Techprecision Corp: Form 10-Q for the period ended Dec 31, 2014
Filed with the SEC on Feb 17, 2015 and accepted by EDGAR at Feb 17, 2015, 16:40 ET.
Management's discussion and analysis
As filed, 43,004 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
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 of Financial Condition and Results of Operations” in this quarterly report on 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 are a contract manufacturer and we sell our services to customers in three industry groups: energy, naval/maritime, and precision industrial. Our strategy is to leverage our core competence as a manufacturer of high-precision, large-scale metal fabrications and machined components to optimize profitability of our current business and expand into markets that have shown increasing demand. We aim to establish our expertise in program and project management and develop and expand a repeatable customer business model in our strongest markets.
We offer a full range of services required to transform metallic raw materials into precise finished products. Our manufacturing capabilities include: fabrication operations (cutting, press and roll forming, assembly, welding, heat treating, blasting and painting) and machining operations including CNC (computer numerical controlled) horizontal and vertical milling centers. We also provide support services to our manufacturing capabilities: manufacturing engineering (planning, fixture and tooling development, manufacturing), quality control (inspection and testing), materials procurement, production control (scheduling, project management and expediting) and final assembly.
All U.S. manufacturing is done at Ranor in accordance with our written quality assurance program, which meets specific national and international codes, standards, and specifications. Ranor holds several certificates of authorization issued by the American Society of Mechanical Engineers and the National Board of Boiler and Pressure Vessel Inspectors. The standards used are specific to the customers’ needs, and our manufacturing operations are conducted in accordance with these standards.
Our Ranor subsidiary performs precision fabrication and machining in all three of the industry groups we serve, delivering turn-key components to our customers stringent design specifications, quality and safety manufacturing standards. Our team at Ranor has successfully developed new, effective approaches to fabrication that continue to be utilized at their facility and at our customer’s own defense component manufacturing facilities. Defense components the Ranor team has delivered include critical sonar housings and fairings, vertical launch missile tubes, and magnetic motor system components. We have developed and built Tier 1 and Tier 2 relationships with our customers and will continue to seek opportunities where we have a Tier 1 or Tier 2 supplier relationship. We have endeavored to increase our business development efforts with large prime defense contractors. Based upon these efforts, we believe there are additional opportunities to secure increased business with existing and new defense contractors who are actively looking to increase outsourced content on certain defense programs over the next several years. We believe that the military quality certifications Ranor maintains and its ability to offer turn-key fabrication and manufacturing services at a single facility position it as an attractive outsourcing partner for prime contractors looking to increase outsourced production.
For several years we have been providing production services to Mevion Medical Systems, Inc., or Mevion, for the manufacture of its proprietary proton beam radiotherapy system. Presently Mevion is installing systems at five customer locations in the U.S. In January 2013, we announced a five-year agreement with Mevion to exclusively produce precision components for the proton beam system. In December 2013, the first center to enter clinical commissioning with Mevion’s proton beam system began treating patients.
Because our revenues are derived from the sale of goods manufactured pursuant to a contract, and we do not sell from inventory, it is necessary for us to constantly seek new contracts. There may be a time lag between our completion of one contract and commencement of work on another contract. During such periods, we may continue to incur overhead expense but with lower revenue resulting in lower operating margins. Furthermore, changes in either the scope of an existing contract or related delivery schedules may impact the revenue we receive under the contract and the allocation of manpower. Although we provide manufacturing services for governmental programs, we usually do not work directly for the government or its agencies. However, our business is dependent in part on the continuation of governmental programs that procure services and products from our customers.
Our contracts are generated both through negotiation with the customer and from bids made pursuant to a request for proposal. Our ability to receive contract awards is dependent upon the contracting party’s perception of such factors as our ability to perform on time, our history of performance, including quality, our financial condition and our ability to price our services competitively. Although some of our contracts contemplate the manufacture of one or a limited number of units, we are seeking more long-term projects with a more predictable revenue stream and cost structure.
We historically have experienced, and continue to experience, customer concentration. For the nine months ended December 31, 2014 and 2013, our five largest customers accounted for approximately 66% and 56% of reported net sales. Our sales order backlog at December 31, 2014 was approximately $13.1 million compared with a backlog of $22.9 million at March 31, 2014. Our March 31, 2014 backlog included approximately $6.1 million of orders for sapphire production furnace components for GT Advanced Technologies, Inc., or GTAT. GTAT commenced voluntary cases under Chapter 11 of the Bankruptcy Code on October 6, 2014. Approximately $1.8 million of components have been shipped to GTAT through December 31, 2014. The remaining orders have been removed from the backlog due to the uncertainty regarding the outcome of the bankruptcy.
At March 31, 2014, we were not in compliance with our financial covenants in the Loan and Security Agreement between Ranor and Santander Bank, N.A., or the Bank, dated February 24, 2006, as amended, or the Loan Agreement, and the Bank did not agree to waive the non-compliance with the covenants. As a result, we were in default at March 31, 2014, and all amounts under all of the Loan Agreement, MDFA Revenue Bonds, Ranor Issue, Series 2010A in the original aggregate principal amount of $4.25 million, or Series A Bonds, and MDFA Revenue Bonds, Ranor Issue, Series 2010B in the original aggregate principal amount of $1.95 million, or Series B Bonds, and the Loan and Security Agreement, or the LSA, with Utica Leaseco, LLC, or Utica, were classified as a current liability at March 31, 2014 ($4.2 million).
Beginning on January 16, 2014, we entered into a series of Forbearance and Modification Agreements, in connection with the Loan Agreement. Under these Forbearance Agreements, the Bank agreed to forbear from exercising certain of its rights and remedies arising as a result of the Company’s non-compliance with certain financial covenants under the Loan Agreement until September 30, 2014. During this period, we were in default under the Loan Agreement and the Bank had the right to accelerate payment of the debt in full upon 60 days' written notice.
On May 30, 2014 and on December 22, 2014 we entered into two new debt agreements with new lenders (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources”). The proceeds from these debt agreements ($6.4 million in total) were used to pay off amounts outstanding under the Mortgage Loan and Security Agreement, dated as of December 1, 2010, by and among us, MDFA and the Bank (as Bond owner and Disbursing Agent) or the MLSA, Series A Bonds and Series B Bonds and to terminate certain interest rate swaps. The proceeds from the new borrowings have improved liquidity and allowed us to emerge from the default provisions under our previous bond agreements. At December 31, 2014 we were not in default under any of our debt agreements.
If we were to violate any of the covenants under the above debt agreements, the lenders could demand full repayment of the amounts we owe. We would be unable to pay the obligation as we do not have existing credit facilities or sufficient cash on hand to satisfy these obligations and would need to seek alternative financing. These factors raise substantial doubt regarding our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
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 2014 Form 10-K. There were no significant changes in the critical accounting policies during the nine months ended December 31, 2014, 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, our rate of progress in the fulfillment of our obligations under our contracts, customer acceptance of the finished product, timing of deliveries of ordered products and when we are able to recognize the related revenue. A delay in customer acceptance, 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. We need to rebuild our backlog with orders from our key customers and continue to execute to the business plan we developed 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.
Three Months Ended December 31, 2014 and 2013
The following table sets forth information from our statements of operations in dollars and as a percentage of revenue:
(dollars in thousands)
| Three Months Ended December 31, 2014 Amount | Percent | Three Months Ended December 31, 2013 Amount | Percent | Changes Period Ended December 31, 2014 to 2013 Amount | Percent | |
|---|---|---|---|---|---|---|
| Net sales | $3,511 | 100% | $5,167 | 100% | $(1,656) | (32)% |
| Cost of sales | 3,170 | 90% | 4,395 | 85% | (1,225) | (28)% |
| Gross profit | 341 | 10% | 772 | 15% | (431) | (56)% |
| Selling, general and administrative | 705 | 20% | 1,433 | 28% | (728) | (51)% |
| Loss from operations | (364) | (10)% | (661) | (13)% | 297 | 45% |
| Other income (expense), net | -- | --% | (16) | --% | 16 | nm |
| Interest expense | (582) | (17)% | (80 | (2)% | (502) | nm |
| Total other expense, net | (582) | (17)% | (96) | (2)% | (486) | nm |
| Loss before income taxes | (946) | (27)% | (757) | (15)% | (189) | (25)% |
| Income tax expense | -- | --% | -- | --% | -- | nm |
| Net Loss | $(946) | (27)% | $(757) | (15)% | $(189) | (25)% |
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Net Sales
For the three months ended December 31, 2014, net sales decreased by $1.6 million, or 32%, to $3.5 million. By market sector, Net Sales decreased in our naval/maritime group by $1.3 million or 54% on lower demand for products from certain defense customers, decreased in our energy group by $0.3 million or 26% because of delayed shipments and soft energy contract demand, and decreased in our precision industrial group by less than 1% on flat demand quarter over quarter. Certain customers have not achieved anticipated demand levels for their products and have delayed orders under our purchase and sale agreements.
Additional shipments for sapphire production furnaces were delayed under a purchase agreement with GTAT, which has indicated a desire to reduce the number of units ordered under the contract. We have been unable to replace the delayed GTAT production units originally scheduled in fiscal 2015 with new orders in a timely manner. We have filed a demand for arbitration under the terms of the agreement. GTAT’s bankruptcy filing on October 6, 2014 causes and automatic stay suspending administration of the arbitration and the claim in the arbitration is now considered an unsecured creditor claim within GTAT’s overall bankruptcy proceedings. Manufacturing activities and shipments under this contract have been suspended until a settlement can be reached among the parties.
Cost of Sales and Gross Margin
Actual production levels were lower than planned and resulted in under absorbed overheads for the period. Our cost of sales for the three months ended December 31, 2014 decreased by $1.2 million, or 28%, on lower sales volume. Gross margins during the three months ended December 31, 2014 were 10% compared with 15.0% for the same period in fiscal 2014. Fiscal 2015 margins were dampened by under absorbed overhead of approximately $1.3 million. Fiscal 2014 margins were also negatively impacted by low margin contracts and under absorbed overhead. Gross margin in any reporting period is impacted by the mix of services we provide on projects completed and in-process within that period.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses, or SG&A, for the three months ended December 31, 2014 were $0.7 million or 51% lower when compared with the same period in fiscal 2014. Our Board of Directors reduced compensation and fees to zero for services rendered by our chairman for his service as our principal executive officer and Directors. As a result approximately $0.3 million of accrued fees and compensation were reversed during the third quarter. In addition, other expenses for employee compensation and benefits decreased by $0.4 million. SG&A spending for outside advisory services increased 10% over the same period in fiscal 2014.
Other Income (Expense)
| Three months ended: | December 31, 2014 | December 31, 2013 | $ Change | % Change |
|---|---|---|---|---|
| Other income (expense), net | $157 | $(15,398) | $15,555 | nm |
| Interest rate swaps | $(217,220) | $-- | $(217,220) | nm |
| Interest expense | $(113,565) | $(56,431) | $(57,134) | nm |
| Interest expense: non-cash | $(251,417) | $(24,371) | $(227,046) | nm |
nm – not meaningful
We terminated our Series A Bond interest rate swap contract on December 22, 2014. Interest expense increased for the three months ended December 31, 2014 due to higher rates related to our new debt financing under an LSA with Utica. Non–cash interest expense reflects higher amounts of amortization for deferred loan costs and deferred interest costs in connection with the LSA.
Income Taxes
For the three months ended December 31, 2014 we recorded zero tax expense in our statement of operations. We maintain a full valuation allowance on our net deferred tax assets. A valuation allowance must be established for deferred tax assets when it is more likely than not that they will not be realized. The assessment was based on the weight of negative evidence at the balance sheet date, our recent operating losses and unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels. We regularly assess the effects resulting from these factors to determine the adequacy of our provision for income taxes. Our future effective tax rate would be affected if earnings were lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof.
Net Loss
Our net loss was $0.9 million, or $0.04 per share basic and fully diluted, for the three months ended December 31, 2014, as compared to net loss of $0.8 million, or $0.04 per share basic and fully diluted, for the three months ended December 31, 2013.
Nine Months Ended December 31, 2014 and 2013
The following table sets forth information from our statements of operations for the nine months ended December 31, 2014 and 2013, in dollars and as a percentage of revenue:
(dollars in thousands)
| Nine Months Ended December 31, 2014 Amount | Percent | Nine Months Ended December 31, 2013 Amount | Percent | Changes Period Ended December 31, 2014 to 2013 Amount | Percent | |
|---|---|---|---|---|---|---|
| Net sales | $14,312 | 100% | $17,460 | 100% | $(3,148) | (18 ) % |
| Cost of sales | 12,885 | 90% | 15,540 | 89% | (2,655) | (17 ) % |
| Gross profit | 1,427 | 10% | 1,920 | 11% | (493) | (26 ) % |
| Selling, general and administrative | 3,244 | 23% | 4,689 | 27% | (1,445) | (31)% |
| Loss from operations | (1,817) | (13)% | (2,769) | (16 ) % | 952 | 34% |
| Other income | (1) | -% | (13) | --% | 12 | nm |
| Interest expense | (1,200) | (8 ) % | (218) | (1 ) % | (982) | nm |
| Total other expense, net | (1,201) | (8 ) % | (231) | (1 ) % | (970) | nm |
| Loss before income taxes | (3,018) | (21 ) % | (3,000) | (17 ) % | (18) | --% |
| Income tax benefit | (153) | (1 ) % | -- | --% | (153) | nm |
| Net Loss | $(2,865) | (20 ) % | $(3,000) | (17 ) % | $135 | 4% |
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Net Sales
Increases and decreases in net sales are reflective of the frequent changes in orders we see from our customers as they gauge customer demand for new and existing products. Net sales decreased by $3.1 million, or 18%, to $14.3 million for the nine months ended December 31, 2014 when compared to the same period last year. By market sector, Net sales decreased by $3.1 million in the navy/maritime markets on lower volume, decreased by 2% in the energy markets on softer demand, and decreased by less than 1% in the precision industrial sector. Certain customers have not achieved anticipated demand levels for their products and have delayed orders under our purchase and sale agreements.
Additional shipments of sapphire production furnaces were delayed under a purchase agreement with GTAT, which has indicated a desire to reduce the number of units ordered under the contract. We have been unable to replace the delayed GTAT production units originally scheduled for fiscal 2015 with new orders in a timely manner. We have filed a demand for arbitration under the terms of the agreement. GTAT’s bankruptcy filing on October 6, 2014 causes an automatic stay suspending administration of the arbitration and the claim in the arbitration is now considered an unsecured creditor claim within GTAT’s overall bankruptcy proceedings. Manufacturing activities and shipments under this contract have been suspended until a settlement can be reached among the parties.
Cost of Sales and Gross Margin
Our cost of sales for the nine months ended December 31, 2014 decreased by $2.6 million to $12.9 million on lower sales volume. Gross margins were 10% and 11% for the same comparable nine month periods. Gross profit was $1.4 million or 26% lower in fiscal 2015 when compared with the same nine month period in fiscal 2014. Gross margin in any reporting period is impacted by the mix of services we provide on projects completed within that period. Under absorbed overhead of $2.4 million dampened our gross profit and gross margin for the period ended December 31, 2014. For the nine months period ended December 31, 2013, certain low margin projects and contract losses dampened gross margin. Gross profit for the nine months period ended December 31, 2013 included additional contract losses of approximately $2.0 million, a majority of which were incurred on the initial units of certain turbine base components manufactured by our Ranor subsidiary.
Selling, General and Administrative Expenses
SG&A expenses for the nine months ended December 31, 2014 were $3.2 million compared to $4.7 million for nine months ended December 31, 2013, representing a decrease of $1.4 million or 31%. Primary drivers of this decrease in expense were reduced spending of approximately $1.4 million for compensation and benefits. Our Board of Directors passed a resolution to reduce compensation and fees to zero for services rendered by our chairman for his service as our principal executive officer and Directors. As a result approximately $0.3 million of accrued fees and compensation were reversed during the third quarter.
Other Income (Expense)
The following table reflects other income (expense), interest rate swaps and interest expense for the nine months ended:
| Nine months ended | December 31, 2014 | December 31, 2013 | $ Change | % Change |
|---|---|---|---|---|
| Other income (expense), net | $(927) | $(13,146) | $(12,219) | 93% |
| Interest rate swaps | $(246,668) | $-- | $(246,668) | nm |
| Interest expense | $(380,294) | $(194,258) | $(186,036) | nm |
| Interest expense: non-cash | $(573,834) | $(24,317) | $(549,517) | nm |
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We recorded a breakage fee of $217,220 in connection with the termination of our Series A Bond interest rate swap in the third quarter. Interest expense for the nine months ended December 31, 2014 was higher due to higher rates related to our forbearance agreements and new debt financing. Non–cash interest expense reflects higher amounts of amortization for deferred loan costs and deferred interest cost in connection with the LSA.
Income Taxes
For the nine months ended December 31, 2014, we recorded a tax benefit of $152,792 as we reclassified losses on an interest rate swap to our statement of operations. We maintain a full valuation allowance on our net deferred tax assets. A valuation allowance must be established for deferred tax assets when it is more likely than not that they will not be realized. The assessment was based on the weight of negative evidence at the balance sheet date, our recent operating losses and unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels. We regularly assess the effects resulting from these factors to determine the adequacy of our provision for income taxes. Our future effective tax rate would be affected if earnings were lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof.
Net Loss
As a result of the factors described above, our net loss was $2.8 million or $0.12 per share basic and fully diluted, for the nine months ended December 31, 2014, compared to a net loss of $3.0 million, or $0.15 per share basic and fully diluted, for the nine months ended December 31, 2013.
Liquidity and Capital Resources
At March 31, 2014, we were not in compliance with the fixed charges and interest coverage financial covenants under the Loan Agreement, and the Bank did not agree to waive the non-compliance with the covenants. The Loan Agreement was amended by the Forbearance and Modification Agreement, dated January 16, 2014, or the First Forbearance Agreement. Under the First Forbearance Agreement, the Bank agreed to forbear from exercising certain of its rights and remedies arising as a result of the Company’s non-compliance with certain financial covenants under the Loan Agreement until March 31, 2014. The First Forbearance Agreement expired on March 31, 2014, and the Bank did not agree to waive the non-compliance with the covenants at March 31, 2014. Since we were in default, the Bank had the right to accelerate payment of the debt in full upon 60 days written notice. As a consequence, we classified all amounts under the Loan Agreement, $4.2 million at March 31, 2014 as a current liability.
On May 30, 2014, July 1, 2014 and August 12, 2014, the Company and the Bank entered into separate Second, Third and Fourth Forbearance and Modification Agreements, respectively, or collectively with the First Forbearance Agreement, the Forbearance Agreements. Under each Forbearance Agreement, the Bank agreed to extend the forbearance period and to forbear from exercising certain of its rights and remedies arising as a result of the Company’s non-compliance with certain financial covenants under the Loan Agreement. The Second Forbearance Agreement was signed on May 30, 2014 and was retroactive to April 1, 2014 and the Fourth Forbearance extended the forbearance period to no later than September 30, 2014. Each Forbearance Agreement expired on its own terms. During the forbearance period, we agreed to comply with the terms, covenants and provisions in the Loan Agreement and related documents, as amended by the Forbearance Agreements. The Forbearance Agreements amended the Loan Agreement to, among other things, prohibit the Company’s Leverage Ratio (as such term is defined in the Loan Agreement) from being greater than 1.75 to 1.0. We were not in compliance with the applicable leverage ratio covenant in the Loan Agreement, as amended by the Forbearance Agreements at September 30, 2014 or at March 31, 2014, as the actual leverage ratio was 4.4 to 1.0 and 3.8 to 1.0, respectively.
On May 30, 2014, TechPrecision and Ranor entered into the LSA with Utica. Pursuant to the LSA, Utica agreed to loan $4.15 million to Ranor under a Credit Loan Note, which is collateralized by a first secured interest in certain machinery and equipment at Ranor. Payments under the LSA and Credit Loan Note are due in monthly installments with interest on the unpaid principal balance of the Credit Loan Note at an interest rate equal to 7.5% plus the greater of 3.3% or the six-month LIBOR interest rate, as described in the Credit Loan Note. In addition, upon payment of all obligations of the debt under the LSA before or on the maturity date, Ranor will be required to pay to Utica deferred interest ranging from $166,000 during the first twelve months of the term to $498,000 at any time after the forty-eighth month of the term. Ranor’s obligations under the LSA and the Credit Loan Note are guaranteed by TechPrecision.
Pursuant to the LSA, Ranor is subject to certain restrictive covenants which, among other things, restrict Ranor’s ability to (1) declare or pay any dividend or other distribution on its equity, purchase or retire any of its equity, or alter its capital structure; (2) make any loan or guaranty or assume any obligation or liability; (3) default in payment of any debt in excess of $5,000 to any person; (4) sell any of the collateral outside the normal course of business or (5) enter into any transaction that would materially or adversely affect the collateral or Ranor’s ability to repay the obligations under the LSA and the Credit Loan Note. The restrictions of these covenants are subject to certain exceptions specified in the LSA and in some cases may be waived by written consent of Utica. Any failure to comply with the covenants outlined in the LSA without waiver by Utica or certain other provisions in the LSA would be an event of default, pursuant to which Utica may accelerate the repayment of the loan.
In connection with the execution of the LSA, we paid approximately $0.24 million in fees and associated costs and utilized approximately $2.65 million to pay off debt obligations owed to the Bank, under the Loan Agreement. Additionally, the Company retained approximately $1.27 million for general corporate purposes.
On December 22, 2014, we entered into a Term Loan and Security Agreement, or TLSA, with Revere High Yield Fund, LP, or Revere. Pursuant to the TLSA, Revere agreed to loan an aggregate of $2.25 million to Ranor under a Term loan note in the aggregate principal amount of $1.5 million, or the First Loan Note, and a term loan note in the aggregate principal amount of $750,000, or the Second Loan Note. The First Loan Note is collateralized by a secured interest in all of Ranor’s Massachusetts facility and certain machinery and equipment at Ranor. The Second Loan Note is collateralized by a secured interest in certain accounts, inventory and equipment of Ranor. Payments under the TLSA, the First Loan Note and the Second Loan Note are due as follows: (a) payments of interest only on advanced principal on a monthly basis on the first day of each month from February 1, 2015 until December 31, 2015 with an annual interest rate on the unpaid principal balance of the First Loan Note and the Second Loan Note equal to 12% per annum and (b) the principal balance plus accrued and unpaid interest payable on December 31, 2015. Ranor’s obligations under the TLSA, the First Loan Note and the Second Loan Note are guaranteed by TechPrecision pursuant to a Guaranty Agreement with Revere. We utilized approximately $1.45 million of the proceeds of the First Loan Note and Second Loan Note to pay off loan obligations owed to the Bank, plus breakage fees on a related interest swap of approximately $220,000 under a previous the Loan Agreement with the Bank. The remaining proceeds of the First Loan Note and the Second Loan Note were retained by the Company to be used for general corporate purposes. Pursuant to the TLSA, Ranor is subject to certain affirmative covenants, including a cash covenant, which requires that we maintain minimum month end cash balances ranging from $400,000 to $820,000. We were required to maintain a cash balance of $750,000 at December 31, 2014. We were in compliance with all covenants under the TLSA at December 31, 2014.
At December 31, 2014, we had cash and cash equivalents of $1,278,667, of which $14,068 is located in China and may not be able to be repatriated for use in the U.S. without undue cost or expense, if at all. We have incurred a net loss of $0.9 million and $2.8 million for the three months and nine months ended December 31, 2014, respectively.
These factors raise substantial doubt about our ability to continue as a going concern. In order for us to continue operations beyond the next twelve months and be able to discharge our liabilities and commitments in the normal course of business, we must secure long-term financing on terms consistent with our business plans.
The condensed consolidated financial statements for the three and nine months ended December 31, 2014, and for the year ended March 31, 2014, were prepared on the basis of a going concern which contemplates that we will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should we be required to liquidate assets. Our ability to satisfy our total current liabilities of $9.7 million at December 31, 2014 and to continue as a going concern is dependent upon the successful execution of our operating plan and our ability to timely secure additional long-term financing. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
In addition, we must increase our backlog and change the composition of our revenues to focus on recurring unit of delivery projects rather than custom first article and prototyping, which, in the past, were not an efficient use of our manufacturing capacity. Also, we must reduce our operating expenses to be in line with current business conditions in order to increase profit margins and decrease the amount of cash used in operations. If successful in changing the volume and composition of revenue and reducing costs, we believe that we would begin to reflect positive operating cash flows. However, we plan to closely monitor our expenses and, if required, will further reduce operating costs and capital spending to enhance liquidity.
Our failure to obtain additional financing could impair our ability to both serve our existing customer base and develop new customers and could result in our failure to continue to operate as a going concern. To the extent that we require new or additional financing, we cannot assure you that we will be able to get such financing on terms equal to or better than the terms of the LSA or the TLSA Agreement. If we are unable to raise funds through a credit facility, it may be necessary for us to conduct an offering of debt and/or equity securities on terms which may be disadvantageous to us or have a negative impact on our outstanding securities and the holders of such securities. In the event of an equity offering, it may be necessary that we offer such securities at a price that is significantly below our current trading levels which may result in substantial dilution to our investors that do not participate in the offering and a new low trading level for our common stock.
Our liquidity is highly dependent on our ability to improve our sales, 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, 2014 and March 31, 2014, we had negative working capital of $1.3 million and $2.0 million, respectively. Existing cash and proceeds from the TLSA with Revere and the LSA with Utica were used to fund operating, investing and financing activities. The following tables set forth the changes in the principal components of our cash flows and working capital for the periods presented:
(dollars in thousands)
| December 31, 2014 | March 31, 2014 | Change Amount | Percentage Change | |
|---|---|---|---|---|
| Cash and cash equivalents | $1,279 | $1,087 | $192 | 17% |
| Accounts receivable, net | $2,060 | $2,280 | $(220) | (10)% |
| Costs incurred on uncompleted contracts | $3,189 | $5,258 | $(2,069) | (39)% |
| Inventory - raw materials | $222 | $293 | $(71) | (24)% |
| Other current assets | $675 | $461 | $(214) | (46)% |
| Current deferred tax assets | $991 | $991 | $-- | --% |
| Accounts payable | $1,775 | $2,888 | $(1,113) | (39)% |
| Trade notes payable | $205 | $-- | $205 | nm% |
| Accrued expenses | $3,345 | $3,893 | $(548) | (14)% |
| Deferred revenues | $1,178 | $1,462 | $(284) | (19)% |
| Short-term debt | $3,183 | $4,170 | $(987) | (24)% |
| nm- not meaningful |
| (dollars in thousands) Cash flows provided by (used in): | December 31, 2014 | December 31, 2013 | Change Amount |
|---|---|---|---|
| Operating activities | $(1,272) | $1,824 | $(3,096) |
| Investing activities | (54) | (54) | -- |
| Financing activities | 1,518 | (1,099) | 2,617 |
| Effects of foreign exchange rates on cash | -- | 1 | (1) |
| Net increase in cash and cash equivalents | $192 | $672 | $(480) |
22
Operating activities
Our primary source of cash is from accounts receivable collections and from customer advance payments for purchase of materials and project progress payments. We use our cash for procurement of materials for projects and to pay salaries and benefits and other operating costs. Our cash flows can fluctuate significantly from period to period as the timing of our cash collections mix between advance payments made before and payments made after shipment of finished goods. Cash used in operations for the nine months ended December 31, 2014 was $1.3 million compared with cash provided by operations of $1.8 million for the nine months ended December 31, 2013. At December 31, 2014, approximately 54% of our accounts receivable were at risk of not being paid in a timely manner due to a contract dispute with one of our customers who filed for bankruptcy. Cash used in operations for the nine months ended December 31, 2014 exceeded cash collected due to lower levels accounts receivables and customers advanced payments due to lower than expected project volume. During the nine months ended December 31, 2013, cash sourced from accounts receivables and advanced payments exceeded cash used in operations. During fiscal 2014 we received $2.9 million in advance payments, primarily in connection with the production ramp for production of sapphire furnace components.
Investing activities
The nine month periods ended December 31, 2014 and December 31, 2013 were marked by cash outflows for capital spending for new equipment of $54,096 and $53,941, respectively.
Financing activities
On May 30, 2014, TechPrecision and Ranor entered into the LSA with Utica. Utica agreed to loan $4.15 million to Ranor under a Credit Loan Note, which is collateralized by a first secured interest in certain machinery and equipment at Ranor. In connection with the execution of the LSA, the Company paid approximately $2.65 million to pay off debt obligations owed to the Bank under the February 2006 Loan Agreement. The remaining proceeds from the debt were used to fund our operations.
On December 22, 2014, we entered into the TLSA with Revere. Pursuant to the TLSA, Revere agreed to loan an aggregate of $2.25 million to Ranor under the First Loan Note and the Second Loan Note. We utilized approximately $1.45 million of the proceeds of the First Loan Note and the Second Loan Note to pay off loan obligations owed to the Bank plus breakage fees on a related interest swap of approximately $217,220 under the Loan Agreement with the Bank.
For the nine months ended December 31, 2014, we used cash of $4.6 million to pay off our MLSA Bonds and to make principal payments on our outstanding debt. We also made payments of approximately $0.3 million to outside advisors to raise new debt. All of the above activity resulted in a net increase in cash for the nine months ended December 31, 2014 of $0.2 million, compared with a net increase in cash of $0.7 million for the nine months ended December 31, 2013. We have no off-balance sheet assets or liabilities.
Controls and procedures
As filed, 2,698 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Evaluation of Disclosure Controls and Procedures
As of December 31, 2014, 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. Based on the evaluation, our chief executive officer and chief financial officer have concluded that, as of December 31, 2014, our disclosure controls and procedures and internal control over financial reporting were not effective because of the material weakness described in Item 9A of our Annual Report on Form 10-K for the year ended March 31, 2014 as filed with the SEC on July 15, 2014, or the 2014 Form 10-K.
Disclosure controls and procedures are designed with the objective of ensuring that (i) information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
We are making progress remediating the material weakness identified and described in the 2014 Form 10-K. Notwithstanding the material weakness described in Item 9A of the 2014 Form 10-K, we believe our condensed consolidated statements presented in this quarterly report on Form 10-Q fairly represent, in all material respects, our financial position, results of operations and cash flows for all periods presented herein.
Changes in Internal Controls
Except as identified below, there has been no change to our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the nine months ended December 31, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. During the nine months ended December 31, 2014, we continued to monitor our control environment and improve manual controls that support our financial reporting process by providing guidelines for account reconciliations and enhancing documentation to support sub-ledger account reconciliations. As we continue to remediate the material weakness described above and in Item 9A of the 2014 Form 10-K, we will determine the appropriate complement of corporate and divisional accounting personnel required to consistently operate management review controls.
Risk factors
As filed, 3,300 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Except for the risk factor below, which supplements the risk factors discussed in Part I, "Item 1A. Risk Factors," in the 2014 Form 10-K, there have been no material changes to the risk factors discussed in Part I, "Item 1A. Risk Factors," in the 2014 Form 10-K. You should carefully consider the risks described in this Form 10-Q and the 2014 Form 10-K which could materially affect our business, financial condition or future results. The risks described in this Form 10-Q and the 2014 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.
We require additional capital to fund our operations. In the event that we determine that we are unable to secure additional funding when required, we may need to downsize or wind down our operations through liquidation, bankruptcy or a sale of our assets.
As of December 31, 2014, we had $1.3 million of cash and cash equivalents. Our cash flows can fluctuate significantly from period to period as the composition of our receivables collections mix changes between advance payments for materials and customer payments made after shipment of finished goods. Assuming no additional debt or equity financing is consummated, we believe that our existing cash and cash equivalents and expected revenue from operations may not be sufficient to meet our operating and capital requirements through the near-term, although changes in our business, whether or not initiated by us, may cause us to deplete such cash and cash equivalents available to us at a quicker rate. We must obtain additional financing in order to continue our operations beyond the near-term. There are no assurances that funding will be available when we need it on terms that we find favorable, if at all. If we are unable to secure additional financing on terms acceptable to us and on a timely basis, we may seek stockholder approval to dissolve or we may file for, or be forced to resort to, bankruptcy protection. Any decision to seek stockholder approval to dissolve or to file for, or be forced to resort to bankruptcy protection, may occur at any point during the near-term. In addition, if we raise additional capital by issuing equity securities, our existing stockholders’ percentage ownership will be reduced and they may experience substantial dilution. We may also issue equity securities that provide for rights, preference and privileges senior to those of our common stock. If we raise additional funds by issuing debt securities, these debt securities would have rights, preferences, and privileges senior to those of our common stock and our preferred stock, and the terms of the debt securities issued could impose significant restrictions on our operations. If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations, take advantage of opportunities, and otherwise respond to competitive pressures could be significantly delayed or limited, and we may need to downsize or halt our operations.
Figures reported in this filing
Standardized line items from the XBRL in this filing, for the period ended 2014-12-31. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Revenue | 3 months2014-10-01 to 2014-12-31 | $3.5m | us-gaap:SalesRevenueNet |
| Revenue | 9 months2014-04-01 to 2014-12-31 | $14.3m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months2014-10-01 to 2014-12-31 | $3.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months2014-04-01 to 2014-12-31 | $12.9m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months2014-10-01 to 2014-12-31 | $341.4k | us-gaap:GrossProfit |
| Gross profit | 9 months2014-04-01 to 2014-12-31 | $1.4m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months2014-10-01 to 2014-12-31 | $705.1k | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months2014-04-01 to 2014-12-31 | $3.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months2014-10-01 to 2014-12-31 | −$363.7k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months2014-04-01 to 2014-12-31 | −$1.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months2014-10-01 to 2014-12-31 | $582.2k | us-gaap:InterestExpense |
| Interest expense | 9 months2014-04-01 to 2014-12-31 | $1.2m | us-gaap:InterestExpense |
| Income tax | 3 months2014-10-01 to 2014-12-31 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months2014-04-01 to 2014-12-31 | −$152.8k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2014-10-01 to 2014-12-31 | −$945.7k | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Net income | 9 months2014-04-01 to 2014-12-31 | −$2.9m | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Diluted shares (weighted) | 3 months2014-10-01 to 2014-12-31 | 24,669,958 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months2014-04-01 to 2014-12-31 | 24,447,736 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months2014-04-01 to 2014-12-31 | −$1.3m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 9 months2014-04-01 to 2014-12-31 | $54.1k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | At period end2014-12-31 | $1.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | At period end2014-12-31 | $8.4m | us-gaap:AssetsCurrent |
| Total assets | At period end2014-12-31 | $14.4m | us-gaap:Assets |
| Current liabilities | At period end2014-12-31 | $9.7m | us-gaap:LiabilitiesCurrent |
| Short-term borrowings | At period end2014-12-31 | $2.3m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | At period end2014-12-31 | $937.1k | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0000950159-15-000059. Last ingested by Listed: Nov 10, 2026, 04:27 ET. Listed shows no prices and gives no investment advice.