# Techprecision Corp: Form 10-Q for the period ended Sep 30, 2016

- Company: [Techprecision Corp](/companies/tpcs.md) (CIK 1328792)
- Form: 10-Q
- Filed: 2016-11-14
- Accepted by EDGAR: Nov 14, 2016, 17:17 ET
- Period: 2016-09-30
- Accession: 0000950159-16-000808
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1328792/000095015916000808/tpcs10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1328792/000095015916000808/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-07-01 to 2016-09-30 | $3.7m | us-gaap:SalesRevenueNet |
| Revenue | 6 months, 2016-04-01 to 2016-09-30 | $8.3m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2016-07-01 to 2016-09-30 | $2.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2016-04-01 to 2016-09-30 | $5.3m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2016-07-01 to 2016-09-30 | $1.5m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2016-04-01 to 2016-09-30 | $3.0m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2016-07-01 to 2016-09-30 | $739.6k | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2016-04-01 to 2016-09-30 | $1.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-07-01 to 2016-09-30 | $734.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2016-04-01 to 2016-09-30 | $1.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-07-01 to 2016-09-30 | $183.3k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2016-04-01 to 2016-09-30 | $376.5k | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-07-01 to 2016-09-30 | $11.5k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2016-04-01 to 2016-09-30 | $21.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-07-01 to 2016-09-30 | $546.1k | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Net income | 6 months, 2016-04-01 to 2016-09-30 | $991.4k | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Diluted EPS | 3 months, 2016-07-01 to 2016-09-30 | $0.02 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2016-04-01 to 2016-09-30 | $0.04 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-07-01 to 2016-09-30 | $0.02 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2016-04-01 to 2016-09-30 | $0.04 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-07-01 to 2016-09-30 | 28,020,795 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2016-04-01 to 2016-09-30 | 27,936,098 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 6 months, 2016-04-01 to 2016-09-30 | $114.9k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Current assets | at 2016-09-30 | $6.4m | us-gaap:AssetsCurrent |
| Total assets | at 2016-09-30 | $11.8m | us-gaap:Assets |
| Current liabilities | at 2016-09-30 | $4.0m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2016-09-30 | $2.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 36,683 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 condensed consolidated financial statements and the related notes which appear elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q, including this section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," may contain predictive or "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based in part on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors. Those factors include those risks discussed in Part I Item 1A "Risk Factors" in the 2016 Form 10-K, as well as those described in any other filings which we make with the SEC. In addition, such statements could be affected by risks and uncertainties related to the availability of appropriate financing facilities, our ability to receive contract awards through competitive bidding processes, our ability to maintain standards to enable us to manufacture products to exacting specifications, our ability to enter new markets for our services, marketing and customer acceptance of our products, our reliance on a small number of customers for a significant percentage of our business, competition, government regulations and requirements, pricing and development difficulties, our ability to make acquisitions and successfully integrate those acquisitions with our business, general industry and market conditions and growth rates, and general economic conditions. Any forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this Quarterly Report on Form 10-Q except as required by applicable law. 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 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.

All of our sales recorded for the six months ended September 30, 2016 are from our U.S. segment. There were no sales generated from WCMC, our subsidiary in China, during the first six months of fiscal 2017. At September 30, 2016, we did not have any open customer orders for WCMC in our backlog. We are evaluating how we utilize the WCMC entity moving forward.

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 industrial companies. However, our business is dependent in part on the continuation of governmental programs which require our services and products.

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

We historically have experienced, and continue to experience, customer concentration. For the six months ended September 30, 2016 and 2015, our largest customer in each period accounted for approximately 40% and 21% of net sales, respectively, and our ten largest customers accounted for approximately 99% of our revenue for each six month period. Our sales order backlog at September 30, 2016 was approximately $17.9 million compared with a backlog of $19.8 million at March 31, 2016.

For the six months ended September 30, 2016, our net sales and net income were $8.3 million and $1.0 million, respectively, compared to net sales and net income of $8.5 million and $0.5 million, respectively, for the six months ended September 30, 2015. Our gross margins for the six months ended September 30, 2016 were 36.2% compared with gross margins of 31.7% for the six months ended September 30, 2015.

On April 17, 2015, the Company, through Ranor, entered into the Assignment Agreement with Citigroup. Pursuant to the terms of the Assignment Agreement, Ranor sold, transferred, conveyed and assigned to Citigroup all of Ranor's right, title and interest in and to Ranor's $3,740,956 unsecured claim against GTAT. Pursuant to the Assignment Agreement, Citigroup paid to Ranor an initial amount equal to $507,835, which amount is classified as a current liability on our balance sheet. The Assignment Agreement provided for Citigroup to pay to Ranor up to an additional $614,452 upon receipt of written notice that Ranor's claim has been fully and finally allowed against GTAT without objection.

On November 7, 2016, GTAT's legal counsel notified Citigroup that Ranor's unsecured claim was fully allowed without objection. In accordance with the terms of the Assignment Agreement, Citigroup paid Ranor an additional $614,452 on November 8, 2016. The resolution of this claim under the Assignment Agreement will be recognized as a gain in our fiscal third quarter ended December 31, 2016 of approximately $1.1 million.

On April 26, 2016 we entered into a new debt agreement, the MLSA, with a new lender, People's (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources"). The proceeds from the MLSA (approximately $3.0 million in total) were used to pay off amounts outstanding under a prior LSA with Utica. We retained $0.2 million of proceeds from the MLSA for general corporate purposes.

At September 30, 2016, we had cash of $2.8 million, of which $1,206 is located in China and may not be able to be repatriated for use in the United States without undue cost or expense, if at all. We generated $1.4 million of cash from operating activities for the six months ended September 30, 2016.

### 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 2016 Form 10-K. There were no significant changes in the critical accounting policies during the six months ended September 30, 2016, 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 Quarterly Report on 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 (particularly steel), commodity prices, macroeconomic factors, including the availability of capital that may be needed by our customers, and political, regulatory and legal conditions in the United States and foreign markets. Our order and revenue stream is uneven and reflects an irregular pattern of orders we receive from our customers as they gauge their customers' demand for new and existing products. Our results of operations are affected by our success in booking new contracts, the timing of revenue recognition, delays in customer acceptances of products, delays in deliveries of ordered products and our rate of progress fulfilling 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 the business plan we developed in fiscal 2015, which has the immediate goal of realigning and stabilizing our cost structure so we can return to and sustain profitability, even at current lower revenue levels. In connection with the execution of this business plan, we need to continue to replenish our backlog with orders from our key customers.

### Three Months Ended September 30, 2016 and 2015

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 September 30, 2016 Amount | Percent | Three Months Ended September 30, 2015 Amount | Percent | Changes from 2016 to 2015 Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $3,656 | 100% | $4,104 | 100% | $(448) | (11)% |
| Cost of sales | 2,182 | 60% | 2,696 | 66% | (514) | (19)% |
| Gross profit | 1,474 | 40% | 1,408 | 34% | 66 | 5% |
| Selling, general and administrative | 740 | 20% | 910 | 22% | (170) | (19)% |
| Income from operations | 734 | 20% | 498 | 12% | 236 | 48% |
| Other income | 7 | --% | 1 | --% | 6 | --% |
| Interest expense | (183) | (5)% | (244) | (6)% | 61 | 25% |
| Total other expense, net | (176) | (5)% | (243) | (6)% | 67 | 28% |
| Income before income taxes | 558 | 15% | 255 | 6% | 303 | 119% |
| Income tax expense | 12 | --% | -- | --% | 12 | nm% |
| Net Income | $546 | 15% | $255 | 6% | $291 | 114% |

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### Net Sales

Our second quarter shipments reflect steady demand from our defense customers, albeit for different products and components than those shipped during the comparable period a year ago. For the three months ended September 30, 2016, net sales decreased by approximately $0.4 million, or 11%, to $3.7 million. For the three months ended September 30, 2016, net sales in our defense markets increased by $0.5 million on higher shipments of components to our largest customer, and net sales in our precision industrial markets increased by $0.2 million primarily on higher shipments of components for medical systems. However, net sales in our energy markets decreased by $1.1 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015, more than offsetting the above increases, as a result of lower volume shipped during the second quarter of fiscal 2017 as the Company worked to replenish backlog and start up new projects.

### Cost of Sales and Gross Margin

Gross margin in any reporting period is impacted by the mix of products and services we provide on projects completed and in-process within that period. Our cost of sales for the three months ended September 30, 2016 decreased by 19% compared to the three months ended September 30, 2015 on lower dollar volume. Gross margins during the three months ended September 30, 2016 were 40.3% compared with 34.3% for the three months ended September 30, 2015. Our product mix for the three months ended September 30, 2016 included orders of higher margin business from our customers compared to the three months ended September 30, 2015. Actual production levels were on par with previous quarters and resulted in normal overhead absorption for both reporting periods.

### Selling, General and Administrative Expenses

Total selling, general and administrative expenses, or SG&A, for the three months ended September 30, 2016 were 19% lower when compared to the three months ended September 30, 2015. SG&A expenses were lower because of lower headcount which lead to reduced compensation and office costs of $212,413 and $5,291, respectively, in the three months ended September 30, 2016, offset in part by an increase for outside advisory expenses of $47,252 in the three months ended September 30, 2016 compared to the three months ended September 30, 2015.

### Interest Expense and Other Income

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

|  | September 30, 2016 | September 30, 2015 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Other income | $6,824 | $1,269 | $5,555 | nm% |
| Interest expense | $(114,012) | $(152,939) | $38,927 | 25% |
| Interest expense: non-cash | $(69,256) | $(91,240) | $21,984 | 24% |

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Interest expense for the three months ended September 30, 2016 was lower compared to the three months ended September 30, 2015 due to lower interest rates. Non-cash interest expense reflects the amortization of deferred loan costs and deferred interest costs in connection with our outstanding debt.

### Income Taxes

For the three months ended September 30, 2016, we recorded income tax expense of $11,505 in connection with an accrual for alternative minimum tax due on taxable income in excess of net operating losses. For the three months ended September 30, 2015, we recorded zero income tax expense. The zero income tax expense recorded for the three months ended September 30, 2015 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, primarily our past operating losses, which cause uncertainty as to whether we will generate sufficient taxable income to utilize the deferred tax assets. We have determined that it is more likely than not that certain future tax benefits may not be realized. A change in the estimates used to make this determination could require an increase in deferred tax assets if they become realizable.

### Net Income

As a result of the foregoing, we had net income of $546,082, or $0.02 per share basic and fully diluted, for the three months ended September 30, 2016, as compared to net income of $254,606, or $0.01 per share basic and fully diluted, for the three months ended September 30, 2015.

### Six Months Ended September 30, 2016 and 2015

The following table sets forth information from our statements of operations for the six months ended September 30, 2016 and 2015, in dollars and as a percentage of revenue:

*(dollars in thousands)*

|  | Six Months Ended September 30, 2016 Amount | Percent | Six Months Ended September 30, 2015 Amount | Percent | Changes from 2016 to 2015 Amount | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $8,301 | 100% | $8,479 | 100% | $(178) | (2)% |
| Cost of sales | 5,292 | 64% | 5,789 | 68% | (497) | (9)% |
| Gross profit | 3,009 | 36% | 2,690 | 32% | 319 | 12% |
| Selling, general and administrative | 1,628 | 19% | 1,714 | 20% | (86) | (5)% |
| Income from operations | 1,381 | 17% | 976 | 12% | 405 | 41% |
| Other income | 7 | --% | 1 | --% | 6 | --% |
| Interest expense | (376) | (5)% | (516) | (6)% | 140 | (27)% |
| Total other expense, net | (369) | (4)% | (515) | (6)% | 146 | (28)% |
| Income before income taxes | 1,012 | 12% | 461 | 5% | 551 | 119% |
| Income tax expense | 21 | --% | -- | --% | 21 | nm% |
| Net income | $991 | 12% | $461 | 5% | $530 | 115% |

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### Net Sales

Our shipments for the first six months of fiscal 2017 reflect steady demand from our customers for our services, albeit for different products and components than those shipped during the comparable period a year ago. For the six months ended September 30, 2016, net sales decreased by $0.2 million, or 2%, to $8.3 million. For the six months ended September 30, 2016, net sales to our defense customers, our largest market group, increased by $0.3 million compared to the six months ended September 30, 2015, primarily on higher shipments of components to defense contractors. Net sales in our precision industrial group increased by $1.1 million compared to the six months ended September 30, 2015, primarily on higher shipment volume for medical components, and net sales in our energy group decreased by $1.5 million compared to the six months ended September 30, 2015 as a result of lower demand as the Company works to replenish its energy backlog.

### Cost of Sales and Gross Margin

Gross margin in any reporting period is impacted by the mix of services we provide on projects completed within that period. Cost of sales consists primarily of raw materials, parts, labor, overhead, and subcontracting costs. Our cost of sales for the six months ended September 30, 2016 decreased by $0.5 million compared to the six months ended September 30, 2015 to $5.3 million primarily on lower sales volume. Gross margins were 36.3% for the six months ended September 30, 2016 and 31.7% for the six months ended September 30, 2015. Gross profit was $3.0 million in the six months ended September 30, 2016, or $0.3 million higher compared with the six months ended September 30, 2015.

### Selling, General and Administrative Expenses

SG&A expenses for the six months ended September 30, 2016 were $1.6 million compared to $1.7 million for six months ended September 30, 2015, representing a decrease of $86,482, or 5%. The primary drivers of this change in SG&A expenses were decreased compensation and office costs of $235,866 and $18,648, respectively, in the six month period ended September 30, 2016, partially offset by an increase of $168,034 for outside advisory services in the six months ended September 30, 2016 compared with the six months ended September 30, 2015.

### Interest Expense and Other Income

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

|  | September 30, 2016 | September 30, 2015 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Other income | $7,575 | $1,090 | $6,485 | nm% |
| Interest expense | $(230,179) | $(312,262) | $82,083 | 26% |
| Interest expense: non-cash | $(146,299) | $(204,039) | $57,740 | 28% |

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For the six months ended September 30, 2016, interest expense decreased by 26% due to lower interest rates when compared to the six months ended September 30, 2015. Non-cash interest expense for the six months ended September 30, 2016 reflects lower amounts of amortization for deferred loan costs in connection with our outstanding long-term debt.

### Income Taxes

For the six months ended September 30, 2016, we recorded income tax expense of $20,958 in connection with an accrual for alternative minimum tax due on taxable income in excess of net operating losses. For the six months ended September 30, 2015, we recorded zero income tax expense. The zero income tax expense recorded for the three months ended September 30, 2015 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, primarily our past operating losses, which cause uncertainty as to whether we will generate sufficient taxable income to utilize the deferred tax assets. We have determined that it is more likely than not that certain future tax benefits may not be realized. A change in the estimates used to make this determination could require an increase in deferred tax assets if they become realizable.

### Net Income

As a result of the factors described above, our net income was $991,385 or $0.04 per share basic and fully diluted for the six months ended September 30, 2016. For the six months ended September 30, 2015, our net income was $460,957 or $0.02 per share basic and fully diluted.

### Liquidity and Capital Resources

On April 17, 2015, the Company, through Ranor, entered into the Assignment Agreement with Citigroup. Pursuant to the terms of the Assignment Agreement, Ranor sold, transferred, conveyed and assigned to Citigroup all of Ranor's right, title and interest in and to Ranor's $3,740,956 unsecured claim against GTAT. Pursuant to the Assignment Agreement, Citigroup paid to Ranor an initial amount equal to $507,835, which amount is classified as a current liability on our balance sheet. The Assignment Agreement provided for Citigroup to pay to Ranor up to an additional $614,452 upon receipt of written notice that Ranor's claim has been fully and finally allowed against GTAT without objection.

On November 7, 2016, GTAT's legal counsel notified Citigroup that Ranor's unsecured claim was fully allowed without objection. In accordance with the terms of the Assignment Agreement, Citigroup paid Ranor an additional $614,452 on November 8, 2016. The resolution of this claim under the Assignment Agreement will be recognized as a gain in our fiscal third quarter ended December 31, 2016 of approximately $1.1 million.

On April 26, 2016, TechPrecision through Ranor, executed and closed the MLSA with People's. Loan proceeds were disbursed to Ranor on April 26, 2016. Pursuant to the MLSA, People's loaned $3,011,648 to Ranor under the People's Loan. The People's Loan is secured by a first lien on the Equipment Collateral. Payments on the People's Loan will be made in 60 monthly installments of $60,921 each, inclusive of interest at a fixed rate of 7.90% per annum. The first monthly installment payment was paid on May 26, 2016. A prepayment penalty will apply during the first four years of the loan term. Ranor's obligations under the MLSA are guaranteed by TechPrecision. The Company covenants to maintain a DSCR of at least 1.5 to 1.0 during the term of the People's Loan. The DSCR will be measured at the end of each fiscal year of the Company. The People's Loan may be accelerated upon the occurrence of an "Event of Default" (as defined in the MLSA). Some of the Events of Default are subject to certain cure periods.

In connection with the MLSA, $2,653,353 of the proceeds from the People's Loan were disbursed to Utica, as payment in full for principal and interest under the LSA. People's retained a holdback in the amount of $182,763. The holdback was released to Ranor in July 2016 after the Company reported a DSCR of 1.82 to 1.0 as of March 31, 2016. Ranor retained $175,532 of the proceeds from the People's Loan for general corporate purposes.

On October 4, 2016, TechPrecision and Ranor became committed to Schedule 2 to the MLSA. Pursuant to Schedule 2, People's made the Additional People's Loan in the amount of $365,852 to Ranor upon the terms and conditions set forth in the MLSA and Schedule 2. Ranor will repay the Additional People's Loan in monthly installments of principal and interest over 60 months. The Additional People's Loan is guaranteed by TechPrecision pursuant to the original Corporate Guaranty from TechPrecision in favor of People's dated March 31, 2016. The Additional People's Loan is secured by a security interest in certain machinery and equipment of Ranor as provided in Schedule 2.

TechPrecision, Ranor and Revere entered into the TLSA on December 22, 2014, pursuant to which Revere loaned an aggregate of $2.25 million to Ranor under two promissory notes that were secured by certain assets of Ranor. On January 22, 2016, TechPrecision and Ranor entered into the Second Modification Agreement. In connection with the Second Modification Agreement, Ranor executed the Amended and Restated Notes in favor of Revere.

The Second Modification Agreement (a) extended the maturity date of the term loans made pursuant to the TLSA to January 22, 2018, (b) amended the amortization schedule such that payments under the TLSA and Amended and Restated Notes are due as follows: (i) payments of interest only on advanced principal on a monthly basis on the first day of each month from March 1, 2016 until January 1, 2017 and (ii) payments of $9,375 in principal plus accrued interest on a monthly basis on the first day of each month from February 1, 2017 until January 22, 2018, (c) reduced the annual interest rate on the unpaid principal balance of the loans to 10% per annum, or the Interest Rate, from 12% per annum, (d) amended the definition of the Minimum Guaranteed Interest payable by Ranor to Revere on the earlier of prepayment in full of the loans or payment in full of the loans on the maturity date to the greater of (i) 12 months interest at the Interest Rate on the amount outstanding on the loans or (ii) interest due on any amount advanced under the TLSA at the Interest Rate, (e) added a restrictive covenant whereby Ranor must maintain monthly minimum cash balances, with failure to comply with such restrictive covenant an event of default pursuant to which Revere may accelerate the repayment of the loans, and (f) included a reaffirmation of TechPrecision's guarantee of Ranor's obligations under the TLSA and the Amended and Restated Notes pursuant to a Guaranty Agreement between TechPrecision and Revere.

On April 26, 2016, TechPrecision and Ranor executed and closed on the Third Modification Agreement with Revere. The Third Modification Agreement, dated and effective as of March 31, 2016, further amended the TLSA. The Third Modification Agreement, among other things, (i) permitted Ranor to pay off in its entirety the indebtedness owed under the LSA with Utica with proceeds from the People's Loan, (ii) added the People's security interest as a "Permitted Lien" under the TLSA, (iii) deleted certain references to Utica, the LSA with Utica and loan documents related to the LSA with Utica and replaced those references with new definitions relating to the People's Loan, (iv) added the People's Loan and TechPrecision's guaranty of the People's Loan as "Existing Indebtedness" under the TLSA, (v) required Ranor, People's and Revere to enter into an Intercreditor and Subordination Agreement to, among other things, establish the relative priorities between Revere and People's with regard to certain assets of Ranor, (vi) required Ranor to cause People's and Revere to enter into a Mortgagee's Disclaimer and Consent to, among other things, require that Revere permit People's access to certain real property owned by Ranor and mortgaged to Revere as collateral for the TLSA in the event that Ranor defaults on the People's Loan and Revere has taken possession of the real property, and (vii) included a reaffirmation of TechPrecision's guarantee of Ranor's obligations under the TLSA.

Other than as so amended by the First Modification Agreement, the Second Modification Agreement and the Third Modification Agreement, the terms and conditions of the TLSA remain in full force and effect.

Pursuant to the TLSA, as amended by the Second Modification Agreement and the Third Modification Agreement, Ranor is subject to certain affirmative and negative covenants, including a minimum cash balance covenant, which requires that we maintain minimum month end cash balances that range from $640,000 to $1,000,000. We were required to maintain a cash balance of $849,940 and $786,212 at September 30, 2016 and March 31, 2016, respectively. We were in compliance with all covenants under the TLSA at September 30, 2016 and March 31, 2016.

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. As such, we would need to seek alternative financing to pay these obligation as we do not have existing facilities or sufficient cash on hand to satisfy these obligations, and there is no guarantee that we would be able to obtain such alternative financing.

At September 30, 2016, we had cash of $2.8 million, of which $1,206 is located in China and may not be able to be repatriated for use in the United States without undue cost or expense, if at all. Net cash provided by operating activities was $1.4 million for the six months ended September 30, 2016. Net cash provided by operating activities for the six months ended September 30, 2015 was $792,887, which included an advance payment of $507,835 received under the Assignment Agreement with Citigroup. Our profit margins continue to improve, as we have scaled our operating expenses with our recent revenue volume. As a result, we recorded net income of $1.0 million for the six months ended September 30, 2016 compared with a net income of $0.5 million for the six months ended September 30, 2015.

We may need to refinance or secure additional long-term financing on terms consistent with our business plans. In addition, we must replenish our backlog and balance our revenue mix to ensure recurring unit of delivery projects, rather than custom first article and prototyping projects which, in the past, did not efficiently utilize our manufacturing capacity. We must also maintain a level of operating expenses in line with current business conditions in order to increase profit margins and decrease the amount of cash used in operations. We plan to closely monitor our expenses and, if required, will further reduce operating costs and capital spending to enhance liquidity.

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 price, which may result in substantial dilution to our investors that do not participate in the offering, as well as a lower trading price for our common stock.

Our liquidity is highly dependent on the availability of financing facilities and our ability to improve our gross profit and operating income. If we successfully execute on our business plans, improve gross profit and operating income, and reduce our operating costs, then we believe our available cash will be sufficient to fund our operations, capital expenditures and principal and interest payments under our debt obligations through the 12 months from the issuance date of our financial statements.

At September 30, 2016 and March 31, 2016, we had working capital of $2.4 million and $0.5 million, respectively. The table below presents selected liquidity and capital measures as of:

*(dollars in thousands)*

|  | September 30, 2016 | March 31, 2016 | Change Amount |
| --- | ---: | ---: | ---: |
| Cash | $2,838 | $1,332 | $1,506 |
| Working capital | $2,371 | $510 | $1,861 |
| Total debt | $5,074 | $4,736 | $338 |
| Total stockholders' equity | $2,741 | $1,728 | $1,013 |

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

*(dollars in thousands)*

| Cash flows provided by (used in): | September 30, 2016 | September 30, 2015 | Change Amount |
| --- | ---: | ---: | ---: |
| Operating activities | $1,429 | $793 | $636 |
| Investing activities | (115) | (18) | (97) |
| Financing activities | 192 | (467) | 659 |
| Effects of foreign exchange rates on cash | -- | -- | -- |
| Net increase in cash | $1,506 | $308 | $1,198 |

#### Operating activities

Our primary sources of cash are from accounts receivable collections, customer advance payments, and project progress payments. Our ability to convert cash expended for materials, labor and overhead to finished goods ready for shipment and collecting the cash back from our trade receivables has improved significantly. Improved turnover rates helped us to generate higher amounts of cash in the six months ended September 30, 2016. Cash provided by operations for the six months ended September 30, 2016 was $1.4 million compared with cash provided by operations of $0.8 million for the six months ended September 30, 2015. For the six months ended September 30, 2016 we recorded net income of $1.0 million compared with a net income of $0.5 million for the six months ended September 30, 2015. Cash provided by operations for the six months ended September 30, 2015 was augmented by an advance payment of $507,835 received under the Assignment Agreement with Citigroup on April 17, 2015.

#### Investing activities

We expended $114,856 for fixed assets during the six months ended September 30, 2016. The six month period ended September 30, 2015 was marked by cash outflows for capital spending for new equipment of $17,600.

#### Financing activities

For the six months ended September 30, 2016 cash provided by financing activities was $192,221. During the six months ended September 30, 2016, we received proceeds of $3,011,648 from our MLSA with People's. In connection with the MLSA, $2,459,259 of the proceeds from the People's Loan were disbursed to Utica, as payment in full of the principal obligations under the LSA. We also paid $145,995 in loan closing costs and $214,173 for monthly principal payments on our outstanding debt during the six months ended September 30, 2016.

For the six months ended September 30, 2015, cash used in financing activities was $466,740, which was used to make principal payments on our outstanding debt.

All of the above activity resulted in a net increase in cash for the six months ended September 30, 2016 of $1.5 million, compared with a net increase in cash of $308,288 for the six months ended September 30, 2015. We have no off-balance sheet assets or liabilities.

A table summarizing the amounts and estimated timing of future cash payments from commitments and contractual obligations was provided in the 2016 Form 10-K. During the six months ended September 30, 2016 there were no material changes to our commitments and contractual obligations.

## Controls and procedures

As filed, 1,772 characters.

Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls include some, but not all, components of our internal control over financial reporting.

### Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our CEO and CFO have concluded that, as of September 30, 2016, our disclosure controls and procedures are effective.

### Changes in Internal Controls

There has been no change to our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Filed Nov 14, 2016.
Source: SEC EDGAR, the filing index for accession 0000950159-16-000808. Last ingested by Listed: Nov 10, 2026, 04:27 ET. No prices; not investment advice.