# Techprecision Corp: Form 10-Q for the period ended Dec 31, 2012

- Company: [Techprecision Corp](/companies/tpcs.md) (CIK 1328792)
- Form: 10-Q
- Filed: 2013-02-19
- Accepted by EDGAR: Feb 19, 2013, 16:08 ET
- Period: 2012-12-31
- Accession: 0000950159-13-000133
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1328792/000095015913000133/tpcs10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1328792/000095015913000133/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-10-01 to 2012-12-31 | $7.3m | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2012-04-01 to 2012-12-31 | $22.5m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2012-10-01 to 2012-12-31 | $5.4m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2012-04-01 to 2012-12-31 | $17.6m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2012-10-01 to 2012-12-31 | $1.9m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2012-04-01 to 2012-12-31 | $4.9m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2012-10-01 to 2012-12-31 | $2.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2012-04-01 to 2012-12-31 | $6.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2012-10-01 to 2012-12-31 | −$409.7k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2012-04-01 to 2012-12-31 | −$1.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2012-10-01 to 2012-12-31 | $64.9k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2012-04-01 to 2012-12-31 | $219.4k | us-gaap:InterestExpense |
| Income tax | 3 months, 2012-10-01 to 2012-12-31 | $43.2k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2012-04-01 to 2012-12-31 | −$235.4k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2012-10-01 to 2012-12-31 | −$545.5k | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Net income | 9 months, 2012-04-01 to 2012-12-31 | −$1.3m | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Diluted EPS | 3 months, 2012-10-01 to 2012-12-31 | −$0.03 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2012-04-01 to 2012-12-31 | −$0.07 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2012-10-01 to 2012-12-31 | −$0.03 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2012-04-01 to 2012-12-31 | −$0.07 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2012-10-01 to 2012-12-31 | 19,089,289 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2012-04-01 to 2012-12-31 | 18,773,080 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2012-04-01 to 2012-12-31 | $650.5k | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 9 months, 2012-04-01 to 2012-12-31 | $395.4k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2012-12-31 | $2.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-12-31 | $15.0m | us-gaap:AssetsCurrent |
| Total assets | at 2012-12-31 | $22.4m | us-gaap:Assets |
| Current liabilities | at 2012-12-31 | $6.0m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2012-12-31 | $11.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 49,189 characters.

### Statement Regarding Forward Looking Disclosure

The following discussion of the results of our operations and financial condition should be read in conjunction with our consolidated financial statements and the related notes herein. This quarterly report on Form 10Q, including this section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” or MD&A, may contain predictive or “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based in part on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and probably will, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors. Those factors include those risks discussed in this Item 2 “Management’s Discussion and Analysis” in this Form 10-Q and those described in any other filings which we make with the SEC. In addition, such statements could be affected by risks and uncertainties related to our ability to generate business on an on-going basis, to obtain any required financing, to receive contract awards from the competitive bidding process, maintain standards to enable us to manufacture products to exacting specifications, enter new markets for our services, marketing and customer acceptance, our reliance on a small number of customers for a significant percentage of our business, competition, government regulations and requirements, pricing and development difficulties, our ability to make acquisitions and successfully integrate those acquisitions with our business, as well as general industry and market conditions and growth rates, and general economic conditions. We undertake no obligation to publicly update or revise any forward looking statements to reflect events or circumstances that may arise after the date of this report, except as required by applicable law. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this report. Investors should evaluate any statements made by the Company in light of these important factors.

### Overview

We offer a full range of services required to transform raw materials into precise finished products. Our manufacturing capabilities include: fabrication operations (cutting, press and roll forming, assembly, welding, heat treating, blasting and painting) and machining operations including CNC (computer numerical controlled) horizontal and vertical milling centers. We also provide support services to our manufacturing capabilities: manufacturing engineering (planning, fixture and tooling development, manufacturing), quality control (inspection and testing), materials procurement, production control (scheduling, project management and expediting) and final assembly. All U.S. manufacturing is done in accordance with our written quality assurance program, which meets specific national and international codes, standards, and specifications. Ranor holds several certificates of authorization issued by the American Society of Mechanical Engineers and the National Board of Boiler and Pressure Vessel Inspectors. The standards used are specific to the customers’ needs, and our manufacturing operations are conducted in accordance with these standards.

During the fiscal year ended March 31, 2012, or fiscal 2012, we brought our WCMC subsidiary online to meet shifting demands from key customers, and simultaneously had to weather slowdowns in our Alternative Energy business. The impact on our Ranor facility was significant, as manufacturing for their largest customer was transferred to China. To replace that transferred business we backfilled our Ranor facility with orders from existing and new customers that required domestic production capacity. Also during fiscal 2012, weaker market demand for our services in the Alternative Energy industry impacted sales in that sector and were 28% lower than in fiscal 2011. However, we were successful in increasing sales to customers in the Commercial and Nuclear sectors, which more than offset the lower sales volume with Alternative Energy customers. We concluded fiscal 2012, with an order backlog of $22.4 million. Our backlog as of December 31, 2012 was approximately $21.9 million.

We historically have experienced, and continue to experience, customer concentration. Our six largest customers collectively accounted for 78% of our revenue for fiscal 2013. For the first nine months of fiscal 2013 and 2012, our single largest customer accounted for approximately 22% and 38% of reported net sales, respectively. In any year, it is likely that five to seven significant customers (albeit not always the same customers from year to year) will account for revenues ranging from 4% to 29% individually, and up to 90% in aggregate of our total annual revenues.

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.

For the three months ended December 31, 2012, our net sales and net loss were $7.3 million and $0.5 million as compared with net sales of $10.9 million and net loss of $1.1 million for the three months ended December 31, 2011. For the nine months ended December 31, 2012, our net sales and net loss were $22.5 million and $1.3 million, and as compared with net sales of $27.2 million and net loss of $0.9 million, respectively. Our gross margins for the three and nine months ended December 31, 2012 and 2011 were 25.8% and 21.9%, and 6.8% and 18.7%, respectively. Gross margins for the three and nine month periods ended December 30, 2011 were negatively impacted by contract losses incurred on first article and prototyping projects at Ranor. As the majority of the contract loss projects were completed during the first half of fiscal 2013, we expect gross margins will recover to historical levels during the balance of fiscal 2013.

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.

### Growth Strategy

Our strategy is to leverage our core competence as a manufacturer of high-precision, large-scale metal fabrications and machined components to expand our business into areas that have shown increasing demand and which we believe could generate higher margins. In November 2010, we announced the formation of WCMC. This subsidiary was formed to respond to an existing customer’s desire to migrate their supply chain nearer to their end market within China. Since the formation of WCMC, we have received numerous inquiries from current and potential customers for precision, large scale fabricated and machined metal components and systems in Asia. Based on the initial interest expressed, we believe there are attractive opportunities to expand our WCMC operations. During the fiscal 2012, WCMC provided initial production volumes on a single product line and completed first article production on four other product lines. After qualifying manufacturing capacity for five product lines on behalf of four customers in China, WCMC has received production volume orders for the production of sapphire chambers in fiscal 2013. Through the period ended December 31, 2012, WCMC shipped $2.0 million of production units for sapphire chambers.

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

#### Nuclear Energy

As a result of both the increased prices of oil and gas and the resulting greenhouse gas emissions, nuclear power may become an increasingly important source of energy. In January 2010, the Obama administration increased the level of government-backed debt guarantees as an incentive to support the construction of new nuclear plants in the U.S. The 2011 nuclear tragedy in Japan has bolstered demand for advanced nuclear reactor designs with passive safety systems. Over the next 10 years, 26 nuclear power plants are scheduled to be built in China, six in the United States and five in Europe (including three in the United Kingdom). Because Ranor is one of the few facilities in the United States that has the certifications required to produce the necessary components for these plants, this pipeline of new nuclear projects creates a significant opportunity. Because of our manufacturing capabilities, our certification from the American Society of Mechanical Engineers and our historic relationships with suppliers in the nuclear power industry, we believe that we are well positioned to benefit from any increased activity in the nuclear sector. However, we cannot assure you that we will be able to develop any significant business from the nuclear industry.

#### Defense and Aerospace

During the fiscal years ended March 2012 and 2011, our sales to customers in the defense and aerospace sectors comprised approximately 25% of our annual sales. We believe that budget and cost containment initiatives by the U.S. Government may drive prime contractors to increase their levels of outsourcing and subcontracting.

Accordingly, we maintain active dialogues with existing and prospective defense related customers on programs where our unique manufacturing capabilities might provide these prime government contractors with opportunities to source additional manufacturing through our Ranor division in Massachusetts.

#### Medical Industry

We have been exploring potential business applications focused in the Medical industry. Our proton beam therapy customer received U.S Food and Drug Administration, or FDA, clearance on June 11, 2012 for their proton beam therapy system and we believe we are positioned to benefit from this development with increased production orders as they begin marketing their regulated product. On January 7, 2013 we announced that a five-year agreement was signed to exclusively produce complete product assemblies for Proton Beam cancer treatment equipment in the U.S. and Asia. We expect this agreement will result in $115.0 million in new orders over a five year period. Our efforts also include the development and fabrication of transportation/storage solutions for radioactive isotopes and the development and fabrication of critical components for proton beam therapy machines designed to be utilized in the treatment of cancer.

In March 2012, our radioactive isotope customer received approval from the U.S. Nuclear Regulatory Commission, or NRC, to market its Type B transportation containers. Now that our radioactive isotope customer has received regulatory approval we are working on initial production orders during fiscal 2013 as they launch their Type B transportation containers in the market.

#### LED Lighting/Enabled Products

Growing global demand for LED lighting and LED enabled products has increased the worldwide demand for Heat Exchanger Method (HEM) sapphire, a core component in high-end LED products. Accordingly, many polysilicon companies, including our customer GTAT, 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 furnaces much like those we have been producing for the processing of polysilicon within the solar industry. Accordingly, 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. We are in active dialogue with both existing customers and potential customers regarding our capability and capacity to manufacture furnaces for the HEM sapphire industry in both the U.S. and Asia. In February 2012, WCMC received a purchase agreement from an existing customer for up to $9.5 million in sapphire chamber orders over the term of the purchase agreement which contemplates orders being placed under the agreement from March 2012 through February 2013. As of December 31, 2012, we have delivered $2.0 million of sapphire chambers under this purchase agreement. We are also working on qualifying manufacturing capacity for other customers who also have developed engineering designs for sapphire growth chambers.

#### Solar Power

Historically we have participated in the multi-crystalline segment of the solar industry through the manufacturing support we have provided GTAT. Increasingly, GTAT and other companies are focusing on production innovations that will improve the production efficiency and cost competitiveness of mono-crystalline solar cells. To diversify our customer and sector concentration within the solar industry, we are in active discussions with various companies focused on enabling production equipment for mono-crystalline solar cells and believe these efforts will provide us with broader capacity and customer diversification in the future. During fiscal 2012, we completed manufacture of initial mono-crystalline furnaces for three separate customers with the goal of qualifying our production capacity in the U.S. and China for these customers and subsequent production volume orders.

During fiscal 2012, we expanded into the polysilicon field through receipt of a $4.8 million order to manufacture polysilicon reactor chambers for an existing customer. Polysilicon reactor chambers operate upstream of the solar equipment we have historically manufactured. Accordingly, this order presents an opportunity to further diversify our product portfolio within the solar sector. The initial production units covered by this order are expected to ship in the fourth quarter of fiscal 2013.

### Expansion of Manufacturing Capabilities

In addition to the expansion of our existing manufacturing capabilities, we may, from time to time, pursue opportunistic acquisitions to increase and strengthen our manufacturing, marketing, product development and customer diversification. During fiscal 2012, we completed a 19,500 sq. ft. expansion of our Westminster, Massachusetts facility at a cost of $1.7 million. The building expansion was completed and placed into service in December, 2011. We also completed the installation of a new $2.4 million gantry mill machine during the year and it was placed in service during January 2012. A portion of the proceeds from the December 2010 municipal bond financing were utilized to finance the building expansion and final payments on the gantry machine.

### Critical Accounting Policies

The preparation of our consolidated financial statements and related disclosures in conformity with generally accepted accounting principles in the United States requires management to make assumptions, estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 2 to the Consolidated Financial Statements describe the significant accounting policies used in preparation of the consolidated financial statements.

We rely on historical experience and other assumptions we believe to be reasonable in making our estimates. We continually evaluate our estimates, including those related to contract accounting, inventories, recovery of long-lived assets, income taxes and the valuation of equity transactions. These estimates and assumptions require management’s most difficult, subjective or complex judgments. Actual financial results of the operations could differ materially from such estimates.

### 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 custom contracts. We recognize contract revenue 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. We may segment a single contract or group of contracts when a clear economic decision has been made during contract negotiations that would produce different rates of profitability for each element or phase of the contract.

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 with the 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) are 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.

As of March 31, 2012, our federal net operating loss carry-forward was approximately $1.25 million. If not utilized, the federal net operating loss carry-forward will begin to expire in 2025. 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 carry forward used in any one year in the future is substantially limited.

### New Accounting Pronouncements

See Note 2, Significant Accounting Policies, in the Notes to our Consolidated Financial Statements.

### 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 foreign markets.

Our results of operations are also affected by our success in booking new contracts and when we are able to recognize the related revenue, delays in customer acceptances of our products, delays in deliveries of ordered products and our rate of progress toward fulfillment of our obligations under our contracts.

A delay in deliveries or cancellations of orders would cause us to have inventories in excess of our short-term needs, and may delay our ability to recognize, or prevent us from recognizing, revenue on contracts in our order backlog. At December 31, 2012, our purchase order backlog was $21.9 million compared with $22.4 million at March 31, 2012.

### Three Months Ended December 31, 2012 and 2011

The following table sets forth information from our statements of operations for the three months ended:

*(dollars in thousands)*

|  | December 31, 2012 Amount | Percent | December 31, 2011 Amount | Percent | Changes Period Ended December 31, 2012 to 2011 Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $7,293 | 100% | $10,864 | 100% | $(3,571) | (33)% |
| Cost of sales | 5,409 | 74% | 10,124 | 93% | (4,715) | (47)% |
| Gross profit | 1,884 | 26% | 740 | 7% | 1,144 | 155% |
| Selling, general and administrative | 2,293 | 31% | 1,924 | 18% | 369 | 19% |
| Loss from operations | (409) | (6)% | (1,184) | (11)% | (775) | (66)% |
| Interest expense | (65) | (1)% | (77) | --% | (12) | (16)% |
| Other income | (28) | --% | 20 | --% | 48 | nm% |
| Total other expense, net | (93) | (1)% | (57) | --% | 36 | 63% |
| Loss before income taxes | (502) | nm% | (1,241) | nm% | (739) | nm% |
| Income tax expense (benefit) | 43 | nm% | (93) | nm% | 136 | nm% |
| Net Loss | $(545) | nm% | $(1,148) | nm% | $(603) | nm% |
| nm - not meaningful |  |  |  |  |  |  |

### Net Sales

Net sales decreased by $3.6 million, or 33%, to $7.3 million for the three months ended December 31, 2012 when compared to the same period last year. This decrease in net sales was due primarily to lower shipments to our Alternative Energy customers in China. Net sales to Alternative Energy customers decreased by $3.8 million compared with the same quarter in fiscal 2012. Net sales in the third quarter of last year included $3.4 million of solar furnace production completed during the second quarter for which the customer delayed delivery until the third quarter. As a result, the highest sales volume reported last year was in the third quarter. Also, net sales to our new Poly Silicon customer were lower than forecasted in the fiscal 2013 quarter due to customer change orders that extended the production cycle and deferred revenue into fourth quarter of fiscal 2013.

Net sales increased by $1.7 million in our Medical markets, reflecting fulfilled new orders for proton beam therapy equipment. These increases were partially offset by a net sales decrease of $1.7 million in the Commercial markets. Net sales to Nuclear markets increased by $0.2 million.

### Cost of Sales and Gross Margin

Our cost of sales for the three months ended December 31, 2012 decreased by $4.7 million to $5.4 million, or 47%, from $10.1 million for the same period in fiscal 2012. The decrease in the cost of sales was principally due to a decrease in the unit volume of shipments to our customers. Gross profit was $1.9 million and $0.7 million for the three month periods ended December 31, 2012 and December 31, 2011, respectively. Gross margins were 25.8% and 6.8% for the same comparable periods, respectively.

Gross margin in any reporting period is impacted by the mix of services we provide on projects completed within that period. Gross margins during fiscal 2013 increased because of a reduction in contract losses for first article production and prototyping at Ranor. Gross margin in the prior year third quarter was negatively impacted by $0.6 million of contract losses. Ranor’s production mix shifted to a greater volume of prototyping and first article production during fiscal 2012 as we redeployed open U.S. production capacity because of the transfer of solar production chambers to China for our largest customer.

### Selling, General and Administrative Expenses

Selling, general and administrative, or SG&A, expenses for the three months ended December 31, 2012 increased by $0.4 million or 19%. SG&A was 31% as a percentage of net sales during the third quarter of fiscal 2013, compared with 18% of net sales for the same period in fiscal 2012. SG&A for the quarter ended December 31, 2012 included $145,000 of nonrecurring executive search fees, $50,000 of increased severance costs, and a $42,000 increase in share based compensation. Additionally, professional fees were $162,000 higher, but this increase was partially offset by a $50,000 reduction in travel related expenses when compared to fiscal 2012.

### Interest Expense

Interest expense decreased by 16% for the three months ended December 31, 2012 when compared with the same period in fiscal 2012. This decrease in interest expense was due to lower average levels of long-term debt which offset the absence of capitalized interest in fiscal 2013 when compared with the same prior year quarter.

### Income Taxes

For the three months ended December 31, 2012, we recorded a tax expense of $43,224 compared with a tax benefit of $92,682 for the comparable three month period ended December 31, 2011. We did not record a tax benefit during the period in connection with our U.S. pretax losses because it is more likely than not that any tax benefit would not be realized and subject to valuation allowance.

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

Our net loss was $545,587 or $0.03 per share basic and fully diluted respectively, for the three months ended December 31, 2012, compared to net loss of $1.1 million or $0.07 per share basic and fully diluted, for the three months ended December 31, 2011.

### Nine Months Ended December 31, 2012 and 2011

The following table sets forth information from our statements of operations for the nine months ended December 31, 2012 and 2011:

*(dollars in thousands)*

|  | December 31, 2012 Amount | Percent | December 31, 2011 Amount | Percent | Changes Period Ended December 31, 2012 to 2011 Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $22,518 | 100% | $27,188 | 100% | $(4,670) | (17)% |
| Cost of sales | 17,590 | 78% | 22,105 | 81% | (4,515) | (20)% |
| Gross profit | 4,928 | 22% | 5,083 | 19% | (155) | (3)% |
| Selling, general and administrative | 6,218 | 28% | 5,611 | 21% | 607 | 11% |
| Loss from operations | (1,290) | (6)% | (528) | (2)% | 762 | nm% |
| Interest expense | (219) | (1)% | (215) | (1)% | 4 | 2% |
| Other income | (23) | --% | 31 | --% | 54 | nm% |
| Total other expense, net | (242) | (1)% | (184) | (1)% | 58 | 32% |
| Loss before income taxes | (1,532) | nm% | (712) | nm% | 820 | nm% |
| Income tax (benefit) expense | (235) | nm% | 143 | nm | 378 | nm% |
| Net Loss | $(1,297) | nm% | (855) | nm% | $442 | nm% |
| nm - not meaningful |  |  |  |  |  |  |

### Net Sales

Net sales decreased by $4.7 million, or 17%, to $22.5 million for the nine months ended December 31, 2012 compared with the same period last year. Net sales to Alternative Energy customers decreased by $5.4 million during the period ended December 31, 2012 when compared with the same period one year ago, as demand for solar chambers continued to be weak. Net sales decreased by $4.8 million in the Commercial markets as certain prototype units, in production for most of fiscal 2012, shipped in the early part of fiscal 2013.These net sales decreases were offset by increases of $3.9 million in our Medical markets, reflecting fulfilled new orders for new proton beam therapy equipment. Also, shipments to customers in the Defense and Aerospace and the Nuclear markets increased by $1.1 million and $0.5 million, respectively.

### Cost of Sales and Gross Margin

Our cost of sales for the nine months ended December 31, 2012 decreased by $4.5 million to $17.6 million, or 20%, from $22.1 million for the same period in fiscal 2012. Gross profit was $4.9 million compared with $5.1 million for the nine month period ended December 31, 2012 and December 31, 2011, respectively. Gross profit for the nine months period ended December 31, 2012 was lower than the prior year due to additional contract losses of $0.3 million incurred on first article and prototype contracts. Gross margins were 21.9% and 18.7% for the same comparable nine month periods, respectively.

Gross margin in any reporting period is impacted by the mix of services we provide on projects completed within that period. Gross margins during fiscal 2013 increased because of improved throughput for first article production and prototyping at Ranor. The production mix at Ranor shifted to a greater volume of prototyping and first article production during fiscal 2012 as we redeployed open U.S. production capacity because of the transfer of solar production chambers to China for our largest customer.

### Selling, General and Administrative Expenses

SG&A expenses for the nine months ended December 31, 2012 were $6.2 million compared to $5.6 million for the same period in fiscal 2012, representing an increase of $0.6 million or 11%. SG&A was 28% and 21% as a percentage of net sales for the same period in fiscal 2013 and 2012, respectively. The primary driver of the increase was non-recurring search fees of $304,000 and $115,000 of expenses related to severance benefits and outside advisory services. Also, share based compensation was $76,000 higher than the prior year. Additionally, professional fees increased by $283,000, but this increase in expense was partially offset by $170,000 of reduced travel related costs when compared to the same nine month period in fiscal 2012. Travel related costs were higher last year due to startup activities in the first full year for our China subsidiary.

### Interest Expense

Interest expense increased by 2% for the nine months ended December 31, 2012 when compared with the same period in fiscal 2012. The increase in interest expense is primarily due to the absence of capitalized interest in fiscal 2013. We recorded capitalized interest of approximately $40,000 during the nine months ended December 31, 2011 in connection with our expansion project at Ranor.

### Income Taxes

For the nine months ended December 31, 2012, we recorded a tax benefit of $235,375 compared to income tax expense of $142,871 for federal and state taxes when compared to the nine months ended December 31, 2011. The tax benefit for the nine months ended December 31, 2012 was primarily the result of pretax losses from operations recorded at the U.S. federal statutory tax rates. Our U.S. Federal tax benefit remained unchanged from that recorded at September 30, 2012 because of the expectation that it would be more likely than not that any additional tax benefit would not be realized and subject to valuation allowance.

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

Our net loss was $1.3 million or $0.07 per share basic and fully diluted respectively, for the nine months ended December 31, 2012, compared to net loss of $0.9 million, or $0.05 per share basic and fully diluted, for the nine months ended December 31, 2011.

### Liquidity and Capital Resources

At December 31, 2012, we had working capital of $9.1 million compared with working capital of $10.2 million at March 31, 2012, a decrease of $1.1 million or 11%. The following table sets forth the changes in the components of our working capital:

*(dollars in thousands)*

|  | December 31, 2012 | March 31, 2012 | Change Amount | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Cash and cash equivalents | $2,013 | $2,823 | $(810) | (29)% |
| Accounts receivable, net | $3,491 | $4,902 | $(1,411) | (29)% |
| Costs incurred on uncompleted contracts | $4,902 | $3,910 | $992 | 25% |
| Inventory - raw materials | $474 | $374 | $100 | 27% |
| Other current assets | $1,712 | $1,487 | $225 | 15% |
| Income taxes receivable | $1,426 | $1,751 | $(325) | (19)% |
| Current deferred tax assets | $995 | $1,020 | $(25) | (2)% |
| Accounts payable | $2,449 | $1,361 | $1,088 | 80% |
| Accrued expenses | $1,441 | $2,425 | $(984) | (41)% |
| Accrued taxes payable | $203 | $160 | $43 | 27% |
| Deferred revenues | $922 | $799 | $123 | 15% |
| Current maturity of long-term debt | $937 | $1,359 | $(422) | (31)% |

24

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

*(dollars in thousands)*

| Cash flows provided by (used in): | December 31, 2012 | December 31, 2011 | Change Amount |
| --- | ---: | ---: | ---: |
| Operating activities | $651 | $(2,747) | $3,398 |
| Investing activities | (395) | (2,343) | 1,948 |
| Financing activities | (1,066) | 623 | (1,689) |
| Effects of foreign exchange rates on cash | -- | 12 | (12) |
| Net decrease in cash and cash equivalents | $(810) | $(4,455) | $3,645 |

#### Operating activities

For the nine months ended December 31, 2012, cash provided by operations was $0.7 million as compared with cash used in operations of $2.7 million for the comparable fiscal 2012 period, a change of $3.4 million. Cash provided by operations in fiscal 2013 includes receipt of approximately $3.0 million in customer deposits reflecting an increase in customer advances on orders and manufacturing activity. This amount was partially offset by our net loss and increased spending on completed projects and uncompleted projects in progress for the remaining volume mix of manufacturing activity related to new production projects which began in fiscal 2012. As all of our production activity is supported by firm orders from customers, the balance of costs incurred on uncompleted contracts will be billed and collected from customers as production billing milestones are achieved and when the orders are completed and delivered to the customer. Customers are billed for costs incurred on uncompleted projects in accordance with predetermined billing schedules or upon delivery of the customer orders. We also received $0.6 million of federal income tax refunds during fiscal 2013. We collected $1.4 million of federal tax carryback refunds in the fourth quarter of fiscal 2013.

#### Investing activities

During the nine months ended December 31, 2012, we paid $395,367 primarily for new equipment installed at our manufacturing facility in Westminster, MA.

#### Financing activities

Net cash used in financing activities was $1.1 million during the nine months ended December 31, 2012 as compared with net cash provided by financing activities of $622,639 for the same period in fiscal 2012. The primary use of cash under financing activities in fiscal 2013 and 2012 related to repayment of long-term debt. In fiscal 2012 we borrowed an additional $1.9 million under the bond financing agreement to fund the ongoing plant and equipment expansion at our Westminster, Massachusetts facility.

### Debt Facilities

On December 30, 2010, the Company completed a $6.2 million tax exempt bond financing with the MDFA pursuant to which the MDFA sold to the Bank the Series A Bonds and the Series B Bonds. The Bank then loaned the proceeds of such sale to the Company under the terms of the MLSA.

The proceeds from the sale of the Series A Bonds were used to finance the Ranor facility acquisition and used to finance the 19,500 sq. ft. expansion of Ranor’s manufacturing facility located in Westminster, MA. The proceeds of the sale of the Series B Bonds were used to finance acquisitions of qualifying manufacturing equipment installed at the Westminster facility. Under the MLSA and related documents, the Westminster facility secures, and the Company further guarantees the Company’s obligations to the Bank and subsequent holders of the Bonds. As of December 31, 2012 there was $3.8 million and $1.4 million outstanding under the Series A and Series B bonds, respectively.

In connection with the December 30, 2010 financing, we executed an Eighth Amendment to the Loan Agreement. The Eighth Amendment incorporated borrowing of the Bond proceeds into the borrowings covered by the Loan Agreement. Under the MLSA and the Eighth Amendment, we must meet certain financial covenants applicable while the Bonds remain outstanding. As of December 31, 2011, we were in compliance with the leverage ratio. However we did not meet the ratio of earnings available to cover fixed charges or the interest coverage covenants.

In February 2012, we executed a Tenth Amendment and obtained a waiver of the breach of such covenants from the Bank, which waiver covered the breach that otherwise would have occurred in connection with the covenant testing for the third quarter ended December 31, 2011 and waived the fixed charge covenant at March 31, 2012.

On July 6, 2012, the Company executed an Eleventh Amendment and obtained a waiver for failure to comply with the fixed charge coverage ratio and the interest coverage ratio covenants at March 31, 2012. The Eleventh Amendment also waived the covenant testing requirements related to the ratio of earnings available to cover fixed charges and the interest coverage ratio for the fiscal quarters ended June 30, 2012 and December 31, 2012. The leverage ratio covenant remained in effect, and must not be greater than 2:1. The Company was in compliance with the leverage ratio covenant at September 30, 2012 as the actual leverage ratio was 1:1. Although there was no testing of the covenant to comply with the ratio of earnings available to cover fixed charges and the interest coverage covenants for the fiscal quarters ended June 30 and September 30, 2012, the Bank required that the Company have earnings before interest and taxes (EBIT) greater than $1 for the fiscal quarter ended September 30, 2012. The Company reported EBIT of $14,286 for the fiscal quarter ended September 30, 2012 and therefore was in compliance with this covenant. The $1 EBIT covenant at September 30, 2012 is not applicable to any future periods as testing of all covenants resumes on December 31, 2012 according to the terms of the Eleventh Amendment.

Under the Eleventh Amendment the covenants were revised such that the Company was not to permit earnings available for fixed charges to be less than 125%, the interest coverage ratio to be less than 2:1, and the leverage ratio to be greater than 2:1 at any time, tested quarterly. Also, in connection with the Eleventh Amendment, the Company paid the Bank a fee of $10,000 and made a collateral deposit of $840,000 to cover estimated principal and interest on its obligation. The collateral deposit included in other current assets at December 31, 2012 and March 31, 2012. This collateral was to be released to the Company upon successful compliance with all debt covenant tests. The earliest date this has occured is December 31, 2012, the first date the Company would have again been subject to testing of all of the financial covenants. The Eleventh Amendment also revised covenant testing to provide that the ratio of earnings available to cover fixed charges and the interest coverage ratio covenant testing was to resume at December 31, 2012 on a trailing six month basis, and continue at March 31, 2013 on a trailing nine month basis and quarterly thereafter on a trailing twelve month basis beginning on June 30, 2013.

The Company did not meet the earnings available for fixed charges or interest coverage covenants at December 31, 2012 as it had an operating loss of $1.3 million for the nine month period ended. The actual ratios for earnings available for fixed charges and interest coverage at December 31, 2012 were negative 41% and negative 256%, respectively.

On February 14, 2013, the Company executed the Twelfth Amendment and obtained a waiver for failure to comply with the fixed charge coverage ratio and interest coverage ratio covenants at December 31, 2012. In connection with the Twelfth Amendment, the Company paid the Bank a fee of $7,500 and extended the pledge of the $840,000 collateral deposit established by the Eleventh Amendment through June 30, 2013. This collateral will be released to the Company upon successful compliance with all debt covenant tests at June 30, 2013. The Twelfth Amendment also revised covenant testing to provide that the ratio of earnings available to cover fixed charges and the interest coverage ratio covenant testing at March 31, 2013 be tested on a trailing three month basis, a trailing six month basis at June 30, 2013, and a trailing nine month basis at September 30, 2013, and at December 31, 2013 and each quarter thereafter, on a trailing twelve month basis.

Without the execution of the Twelfth Amendment for the applicable periods and the Company's determination that it expects to be in compliance for each of the next four quarterly periods, the Company would have been required to reclassify all of its long-term debt as a current liability. In addition, if the lender had demanded repayment and caused the debt to be considered a short-term obligation, the Company may have been unable to pay the obligation because the Company does not have existing facilities or sufficient cash on hand to satisfy these obligations. In the event of default (which default may occur in connection with a non-waived breach), the Bank may choose to accelerate payment of any long-term debt outstanding and, under certain circumstances, the Bank may be entitled to cancel the facilities. If the Company were unable to obtain a waiver for a breach of covenant and the Bank accelerated the payment of any outstanding amounts, such acceleration may cause the Company’s cash position to deteriorate or, if cash on hand were insufficient to satisfy any payment due, may require the Company to seek alternate financing to satisfy any accelerated payment obligation. The Company believes it will achieve compliance with all of the revised covenants quarterly through at least December 31, 2013.

We believe that the $2.0 million revolving credit facility that was extended through July 31, 2013 by the Twelfth Amendment, all of which was available and unused as of December 31, 2012, our capacity to access equipment-specific financing, plus our current cash balance of $2.0 million and ability to generate cash from operations, will be sufficient to enable us to satisfy our cash requirements for the foreseeable future. Nevertheless, it is possible that we may require additional funds to the extent that we upgrade or expand our manufacturing facilities.

Obligations under the Term Note, Revolving Note, Capital Expenditure Note and Staged Advance Note are guaranteed by us. Collateral securing such notes comprises all personal property of ours, including cash, accounts receivable, inventories, equipment, financial and intangible assets.

The term note issued on February 24, 2006 has a term of seven years with an initial fixed interest rate of 9%. The interest rate on the term note converted from a fixed rate of 9% to a variable rate on February 28, 2011. From February 28, 2011 until maturity the term note will bear interest at the prime rate plus 1.5%, payable on a quarterly basis. Principal is payable in quarterly installments of $142,857 plus interest, with a final payment due on March 1, 2013. The balance outstanding on the term note as of December 31, 2012 was $142,857.

We also had a $3.0 million capital expenditure facility which was available until November 30, 2009. The capital expenditure facility was not renewed upon its expiration on November 30, 2009. Borrowings available under this facility were converted to a note when the facility terminated. Principal and interest payments are due monthly based on a five year amortization schedule. The current rate of interest is based on LIBOR, plus 3%. Any unpaid balance on the capital expenditures facility is to be paid on November 30, 2014. As of December 31, 2012, there was $324,576 outstanding under this facility.

The Bank made certain loans to the Company limited to a cap of $1.9 million for the purpose of acquiring a gantry mill machine. The machine serves as collateral for the loan. The total aggregate amount of advances under this agreement could not exceed 80% of the actual purchase price of the gantry mill machine. All advances provided for a payment of interest only monthly through February 28, 2011, and thereafter no further borrowings were permitted under this facility. The current interest rate is LIBOR plus 4%. Beginning on April 1, 2011, the Company was obligated to pay principal and interest sufficient to amortize the outstanding balance on a five year schedule. As of December 31, 2012, there was $389,491 outstanding under this facility.

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

## Controls and procedures

As filed, 2,070 characters.

### Evaluation of Disclosure Controls and Procedures

As of December 31, 2012, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act.

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

Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were designed and operating effectively as of December 31, 2012, to provide reasonable assurance that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

### Changes in Internal Controls

During the quarter ended December 31, 2012, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 683 characters.

There have been no material changes to the risk factors discussed in Part I, "Item 1A. Risk Factors," in the 2012 Form 10-K. You should carefully consider the risks described in our 2012 Form 10-K which could materially affect our business, financial condition or future results. The risks described in our 2012 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. If any of the risks actually occur, our business, financial condition and/or results of operations could be negatively affected.

Filed Feb 19, 2013.
Source: SEC EDGAR, the filing index for accession 0000950159-13-000133. Last ingested by Listed: Nov 10, 2026, 04:27 ET. No prices; not investment advice.