Techprecision Corp: Form 10-Q for the period ended Dec 31, 2013

Statement Regarding Forward Looking Disclosure

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

Overview

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

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

We historically have experienced, and continue to experience, customer concentration. For the nine months ended December 31, 2013, our five largest customers accounted for approximately 56% of reported net sales. Our five largest customers collectively accounted for 74% of our revenue for fiscal 2013. Our contracts are generated both through negotiation with the customer and from bids made pursuant to a request for proposal. Our ability to receive contract awards is dependent upon the contracting party’s perception of such factors as our ability to perform on time, our history of performance, including quality, our financial condition and our ability to price our services competitively. Although some of our contracts contemplate the manufacture of one or a limited number of units, we are seeking more long-term projects with a more predictable revenue stream and cost structure. During the third quarter we received an $8.1 million purchase order for new production furnaces with an existing customer. Our sales order backlog at December 31, 2013 was approximately $22.1 million compared with a backlog of $16.4 million at March 31, 2013. Our financial results for the nine month ended December 31, 2013 include significant losses on certain contracts that continue to have a negative impact on operations.

At December 31, 2013, we were in default and continue to be in default with the Loan Agreement with the Bank. At March 31, 2013, we were not in compliance with our financial covenants in the Loan Agreement, and the Bank did not agree to waive the non-compliance with the covenants. As a result, we were in default at March 31, 2013. In addition, the Bank also did not renew the revolving credit facility which expired on July 31, 2013. The Bank had the right to accelerate payment of the debt in full upon 60 days' written notice. As a consequence, all amounts under the Loan Agreement are classified as a current liability at December 31, 2013 ($5.2 million) and March 31, 2013 ($5.8 million).

On January 16, 2014, we signed the Forbearance Agreement with the Bank. Under the terms of the Forbearance Agreement we requested and the Bank agreed to forbear from accelerating the payment in full until the forbearance termination date on March 31, 2014. We are currently in the process of seeking alternative financing from other lenders.

These factors raise substantial doubt regarding our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

Growth Strategy

We are a contract manufacturer and we sell our services to customers in three industry groups: energy, naval/maritime, and precision industrial. Our strategy is to leverage our core competence as a manufacturer of high-precision, large-scale metal fabrications and machined components to optimize profitability of our current business and expand into 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. The following discussion addresses certain growth opportunities within the three industry groups:

Energy

Ranor is one of the few facilities in the United States that has the certifications required to produce the necessary components for nuclear power 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.

In February 2013, we completed the initial manufacture of Type B radioactive isotope transport casks on behalf of a customer. We have been working with this customer for several years while it was seeking U.S. Nuclear Regulatory Commission, or NRC, license approval of its proprietary Type B radioactive isotope transport casks. As this customer’s cask design meets the NRC’s most recent regulatory requirements for Type B transport casks, we and our customer expect increased demand for this product as the NRC requires companies that transport radioactive isotopes to replace their existing Type B transport casks with casks that meet the latest NRC requirements.

Naval/Maritime

Our Ranor subsidiary performs precision fabrication and machining for the defense and aerospace industries, delivering turnkey 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 developed and built Tier 1 and Tier 2 relationships with our customers and will continue to seek opportunities in this sector where we are in a Tier 1 or Tier 2 supplier relationship.

We continue to concentrate our business development efforts with large prime defense contractors. Based upon these efforts, we believe there are additional opportunities to secure increased outsourcing business with existing and new defense contractors who are actively looking to increase outsourced content on certain expanding defense programs over the next several years. We believe that the military quality certifications we maintain and our ability to offer turn-key fabrication, machining and manufacturing services at a single facility position us as an attractive outsourcing partner for prime contractors looking to increase outsourced production.

Precision Industrial

For several years we have been providing production services to Mevion Medical Systems, or 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 eleven systems currently under development with customers in the U.S. In January 2013, we announced a five-year agreement with Mevion to exclusively produce precision components for Mevion’s proton beam system. Mevion was our largest customer in fiscal 2013 and accounted for $7.7 million in net sales. We expect that sales volume to Mevion will increase if Mevion expands the market launch of its innovative proton therapy device.

Historically, alternative energy has been our largest market served and has comprised a significant amount of annual net sales. The primary products we have manufactured for alternative energy customers have been multi-crystalline and mono-crystalline solar furnaces, and other production furnaces as well as polysilicon reactor vessels. During fiscal 2013 and the year ended March 31, 2012, the pace at which solar and sapphire manufactures increased their production capacity was slow. As a result, our sales volume to customers within the alternative energy sector comprised less than 10% and 30% of our total sales for fiscal 2014 and fiscal 2013, respectively.

We believe the Heat Exchanger Method (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 existing customers regarding our capability and capacity to manufacture furnaces for the HEM sapphire industry.

Demand in our end-use markets is 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 operate, which in some cases have been highly cyclical and subject to substantial downturns. As a result of the cyclical nature of our 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.

Critical Accounting Policies and Estimates

The preparation of the unaudited condensed consolidated financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We continually evaluate our estimates, including those related to contract accounting, inventories, recovery of long-lived assets, income taxes and the valuation of equity transactions. These estimates and assumptions require management’s most difficult, subjective or complex judgments. Actual results may differ under different assumptions or conditions.

Our significant accounting policies are set forth in detail in Note 2 to the consolidated financial statements included in the 2013 Form 10-K. There were no significant changes in the critical accounting policies during the three and nine months ended December 31, 2013, nor did we make any changes to our accounting policies that would have changed these critical accounting policies.

New Accounting Pronouncements

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

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 order and revenue stream is uneven and reflects an irregular pattern of orders we receive from our customers as they gauge their customer’s demand for new and existing products. Our results of operations are affected by our success in booking new contracts and when we are able to recognize the related revenue, delays in customer acceptances of our products, delays in deliveries of ordered products and our rate of progress in the fulfillment of our obligations under our contracts. A delay in deliveries or cancellations of orders would cause us to have inventories in excess of our short-term needs, and may delay our ability to recognize, or prevent us from recognizing, revenue on contracts in our order backlog. We continue to execute to the business plan we developed early in our first quarter that has the immediate goal of realigning and stabilizing our cost structure so we can return to profitability, even at current lower revenue levels. We need to rebuild our backlog with production orders from our key customers. At December 31, 2013 our backlog was $22.1 million compared with a backlog of $16.4 million as of March 31, 2013. During the third quarter we received an $8.1 million purchase order for new production furnaces with an existing key customer.

Three Months Ended December 31, 2013 and 2012

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

(dollars in thousands)

Net Sales

For the three months ended December 31, 2013, net sales decreased by $2.1 million, or 29%, to $5.2 million. Net sales decreased in the precision industrial markets by $3.6 million on lower shipments of medical components, production furnaces and pressure vessels. This amount was partially offset by increased net sales to our naval/maritime and energy customers of $0.7 and $0.8 million, respectively. For the three months ended December 31, 2013, net sales originating at our WCMC division decreased by $1.3 million because of weaker demand for our production furnaces in China. The decreases in net sales reflect an irregular order flow from our customers as they gauge market demand for new and existing products.

Cost of Sales and Gross Margin

Our cost of sales for the three months ended December 31, 2013 decreased by $1.0 million, or 19%, on significantly lower sales volume. Gross margins during the three months ended December 31, 2013 were 15% compared with 26% for the same period in fiscal 2013. Gross margin in any reporting period is impacted by the mix of services we provide on projects completed and in-process within that period. Actual production levels were lower than planned and resulted in over absorbed overheads for the period. Also, certain low margin projects associated with base components manufactured by our Ranor subsidiary dampened our margins in the quarter.

Selling, General and Administrative Expenses

Total selling, general and administrative expenses, or SG&A, for the three months ended December 31, 2013 were $1.4 million compared with $2.2 million for the same period in fiscal 2013, representing a decrease of $0.9 million, or 37%. Reduced SG&A headcounts resulted in lower spending for compensation ($0.3 million), outside advisory services ($0.3 million), travel ($0.2 million) and other business expenses ($0.1 million) when compared with the same period in fiscal 2013.

Other Income (Expense)

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

(dollars in thousands)

20

Interest expense for the three months ended December 31, 2013 decreased when compared with the same prior year period as our average levels of debt continued to decrease as we pay down principal. Non–cash interest expense reflects the amortization of deferred loan costs in connection with the Bonds.

Income Taxes

For the three months ended December 31, 2013, we recorded zero tax expense or benefit. For the three months ended December 31, 2012, we recorded tax expense of $43,224. The zero tax expense or benefit recorded for the three months ended December 31, 2013 was the result of maintaining a full valuation allowance on our net deferred tax assets. A valuation allowance must be established for deferred tax assets when it is more likely than not that they will not be realized. The assessment was based on the weight of negative evidence at the balance sheet date, our recent operating losses and unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels. We regularly assess the effects resulting from these factors to determine the adequacy of our provision for income taxes. Our future effective tax rate would be affected if earnings were lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof.

Net Loss

As a result of the foregoing, our net loss was $0.8 million, or $0.04 per share basic and fully diluted, for the three months ended December 31, 2013, as compared to net loss of $0.5 million, or $0.03 per share basic and fully diluted, for the three months ended December 31, 2012.

Nine Months Ended December 31, 2013 and 2012

The following table sets forth information from our statements of operations for the nine months ended December 31, 2013 and 2012, in dollars and as a percentage of revenue:

(dollars in thousands)

Net Sales

Net sales decreased by $5.0 million, or 22%, to $17.4 million for the nine months ended December 31, 2013 when compared to the same period last year. We recorded lower revenue of $6.4 million in the Precision industrial sector primarily on lower shipments of production furnaces and medical components. The decreases in net sales reflect an irregular order flow from our customers as they gauge market demand for new and existing products. This revenue shortfall was offset in part by increased product sales to our customers in the Navy/Maritime and Nuclear sectors of $0.5 million and $0.9 million, respectively.

Cost of Sales and Gross Margin

Our cost of sales for the nine months ended December 31, 2013 decreased by $2.0 million to $15.5 million on lower sales volume. Gross profit and gross margins were $1.9 million and $4.9 million, and 11.0% and 21.9%, respectively, for the comparable periods. Gross margin in any reporting period is impacted by the mix of services we provide on projects completed within that period. Actual production levels were lower than planned and resulted in over absorbed overheads for the period. Also, certain low margin projects and contract losses dampened our margins for the nine month period. Gross profit for the nine months period ended December 31, 2013 included approximately $2.0 million of contract losses incurred on the initial units of base components manufactured by our Ranor subsidiary. These component units were initiated during the first quarter of fiscal 2014 and are expected to be completed and shipped before the end of our first quarter in fiscal 2015.

Selling, General and Administrative Expenses

SG&A expenses for the nine months ended December 31, 2013 were $4.7 million compared to $6.2 million for nine months ended December 31, 2012, representing a decrease of $1.5 million, or 25%. Primary drivers of this decrease in expense were reduced headcounts which accounted for lower spending of $0.7 million for compensation and benefits, $0.4 million for outside services, and $0.4 million for travel and other business expenses.

Interest Expense

The following table reflects other income and interest expense for the nine months ended:

(dollars in thousands)

Interest expense decreased by 14% for the nine months ended December 31, 2013 when compared with the same period in fiscal 2013 due to lower average levels of debt.

Income Taxes

For the nine months ended December 31, 2013, we recorded zero tax expense or benefit. For the nine months ended December 31, 2012, we recorded a tax benefit of $235,375. The lack of a tax benefit for the nine months ended December 31, 2013 was the result of maintaining a full valuation allowance on our net deferred tax assets. A valuation allowance must be established for deferred tax assets when it is more likely than not that they will not be realized. The assessment was based on the weight of negative evidence at the balance sheet date, our recent operating losses and unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels. We regularly assess the effects resulting from these factors to determine the adequacy of our provision for income taxes. Our future effective tax rate would be affected if earnings were lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof.

Net Loss

As a result of the factors described above, our net loss was $3.0 million, or $0.15 per share basic and fully diluted, for the nine months ended December 31, 2013, compared to net loss of $1.3 million, or $0.07 per share basic and fully diluted, for the nine months ended December 31, 2012.

Liquidity and Capital Resources

At December 31, 2013, we were in default and continue to be in default with the Loan Agreement with the Bank. At March 31, 2013, 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 our non-compliance with the covenants. In addition, the Bank did not renew the revolving credit facility which expired on July 31, 2013. The Bank had the right to accelerate payment of the debt in full upon 60 days' written notice. As a consequence, all amounts under the Loan Agreement are classified as a current liability at December 31, 2013 ($5.2 million) and March 31, 2013 ($5.8 million). The covenants under the loan agreement are no longer being tested on a monthly, quarterly or annual basis.

On January 16, 2014, we signed the Forbearance Agreement with the Bank. Under the terms of the Forbearance Agreement, the Bank agreed to forbear from accelerating the principal payment in full until the forbearance termination date on March 31, 2014. In consideration for the granting of the Forbearance Agreement, we agreed, among other things, to: (i) have paid in full all interest and fees accrued under the Loan Agreement and other related documents through December 31, 2013 (at such interest rate and in accordance with the terms therein); (ii) reimburse the Bank for appraisal costs in the amount of $11,240; (iii) an increase in the interest rate of 2% for the Series A Bonds and the Series B Bonds to 5.6% and 6%, respectively, until March 31, 2014; (iv) the application of $394,329 and $445,671 of the Company’s restricted cash collateral deposit of $840,000 to pay off certain obligations under the Loan Agreement described above and the Series B Bonds respectively and (v) pay a forbearance fee of 3% of the net outstanding balance due from us to the Bank, which amounts to $128,433 due in installments until March 31, 2014.

The 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. In the event we fail to complete a refinancing of the current outstanding obligations by March 31, 2014, the interest rate on outstanding obligations will convert to 9.14% and 8.63% on the Series A and the Series B Bonds, respectively, as of April 1, 2014.

We have incurred an operating loss of $3.0 million for the nine months ended December 31, 2013, and $2.4 million and $2.1 million for the fiscal years ended March 31, 2013 and 2012, respectively. At December 31, 2013, we had cash and cash equivalents of $3.7 million, of which $0.1 million is located in China and which we may not be able to repatriate for use in the U.S. without undue cost or expense, if at all. We borrowed $0.5 million under our revolving line of credit during the three months ended March 31, 2013, and repaid this borrowing in full in July 2013. In addition, we have $0.9 million of restricted cash with the Bank (included in our other current assets) that will be used toward satisfying our obligation under the Forbearance Agreement.

These factors raise substantial doubt about our ability to continue as a going concern. In order for us to continue operations beyond the next twelve months and be able to discharge our liabilities and commitments in the normal course of business, we must secure long-term financing on terms consistent with our business plans. In addition, we must increase our backlog and change the composition of our revenues to focus on recurring unit of delivery projects rather than custom first article and prototyping which, in the past, were note an efficient use of our manufacturing capacity. Also, we must reduce our operating expenses to be in line with current business conditions in order to increase profit margins and decrease the amount of cash used in operations. If successful in changing the composition of revenue and reducing costs, we believe that fiscal 2014 operating results could 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.

The condensed consolidated financial statements for the nine months ended December 31, 2013, and for the year ended March 31, 2013, 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 $11.0 million at December 31, 2013 and to continue as a going concern is dependent upon the availability of and our ability to timely secure long-term financing and the successful execution of our operating plan. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Our failure to 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 Forbearance Agreement. If we are unable to raise funds through a credit facility, it may be necessary for us to conduct an offering of debt and/or equity securities on terms which may be disadvantageous to us or have a negative impact on our outstanding securities and the holders of such securities. In the event of an equity offering, it may be necessary that we offer such securities at a price that is significantly below our current trading levels which may result in substantial dilution to our investors that do not participate in the offering and a new low trading level for our common stock.

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

At December 31, 2013, we had working capital of $1.1 million as compared with working capital of $3.1 million at March 31, 2013, representing a decrease of $2.0 million, or 65%. The following table sets forth information as to the principal changes in the components of our working capital:

(dollars in thousands)

23

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

(dollars in thousands)

Operating activities

Cash provided by operations for the nine months ended December 31, 2013 was $1.8 million compared with cash provided by operations of $0.6 million for the nine months ended December 31, 2012. Cash generated from our accounts receivables collections during the nine month period were used for customer projects, accounts payable and principal on short and long-term debt.

Cash provided by operations for the nine months ended December 31, 2013 were higher when compared with the nine months ended December 31, 2012 due to cash advance payments ($2.9 million) received at the end of third quarter from customers for new projects. The proceeds will be used to pay suppliers and vendors for materials and services as we commence work on new projects in the fourth quarter of fiscal 2014. Our cash flows can fluctuate significantly from period to period as the composition of our receivables collections mix changes between advance payments and customer payments made after shipment of finished goods.

Investing activities

The nine month periods ended December 31, 2013 and 2012 were marked by cash outflows for capital spending of $54,343 and $395,367, respectively.

Financing activities

For the nine months ended December 31, 2013, cash used in financing activities was $1.1 million to make principal payments on our outstanding debt. For the comparable period end in fiscal 2013, cash used in financing activities was $1.1 million related to principal payments for long-term debt. Obligations under the Term Note, Revolving Note, Capital Expenditure Note and Staged Advance Note are guaranteed by TechPrecision and Ranor. Collateral securing such notes comprises all personal property of TechPrecision and Ranor, including cash, accounts receivable, inventories, equipment, financial and intangible assets. We have no off-balance sheet assets or liabilities.

All of the above activity resulted in a net increase in cash for the nine months ended December 31, 2013 of $0.7 million, compared with a net decrease in cash of $0.8 million for the nine months ended December 31, 2012.

Evaluation of Disclosure Controls and Procedures

As of December 31, 2013, we carried out an evaluation, under the supervision and with the participation of management, including our executive chairman and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act. Based on the evaluation, our executive chairman and chief financial officer have concluded that, as of December 31, 2013, our disclosure controls and procedures and internal control over financial reporting were not effective because of the material weakness described in Item 9A of our Annual Report on our 2013 Form 10-K filed with the SEC on August 16, 2013.

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

We are making progress remediating the material weakness identified in our 2013 Form 10-K. Notwithstanding the material weakness described in Item 9A of the 2013 Form 10-K, we believe our condensed consolidated statements presented in this Quarterly Report on Form 10-Q fairly represent, in all material respects, our financial position, results of operations and cash flows for all periods presented herein.

Changes in Internal Controls

Except as identified below, there has been no change to our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the nine months ended December 31, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. During the nine months ended December 31, 2013, we began implementing stronger manual controls that support our financial reporting process by providing guidelines for account reconciliations and enhancing documentation to support sub-ledger account reconciliations. As we continue to remediate the material weakness described above, we will determine the appropriate complement of corporate and divisional accounting personnel required to consistently operate management review controls.

There have been no material changes to the risk factors discussed in Part I, "Item 1A. Risk Factors," in the 2013 Form 10-K. You should carefully consider the risks described in our 2013 Form 10-K which could materially affect our business, financial condition or future results. The risks described in our 2013 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.