, and our financial condition, results of operations, business and/or prospects may be materially adversely affected.

The extensive environmental, health and safety regulatory regimes applicable to our manufacturing operations create potential exposure to significant liabilities.
 
The nature of our manufacturing business subjects our operations to numerous and varied federal, state, local and international laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health.  Failure to comply with these laws and regulations, or with the permits required for our operations, could result in fines or civil or criminal sanctions, third party claims for property damage or personal injury, and investigation and cleanup costs.  Potentially significant expenditures could be required in order to comply with environmental laws that may be adopted or imposed in the future.

We have used, and currently use certain quantities of substances that are considered hazardous, extremely hazardous or toxic under worker safety and health laws and regulations.  Although we implement controls and procedures designed to reduce continuing risk of adverse impacts and health and safety issues, we could incur substantial cleanup costs, fines and civil or criminal sanctions, and third party property damage or personal injury claims as a result of violations, non-compliance or liabilities under these regulatory regimes.
 
As a manufacturing business, we also must comply with federal and state environmental laws and regulations which relate to the manner in which we store and dispose of materials and the reports that we are required to file.  We cannot assure you that we will not incur additional costs to maintain compliance with environmental laws and regulations or that we will not incur significant penalties for failure to be in compliance.

Changes in delivery schedules and order specifications may affect our revenue stream.
 
Although we perform manufacturing services pursuant to orders placed by our customers, we have in the past experienced delays in the scheduling and changes in the specification of the products.  These changes may result from a number of factors, including a determination by the customer that the product specifications need to be changed after receipt of an initial product or prototype.  As a result of these changes, we may suffer a delay in the recognition of revenue from projects and may incur contract losses.  We cannot assure you that our results of operations will not be affected in the future by delays or changes in specifications or that we will ever be able to recoup revenue which was lost as a result of the delays or changes.  Further, if we cannot allocate our personnel to a different project, we will continue to incur expenses relating to the initial project, including labor and overhead.  Thus, if orders are postponed, our results of operations would be impacted by our need to maintain staffing and other expense generating aspects of production for the postponed projects, even though they were not fully utilized, and revenue associated with the project will not be recognized, during this period.  We cannot assure you that our operating results will not decline in future periods as a result of changes in customers’ orders.

Negative economic conditions may adversely impact the demand for our products and services, and the ability of our customers to meet their obligations to us on a timely basis.  Any disputes with customers could also have an adverse impact on our income and cash flows.
 
Tightening of credit in financial markets may lead businesses to postpone spending, which may impact our customers, causing them to cancel, decrease or delay their existing and future orders with us.  Declines in economic conditions may further impact the ability of our customers to meet their obligations to us on a timely basis.  If customers are unable to meet their obligations to us on a timely basis, it could adversely impact the realization of receivables, the valuation of inventories and the valuation of long lived assets across our businesses.  Additionally, we may be negatively affected by contractual disputes with customers, which could have an adverse impact on our income and cash flows.
 
Our business may be impacted by external factors that we may not be able to control.
 
War, civil conflict, terrorism, natural disasters and public health issues including domestic or international pandemic have caused and could cause damage or disruption to domestic or international commerce by creating economic or political uncertainties.  Additionally, the volatility in the financial markets and disruptions or downturns in other areas of the global or U.S. economies could negatively impact our business.  These events could result in a decrease in demand for our products, make it difficult or impossible to deliver orders to customers or receive materials from suppliers, affect the availability or pricing of energy sources or result in other severe consequences that may or may not be predictable.  As a result, our business, financial condition and results of operations could be materially adversely affected.

Our revenues may include international sales, which are associated with various risks.

Risks associated with international sales include without limitation: political and economic instability, including weak conditions in the world’s economies; difficulty in collecting accounts receivable; unstable or unenforced export controls; changes in legal and regulatory requirements; policy changes affecting the markets for our products; changes in tax laws and tariffs; and exchange rate fluctuations (which may affect sales to international customers and the value of profits earned on international sales when converted into U.S. dollars).  Any of these factors could materially adversely affect our results for the period in which they occur.
 
 
 
 
 
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The dangers inherent in our operations and the limits on insurance coverage could expose us to potentially significant liability costs and materially interfere with the performance of our operations.

The fabrication of large steel structures involves operating hazards that can cause personal injury or loss of life, severe damage to and destruction of property and equipment and suspension of operations. The failure of such structures during and after installation can result in similar injuries and damages. Although we believe that our insurance coverage is adequate, there can be no assurance that we will be able to maintain adequate insurance in the future at rates we consider reasonable or that our insurance coverage will be adequate to cover future claims that may arise. Claims for which we are not fully insured may adversely affect our working capital and profitability. In addition, changes in the insurance industry have generally led to higher insurance costs and decreased availability of coverage. The availability of insurance that covers risks we and our competitors typically insure against may decrease, and the insurance that we are able to obtain may have higher deductibles, higher premiums and more restrictive policy terms.
 
The rights of the holders of our common stock may be impaired by the potential issuance of preferred stock.
 
Our certificate of incorporation gives our board of directors the right to create new series of preferred stock.  As a result, the board of directors may, without stockholder approval, issue preferred stock with voting, dividend, conversion, liquidation or other rights, which could adversely affect the voting power and equity interest of the holders of our common stock.  Preferred stock, which could be issued with the right to more than one vote per share, could be utilized as a method of discouraging, delaying or preventing a change of control.  The possible impact on takeover attempts could adversely affect the price of our common stock.  Although we have no present intention to issue any additional shares of preferred stock or to create any new series of preferred stock and the certificate of designation relating to the Series A Convertible Preferred Stock restricts our ability to issue additional series of preferred stock, we may issue such shares in the future.  Without the consent of the holders of 75% of the outstanding shares of Series A Convertible Preferred Stock, we may not alter or change adversely the rights of the holders of the Series A Convertible Preferred Stock or increase the number of authorized shares of Series A Convertible Preferred Stock, create a class of stock which is senior to or on a parity with the Series A Convertible Preferred Stock, amend our certificate of incorporation in breach of these provisions or agree to any of the foregoing.

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

Because of our cash requirements and restrictions in the terms of our preferred stock and our debt agreements, we may be unable to pay dividends.
 
In view of the cash requirements of our business, we expect to use any cash flow generated by our business to finance our operations and growth.  Further, we are prohibited from paying dividends on our common stock while the Series A Convertible Preferred Stock is outstanding.

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

The deterioration of the credit and capital markets may adversely affect our access to sources of funding.
 
We rely on our credit facilities to fund a portion of our working capital needs and other general corporate purposes. If the counterparty backing these facilities were unable to perform on its commitments, our liquidity could be impacted, which could adversely affect funding of working capital requirements and other general corporate purposes. In the event that we need to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time, if at all.  Our inability to obtain financing on terms and within a time acceptable to us could have an adverse impact on our operations, financial condition, and liquidity.
 
Our stock price may fluctuate significantly.

The stock market, particularly in recent years, has experienced significant volatility, and the volatility of stocks often does not relate to the operating performance of the companies represented by the stock.  The market price of our common stock could be subject to significant fluctuations because of general market conditions and because of factors specifically related to our businesses.

Factors that could cause volatility in the market price of our common stock include market conditions affecting our customers’ businesses, including the level of mergers and acquisitions activity, and  actual and anticipated fluctuations in our quarterly operating results, rumors relating to us or our competitors, actions of stockholders, including sales of shares by our directors and executive officers, additions or departures of key personnel, and developments concerning current or future strategic alliances or acquisitions.
 
 
 
 
 
13

 
 
 
These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock at a profit and may otherwise negatively affect the liquidity of our common stock.  In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock.  If any of our stockholders brought a lawsuit against us, even if the lawsuit is without merit, we could incur substantial costs defending the lawsuit.  Such a lawsuit could also divert the time and attention of our management.

If equity research analysts do not publish research or reports about our business, or if they issue unfavorable commentary or downgrade their rating on our common stock, the price of our common stock could decline.

The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business.  The price of our common stock could decline if one or more securities analysts downgrade their rating on our common stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.
 

None.

Item 2. Properties.

We own approximately 145,000 square feet of office and manufacturing space at 1 Bella Drive, Westminster, Massachusetts. Our current facilities in Westminster are adequate for our present operational requirements.

From April 1, 2011 until March 31, 2015, we leased approximately 3,200 square feet of office space in Center Valley, Pennsylvania for our corporate headquarters.  On March 3, 2015, we entered into a lease termination agreement, or the Termination Agreement, with respect to this office with Center Valley Parkway Associates, L.P., pursuant to which the parties agreed to terminate without penalty that certain Lease Agreement, dated November 17, 2010.

On March 6, 2015, we entered into a new office lease with CLA Building Associates, L.P., or CLA, pursuant to which the Company is leasing approximately 4,000 square feet of office space located at 2 Campus Boulevard, Newtown Square, Pennsylvania, or the Newtown Square Property. The initial term of the new lease commenced on March 15, 2015 and will expire on September 15, 2015, unless sooner if terminated in accordance with the terms of the new lease. The monthly base rent for the Newtown Square Property was $2,400 per month, in addition to payments for electricity and gas (on a proportionate ratio basis for the entire building).

On June 1, 2015, we entered into a new office lease with GPX Wayne Office Properties, L.P., or GPX Wayne, pursuant to which the Company leases approximately 1,100 square feet located at 992 Old Eagle School Road, Wayne, Pennsylvania, or the Wayne Property. The Company assumed possession of the Wayne Property on June 16, 2015, or the Commencement Date. The initial term of the lease will expire on the last day of the twelfth calendar month after the Commencement Date, unless sooner terminated in accordance with the terms of the lease. The Company’s monthly base rent for the Wayne Property is $1,837.88 per month in addition to payments for electricity (on a proportionate ratio basis for the entire building), certain contributions for leasehold improvements, and certain other additional rent items (including certain taxes, insurance premiums and operating expenses). Other than as described above, there is no relationship between the Company and GPX Wayne.

On June 4, 2015, the Company entered into a lease termination agreement with CLA, pursuant to which the Company and CLA agreed to terminate the lease relating to the Newtown Square Property. As a result of this termination agreement, the lease relating to the Newtown Square Property will be terminated, and the Company will vacate this property, on or before June 30, 2015. Other than as described above, there is no relationship between the Company and CLA.

WCMC leased approximately 1,000 square feet. of office space from an affiliate of Cleantech Solutions International, or CSI, to serve as its primary corporate offices in Wuxi, China. The lease had an initial two-year term and rent under the lease with the CSI affiliate was approximately $17,000 on an annual basis. This lease expired on November 15, 2013 and was not renewed.

In November 2013, we leased approximately 1,000 square feet of new office space in Wuxi City, Jiangsu Province, China, which currently houses WCMC.  The lease has a one-year term and provides for rent of approximately $4,000 annually. The initial lease was renewed by the parties in November 2014 for a term of two years to November 2016.

Item 3. Legal Proceedings.

On May 29, 2014, the Company filed a Demand for Arbitration against a customer, GT Advanced Technologies, Inc., or GTAT, for breach of contractual duties set forth pursuant to Rule R-4 of the Commercial Rules of the American Arbitration Association in accordance with the Terms and Conditions of the purchase agreement, dated November 8, 2013, between the parties. The claim was filed by the Company in response to GTAT’s request in April 2014 to reduce the number of units ordered under the purchase agreement. The basis for the Company’s claim is detrimental reliance on the purchase order and subsequent modifications by GTAT during the course of production as evidenced by the Company’s purchased materials, personnel hires, units shipped, and other incurred costs. The parties negotiated but were not able to resolve the dispute under the terms of the contract. As such, the Company submitted the dispute to binding arbitration. The Company seeks to recover damages, together with attorney's fees, interest and costs.
 
 
 
 
 
14

 

 
On October 6, 2014, GTAT, together with certain of its direct and indirect subsidiaries, or collectively, the GTAT Group, commenced voluntary cases under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of New Hampshire.   Pursuant to the GTAT Group’s bankruptcy filing caused an automatic stay in the arbitration proceeding brought by the Company. The Company’s arbitration claim against GTAT is now asserted as an unsecured creditor claim in the GTAT Group’s bankruptcy case.

On April 17, 2014, the Company, through Ranor, entered into an Assignment of Claim Agreement, or the Assignment Agreement, with Citigroup Financial Products Inc., or Citigroup. Pursuant to the terms of the Assignment Agreement, Ranor agreed to sell, transfer, convey and assign to Citigroup all of Ranor’s right, title and interest in and to Ranor’s unsecured claim against GTAT in the aggregate amount of $3,740,956.34. Pursuant to the Assignment Agreement, Citigroup will pay to Ranor an initial amount equal to $1,122,286.90, subject to a 54.75% holdback, or the Holdback, such Holdback to be paid either (A) upon 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 the GTAT proceedings, as “allowed” or “accepted as filed”; or (B) when the time period during which any party (including GTAT) is permitted to file an objection, dispute or challenge with respect to Ranor’s claim in the proceedings expires and no objection, dispute or challenge has been filed with respect to any portion of Ranor’s claim. If the total amount of Ranor’s claim is allowed against GTAT, then Citigroup must pay Ranor the entire Holdback; however; if the amount of Ranor’s claim allowed is greater than $1,692,782.74 but less than the total amount or Ranor’s claim, then Citigroup is only required to pay Ranor an amount equal to the Holdback minus the product of 30% multiplied by the difference between the total amount of Ranor’s claim and the amount of such claim actually allowed against GTAT. If the total amount of Ranor’s claim that is allowed against GTAT is less than $1,692,782.74, then Ranor may be obligated to repurchase, at Citigroup’s election, any portion of Ranor’s claim not allowed below $1,692,782.74 multiplied by 30%, 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 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.


Not applicable to the Registrant.

Item 4A. Executive Officers of the Registrant

The following table sets forth certain information concerning our executive officers.
 
Name
Age
Position
Alexander Shen
53
Chief Executive Officer, President of Ranor, Inc.
Richard F. Fitzgerald
51
Chief Financial Officer
 
Alexander Shen, was appointed Chief Executive Officer of the Company on November 14, 2014. Mr. Shen also serves as President of our Ranor subsidiary. Mr. Shen has experience in a broad range of industries including metal fabrication, automotive, contract manufacturing, safety and security, and industrial distribution.  Prior to joining us, Mr. Shen served as President of SIB Development and Consulting in 2013, a firm specializing in fixed, monthly cost reduction. Mr. Shen served as President of Tydenbrooks Security Products Group, a security products company, from July 2011 to December 2012. Mr. Shen served as President and CEO of Burgon Tool Steel Company between January 2009 and June 2011, and served as CEO of Ryerson Mexico & Vice President – International for Ryerson, Inc., a multi-national distributor and processor of metals, from 2007 to 2010. Mr. Shen was Division General Manager & COO at Sumitomo Electric Group from 1998 to 2007, focused on automotive electrical and electronic products. Prior to 1998, he had a 10-year career at the Automotive Division of Alcoa Inc. with roles of increasing responsibility.  Mr. Shen began his career with General Motors, moving to Chrysler, before joining Alcoa Inc.  His career includes multiple international management roles in Japan, China, Mexico, and Europe, and he is fluent in the Chinese and Japanese languages and cultures.  Mr. Shen holds a B.S. in Engineering from Michigan State University.

Richard F. Fitzgerald, became our Chief Financial Officer in March 2009. Prior to joining us as Chief Financial Officer, Mr. Fitzgerald was engaged as a consultant providing tax, corporate development and financial consulting services for a specialty pharmaceutical company and a transportation manufacturing concern between December 2008 and March 2009. From 2002 until December 2008, Mr. Fitzgerald served in a variety of senior financial roles at Nucleonics, Inc., a private venture capital backed biotechnology company, eventually becoming Vice-President and Chief Financial Officer of Nucleonics, Inc. in February 2008. Prior to his employment with Nucleonics, Inc., Mr. Fitzgerald served as Director, Corporate Development of Exelon Corporation and PECO Energy Company from 1997 through 2002. Mr. Fitzgerald began his career with Coopers & Lybrand (now PricewaterhouseCoopers) in Philadelphia, Pennsylvania. Mr. Fitzgerald is a member of both the American and Pennsylvania Institutes of Certified Public Accountants. He holds a B.S. in Business Administration from Bucknell University. 
 
 
 
 
 
15

 
 
 
PART II

 
Our common stock is traded on the Over the Counter (OTC) Bulletin Board under the symbol “TPCS”.  The following table sets forth the high and low bid quotations per share of our common stock as reported on the OTC Bulletin Board for the last two completed fiscal years. The quarterly high and low bid quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.  
   
High
   
Low
 
Fiscal year ended March 31, 2015
           
4th Quarter (three months ended March 31, 2015)
 
$
0.24
   
$
0.09
 
3rd Quarter (three months ended December 31, 2014)
 
$
0.28
   
$
0.09
 
2nd Quarter (three months ended September 30, 2014)
 
$
0.62
   
$
0.24
 
1st Quarter (three months ended June 30, 2014)
 
$
0.96
   
$
0.45
 
             
Fiscal year ended March 31, 2014
           
4th Quarter (three months ended March 31, 2014)
 
$
1.35
   
$
0.94
 
3rd Quarter (three months ended December 31, 2013)
 
$
1.26
   
$
0.40
 
2nd Quarter (three months ended September 30, 2013)
 
$
0.70
   
$
0.27
 
1st Quarter (three months ended June 30, 2013)
 
$
1.15
   
$
0.59
 

As of June 9, 2015, we had approximately 1,457 record holders of our common stock. We have not paid dividends on our common stock, and the terms of the certificate of designation relating to the creation of the Series A Convertible Preferred Stock prohibit us from paying dividends. We plan to retain future earnings, if any, for use in our business, and do not anticipate paying dividends on our common stock in the foreseeable future.

For certain information concerning securities authorized for issuance under our 2006 long-term incentive plan, see Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”


Item 6.  Selected Financial Data

As a smaller reporting company, we have elected not to provide the information required by this Item.
 
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Statement Regarding Forward Looking Disclosure
 
The following discussion of the results of our operations and financial condition should be read in conjunction with our audited consolidated financial statements and the related notes, which appear elsewhere in this Annual Report on Form 10K. This Annual Report on Form 10-K, including this section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may contain predictive or “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based in part on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors. Those factors include those risks discussed in Item 1A “Risk Factors” and elsewhere in this Annual Report on Form 10-K, as well as those described in any other filings which we make with the SEC. In addition, such statements could be affected by risks and uncertainties related to recurring operating losses and the availability of appropriate financing facilities impacting our ability to continue as a going concern, our ability to change the composition of our revenues and effectively reduce operating expenses, our ability to receive contract awards through competitive bidding processes, our ability to maintain standards to enable us to manufacture products to exacting specifications, our ability to enter new markets for our services, market and customer acceptance of our products, our reliance on a small number of customers for a significant percentage of our business, competition, government regulations and requirements, pricing and development difficulties, our ability to make acquisitions and successfully integrate those acquisitions with our business, general industry and market conditions and growth rates, and general economic conditions. Any forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this Annual Report on Form 10-K, except as required by applicable law. Investors should evaluate any statements made by us in light of these important factors.
 
 
 
 
 
16

 
 
 
Overview
 
We offer a full range of services required to transform raw materials into precise finished products. Our manufacturing capabilities include: fabrication operations (cutting, press and roll forming, assembly, welding, heat treating, blasting and painting) and machining operations including CNC (computer numerical controlled) horizontal and vertical milling centers. We also provide support services to our manufacturing capabilities: manufacturing engineering (planning, fixture and tooling development, manufacturing), quality control (inspection and testing), materials procurement, production control (scheduling, project management and expediting) and final assembly.

All U.S. manufacturing is done in accordance with our written quality assurance program, which meets specific national and international codes, standards, and specifications. Ranor holds several certificates of authorization issued by the American Society of Mechanical Engineers and the National Board of Boiler and Pressure Vessel Inspectors. The standards used are specific to the customers’ needs, and our manufacturing operations are conducted in accordance with these standards.

Because our revenues are derived from the sale of goods manufactured pursuant to a contract, and we do not sell from inventory, it is necessary for us to constantly seek new contracts. There may be a time lag between 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 which require our services and products.
 
Our contracts are generated both through negotiation with the customer and from bids made pursuant to a request for proposal. Our ability to receive contract awards is dependent upon the contracting party’s perception of such factors as our ability to perform on time, our history of performance, including quality, our financial condition and our ability to price our services competitively.  Although some of our contracts contemplate the manufacture of one or a limited number of units, we are seeking more long-term projects with a more predictable cost structure.

We historically have experienced, and continue to experience, customer concentration. For fiscal 2015 and fiscal 2014, our largest customer accounted for approximately 19% and 19% of reported net sales, respectively. For the last two fiscal years, our top two customers have accounted for up to approximately 35% in aggregate of our total annual revenues. Our seven largest customers, who each generated revenue for the Company in excess of $1.0 million in fiscal 2015, accounted for approximately 79% of our revenue for fiscal 2015 in the aggregate. Our sales order backlog at March 31, 2015 was approximately $14.3 million compared with a backlog of $22.9 million at March 31, 2014. Our March 31, 2014 backlog included approximately $7.7 million of orders for sapphire production furnace components for GTAT. GTAT commenced voluntary cases under Chapter 11 of the Bankruptcy Code on October 6, 2014. Approximately $1.8 million of components have been shipped to GTAT through March 31, 2015. The remaining orders have been removed from the backlog due to the uncertainty regarding the outcome of the bankruptcy.
 
At March 31, 2014, we were not in compliance with our financial covenants in the Loan and Security Agreement between Ranor and Santander Bank, N.A., 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 under the Loan Agreement at March 31, 2014, and all amounts outstanding under the Loan Agreement, our Massachusetts Development Finance Authority, or MDFA, Revenue Bonds, Ranor Issue, Series 2010A, or Series A Bonds, and our MDFA Revenue Bonds, Ranor Issue, Series 2010B, or Series B Bonds, totaling $4.2 million in the aggregate, were classified as a current liability at March 31, 2014.

Beginning on January 16, 2014, we entered into a series of Forbearance and Modification Agreements in connection with the Loan Agreement. Under these Forbearance Agreements, 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 September 30, 2014. During this period, we were in default under the Loan Agreement.

On May 30, 2014 and on 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 the Loan Agreement and the Mortgage Loan and Security Agreement, dated as of December 1, 2010, by and among us, the MDFA and the Bank (as Bond owner and Disbursing Agent) or the MLSA, the Series A Bonds and the Series B Bonds, and to terminate certain interest rate swaps. The proceeds from the new borrowings have improved liquidity and allowed us to emerge from provisions we were in default of under our previous debt agreements. At March 31, 2015, we were not in default under any of our debt agreements.
 
 
 
 
 
17

 

 
For fiscal 2015, our net sales and net loss were $18.2 million and $3.6 million, respectively, compared with net sales of $21.1 million and net loss of $7.1 million, for fiscal 2014.  Our gross margins for fiscal 2015 were 12.7% compared with negative gross margins of 3.4% in fiscal 2014. Fiscal 2015 margins improved as the volume of units shipped in connection with certain loss contracts were significantly lower. Fiscal 2014 margins were impacted by approximately $4.6 million of new contract losses, primarily related to two customer contracts. One contract resulted in cost production overruns and unplanned costs incurred on first articles and prototyping. On the second contract, our customer indicated a desire to significantly reduce the number of units ordered. We have recorded a reserve for potential losses and have filed an arbitration claim under the contract terms to recover all of our potential losses, though the arbitration proceeding has been stayed pending the bankruptcy of this customer. We cannot be certain that we will be successful in recovering the full amount of our loss.

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 “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

Strategy

We concentrate our sales and marketing activities on customers under three main industry groups, Defense, Energy 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 stronger 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. Historically, alternative energy has been our largest market served and has comprised a significant amount of our annual net sales. In November 2010, we announced the formation of WCMC. This subsidiary was formed to respond to an existing customer’s desire to migrate their supply chain nearer to their end market within China. Since forming WCMC, we have produced, through subcontractors, furnaces for alternative energy customers in China. The primary products we have manufactured for alternative energy customers have been multi-crystalline and mono-crystalline solar furnaces, as well as polysilicon reactor vessels and sapphire growth furnaces.  For fiscal 2015 and fiscal 2014, WCMC’s net sales were $0.8 million and $0.2 million, respectively. In fiscal 2015 we shipped a pressure vessel ($0.3 million) and sapphire furnace components ($0.5 million). Fiscal 2014 sales to solar manufacturers decreased as solar production capacity growth slowed. As of March 31, 2015, there were no orders in our WCMC backlog.

Defense

Our Ranor subsidiary performs precision fabrication and machining for the defense and aerospace industries, delivering turn-key defense components to our customers stringent design specifications, as well as quality and safety manufacturing standards specifically for defense component fabrication and machining. Defense components the Ranor team has delivered include critical sonar housings and fairings, vertical launch missile tubes, and magnetic motor system components. In addition, the 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. 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.

Energy

We believe that nuclear power plants scheduled to be built over the next 10 years worldwide could present an opportunity for us. Our Ranor subsidiary has the certifications required to produce the necessary components for new plants. Because of our manufacturing capabilities, our certification from the American Society of Mechanical Engineers and our historic relationships with suppliers in the nuclear power industry, we believe that we are well positioned to benefit from any increased activity in the nuclear sector. However, we cannot assure you that we will be able to develop any significant business from the nuclear industry.
 
Precision Industrial

For several years we have been providing production services to Mevion for the manufacture of its proprietary proton beam radiotherapy system. Mevion received 510(k) clearance from the U.S. Food and Drug Administration in June 2012 to market its proton radiotherapy device. Presently Mevion has 10 systems under development with customers in the United States. In January 2013, we announced a five-year agreement with Mevion to exclusively produce precision components for Mevion’s proton beam system.  In December 2013, the first center to enter clinical commissioning with Mevion’s proton beam system began treating patients. During calendar year 2015, Mevion customers opened two proton beam therapy centers and began treating cancer patients. During the fiscal year ended March 31, 2013, Mevion was our largest customer and accounted for $7.7 million in net sales.  For the fiscal years ended March 31, 2015 and 2014, sales to Mevion were $2.9 million and $2.1 million as orders slowed while the first clinical commissioning events concluded.

Growing global demand for sapphire, a core component in high-end LED products and smartphones, has increased the worldwide demand for Heat Exchanger Method, or HEM, sapphire. Accordingly, many polysilicon companies are expanding into the field of HEM sapphire and existing players in the HEM sapphire industry are expanding their production capacity. The production of HEM sapphire requires robust high temperature vacuum furnaces much like those we have been producing for the processing of polysilicon within the solar industry. We believe the HEM sapphire field is a growing sector where our manufacturing expertise and experience with similar products for the solar industry can be directly leveraged.
 
 
 
 
 
18

 

 
Revenue Recognition
 
We account for revenues and earnings in our business using the percentage-of-completion method of accounting. Percentage-of-completion is considered the revenue recognition model that best reflects the economics for our customer contracts. We recognize contract revenue and gross profit under this method as the work progresses, either as the products are produced and delivered, or as services are rendered. We determine progress toward completion on production contracts based on either input measures, such as labor hours incurred, or output measures, such as units delivered.

Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability are recognized in the period in which the revisions are determined. Costs incurred on uncompleted contracts consist of labor, overhead, and materials. Work in process is stated at the lower of cost or market. We may combine contracts for accounting purposes when they are negotiated as a package with an overall profit margin objective. These essentially represent an agreement to do a single project for a single customer, involve interrelated construction activities with substantial common costs, and are performed concurrently or sequentially. When a group of contracts is combined, revenue and profit are earned during the performance of the combined contracts.
 
Costs allocable to undelivered units are reported in the consolidated balance sheet as costs incurred on uncompleted contracts. Amounts in excess of agreed upon contract price for customer directed changes, construction changes, customer delays or other causes of additional contract costs are recognized in contract value if it is probable that a claim for such amounts will result in additional revenue and the amounts can be reliably estimated. Revenues from such claims are recorded only to the extent that contract costs have been incurred.

Revisions in cost and profit estimates are reflected in the period in which the facts requiring the revision become known and are estimable. The unit of delivery method requires the existence of a contract to provide the persuasive evidence of an arrangement and determinable seller’s price, delivery of the product and reasonable collection prospects. We have written agreements or purchase orders with our customers that specify contract prices and delivery terms. We recognize revenues only when the collectability is reasonably assured. When we can only estimate a range of revenues and costs, we use the most likely estimate within the range. If we cannot determine which estimate in the range is most likely, the amounts within the ranges that would result in the lowest profit margin (the lowest contract revenue estimate and the highest contract cost estimate) is used.

Income Taxes

We provide for federal and state income taxes currently payable, as well as those deferred because of temporary differences between reporting income and expenses for financial statement purposes versus tax purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recoverable. The effect of the change in the tax rates is recognized as income or expense in the period of the change. A valuation allowance is established, when necessary, to reduce deferred income taxes to the amount that is more likely than not to be realized.
 
In assessing the recoverability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. If we determine that it is more likely than not that certain future tax benefits may not be realized, a valuation allowance will be recorded against deferred tax assets that are unlikely to be realized. Realization of the remaining deferred tax assets will depend on the generation of sufficient taxable income in the appropriate jurisdiction, the reversal of deferred tax liabilities, tax planning strategies and other factors prior to the expiration date of the carryforwards. A change in the estimates used to make this determination could require a reduction in the valuation allowance for deferred tax assets if they become realizable. Our tax expense for fiscal 2015 includes the result of recording a full valuation allowance on our deferred tax assets.

As of March 31, 2015, our federal net operating loss carryforward was approximately $10.0 million. If not utilized, the federal net operating loss carryforward will expire in 2033. Furthermore, because of the over fifty-percent change in ownership as a consequence of the reverse acquisition of Ranor in February 2006, the amount of net operating loss carryforward used in any one year in the future is substantially limited.
 
New Accounting Pronouncements
 
See Note 2, Significant Accounting Policies, in the Notes to the Consolidated Financial Statements.
 
 
 
 
 
19

 
 
 
Results of Operations

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 in foreign markets. Ranor’s product mix changed significantly between fiscal 2011 and fiscal 2015 and included a higher sales dollar volume of prototype and first article production contracts which resulted in higher revenues and higher contract losses. These contract losses have been the result of only a few contracts but they have dampened our gross profit margins. Units manufactured under the majority of our customer contracts are delivered on time and with a positive gross margin.  Our results of operations are also affected by our success in booking new contracts, to the timing of revenue recognition, delays in customer acceptances of our products, delays in deliveries of ordered products and our rate of progress fulfilling 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.

Years Ended March 31, 2015 and 2014

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

 
   
2015
   
2014
   
Changes Year
Ended
March 31, 2015 to 2014
 
(dollars in thousands)
 
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
Net sales
  $ 18,233       100 %   $ 21,068       100 %   $ (2,835 )     (13 )%
Cost of sales
    15,926       87 %     21,800       104 %     (5,874 )     (27 )%
Gross profit (loss)
    2,307       13 %     (732     (4 )%     3,039   nm %
Selling, general and administrative
    4,533       25 %     6,113       29 %     (1,580 )     (26 )%
Loss from operations
    (2,226 )     (12 )%     (6,845 )     (33 )%     4,619       67 %
Other (expense) income:
                                               
 Other (expense) income
    (4     (1 )%     1       -- %     (5 ) nm %
 Interest expense
    (1,515 )     (8 )%     (441 )     (2 )%     (1,074 ) nm %
 Interest income
    --       -- %     4       -- %     (4 nm %
Total other expense, net
    (1,519 )     (9 )%     (436 )     (2 )%     (1,083 ) nm %
Loss before income taxes
    (3,745 )     (21 )%     (7,281 )     (35 )%     3,536       49 %
Income tax benefit
    (161     (1 )%     (186     (1 )%     25       13 %
Net Loss
  $ (3,584 )     (20 )%   $ (7,095 )     (34 )%   $ 3,511       49 %

Net Sales

For the year ended March 31, 2015, net sales decreased by $2.8 million, or 13%, to $18.2 million. Our net sales to Precision Industrial customers decreased by $3.3 million when compared with fiscal 2014 as the Company continues to transition from low margin legacy contracts and nonrecurring prototype work to new orders with higher margins with new and existing customers. This decrease was offset in part by increases in shipments of proton beam accelerator components ($0.9 million) and sapphire production furnaces ($1.3 million). Net sales for components and products sold to our customers in the Energy group decreased by $1.9 million, primarily on lower order demand for isotope transport casks. Net sales to customers in the Defense group increased by $0.2 million.
 
Cost of Sales and Gross Margin

Business process improvements have solidified our quoting process from pre-award to post-award. New orders with positive margins have resulted in improved gross margins during fiscal 2015. Gross margin in any reporting period is impacted by the mix of services we provide on projects completed and in-process within that period.  Our cost of sales for fiscal 2015 decreased by $5.9 million or 27% when compared to fiscal 2014 on lower contract volume. Gross margins for fiscal 2014 were negative compared with a 12.6% positive gross margin for the same period in fiscal 2015. Actual production levels were lower than planned and resulted in approximately $3.3 million in under absorbed overheads for the period. Our product mix in fiscal 2015 included less prototype and first article production contracts. New contract losses totaled less than $0.3 million in fiscal 2015. In fiscal 2014, we recorded a provision for potential contract losses of $2.7 million in connection with a customer change request to reduce or delay the number units delivered under a long-term purchase agreement, which was recorded due to the uncertain outcome in connection with the contract. We filed a legal claim and demand for arbitration under this contract to recover all of our potential losses, but, as a result of this customer filing a voluntary bankruptcy claim, the claim the Company asserted in the arbitration is now asserted as an unsecured creditor claim in the customer’s bankruptcy case.
 
 
Selling, General and Administrative Expenses
 
Total selling, general, and administrative expenses for fiscal 2015 were $4.5 million compared with $6.1 million for fiscal 2014, representing a decrease of $1.6 million or 27%.  Reduced headcount resulted in lower spending for compensation and other business expenses of $1.5 million and $0.1 million, respectively, in fiscal 2015 and fiscal 2014.
 
 
 
 
 
20

 
 
 
Other Income (Expense)

The following table reflects other income (expense), interest income and interest expense for fiscal 2015 and 2014:

   
2015
   
2014
   
$ Change
   
% Change
 
Other (expense) income
 
$
    (4,512
)
 
$
4,472
   
$
(8,984
)
   
     nm
%
Interest expense
 
$
(790,695
)
 
$
(385,767
)
 
$
(404,928
)
   
      nm
%
Interest expense: non-cash
 
$
   (723,770
)
 
$
(54,867
)
 
$
(668,904
)
   
      nm
%

Cash paid for interest expense was $544,027 in fiscal 2015, an increase when compared with fiscal 2014 due to higher debt levels and interest rates in connection with the refinancing transactions in May 2014 and December 2014. We also paid out $246,668 in connection with the early termination of an interest rate swap in December 2014. Non-cash interest expense reflects the amortization of deferred loan costs of $303,040 and the amortization of deferred interest expense of $420,730 in connection with our new debt.

Income Taxes

We recorded a tax benefit of $160,505 in fiscal 2015, of which $152,791 in deferred taxes were reclassified and reversed in connection with the termination of our interest rate swap agreements. For fiscal 2014, we recorded tax benefit of $185,473. The fiscal 2014 tax benefit primarily reflects a reduction in our tax liability in China. 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.
 
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. We regularly assess the effects resulting from these factors to determine the adequacy of our provision for income taxes.

Net Loss
 
As a result of the foregoing, our net loss was $3.6 million or $0.15 per share, both basic and fully diluted, for fiscal 2015, as compared to net loss of $7.1 million or $0.34 per share, both basic and fully diluted, for fiscal 2014.

Liquidity and Capital Resources

At March 31, 2015, we had cash and cash equivalents of $1.3 million, of which $14,185 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. We incurred a net loss of $3.6 million for the year ended March 31, 2015. We have no material commitments for capital expenditures as of March 31, 2015. We expect to fund our purchase commitments for materials and operating costs with existing cash, accounts receivable collections and customer advance payments. Our fiscal 2015 margins improved because of lower contract losses and improved throughput. In fiscal 2014, we recorded $4.9 million of new contract losses. A majority of those losses were associated with one of our major customers. We filed a legal claim and demand for arbitration under the contract with this customer to recover all of our potential losses. The Company’s claim was asserted in arbitration, but, as a result of this customer filing a voluntary bankruptcy claim, is now asserted as an unsecured creditor claim in the customer’s bankruptcy case.

On April 17, 2015, the Company, through Ranor, entered into an Assignment of Claim Agreement, or the Assignment Agreement,  with Citigroup Financial Products Inc., or Citigroup. Pursuant to the terms of the Assignment Agreement, Ranor agreed to sell, transfer, convey and assign to Citigroup all of Ranor’s right, title and interest in and to Ranor’s unsecured claim against GTAT in the aggregate amount of $3,740,956.34. Pursuant to the Assignment Agreement, Citigroup will pay to Ranor an initial amount equal to $1,122,286.90, subject to a 54.75% holdback, or the Holdback. As a result, Ranor received $507,834.82 in cash under the terms of the Assignment Agreement on April 21, 2015, which we intend to use for general corporate purposes.

If the total amount of Ranor’s claim is allowed against GTAT, then Citigroup must pay Ranor the entire Holdback; however; if the amount of Ranor’s claim that is allowed is greater than $1,692,782.74 but less than the total amount of the claim, then Citigroup is only required to pay Ranor an amount equal to the Holdback minus the product of 30% multiplied by the difference between the total  amount of Ranor’s claim and the amount of such claim actually allowed against GTAT. If the total amount of Ranor’s claim allowed against GTAT is less than $1,692,782.74, then Ranor may be obligated to repurchase, at Citigroup’s election, any portion of its claim not allowed below $1,692,782.74 multiplied by 30%, 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 the GTAT bankruptcy proceeding and cannot guarantee that Ranor will receive any additional payment on its claim. An adverse decision in any proceeding could significantly harm our business and our consolidated financial position, results of operations and cash flows.
 
 
 
 
 
21

 

 
On December 22, 2014, Ranor entered into a Term Loan and Security Agreement, or TLSA, with Revere High Yield Fund, LP, or Revere. Pursuant to the 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 Loan 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 Second Loan Note to pay off loan obligations owed to the Bank, plus breakage fees on a related interest swap of approximately $220,000 under the Loan Agreement with the Bank. The remaining proceeds of the First Loan Note and the Second Loan Note were retained by the Company to be used for general corporate purposes. Pursuant to the TLSA, Ranor is subject to certain affirmative covenants, including a cash covenant, which requires that we maintain minimum month end cash balances ranging from $400,000 to $820,000. We were required to maintain a cash balance of $500,000 at March 31, 2015. We were in compliance with all covenants under the TLSA at March 31, 2015.

On May 30, 2014, TechPrecision and Ranor entered into a Loan and Security Agreement, or the LSA, with Utica Leasco, LLC, or Utica. Pursuant to the LSA, Utica agreed to loan $4.15 million to Ranor under a Credit Loan Note, which is collateralized by a first secured interest in certain machinery and equipment at Ranor.  Payments under the LSA and Credit Loan Note are due in monthly installments with an interest rate on the unpaid principal balance of the Credit Loan Note equal to 7.5% plus the greater of 3.3% or the six-month LIBOR interest rate, as described in the Credit Loan Note. 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 to Utica deferred interest in an amount ranging from $166,000 during the first twelve months of the term of the loan to $498,000 at any time after the forty-eighth month of the term of the loan. Ranor’s obligations under the LSA and the Credit Loan Note are guaranteed by TechPrecision.

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

In connection with the execution of the LSA, 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 the Bank, under the Loan Agreement.  Additionally, the Company retained approximately $1.27 million of the proceeds of the Credit Loan Note for general corporate purposes.

On January 16, 2014, 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. At March 31, 2014, we were not in compliance with the fixed charges and interest coverage financial covenants under the Loan Agreement, 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, July 1, 2014 and August 12, 2014, Ranor, TechPrecision and the Bank entered into additional Forbearance and Modification Agreements, or the Second Forbearance Agreement, Third Forbearance Agreement and Fourth Forbearance and Modification Agreement, respectively, or collectively with the First Forbearance Agreement, the Forbearance Agreements. Under each Forbearance Agreement, the Bank agreed to extend the forbearance period and 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. Each Forbearance Agreement expired on its own terms, with the Fourth Forbearance expiring on September 30, 2014. During the forbearance period, we agreed to comply with the terms, covenants and provisions in the Loan Agreement and related documents, as amended by the Forbearance Agreements.  The Forbearance Agreements amended the Loan Agreement to, among other things, prohibit the Company’s Leverage Ratio (as such term is defined in the Loan Agreement) from being greater than 1.75 to 1.0.  We were not in compliance with the applicable leverage ratio covenant in the Loan Agreement, as amended by the Forbearance Agreements, at September 30, 2014 or at March 31, 2014, as the actual leverage ratios were 4.4 to 1.0 and 3.8 to 1.0, respectively.

Our high level of debt in relation to our cash-on-hand and expected cash flows as well as other 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, in the past, did not efficiently utilize our manufacturing capacity. We must also 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 volume and composition of revenue and reducing costs, we believe that we would 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.  
 
 
 
 
 
22

 
 
 
The consolidated financial statements for the year ended March 31, 2015 were prepared on the basis of a going concern which contemplates that we will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should we be required to liquidate assets. Our ability to satisfy our total current liabilities of $7.7 million at March 31, 2015 and to continue as a going concern is dependent upon the successful execution of our operating plan and our ability to timely secure additional long-term financing. 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 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 unable to get such financing on terms equal to or better than the terms of our LSA and 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 levels which may result in substantial dilution to our investors that do not participate in the offering, as well as a lower trading level for our common stock.
 
Our liquidity is highly dependent on our available financing facilities and ability to improve our gross profit and operating income. If we successfully secure additional acceptable financing facilities, execute on our business plans, improve gross profit and operating income, and reduce our operating costs, then we believe our available cash will be sufficient to fund our operations, capital expenditures and principal and interest payments under our debt obligations through the next twelve months. At March 31, 2015, we had negative working capital of $2.1 million as compared with negative working capital of $2.0 million at March 31, 2014. The following table sets forth information as to the principal changes in the components of our working capital:   

(dollars in thousands)
 
March 31,
2015
   
March 31,
2014
   
Change
Amount
   
Percentage
Change
 
Cash and cash equivalents
 
$
1,336
   
$
1,086
   
$
250
     
23
%
Accounts receivable, net
 
$
826
   
$
2,280
   
$
(1,454
)
   
(64)
%
Costs incurred on uncompleted contracts
 
$
2,008
   
$
5,258
   
$
(3,250
)
   
    (62)
%
Inventory - raw materials
 
$
135
   
$
293
   
$
(158
)
   
(54)
%
Other current assets
 
$
538
   
$
461
   
$
77
     
17
%
Income taxes receivable
 
$
--
   
$
8
   
$
(8
)
   
(100)
%
Current deferred tax assets
 
$
827
   
$
991
   
$
(164
)
   
    (16)
%
Accounts payable
 
$
1,526
   
$
2,888
   
$
(1,362
)
   
       (47)
%
Accrued expenses
 
$
1,666
   
$
3,893
   
$
(2,227
)
   
       (57)
%
Deferred revenues
 
$
1,212
   
$
1,462
   
$
(250
)
   
       (17)
%
Short-term debt
 
$
2,250
   
$
--
   
$
2,250
     
nm
%
Current portion of long-term debt
 
$
934
   
$
4,169
   
$
(3,235
)
   
(76)
%
Trade notes payable
 
$
138
   
$
--
   
$
138
     
--
%
 
 
The following table summarizes our primary cash flows for the periods presented:
(dollars in thousands)
 
March 31,
2015
   
March 31,
2014
   
Change
Amount
 
Cash flows provided by (used in):
                       
Operating activities
 
$
(776
 
$
203
   
$
(979
)
Investing activities
   
(42
)
   
(65
)
   
       23
 
Financing activities
   
1,068
     
(2,127
)
   
3,195
 
Effect of exchange rates on cash and cash equivalents
   
--
     
--
     
--
 
Net increase (decrease) in cash and cash equivalents
 
$
250
   
$
(1,989
)
 
$
2,239
 

Operating activities

Our primary source of cash is from accounts receivable collections and customer advance payments for purchases of materials and project progress payments. We use our cash for the procurement of materials for projects and to pay salaries and benefits to employees and other operating costs. Our cash flows can fluctuate significantly from period to period based on the timing of our cash collections.  Cash used in operations in fiscal 2015 was $0.8 million compared with cash provided by operations in fiscal 2014 of $0.2 million. Customer advance payments, accounts receivable collections and other payments received in fiscal 2015 were not enough to offset all of the cash used in operations. During fiscal 2014, we received $2.9 million in customer advance payments, primarily in connection with a ramp up for production of sapphire furnace components.  
 
 
 
 
 
23

 

 
Investing activities

The years ended March 31, 2015 and March 31, 2014 were marked by cash outflows for capital spending for new equipment of $54,096 and $64,895, respectively. In March 2015, we received cash proceeds of $12,500 from the sale of furniture and fixtures, which partially offset the cash outflows for capital spending for new equipment in fiscal 2015.
 
Financing activities

In fiscal 2015, net cash provided by financing activities was $1.1 million. On May 30, 2014, TechPrecision and Ranor entered into the LSA with Utica, pursuant to which Utica loaned $4.15 million to Ranor under a Credit Loan Note.  Ranor used approximately $2.65 million of the proceeds of the Credit Loan Note to pay off debt obligations owed to the Bank under the Loan Agreement, while the remaining proceeds were retained for general corporate purposes. On December 22, 2014, we entered into the TLSA with Revere, pursuant to which Revere loaned an aggregate of $2.25 million to Ranor under the First Loan Note and the Second Loan Note. Ranor  utilized approximately $1.45 million of the proceeds of the First Loan Note and the Second Loan Note to pay off loan obligations owed to the Bank, while the remaining proceeds were retained for general corporate purposes. We paid approximately $0.8 million in principal under the LSA and TLSA through March 31, 2015.

In fiscal 2014, net cash used in financing activities was $2.1 million. In fiscal 2014 we used $1.2 million to meet our normal monthly debt obligations, including repayment of $500,000 under our revolving line of credit with the Bank. In addition, we used $0.9 million to retire our capital expenditure and staged advance note and to pay down additional principal under our MDFA bonds.

All of the above activity resulted in a net increase in cash of $0.25 million in fiscal 2015 compared with a decrease in cash of $2.0 million in fiscal 2014.

Obligations under the Credit Loan Note, the First Loan Note and the Second Loan Note are guaranteed by TechPrecision. Collateral securing such notes comprises all personal and real property of TechPrecision and Ranor, including cash, accounts receivable, inventories, equipment, financial and intangible assets. There are no material commitments for capital expenditures at March 31, 2015. We have no off-balance sheet assets or liabilities.

The following table sets forth information as of March 31, 2015 as to our contractual obligations:
 
(dollars in thousands)
 
Payments due by period
 
   
Total
   
Less than 1
 Year
   
2-3 Years
   
4-5 Years
   
After 5
 Years
 
Debt and capital lease obligations
 
$
5,669
   
$
3,184
   
$
1,868
   
$
617
   
$
--
 
Interest on debt and capital leases 
   
1,400
     
530
     
347
     
523
     
--
 
Employee compensation
   
1,280
     
1,280
     
--
     
--
     
--
 
Purchase obligations
   
924
     
924
     
--
     
--
     
--
 
Non-cancellable operating leases
   
22
     
18
     
4
     
--
     
--
 
Total
 
$
9,295
   
$
5,936
   
$
2,219
   
$
1,140
   
$
--
 
 

As a smaller reporting company, we have elected not to provide the information required by this Item.
 
 

 
24

 
 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Audit Committee of the Board of Directors
 and Stockholders of TechPrecision Corporation

 
We have audited the accompanying consolidated balance sheets of TechPrecision Corporation and subsidiaries (the “Company”) as of March 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TechPrecision Corporation and subsidiaries as of March 31, 2015 and 2014, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, and the Company’s liquidity may not be sufficient to meet its debt service requirements as they come due over the next twelve months.  These circumstances raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 1.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 

 
/s/ Marcum LLP
Marcum LLP
Bala Cynwyd, Pennsylvania
June 29, 2015




 
25

 
 

TECHPRECISION CORPORATION
CONSOLIDATED BALANCE SHEETS

   
March 31,
2015
   
March 31,
2014
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
1,336,325
   
$
1,086,701
 
Accounts receivable, less allowance for doubtful accounts of $24,693 - 2015 and $25,010 - 2014
   
826,363
     
2,280,469
 
Costs incurred on uncompleted contracts, in excess of progress billings
   
2,008,244
     
5,258,002
 
Inventories- raw materials
   
134,812
     
293,326
 
Income taxes receivable
   
--
     
8,062
 
Current deferred taxes
   
826,697
     
991,096
 
Other current assets
   
538,253
     
461,245
 
   Total current assets
   
5,670,694
     
10,378,901
 
Property, plant and equipment, net
   
5,610,041
     
6,489,212
 
Other noncurrent assets, net
   
45,490
     
105,395
 
   Total assets
 
$
11,326,225
   
$
16,973,508
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY:
               
Current liabilities:
               
Accounts payable
 
$
1,526,123
   
$
2,888,385
 
Accrued expenses
   
1,665,658
     
3,893,028
 
Trade notes payable
   
138,237
     
--
 
Deferred revenues
   
1,211,506
     
1,461,689
 
Short-term debt
   
2,250,000
     
--
 
Current portion of long-term debt
   
933,651
     
4,169,771
 
   Total current liabilities
   
7,725,175
     
12,412,873
 
Long-term debt, including capital leases
   
2,485,858
     
38,071
 
Noncurrent deferred taxes
   
826,697
     
991,096
 
Commitments and contingent liabilities (see Note 16)
               
Stockholders’ Equity:
               
Preferred stock - par value $.0001 per share, 10,000,000 shares authorized,
               
  of which 9,890,980 are designated as Series A Preferred Stock, with
               
  1,927,508 and 2,477,508 shares issued and outstanding at March 31, 2015 and 2014, respectively
               
  (liquidation preference of $549,340 and $706,090 at March 31, 2015 and 2014, respectively)
   
524,210
     
644,110
 
Common stock - par value $.0001 per share, 90,000,000 shares authorized,
               
   24,669,958 shares issued and outstanding at March 31, 2015,
               
   and 23,951,004 shares issued and outstanding at March 31, 2014
   
2,467
     
2,395
 
Additional paid in capital
   
6,487,589
     
6,105,211
 
Accumulated other comprehensive loss
   
23,561
     
(55,097
)
Accumulated deficit
   
(6,749,332
)
   
(3,165,151
)
   Total stockholders’ equity
   
288,495
     
3,531,468
 
   Total liabilities and stockholders’ equity
 
$
11,326,225
   
$
16,973,508
 
 See accompanying notes to the consolidated financial statements.
 
 
 

 
26

 
 
 
TECHPRECISION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 
  
 
Years ended March 31,
 
   
2015
   
2014
 
Net sales
 
$
18,233,214
   
$
21,068,063
 
Cost of sales
   
15,925,742
     
21,799,856
 
Gross profit (loss)
   
2,307,472
     
(731,793
)
Selling, general and administrative 
   
4,533,181
     
6,112,909
 
Loss from operations
   
(2,225,709
)
   
(6,844,702
)
  Other (expense) income
   
(4,633
)
   
874
 
  Interest expense
   
(1,514,465
)
   
(440,634
)
  Interest income
   
121
     
3,598
 
Total other expense, net
   
(1,518,977
)
   
(436,162
)
Loss before income taxes
   
(3,744,686
)
   
(7,280,864
)
Income tax benefit
   
(160,505
)
   
(185,473
)
Net loss
 
$
(3,584,181
)
 
$
(7,095,391
)
Other comprehensive income, before tax:
               
 Reclassification adjustments for cash flow hedges
 
$
248,464
   
$
--
 
  Change in unrealized loss on cash flow hedges
   
(16,681
)
   
157,197
 
  Foreign currency translation adjustments
   
    (334
)
   
      9,124
 
    Other comprehensive income, before tax
   
231,449
     
166,321
 
    Tax expense from reclassification adjustment
   
152,791
     
--
 
Other comprehensive income, net of tax
 
$
78,658
   
$
166,321
 
Comprehensive loss
 
$
(3,505,523
)
 
$
(6,929,070
)
Net loss per share (basic)
 
$
(0.15
)
 
$
(0.34
)
Net loss per share (diluted)
 
$
(0.15
)
 
$
(0.34
)
Weighted average number of shares outstanding (basic)
   
24,120,402
     
20,766,914
 
Weighted average number of shares outstanding (diluted)
   
24,120,402
     
20,766,914
 
See accompanying notes to the consolidated financial statements.
 
 
 
 
 
27

 
 

TECHPRECISION CORPORATION 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 
    Preferred
Stock Outstanding
   
Preferred
Stock
   
Common
Stock
Outstanding
   
Par Value
    Additional
Paid in
Capital
   
Accumulated
Other Comprehensive Income (Loss)
   
Retained
Earnings (accumulated deficit)
   
Total
Stockholders’
Equity
 
Balance 3/31/2013
    5,532,998     $ 1,310,206       19,956,871     $ 1,996     $ 5,076,552     $ (221,418 )   $ 3,930,240     $ 10,097,576  
                                                              --  
Share based
compensation
                                    362,962                       362,962  
Conversion of
preferred stock
    (3,055,490 )     (666,096 )     3,994,133       399       665,697                       --  
Net Loss
                                                    (7,095,391 )     (7,095,391 )
Other comprehensive
loss, net of tax benefit
($0)
                                            166,321               166,321  
Balance 3/31/2014
    2,477,508     $ 644,110       23,951,004     $ 2,395     $ 6,105,211     $ (55,097 )   $ (3,165,151 )   $ 3,531,468  
                                                                 
Share based
compensation
                                    262,550                       262,550  
Conversion of
preferred stock
    (550,000 )     (119,900 )     718,954       72       119,828                       --  
Net Loss
                                                    (3,584,181 )     (3,584,181 )
Other comprehensive
loss, net of tax benefit
($0)
                                            78,658               78,658  
Balance 3/31/2015
    1,927,508     $ 524,210       24,669,958     $ 2,467     $ 6,487,589     $ 23,561     $ (6,749,332 )   $ 288,495  
See accompanying notes to the consolidated financial statements. 
 
 
 
 
 
28

 
 
 
TECHPRECISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Years Ended March 31,
 
   
2015
   
2014
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
 
$
(3,584,181
)
 
$
(7,095,391
)
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization
   
839,508
     
893,592
 
Loss on sale of equipment
   
81,340
     
882
 
Stock based compensation expense
   
262,550
     
362,962
 
Amortization deferred loan costs
   
269,840
     
59,836
 
Provision for contract losses
   
(790,790
)
   
2,988,931
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
1,454,153
     
2,056,509
 
Costs incurred on uncompleted contracts, in excess of progress billings
   
3,249,758
     
(959,709
)
Inventories – raw materials
   
158,513
     
62,220
 
Other current assets
   
45,702
     
1,059,350
 
Taxes receivable
   
8,062
     
365,968
 
Other noncurrent assets
   
61,354
     
(105,395
)
Accounts payable
   
(1,224,025
)
   
357,115
 
Accrued expenses
   
(1,358,070
)
   
(818,858
)
Accrued taxes payable
   
--
     
(232,624
)
Deferred revenues
   
(250,183
   
1,207,223
 
   Net cash (used in) provided by operating activities
   
(776,469
   
202,611
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from sale of fixed assets
   
12,500
     
--
 
Purchases of property, plant and equipment
   
(54,099
)
   
(64,895
)
   Net cash used in investing activities
   
(41,599
)
   
(64,895
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Deferred loan costs
   
(393,998
)
   
--
 
Borrowings of short-term debt
   
6,400,000
     
--
 
Repayment of long-term debt
   
(4,938,333
)
   
(2,126,935
)
   Net cash provided by (used in) financing activities
   
1,067,669
     
(2,126,935
)
Effect of exchange rate on cash and cash equivalents
   
23
     
544
 
Net increase (decrease) in cash and cash equivalents
   
249,624
     
(1,988,675
)
Cash and cash equivalents, beginning of period
   
1,086,701
     
3,075,376
 
Cash and cash equivalents, end of period
 
$
1,336,325
   
$
1,086,701
 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
               
Cash paid during the year for:
               
Interest expense
 
$
790,695
   
$
385,767
 
Income taxes
 
$
--    
$
--  
 
See accompanying notes to the consolidated financial statements.




 
29

 
 

SUPPLEMENTAL INFORMATION – NONCASH INVESTING AND FINANCING TRANSACTIONS:

Year Ended March 31, 2015

For the year ended March 31, 2015, the Company issued $279,297 of trade notes payable in connection with the conversion of certain vendor trade accounts payable for the purchase of goods and services used in the ordinary course of business.

For the year ended March 31, 2015, the Company issued 718,954 shares of common stock in connection with the conversion of 550,000 shares of Series A Convertible Preferred Stock.

Year Ended March 31, 2014

In connection with shareholder transactions during fiscal 2014, 3,055,490 shares of Series A Convertible Preferred Stock were converted into 3,994,133 shares of common stock.

We recorded a liability of $231,784 (net of tax of $0) to reflect the fair value of interest rate swap contracts in connection with a tax-exempt bond financing transaction.

See accompanying notes to the consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - DESCRIPTION OF BUSINESS
 
TechPrecision Corporation, or TechPrecision, is a Delaware corporation organized in February 2005 under the name Lounsberry Holdings II, Inc. The name was changed to TechPrecision Corporation on March 6, 2006. TechPrecision is the parent company of Ranor, Inc., or Ranor, a Delaware corporation and Wuxi Critical Mechanical Components Co., Ltd., or WCMC, a wholly foreign owned enterprise (WFOE). TechPrecision, WCMC and Ranor are collectively referred to as the “Company”, “we”, “us” or “our”.
 
We manufacture large scale metal fabricated and machined precision components and equipment. These products are used in a variety of markets including the alternative energy, medical, nuclear, defense, commercial, and aerospace industries.

 
Liquidity and Capital Resources
 
At March 31, 2014, we were not in compliance with the fixed charges and interest coverage financial covenants under the Loan and Security Agreement between Ranor and Santander Bank N.A., 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 under the Loan Agreement, 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, July 1, 2014, and August 12, 2014, Ranor, TechPrecision and the Bank entered into additional Forbearance and Modification Agreements, or the Second Forbearance Agreement, Third Forbearance Agreement and Fourth Forbearance Agreement, respectively, or collectively with the First Forbearance Agreement, the Forbearance Agreements. Under each of the Forbearance Agreements, the Bank agreed to extend the Company’s forbearance period and 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. Each  Forbearance Agreement expired on its own terms, with the Fourth Forbearance Agreement expiring on September 30, 2014.  During the forbearance period, we agreed to comply with the terms, covenants and provisions in the Loan Agreement and related documents, as amended by the Forbearance Agreements.  The Forbearance Agreements amended the Loan Agreement to, among other things, prohibit the Company’s Leverage Ratio (as such term is defined in the Loan Agreement) from exceeding 1.75 to 1.0.  We were not in compliance with the applicable leverage ratio covenant in the Loan Agreement, as amended by the Forbearance Agreements, at September 30, 2014 or at March 31, 2014, as the actual leverage ratios were 4.4 to 1.0 and 3.8 to 1.0, respectively.
 
 
 
 
 
30

 

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

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

In connection with the execution of the LSA, we paid approximately $0.24 million in fees and associated costs and utilized approximately $2.65 million of the proceeds of the Credit Loan Note to pay off debt obligations owed to the Bank under the Loan Agreement.  Additionally, the Company retained approximately $1.27 million of the proceeds of the Credit Loan Note for general corporate purposes.
  
On December 22, 2014, Ranor entered into a Term Loan and Security Agreement, or TLSA, with Revere High Yield Fund, LP, or Revere. Pursuant to the 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 Loan 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 full loan obligations owed to the Bank, plus breakage fees on a related interest swap of $217,220 under the Loan Agreement with the Bank. The remaining proceeds of the First Loan Note and the Second Loan Note were retained by the Company to be used for general corporate purposes. Pursuant to the TLSA, Ranor is subject to certain affirmative covenants more fully described in Note 8 – Debt.

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

We incurred an operating loss of $3.6 million for the year ended March 31, 2015. At March 31, 2015, we had cash and cash equivalents of $1.3 million, of which $14,185 is located in China and which we may not be able to repatriate for use in the United States without undue cost or expense, if at all. We have recorded a provision for potential contract losses of $2.4 million in connection with the bankruptcy filing and filed a proof of claim with the bankruptcy court to recover all of our costs under the contract terms of the GT Advanced Technologies, Inc., or GTAT, purchase agreement. The claim is now considered an unsecured creditor claim within the customer’s overall bankruptcy proceedings. We cannot be certain that we will be successful in recovering the full amount of our losses under this contract.

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 utilize our manufacturing capacity. We must also 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. We plan to closely monitor our expenses and, if required, will further reduce operating costs and capital spending to enhance liquidity. For the year ended March 31, 2015, our profit margins have improved significantly when compared to the year ended March 31, 2014, but our revenues are lower. Also, net cash used in operating activities was $776,469 for the year ended March 31, 2015.

The consolidated financial statements for the year ended March 31, 2015, or fiscal 2015, 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 $7.7 million at March 31, 2015 and to continue as a going concern is dependent upon the successful execution of our operating plan and our ability to timely secure additional long-term financing. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
 
 
 
 
 
31

 

 
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation
 
The accompanying consolidated financial statements include the accounts of TechPrecision, WCMC and Ranor. Intercompany transactions and balances have been eliminated in consolidation.
 
Use of Estimates in the Preparation of Financial Statements
 
In preparing the consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reported period. We continually evaluate our estimates, including those related to contract accounting, accounts receivable, inventories, recovery of long-lived assets, income taxes and the valuation of equity transactions. We base our estimates on historical and current experiences and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements.
 
Fair Value Measurements
 
We account for fair value of financial instruments under the Financial Accounting Standard Board’s (FASB) Accounting Standards Codification (ASC) authoritative guidance which defines fair value and establishes a framework to measure fair value and the related disclosures about fair value measurements. The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. The FASB establishes a fair value hierarchy used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories: Level 1: Inputs based upon quoted market prices for identical assets or liabilities in active markets at the measurement date; Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and Level 3: Inputs that are management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instruments’ valuation. In addition, we will measure fair value in an inactive or dislocated market based on facts and circumstances and significant management judgment.  We will use inputs based on management estimates or assumptions, or make adjustments to observable inputs to determine fair value when markets are not active and relevant observable inputs are not available.  

The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses as presented in the balance sheet, approximates fair value due to the short-term nature of these instruments. The carrying value of short and long-term borrowings approximates their fair value. The Company’s short-term and long-term debt is all privately held with no public market for this debt. The fair value of short-term and long-term debt was computed based on comparable current market data for similar debt instruments and is considered to be level 3 under the fair value hierarchy.

Cash and cash equivalents
 
Holdings of highly liquid investments with maturities of three months or less, when purchased, are considered to be cash equivalents.  U.S. based deposits are maintained in a large regional bank. Our China subsidiary also maintains a bank account in a large national bank in China subject to People’s Republic of China (PRC) banking regulations. Cash on deposit with a large national China-based bank was $14,185 and $29,191 at March 31, 2015 and 2014, respectively.

Foreign currency translation

The majority of our business is transacted in U.S. dollars; however, the functional currency of our China subsidiary is the local currency, the Chinese Yuan Renminbi. In accordance with ASC No. 830, Foreign Currency Matters (ASC 830), foreign currency translation adjustments of subsidiaries operating outside the United States are accumulated in other comprehensive income, a separate component of equity. Foreign currency transaction gains and losses are recognized in the determination of net income.
 
Accounts receivable and allowance for doubtful accounts
 
Accounts receivable are stated at the amount we expect to collect. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. Based on management’s assessment, we provide for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances which remain outstanding after reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Current earnings are also charged with an allowance for sales returns based on historical experience. Historically, the level of uncollectible accounts has not been significant. There was no bad debt expense for the years ended March 31, 2015 and 2014.
 
 
 
 
 
32

 

 
Inventories
 
Inventories - raw materials is stated at the lower of cost or market determined by the first-in, first-out (FIFO) method.
 
Property, plant and equipment, net
 
Property, plant and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are accounted for on the straight-line method based on estimated useful lives. The amortization of leasehold improvements is based on the shorter of the lease term or the useful life of the improvement. Amortization of assets recorded under capital leases is included under depreciation expense. Betterments and large renewals, which extend the life of the asset, are capitalized whereas maintenance and repairs and small renewals are expensed as incurred. The estimated useful lives are: machinery and equipment, 5-15 years; buildings, 30 years; and leasehold improvements, 2-5 years. Upon sale or retirement of depreciable assets, costs and related accumulated depreciation are eliminated and gains or losses are recognized in the statement of operations above operating income or loss.

Interest is capitalized for assets that are constructed or otherwise produced for our own use, including assets constructed or produced for us by others for which deposits or progress payments have been made. Interest is capitalized to the date the assets are available and ready for use. When an asset is constructed in stages, interest is capitalized for each stage until it is available and ready for use. We use the interest rate incurred on funds borrowed specifically for the project. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. There was no interest cost capitalized in fiscal 2015 and 2014.

In accordance with ASC No. 360, Property, Plant & Equipment (ASC 360), our property, plant and equipment is tested for impairment when triggering events occur, and if impaired, written-down to fair value based on either discounted cash flows or appraised values. The carrying amount of an asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group. There were no impairments for the years ended March 31, 2015 and 2014.
 
Operating Leases
 
Operating leases are charged to operations on a straight-line basis over the term of the lease. We lease our office facilities for various terms under long-term, non-cancelable operating lease agreements. The leases expire at various dates through 2017 and provide for renewal options ranging from one to two years. In the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties.
 
Derivative Financial Instruments

We are exposed to various risks such as fluctuating interest rates, foreign exchange rates and increasing commodity prices. To manage these market risks, we may periodically enter into derivative financial instruments such as interest rate swaps, options and foreign exchange contracts for periods consistent with and for notional amounts equal to or less than the related underlying exposures. We do not purchase or hold any derivative financial instruments for speculation or trading purposes.

All derivative instruments are recognized in the financial statements and measured at fair value regardless of the purpose or intent of holding them. At March 31, 2014, we had two interest rate swap transactions designated as cash flow hedges, each with an effective date of January 3, 2011. For our cash flow hedges, the effective portion of the derivative’s gain or loss is initially reported in stockholders’ equity (as a component of accumulated other comprehensive income (loss)) and is subsequently reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. The ineffective portion of the gain or loss of a cash flow hedge is reported in earnings immediately.
 
We formally document the hedging relationship and its risk management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness. We also formally assess, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions.
 
We will discontinue hedge accounting prospectively when we determine that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk, the derivative expires, is sold, terminated, or exercised, or our management determines to remove the designation of a cash flow hedge. See Note 8 for additional disclosure related to interest rate swaps.

Convertible Preferred Stock and Warrants
 
We measured the fair value of the Series A Convertible Preferred Stock by the amount of cash that was received for its issuance. We have determined that the convertible preferred shares and warrants issued are equity instruments. The holders of the Series A Convertible Preferred Stock have no right higher than the common stockholders other than the liquidation preference in the event of liquidation of the Company.
 
 
 
 
 
33

 

 
Research and Development

We charge research and development costs associated with the design and development of new products to expense when incurred. We incurred no research and development expense in fiscal 2015 or 2014.

Selling, General, and Administrative 
 
Selling, general and administrative (SG&A) expenses include items such as executive compensation, business travel and advertising costs. Advertising costs are nominal and expensed as incurred. Other general and administrative expenses include items for our administrative functions and include costs for items such as office rent, supplies, insurance, legal, accounting, tax, telephone and other outside services. SG&A consisted of the following as of March 31:  
 
   
2015
   
2014
 
Salaries and related expenses
 
$
2,359,831
   
$
3,634,538
 
Professional fees
   
1,281,268
     
1,165,523
 
Other general and administrative
   
892,082
     
1,312,848
 
Total Selling, General and Administrative
 
$
4,533,181
   
$
6,112,909
 

Stock Based Compensation
 
Stock based compensation represents the cost related to stock based awards granted to our board of directors and employees. We measure stock based compensation cost at the grant date based on the estimated fair value of the award and recognize the cost as expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. We estimate the fair value of stock options using a Black-Scholes valuation model.

Excess tax benefits of awards that are recognized in equity related to stock options exercises are reflected as financing cash inflows. Stock based compensation cost that has been included in loss from operations amounted to $262,550 and $362,962 for the fiscal years ended 2015 and 2014, respectively. See Note 13 for additional disclosures related to stock based compensation.
 
Net Income (Loss) per Share of Common Stock
 
Basic net income (loss) per common share is computed by dividing net income or loss by the weighted average number of shares outstanding during the year. Diluted net income (loss) per common share is calculated using net income or loss divided by diluted weighted-average shares. Diluted weighted-average shares include weighted-average shares outstanding plus the dilutive effect of convertible preferred stock, stock options and warrants calculated using the treasury stock method. See Note 13 for additional disclosures related to stock based compensation.
 
Revenue Recognition

We account for revenues and earnings using the percentage-of-completion method of accounting. Under this method, we recognize contract revenue and gross profit as the work progresses, either as the products are produced and delivered, or as services are rendered. We determine progress toward completion on production contracts based on either input measures, such as labor hours incurred, or output measures, such as units delivered.

Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability are recognized in the period in which the revisions are determined. Costs incurred on uncompleted contracts consist of labor, overhead, and materials.

We may combine contracts for accounting purposes when they are negotiated as a package with an overall profit margin objective. These essentially represent an agreement to do a single project for a single customer, involve interrelated construction activities with substantial common costs, and are performed concurrently or sequentially. When a group of contracts is combined, revenue and profit are earned during the performance of the combined contracts.

Costs allocable to undelivered units are reported in the consolidated balance sheet as costs incurred on uncompleted contracts. Amounts in excess of agreed upon contract price for customer directed changes, construction changes, customer delays or other causes of additional contract costs are recognized in contract value if it is probable that a claim for such amounts will result in additional revenue and the amounts can be reliably estimated. Revenues from such claims are recorded only to the extent that contract costs relating to the claim have been incurred. Revisions in cost and profit estimates are reflected in the period in which the facts requiring the revision become known and are estimable.

When we can only estimate a range of revenues and costs, we use the most likely estimate within the range. If we cannot determine which estimate in the range is most likely, the amounts within the ranges that would result in the lowest profit margin (the lowest contract revenue estimate and the highest contract cost estimate) are used.
 
 
 
 
 
34

 
 
 
In some situations, it may be impractical for us to estimate either specific amounts or ranges of contract revenues and costs. However, if we can at least determine that we will not incur a loss, a zero profit model is adopted. The zero profit model results in the recognition of an equal amount of revenues and costs. This method is only used if more precise estimates cannot be made and its use is discontinued when such estimates are obtainable. When we obtain more precise estimates, the change is treated as a change in an accounting estimate.

Income Taxes
 
In accordance with ASC No. 740, Income Taxes (ASC 740), income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. We recognize the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
 
New Accounting Standards

Issued Standards Not Yet Adopted
 
In April 2015, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update, or ASU, No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. ASU 2015-03 is effective for interim and annual reporting periods beginning after December 15, 2015. The new guidance will be applied on a retrospective basis and early adoption is permitted. The Company does not expect the adoption of ASU 2015-03 to have a significant impact on the Company’s consolidated results of operations, financial position or cash flows.

In January 2015, the FASB issued ASU No. 2015-01, Income Statement – Extraordinary and unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This guidance removes the concept of extraordinary items from U.S. GAAP. This guidance eliminates the requirement for companies to spend time assessing whether items meet the criteria of being both unusual and infrequent. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The Company does not expect the adoption of this guidance to have a material impact on our financial statements.

In August, 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The Amendments in ASU 2014-15 are intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016, with early adoption permitted. We are currently evaluating ASU 2014-15 to determine the impact on the Company’s consolidated financial statements and related disclosures.
 
In June, 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718)- Accounting for Share-based Payments when Terms of an award Provide That a Performance Target Could be Achieved after the Requisite Service Period. The Amendments in 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 2014-12 is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. We are currently evaluating ASU 2014-12 to determine the impact on the Company’s consolidated results of operations, financial position and cash flows.

In May 2014, the FASB and the International Accounting Standards Board (IASB) issued ASU 2014-09 (Topic 606) Revenue from Contracts with Customers. The guidance converges final standards on revenue recognition between the FASB and IASB providing a framework on addressing revenue recognition issues and, upon its effective date, replaces almost all existing revenue recognition guidance, including industry-specific guidance, in current U.S. GAAP. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016. We are currently evaluating ASU 2014-09 to determine the impact it may have on our current practices.
 
 
 
 
 
35

 
 
 
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consisted of the following as of March 31: 
   
2015
   
2014
 
Land
 
$
110,113
   
$
110,113
 
Building and improvements
   
3,235,308
     
3,261,680
 
Machinery equipment, furniture and fixtures
   
8,733,660
     
8,889,051
 
Equipment under capital leases
   
65,568
     
65,568
 
Total property, plant and equipment
   
12,144,649
     
12,326,412
 
Less: accumulated depreciation
   
(6,534,608
)
   
(5,837,200
)
Total property, plant and equipment, net
 
$
5,610,041
   
$
6,489,212
 

Depreciation expense for the years ended March 31, 2015 and 2014 was $839,508 and $895,528, respectively.
 
NOTE 4 - COSTS INCURRED ON UNCOMPLETED CONTRACTS
 
The following table sets forth information as to costs incurred on uncompleted contracts as of March 31:
  
 
2015
   
2014
 
Cost incurred on uncompleted contracts, beginning balance
 
$
9,960,072
   
$
6,180,839
 
Total cost incurred on contracts during the year
   
10,034,158
     
25,579,089
 
Less cost of sales, during the year
   
(15,925,742
)
   
(21,799,856
)
Cost incurred on uncompleted contracts, ending balance
 
$
4,068,488
   
$
9,960,072
 
                 
Billings on uncompleted contracts, beginning balance
 
$
4,702,070
   
$
1,882,546
 
Plus: Total billings incurred on contracts, during the year
   
15,591,388
     
23,887,587
 
Less: Contracts recognized as revenue, during the year
   
(18,233,214
)
   
(21,068,063
)
Billings on uncompleted contracts, ending balance
 
$
2,060,244
   
$
4,702,070
 
                 
Cost incurred on uncompleted contracts, ending balance
 
$
4,068,488
   
$
9,960,072
 
Billings on uncompleted contracts, ending balance
   
2,060,244
     
4,702,070
 
Costs incurred on uncompleted contracts, in excess of progress billings
 
$
2,008,244
   
$
5,258,002
 
 
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 March 31, 2015 and 2014, we had deferred revenues totaling $1,211,506 and $1,461,689, 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 consolidated statement of operations and comprehensive (loss) income. We also receive advance billings and deposits representing down payments for acquisition of materials and progress payments on contracts. The agreements with our customers allow us to offset the progress payments against the costs incurred.

NOTE 5 – OTHER CURRENT ASSETS
 
Other current assets included the following as of March 31: 
 
2015
   
2014
 
Payments advanced to suppliers
 
$
54,422
   
$
196,534
 
Prepaid insurance
   
205,477
     
229,727
 
Collateral deposits (see Note 8)
   
85,252
     
--
 
Deferred loan costs, net of amortization
   
184,063
     
--
 
Other
   
9,039
     
34,984
 
Total
 
 $
538,253
   
$
461,245
 
  
NOTE 6 – OTHER NONCURRENT ASSETS

Other noncurrent assets included the following as of March 31: 
 
2015
   
2014
 
Deferred loan costs, net of amortization
 
$
45,490
   
$
105,395
 
Total
 
$
45,490
   
$
105,395
 
 
 
 
 
 
 
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NOTE 7 - ACCRUED EXPENSES
 
Accrued expenses included the following as of March 31: 
 
2015
   
2014
 
Accrued compensation
 
$
613,838
   
$
320,419
 
Interest rate swaps market value
   
--
     
231,783
 
Provision for contract losses
   
533,799
     
3,259,103
 
Accrued interest expense
   
436,787
     
          --
 
Other
   
81,234
     
81,723
 
Total
 
$
1,665,658
   
$
3,893,028
 
 
Our contract loss provision at March 31, 2015 and 2014 includes approximately $0.5 million and $2.7 million, respectively, for estimated contract losses in connection with a certain customer purchase agreement. We filed a demand for arbitration under the contract to recover damages, together with attorney's fees, interest and costs, subsequent to the customer’s request to reduce the number of units ordered under the purchase agreement. As a result of the customer filing a voluntary bankruptcy claim, the demand is now considered an unsecured creditor claim within the customer’s overall bankruptcy proceedings. It is more likely than not that we will not be able to recover the full amount of our claim. As such, part of the total reduction in the liability reflects the netting of approximately $0.8 million of accumulated costs in work-in-progress and $1.1 million of accounts receivable with the loss provision. Accrued interest expense is for deferred interest costs accounted for under the effective interest method in connection with the Utica Credit Loan Note due November 2018.

NOTE 8 – DEBT
Long-term debt as of March 31: 
 
2015
   
2014
 
Utica Credit Loan Note due November 2018
 
 $
3,381,481
   
 $
          --
 
Revere Term Loan and Notes due December 2015
   
2,250,000
     
          --
 
MDFA Series A Bonds
   
--
     
3,559,375
 
MDFA Series B Bonds
   
--
     
599,634
 
Obligations under capital leases
   
38,028
     
48,833
 
Total debt
 
 $
5,669,509
   
 $
4,207,842
 
Less: Short-term debt
 
 $
2,250,000
   
 $
--
 
Less: Current portion of long-term debt
 
 $
933,651
   
 $
4,169,771
 
Total long-term debt, including capital lease
 
 $
2,485,858
   
 $
38,071
 
 

Term Loan and Security Agreement

On December 22, 2014, Ranor entered into the TLSA with Revere. Pursuant to the TLSA, Revere agreed to loan an aggregate of $2.25 million to Ranor under the First Loan Note in the aggregate principal amount of $1.5 million and the Second Loan Note in the aggregate principal amount of $750,000. The First Loan Note is collateralized by a secured interest in Ranor’s Massachusetts facility and certain machinery and equipment at Ranor. The Second Loan Note is collateralized by a secured interest in certain accounts, inventory and equipment of Ranor. Payments under the TLSA, the First Loan Note and the Second Loan Note 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 Second Loan Note to pay off MDFA Bond obligations owed to the Bank plus breakage fees on a related interest swap of $217,220 under the Loan Agreement with the Bank. The remaining proceeds of the First Loan Note and the Second Loan Note were retained by the Company for general corporate purposes. Pursuant to the TLSA, Ranor is subject to certain affirmative and negative covenants, including a cash covenant, which requires that we maintain minimum month end cash balances that range from $400,000 to $820,000. We were required to maintain a cash balance of $500,000 at March 31, 2015. We were in compliance with all covenants under the TLSA at March 31, 2015.

Loan and Security Agreement

On May 30, 2014, TechPrecision and Ranor entered into the LSA, with Utica. Pursuant to the LSA, Utica agreed to loan $4.15 million to Ranor under a Credit Loan Note, which is collateralized by a first secured interest in certain machinery and equipment at Ranor.  Payments under the LSA and the Credit Loan Note are due in monthly installments with an interest rate on the unpaid principal balance of the Credit Loan Note equal to 7.5% plus the greater of 3.3% or the six-month LIBOR interest rate, as described in the Credit Loan Note. At December 31, 2014, 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.
 
 
 
 
 
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Pursuant to the LSA, Ranor is subject to certain restrictive covenants which, among other things, restrict Ranor’s ability to (1) declare or pay any dividend or other distribution on its equity, purchase or retire any of its equity, or alter its capital structure; (2) make any loan or guaranty or assume any obligation or liability; (3) default in payment of any debt in excess of $5,000 to any person; (4) sell any of the collateral outside the normal course of business; and (5) enter into any transaction that would materially or adversely affect the collateral or Ranor’s ability to repay the obligations under the LSA and the Credit Loan Note.  The restrictions contained in these covenants are subject to certain exceptions specified in the LSA and in some cases may be waived by written consent of Utica.  Any failure to comply with the covenants outlined in the LSA without waiver by Utica or certain other provisions in the LSA would constitute an event of default, pursuant to which Utica may accelerate the repayment of the loan. In connection with the execution of the LSA, the Company paid approximately $0.24 million in fees and associated costs and utilized approximately $2.65 million of the proceeds of the Credit Loan Note to pay off, or complete a refinancing of, debt obligations owed to the Bank under the Loan Agreement. We retained approximately $1.27 million of the proceeds of the Credit Loan Note for general corporate purposes.

MDFA Series A and B 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. 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 Ranor, MDFA and the Bank (as Bond owner and Disbursing Agent), or the MLSA. The proceeds from the sale of the Series A Bonds were used to finance the acquisition of Ranor’s manufacturing facility in Westminster, Massachusetts and a 19,500 square foot expansion of this facility, and the proceeds from the sale of the Series B Bonds were used to finance acquisitions of qualifying manufacturing equipment installed at the Westminster facility. At March 31, 2014, we were not in compliance with the leverage ratio coverage covenants under the Loan Agreement, and the Bank did not agree to waive our non-compliance with the covenants at March 31, 2014, as the actual leverage ratio was 3.81 to 1.0.

On May 30, 2014, in connection with the execution of the LSA with Utica, the Company paid down approximately $2.0 million of our obligations under the Series A Bonds owed to the Bank, and paid off the remaining balance ($576,419) of the Series B Bonds in full. We also terminated the interest rate swap which hedged the cash flows of the Series B Bonds. We paid a breakage fee of $29,448 for early termination of the interest rate swap for the Series B Bonds and recorded the amount as interest expense in our statement of operations.

On December 22, 2014, we entered into the TLSA with Revere. We utilized approximately $1.45 million of the proceeds of the First Loan Note and Second Loan Note to pay off the remaining balance of the Series A Bonds in full and to pay a breakage fee of $217,220 for early termination of the interest rate swap for the Series A Bonds.

Derivative Instruments

At March 31, 2014, we held two interest rate swap contracts, which were designated as cash flow hedges, to hedge our interest rate exposure on the underlying Series A Bonds and Series B Bonds under the MLSA. We recorded the fair value of the contracts in our consolidated balance sheet 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 Bonds interest rate swap, and de-designated our Series A Bonds interest rate swap in the second quarter of fiscal 2015. 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 of the interest rate swap recorded in current liabilities on our balance sheet was $0 and $231,784 on December 31, 2014 and March 31, 2014, respectively. We terminated the interest rate swap which hedged the cash flows of the Series A Bonds on December 22, 2014. We paid a breakage fee of $217,220 for early termination of the interest rate swap for the Series A Bonds and recorded the amount as interest expense in our statement of operations.

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 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.

Forbearance Agreements

On January 16, 2014, Ranor, TechPrecision 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, or the First Forbearance Period.

In consideration for the granting of the First Forbearance Agreement, we agreed to: (i) pay 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 and the Series B Bonds, respectively; and (v) pay a forbearance fee of 3% of the net outstanding balance due to the Bank, which amounted to $128,433 due in installments during the First Forbearance Period.
 
 
 
 
 
38

 

 
On May 30, 2014, Ranor, TechPrecision 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, 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.  

On July 1, 2014, Ranor, TechPrecision and the Bank entered into 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, Ranor, TechPrecision and the Bank entered into 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, or the Fourth Forbearance Period. Under the Fourth Forbearance Agreement we were required to retain a management consultant acceptable to the Bank and continued to make principal and interest payments pursuant to the terms of the Loan Agreement