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EX-32.1 - EXHIBIT 32.1 - TECHPRECISION CORPtv478410_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - TECHPRECISION CORPtv478410_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - TECHPRECISION CORPtv478410_ex31-1.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2017

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________________ to __________________

 

Commission File Number: 000-51378

 

TechPrecision Corporation 

(Exact name of registrant as specified in its charter)

 

Delaware   51-0539828
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

1 Bella Drive    
Westminster, MA   01473
(Address of principal executive offices)   (Zip Code)
     
Registrant’s telephone number, including area code   (978) 874-0591 

  

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

x Yes ¨ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    

x Yes ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨     Accelerated filer   ¨
Non-accelerated filer     ¨ (Do not check if a smaller reporting company)   Smaller reporting company    x
Emerging growth company    ¨        

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

¨ Yes x No

 

The number of shares outstanding of the registrant’s common stock as of November 7, 2017 was 28,824,593.  

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
PART I.  FINANCIAL INFORMATION 2
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) 2
  CONDENSED CONSOLIDATED BALANCE SHEETS 2
  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME 3
  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 4
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
ITEM 4. CONTROLS AND PROCEDURES 18
PART II. OTHER INFORMATION 19
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 6.   EXHIBITS 19
  SIGNATURES 20

 

 

 

1 

 

 

PART I.

ITEM 1. FINANCIAL STATEMENTS

TECHPRECISION CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 

  

September 30,

2017

  

March 31,

2017

 
ASSETS          
Current assets:          
Cash and cash equivalents  $2,489,626   $3,066,156 
Accounts receivable, net   2,175,822    1,870,672 
Costs incurred on uncompleted contracts, in excess of progress billings   3,213,329    2,097,221 
Inventories - raw materials   200,787    141,792 
Other current assets   546,633    422,096 
Total current assets   8,626,197    7,597,937 
Property, plant and equipment, net   5,369,167    4,912,202 
Deferred income taxes   2,364,303    2,871,680 
Other noncurrent assets, net   68,625    100,000 
Total assets  $16,428,292   $15,481,819 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable  $380,318   $365,308 
Accrued expenses   1,008,717    893,415 
Billings on uncompleted contracts, in excess of related costs   827,573    642,831 
Current portion of long-term debt   742,292    717,481 
Total current liabilities   2,958,900    2,619,035 
Long-term debt, including capital leases   4,546,078    4,874,721 
Noncurrent accrued expenses   8,064    17,742 
Commitments and contingent liabilities (see Note 14)          
Stockholders’ Equity:          
Common stock - par value $.0001 per share, 90,000,000 shares authorized, 28,824,593 shares issued and outstanding at September 30 and March 31, 2017   2,882    2,882 
Additional paid in capital   8,409,517    8,258,820 
Accumulated other comprehensive income   20,872    19,328 
Retained earnings (accumulated deficit)   481,979    (310,709)
Total stockholders’ equity   8,915,250    7,970,321 
Total liabilities and stockholders’ equity  $16,428,292   $15,481,819 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

2 

 

 

TECHPRECISION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Unaudited)

 

 

   Three Months Ended
September 30,
   Six Months Ended
September 30,
 
   2017   2016   2017   2016 
Net sales  $4,588,894   $3,656,163   $10,419,280   $8,300,968 
Cost of sales   3,155,893    2,182,547    7,245,692    5,291,959 
Gross profit   1,433,001    1,473,616    3,173,588    3,009,009 
Selling, general and administrative   720,341    739,585    1,640,100    1,627,763 
Income from operations   712,660    734,031    1,533,488    1,381,246 
Other income   1,456    6,824    1,547    7,575 
Interest expense   (100,414)   (183,268)   (209,196)   (376,478)
Total other expense, net   (98,958)   (176,444)   (207,649)   (368,903)
Income before income taxes   613,702    557,587    1,325,839    1,012,343 
Income tax expense   245,516    11,505    533,151    20,958 
Net income  $368,186   $546,082   $792,688   $991,385 
Other comprehensive income (loss), before tax:                    
Foreign currency translation adjustments  $1,854   $(281)  $2,586   $(1,223)
Other comprehensive income (loss), before tax   1,854    (281)   2,586    (1,223)
Income tax expense on other comprehensive income   746    --    1,042    -- 
Other comprehensive income (loss), net of tax  $1,108   $(281)  $1,544   $(1,223)
Comprehensive income  $369,294   $545,801   $794,232   $990,162 
Net income per share (basic)  $0.01   $0.02   $0.03   $0.04 
Net income per share (diluted)  $0.01   $0.02   $0.03   $0.04 
Weighted average number of shares outstanding (basic)   28,824,593    27,324,593    28,824,593    27,324,593 
Weighted average number of shares outstanding (diluted)   29,730,456    28,020,795    29,751,219    27,936,098 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

3 

 

 

TECHPRECISION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

   Six Months Ended
September 30,
 
   2017   2016 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $792,688   $991,385 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation   351,422    353,488 
Amortization of debt issue costs   37,038    90,049 
Stock based compensation expense   150,697    22,910 
Change in contract losses   29,139    (40,532)
Deferred income taxes   507,376    -- 
Changes in operating assets and liabilities:          
Accounts receivable   (305,150)   1,118,019 
Costs on uncompleted contracts, in excess of progress billings   (1,116,108)   240,431 
Inventories – raw materials   (58,995)   3,005 
Other current assets   (124,537)   152,051 
Other noncurrent assets and liabilities   (9,678)   (819)
Accounts payable   15,010    (406,463)
Accrued expenses   88,319    (170,369)
Accrued taxes   --    20,958 
Billings on uncompleted contracts, in excess of related costs   184,742    (945,358)
   Net cash provided by operating activities   541,963    1,428,755 
CASH FLOWS FROM INVESTING ACTIVITIES          
Proceeds from sale of equipment   80,000    -- 
Deposit for fixed assets   (36,987)   -- 
Purchases of property, plant and equipment   (808,386)   (114,856)
   Net cash used in investing activities   (765,373)   (114,856)
CASH FLOWS FROM FINANCING ACTIVITIES          
Deferred loan costs   --    (145,995)
Borrowings of long-term debt   --    3,011,648 
Repayment of long-term debt   (352,509)   (2,673,432)
   Net cash (used in) provided by financing activities   (352,509)   192,221 
Effect of exchange rate on cash and cash equivalents   (611)   42 
Net (decrease) increase in cash and cash equivalents   (576,530)   1,506,162 
Cash and cash equivalents, beginning of period  $3,066,156   $1,332,166 
Cash and cash equivalents, end of period  $2,489,626   $2,838,328 
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION          
Cash paid during the period for:          
Interest  $185,415   $479,179 
Income taxes  $30,000   $20,000 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

4 

 

  

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - DESCRIPTION OF BUSINESS

 

TechPrecision Corporation, or TechPrecision, is the parent company of Ranor, Inc., or Ranor, a Delaware corporation and Wuxi Critical Mechanical Components Co., Ltd., or WCMC, a wholly foreign owned enterprise (WFOE) organized under the laws of the People’s Republic of China. TechPrecision, WCMC and Ranor are collectively referred to as the “Company”, “we”, “us” or “our”.

 

We manufacture large scale metal fabricated and machined precision components and equipment. These products are used in a variety of markets including defense and aerospace, nuclear, medical and precision industrial.

 

NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of TechPrecision, Ranor and WCMC. Intercompany transactions and balances have been eliminated in consolidation. The accompanying condensed consolidated balance sheets as of September 30, 2017 and March 31, 2017, the condensed consolidated statements of operations and comprehensive income for the three and six months ended September 30, 2017 and 2016, and the condensed consolidated statements of cash flows for the six months ended September 30, 2017 and 2016 are unaudited, but, in the opinion of management, include all adjustments that are necessary for a fair presentation of our financial statements for interim periods in accordance with U.S. Generally Accepted Accounting Principles, or U.S. GAAP. All adjustments are of a normal, recurring nature, except as otherwise disclosed. The results of operations for an interim period are not necessarily indicative of the results of operations to be expected for the fiscal year.

 

The Notes to Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC, for Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited financial statements and related notes should be read in conjunction with our consolidated financial statements included with our Annual Report on Form 10-K for the fiscal year ended March 31, 2017, or the 2017 Form 10-K, filed with the SEC on June 29, 2017.

 

Significant Accounting Policies

 

Our significant accounting policies are set forth in detail in Note 2 to the 2017 Form 10-K.

 

NOTE 3 - NEW ACCOUNTING STANDARDS

 

New Accounting Standards Recently Adopted

 

In March 2016, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update, or ASU, 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting, or ASU 2016-09, which contains authoritative guidance intended to simplify various aspects to how share-based payment awards to employees are accounted for and presented in the financial statements. We adopted this guidance as of April 1, 2017, on a prospective basis. The guidance eliminates additional paid-in capital pools and allows entities to record tax benefits within income tax expense in the consolidated statement of operations, classify any excess tax benefits within net cash provided by operating activities in the consolidated statement of cash flows, and account for award forfeitures as they occur. The adoption of this new guidance did not have an impact on our financial statements and disclosures.

 

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, or ASU 2015-11. The new guidance defines net realizable value as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This definition is consistent with existing authoritative guidance. We adopted this guidance as of April 1, 2017, on a prospective basis. The adoption did not have an impact on our financial statements and disclosures.

 

Issued Standards Not Yet Adopted

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments, or ASU 2016-15. The new guidance reduces the diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. We are currently evaluating the impact that this guidance will have on our financial statements and disclosures.

 

5 

 

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, the authoritative guidance that changes the criteria for recognizing revenue from a contract with a customer. The new revenue recognition standard replaces existing guidance on revenue recognition, including most industry specific guidance, with a five step model for recognizing and measuring revenue from contracts with customers. The objective of the new standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries and across capital markets.

 

The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. Current practice is primarily a risk and rewards based model, while the new standard introduces the concept of inventory control and satisfaction of performance obligations over time. We are currently assessing the impact that the new revenue recognition guidance may have on our financial statements and disclosures by comparing our current revenue recognition policy with the requirements of the new standard. A review of contracts with our largest customers which represents more than 80% of our revenue is underway, and it is probable that our current practices may no longer be viable for all customers under the new revenue recognition guidance. The guidance also requires a number of disclosures regarding the nature, amount, timing and uncertainty of revenue and the related cash flows.

 

The new guidance can be applied retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with a cumulative effect adjustment to retained earnings for initial application of the guidance at the date of initial adoption (modified retrospective method). The guidance is effective for annual reporting periods beginning on or after December 15, 2017. We plan to adopt the new standard on April 1, 2018.

 

In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, or ASU 2016-20. The amendments in ASU 2016-20 update and affect narrow aspects of the guidance issued in ASU 2014-09. In May 2016, the FASB issued ASU 2016-12, Narrow Scope Improvements and Practical Expedients, which provided revised guidance on certain issues relating to revenue from contracts with customers, including clarification of the objective of the collectability criterion. In March 2016, the FASB issued an amendment to clarify the implementation guidance for principal versus agent considerations and in April 2016 issued a final amendment to clarify the guidance related to identifying performance obligations and the accounting for intellectual property licenses. We are currently evaluating the impact these updates may have on our financial statements and disclosures.

     

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra Entity Transfers of Assets Other Than Inventory, or ASU 2016-16. The guidance in ASU 2016-16 requires companies to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact that this guidance will have on our financial statements and disclosures.

 

In February 2016, the FASB issued ASU 2016-02, Leases, or ASU 2016-02. Under this amendment, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) a lease liability which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early application permitted. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently evaluating the impact ASU 2016-02 will have on our financial statements and disclosures.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, or ASU 2017-09. ASU 2017-09 provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017. We are currently evaluating the impact ASU 2017-09 will have on our financial statements and disclosures.

 

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT, NET

 

Property, plant and equipment, net consisted of the following as of: 

 

   September 30, 2017   March 31, 2017 
Land  $110,113   $110,113 
Building and improvements   3,252,908    3,252,908 
Machinery equipment, furniture and fixtures   9,896,917    8,601,199 
Construction in progress   --    487,331 
Equipment under capital leases   54,376    54,376 
Total property, plant and equipment   13,314,314    12,505,927 
Less: accumulated depreciation   (7,945,147)   (7,593,725)
Total property, plant and equipment, net  $5,369,167   $4,912,202 

 

 

6 

 

 

Depreciation expense, which includes amortization of equipment under capital leases, for the three and six months ended September 30, 2017 and 2016 was $179,808 and $351,422, and $177,438 and $353,488, respectively.

 

Capitalized leases were $54,376 at the end of September 30, 2017 and March 31, 2017. Accumulated depreciation on all property, plant and equipment accounted for as capitalized leases at September 30, 2017 and March 31, 2017, was $8,156 and $2,719, respectively.

 

We capitalize interest during the active construction period of major capital projects. Capitalized interest is added to the cost of the underlying assets and is amortized over the useful lives of the assets. Capitalized interest for the three and six months ended September 30, 2017 was $8,590 and $13,257, respectively.

 

NOTE 5 - COSTS INCURRED ON UNCOMPLETED CONTRACTS

 

The following table sets forth information as to costs incurred on uncompleted contracts as of:

 

   September 30, 2017   March 31, 2017 
Cost incurred on uncompleted contracts, beginning balance  $5,538,815   $5,491,605 
Total cost incurred on contracts during the year   6,351,959    12,501,752 
Less: cost of sales, during the year   (7,245,692)   (12,454,542)
Cost incurred on uncompleted contracts, ending balance  $4,645,082   $5,538,815 
Billings on uncompleted contracts, beginning balance  $3,441,594   $3,095,963 
Total billings incurred on contracts, during the year   8,409,439    18,896,305 
Less: Contracts recognized as revenue, during the year   (10,419,280)   (18,550,674)
Billings on uncompleted contracts, ending balance  $1,431,753   $3,441,594 
Cost incurred on uncompleted contracts, ending balance  $4,645,082   $5,538,815 
Billings on uncompleted contracts, ending balance   1,431,753    3,441,594 
Costs incurred on uncompleted contracts, in excess of progress billings  $3,213,329   $2,097,221 

 

Contract costs consist primarily of labor and materials and related overhead, to the extent that such costs are recoverable. Revenues associated with these contracts are recorded only when the amount of recovery can be estimated reliably and realization is probable. As of September 30, 2017 and March 31, 2017, we had billings in excess of costs totaling $827,573 and $642,831, respectively. Billings on uncompleted contracts represent customer prepayments on their contracts and completed contracts for which all revenue recognition criteria were not met.   We also receive advance billings and deposits representing down payments for acquisition of materials and progress payments on contracts. The agreements with our customers allow us to offset the progress payments against the costs incurred.

 

NOTE 6 - OTHER CURRENT ASSETS

 

Other current assets included the following as of:

 

   September 30, 2017   March 31, 2017 
Payments advanced to suppliers  $190,163   $107,591 
Prepaid insurance   226,174    229,132 
Other   130,296    85,373 
Total  $546,633   $422,096 

 

NOTE 7 - OTHER NONCURRENT ASSETS

 

Other noncurrent assets included the following as of:

 

   September 30, 2017   March 31, 2017 
Assets held for sale  $20,000   $100,000 
Deposit for fixed assets   36,987    -- 
Prepaid loan costs   11,638    -- 
Total  $68,625   $100,000 

 

7 

 

 

At September 30, 2017 and March 31, 2017, we classified certain machinery and equipment of $20,000 and $100,000, respectively, to assets held for sale. This amount approximates fair value net of selling costs. We expect to sell the remaining fixed asset held for sale before the end of fiscal 2018. In fiscal 2017, we wrote down certain machinery held for sale and subsequently sold the machinery in May 2017.

 

NOTE 8 - ACCRUED EXPENSES

 

Accrued expenses included the following as of:  

 

   September 30, 2017   March 31, 2017 
Accrued compensation  $551,128   $568,766 
Provision for contract losses   177,838    148,699 
Accrued professional fees   141,139    142,648 
Accrued project costs   97,525    -- 
Other   41,087    33,302 
Total  $1,008,717   $893,415 

 

Accrued compensation includes amounts for executive bonuses, payroll and vacation and holiday pay. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in the provision are recorded in cost of sales. 

 

NOTE 9 - DEBT

 

Long-term debt included the following as of: 

 

   September 30, 2017   March 31, 2017 
Commerce Term Loan due January 2022  $2,788,161   $2,828,844 
People’s Equipment Loan Facility due April 2021   2,584,086    2,884,982 
Obligations under capital leases   56,423    67,353 
Total debt  $5,428,670   $5,781,179 
Less: debt issue costs unamortized  $140,300   $188,977 
Total debt, net  $5,288,370   $5,592,202 
Less: Current portion of long-term debt  $742,292   $717,481 
Total long-term debt, net  $4,546,078   $4,874,721 

 

Commerce Bank & Trust Company Loan Facility

 

On December 21, 2016, TechPrecision, through Ranor, closed on a Loan Agreement, or the Commerce Loan Agreement, with Commerce Bank & Trust Company, or Commerce.  Pursuant to the Commerce Loan Agreement, Commerce made a term loan to Ranor in the amount of $2,850,000, or the Term Loan, and made available to Ranor a revolving line of credit in the amount of $1,000,000, or the Revolver Loan, and together with the Term Loan, the Commerce Loans.  The Commerce Loans are secured by a first lien on all personal and real property of Ranor.  Starting on January 20, 2017, payments on the Term Loan began and will be made in 60 monthly installments of $19,260 each, inclusive of interest at a fixed rate of 5.21% per annum, with all outstanding principal and accrued interest due and payable on December 20, 2021.  A prepayment penalty will apply during the loan term but will not apply if a prepayment is made from either casualty loss insurance proceeds or a condemnation award applicable to any collateral or if a full prepayment is made during the 45-day period immediately preceding the maturity date.  Advances under the Revolver Loan will be subject to a borrowing base equal to the lesser of (A) $1,000,000 and (B) the sum of (i) 80% of eligible accounts receivable, and (ii) the lesser of (a) 25% of eligible raw material inventory and (b) $250,000.  Advances made under the Revolver Loan bear interest at a variable rate equal to the one-month LIBOR plus 275 basis points.  Interest-only payments on advances made under the Revolver Loan will be payable monthly in arrears.  The Revolver Loan will mature on December 21, 2018.  Ranor’s obligations under the Commerce Loan Agreement are guaranteed by TechPrecision. There were no amounts outstanding under the Revolver Loan at September 30, 2017 and March 31, 2017. Unamortized debt issue costs for the Term Loan at September 30, 2017 were $52,594.

 

The Commerce Loan Agreement contains a covenant whereby the Company is required to maintain a debt service coverage ratio, or DSCR, of at least 1.2 to 1.0 during the term of the Commerce Loans.  The DSCR will be measured at the end of each fiscal quarter of the Company.  Pursuant to the Commerce Loan Agreement, Ranor also covenants (a) to cause its balance sheet leverage to be less than or equal to 3.00 to 1.00 for the fiscal year ending March 31, 2018, and less than or equal to 2.50 to 1.00 for the fiscal year ending March 31, 2019 and each fiscal year end thereafter, and (b) that its annual capital expenditures shall not exceed $2,500,000 for the fiscal year ending March 31, 2018, $2,500,000 for the fiscal year ended March 31, 2019, and $1,500,000 for the fiscal year ending March 31, 2020 and each fiscal year end thereafter.  The Commerce Loan Agreement contains an additional covenant whereby Ranor is required to maintain a loan-to-value ratio of not greater than 0.75 to 1.00, to be measured by appraisal not more frequently than one time during each 365-day period. At September 30, 2017 and March 31, 2017, the DSCR was 3.07 to 1.00 and 3.40 to 1.00, respectively. At March 31, 2017, the leverage ratio was 1.01 to 1.00.

 

8 

 

  

People’s Capital and Leasing Corp. Equipment Loan Facility

 

On April 26, 2016, TechPrecision, through Ranor, executed and closed a Master Loan and Security Agreement, or the MLSA, with People’s Capital and Leasing Corp., or People’s.  Loan proceeds were disbursed to Ranor on April 26, 2016.  Pursuant to the MLSA, People’s loaned $3,011,648 to Ranor, or the People’s Loan. The People’s Loan is secured by a first lien on certain machinery and equipment of Ranor, or 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.  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. At March 31, 2017, the DSCR was 2.86 to 1.00. 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. Unamortized debt issue costs at September 30, 2017 were $87,706.

 

Capital Lease

 

We entered into a new capital lease in January 2017 for certain office equipment. The lease term is for 60 months, bears interest at 7.9% per annum and requires monthly payments of principal and interest of $1,169. Concurrently, in January 2017 we retired certain office equipment under an existing capital lease which was amended in 2014. The revised lease term will expire in March 2018 and the required monthly payments of principal and interest will be $1,187 through October 2017, and then $720 until the lease payment expires in September 2018.

 

Collateral securing the above obligations comprises all personal and real property of TechPrecision and Ranor, including cash, accounts receivable, inventories, equipment, financial and intangible assets.

 

NOTE 10 - INCOME TAXES

 

We account for income taxes under the provisions of FASB ASC 740, Income Taxes.   The tax provision for interim periods is determined using the estimated annual effective consolidated tax rate, based on the current estimate of full-year earnings before taxes, adjusted for the impact of discrete quarterly items. The provision for income taxes was $533,151 and $20,958 and the effective tax rate was 40.2% and 2.1%, for the six months ended September 30, 2017 and 2016, respectively. The low effective tax rate for the six months ended September 30, 2016 was a result of net operating loss utilization and the associated reduction in the valuation allowance which had been provided for this deferred tax asset. The tax provision for the six months ended September 30, 2016 was an accrual for the alternative minimum tax.

 

The valuation allowance on deferred tax assets at September 30, 2017 and March 31, 2017 was approximately $1.5 million. We believe that it is more likely than not that the benefit from certain state and foreign NOL carryforwards and other deferred tax assets will not be realized. In recognition of this risk, we continue to provide a valuation allowance on these items. In the event future taxable income is below management’s estimates or is generated in tax jurisdictions different than projected, the Company could be required to increase the valuation allowance for deferred tax assets. This would result in an increase in the Company’s effective tax rate.

 

We regularly assess the effects of various factors to determine the adequacy of our provision for income taxes. For example, our future effective tax rate would be affected if earnings were lower than anticipated in tax jurisdictions where we have lower statutory rates and higher than anticipated in tax jurisdictions 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. 

 

NOTE 11 - PROFIT SHARING PLAN

 

Ranor has a 401(k) profit sharing plan that covers substantially all Ranor employees who have completed 90 days of service. Ranor retains the option to match employee contributions. The Company’s contributions were $40,850 and $39,653 for the six months ended September 30, 2017 and 2016, respectively.

 

NOTE 12 - STOCK BASED COMPENSATION

 

Our board of directors, upon the recommendation of the previously constituted compensation committee of our board of directors, approved the 2016 TechPrecision Equity Incentive Plan, or the 2016 Plan, on November 10, 2016. Our stockholders approved the 2016 Plan at the Company’s Annual Meeting of Stockholders on December 8, 2016, and it applies to awards granted after that date. The 2016 Plan provides for a share reserve of 5,000,000 shares of common stock.

 

9 

 

  

On April 4, 2017, we granted stock options to members of our board of directors to collectively purchase 200,000 shares of common stock at an exercise price of $0.74 per share, the closing stock market price on the date of grant. The weighted average fair value of the options on the grant date was $0.60 each. Forty percent of the options granted vested immediately. The remaining options will vest equally at the end of each quarter during fiscal 2018, beginning with the second quarter of fiscal 2018. The aggregate fair value of the stock options expensed during the six months ended September 30, 2017 was $84,138.

 

The fair value of the options we grant is estimated using the Black-Scholes option-pricing model based on the closing stock prices at the grant date and the weighted average assumptions specific to the underlying options. Expected volatility assumptions are based on the historical volatility of our common stock. The average dividend yield over the historical period for which volatility was computed is zero. The risk-free interest rate was selected based upon yields of five-year U.S. Treasury issues. We used the simplified method for all grants to estimate the expected life of the option. We assume that stock options will be exercised evenly over the period from vesting until the awards expire. As such, the assumed period for each vesting tranche is computed separately and then averaged together to determine the expected term for the award. The assumptions utilized for options granted during the period were 110.1% for volatility, 1.88% for the risk free interest rate and approximately six years for the expected life. At September 30, 2017, there were 1,803,332 shares available for grant under the 2016 Plan.

 

The following table summarizes information about options for the six months ended September 30, 2017: 

 

   Number Of  

Weighted

Average

  

Aggregate

Intrinsic

  

Weighted

Average

Remaining

Contractual Life

 
   Options   Exercise Price   Value   (in years) 
Outstanding at 3/31/2017   3,002,668   $0.387   $1,246,600    5.72 
Granted   200,000   $0.740    --    -- 
Forfeited   (6,000)  $1.960    --    -- 
Outstanding at 9/30/2017   3,196,668   $0.406   $1,084,600    6.22 
Vested or expected to vest at 9/30/2017   3,196,668   $0.406   $1,084,600    6.22 
Exercisable and vested at 9/30/2017   2,576,668   $0.394   $934,600    6.22 

 

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the closing stock price on the last trading day of the second quarter of fiscal 2018 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2017. This amount changes based on the fair market value of the Company’s common stock.

 

The following table summarizes the status of our stock options outstanding but not vested for the six month period ended September 30, 2017:

 

  

Number of

Options

  

Weighted

Average

Exercise Price

 
Outstanding at 3/31/2017   833,334   $0.266 
Granted   200,000   $0.740 
Vested   (413,334)  $0.208 
Outstanding at 9/30/2017   620,000   $0.458 

 

The total fair value of shares vested during the period was $74,747. Other information relating to stock options outstanding at September 30, 2017 is as follows:

 

Range of Exercise Prices: 

Options

Outstanding

  

Weighted

Average

Remaining

Contractual

Term (in years)

  

Weighted

Average

Exercise Price

  

Options

Exercisable

  

Weighted

Average

Exercise Price

 
$0.01-$1.00   3,021,668    6.92   $0.34    2,401,668   $0.31 
$1.01-$1.96   175,000    2.84   $1.59    175,000   $1.59 
Totals   3,196,668              2,576,668      

 

 

10 

 

 

NOTE 13 - CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

 

We maintain bank account balances, which, at times, may exceed insured limits. We have not experienced any losses with these accounts and believe that we are not exposed to any significant credit risk on cash.

 

At September 30, 2017, there were accounts receivable balances outstanding from two customers comprising 82% of the total receivables balance. The following table sets forth information as to accounts receivable from customers who accounted for more than 10% of our accounts receivable balance as of: 

 

   September 30, 2017   March 31, 2017 
Customer  Dollars   Percent   Dollars   Percent 
A  $1,478,882    68%  $*      *%
B  $308,638    14%  $961,463    51%
C  $*    *%  $406,428    22%
D  $*      *%  $187,410    10%

  

*less than 10% of total

 

We have been dependent in each year on a small number of customers who generate a significant portion of our business, and these customers change from year to year. The following table sets forth information as to net sales from customers who accounted for more than 10% of our net sales in the periods presented:

 

   Three months ended
September 30, 2017
   Three months ended
September 30, 2016
   Six months ended
September 30, 2017
   Six months ended
September 30, 2016
 
Customer  Dollars   Percent   Dollars   Percent   Dollars   Percent   Dollars   Percent 
A  $2,061,276    45%  $383,253    10%  $4,950,432    48%  $*    *%
B  $746,877    16%  $*    *%  $2,330,088    22%  $1,457,222    18%
C  $*    *%  $*    *%  $1,079,832    10%  $ *    *%
D  $*    *%  $1,998,724    55%    *    *%  $3,285,065    40%
E  $*    *%  $*    *%   *    *%  $1,741,084    21%

  

*less than 10% of total

 

NOTE 14 - COMMITMENTS

 

Employment Agreements

 

We have employment agreements with each of our executive officers. Such agreements provide for minimum salary levels, adjusted annually, and incentive bonuses that are payable if specified company goals are attained. The aggregate commitment at September 30, 2017 for future executive salaries during the next twelve months was approximately $0.5 million. The aggregate commitment for the remainder of our employees at September 30, 2017 was approximately $0.3 million for accrued payroll, vacation and holiday pay.

 

NOTE 15 - EARNINGS PER SHARE (EPS)

 

Basic EPS is computed by dividing reported earnings available to stockholders by the weighted average shares outstanding. Diluted EPS also includes the effect of stock options that would be dilutive. The following table provides a reconciliation of the numerators and denominators reflected in the basic and diluted earnings per share computations, as required under FASB ASC 260:

 

   Three months ended
September 30, 2017
   Three months ended
September 30, 2016
   Six months ended
September 30, 2017
   Six months ended
September 30, 2016
 
Basic EPS                    
Net Income  $368,186   $546,082   $792,688   $991,385 
Weighted average shares   28,824,593    27,324,593    28,824,593    27,324,593 
Basic Income per share  $0.01   $0.02   $0.03   $0.04 
Diluted EPS                    
Net Income  $368,186   $546,082   $792,688   $991,385 
Dilutive effect of stock options   905,863    696,202    926,626    611,505 
Diluted weighted average shares   29,730,456    28,020,795    29,751,219    27,936,098 
Diluted Income per share  $0.01   $0.02   $0.03   $0.04 

 

All potential common share equivalents that have an anti-dilutive effect (i.e. those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. For the three and six months ended September 30, 2017, there were 596,668 and 496,668, respectively, of potentially anti-dilutive stock options, none of which were included in the EPS calculations above. For each of the three and six months ended September 30, 2016, there were 428,500 of potentially anti-dilutive stock options, none of which were included in the EPS calculations above.

 

11 

 

 

NOTE 16 – RECLASSIFICATION OF PRIOR YEAR PRESENTATION

 

Certain prior year amounts have been reclassified for consistency with the current year presentation. A reclassification has been made to the condensed consolidated balance sheets for fiscal year ended March 31, 2017, to offset deferred taxes within the same tax jurisdiction. This reclassification had no effect on the reported results of operations or the consolidated statements of cash flows.

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Statement Regarding Forward Looking Disclosure

 

The following discussion of the results of our operations and financial condition should be read in conjunction with our 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. All statements other than statements of current or historical fact contained in this annual report, including statements that express our intentions, plans, objectives, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “should,” “would” and similar expressions are intended to identify forward-looking statements.

 

These statements are based on current expectations, estimates and projections made by management about our business, our industry and other conditions affecting our financial condition, results of operations or business prospects. 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 risks and uncertainties. Factors that could cause such outcomes and results to differ include, but are not limited to:

 

  · our ability to change the composition of our revenues and effectively reduce operating expenses;  
  · the availability of appropriate financing facilities impacting our operations, financial condition and/or liquidity;  
  · 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;  
  · our reliance on a small number of customers for a significant percentage of our business;  
  · competitive pressures in the markets we serve;  
  · changes in the availability or cost of raw materials and energy for our production facilities;  
  · restrictions in our ability to our operate our business due to our outstanding indebtedness;  
  · government regulations and requirements;  
  · pricing and business development difficulties;  
  · our ability to make acquisitions and successfully integrate those acquisitions with our business;  
  · general industry and market conditions and growth rates;  
  · general economic conditions; and  
  · the risks discussed in “Item 1A. Risk Factors” and elsewhere in our 2017 Annual Report on Form 10-K, as well as those described in any other filings which we make with the SEC.
                                 

 

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 precision 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.

  

12 

 

 

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 the 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. Our business is dependent in part on the continuation of governmental programs which require our services and products.

 

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

 

We historically have experienced, and continue to experience, customer concentration. For the six months ended September 30, 2017 and September 30, 2016, our largest customers accounted for approximately 48% and 40% of reported net sales, respectively. Our sales order backlog at September 30, 2017 was approximately $10.8 million compared with a backlog of $15.8 million at March 31, 2017.

 

For the six months ended September 30, 2017, our net sales and net income were $10.4 million and $0.8 million, respectively, compared with net sales and net income of $8.3 and $1.0 million, respectively, for the six months ended September 30, 2016.  Our gross margins for the six months ended September 30, 2017 were 30.5% compared with gross margins of 36.2% in the six months ended September 30, 2016. We generated $0.5 million of cash from operating activities and invested $0.8 million in new machinery and equipment for the six months ended September 30, 2017. We had a cash balance of $2.5 million at September 30, 2017.

 

Critical Accounting Policies

 

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 2017 Form 10-K. There were no significant changes in the critical accounting policies during the six months ended September 30, 2017, nor did we make any changes to our accounting policies that would have changed these critical accounting policies.

 

New Accounting Pronouncements

 

See Note 3 - New Accounting Standards to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of recently adopted new accounting guidance and new accounting guidance not yet adopted.

 

Results of Operations

 

Our results of operations are affected by a number of external factors including the availability of raw materials, commodity prices (particularly steel), macroeconomic factors, including the availability of capital that may be needed by our customers, and political, regulatory and legal conditions in the United States and in foreign markets. Generally, our product mix is made up of short-term contracts with a production timeline of less than twelve months. Units manufactured under the majority of our customer contracts are delivered on time and with a positive gross margin.  Our results of operations are also affected by our success in booking new contracts, the timing of revenue recognition, delays in customer acceptances of our products, delays in deliveries of ordered products and our rate of progress fulfilling obligations under our contracts. A delay in deliveries or cancellations of orders could have an unfavorable impact on liquidity, cause us to have inventories in excess of our short-term needs, and delay our ability to recognize, or prevent us from recognizing, revenue on contracts in our order backlog.

  

Key Performance Indicators

 

While we prepare our financial statements in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, we also utilize and present certain financial measures that are not based on or included in U.S. GAAP. We refer to these as Non-GAAP financial measures.  Please see the section “EBITDA Non-GAAP financial measures” below for further discussion of these financial measures, including the reasons why we use such financial measures and reconciliations of such financial measures to the nearest U.S. GAAP financial measures.

 

13 

 

 

Three Months Ended September 30, 2017 and 2016

 

The following table sets forth information from our Condensed Consolidated Statements of Operations and Comprehensive Income, in dollars and as a percentage of revenue: 

 

   September 30, 2017   September 30, 2016  

Changes Period

Ended

September 30, 2017 to 2016

 
(dollars in thousands)  Amount   Percent   Amount   Percent   Amount   Percent 
Net sales  $4,589    100%  $3,656    100%  $933    26%
Cost of sales   3,156    69%   2,182    60%   974    45%
Gross profit   1,433    31%   1,474    40%   (41)   (3)%
Selling, general and administrative   720    16%   740    20%   (20)   (3)%
Income from operations   713    15%   734    20%   (21)   (3)%
Other income   1    -%   7    -%   (6)   (86)%
Interest expense   (100)   (2)%   (183)   (5)%   83    45%
Total other expense, net   (99)   (2)%   (176)   (5)%   77    44%
Income before income taxes   614    13%   558    15%   56    10%
Income tax expense   246    5%   12    -%   234    nm%
Net income  $368    8%  $546    15%  $(178)   (33)%

nm - not meaningful

 

Net Sales

 

Generally, increases and decreases in net sales reflect changes in product mix as our customers gauge their demand for new components. Our shipments in the three months ended September 30, 2017 included orders for new and repeat business from existing key customers. Customer acceptance and the timing of delivery dates play a significant role as to when we can recognize revenue in any given period. For the three months ended September 30, 2017, net sales increased by $0.9 million, or 26%, to $4.6 million when compared to $3.7 million for the three months ended September 30, 2016.  Net sales in our defense market increased by $0.5 million in the three months ended September 30, 2017 when compared to the three months ended September 30, 2016, primarily on higher shipments of new product components to our largest defense customers.  Net sales in our energy market increased by $0.6 million when compared to the three months ended September 30, 2016, primarily on a higher shipment volume of nuclear plant components. Net sales in our precision industrial market decreased by $0.2 million when compared to the three months ended September 30, 2016 on lower shipments of large scale medical device components.

 

Cost of Sales and Gross Margin

 

Cost of sales consists primarily of raw materials, parts, labor, overhead and subcontracting costs. Our cost of sales for the three months ended September 30, 2017 increased by $1.0 million compared to the three months ended September 30, 2016 on higher sales volume and unabsorbed overhead costs, caused by a time lag between contract deliveries and the startup schedule for new projects. Gross profit decreased by approximately $41,000 for the three months ended September 30, 2017 when compared to the three months ended September 30, 2016.  Gross margin in any reporting period is impacted by the mix of products and services we provide on projects completed within that period. Gross margins were 31.2% and 40.3% for the three months ended September 30, 2017 and 2016, respectively.

 

Selling, General and Administrative Expenses

 

Total SG&A expenses for the three months ended September 30, 2017 decreased by approximately $20,000 compared to the three months ended September 30, 2016, primarily the result of lower expenses for outside advisory services.

  

Other Income (Expense)

 

The following table reflects other income, interest expense and amortization of debt issue costs for the three months ended September 30: 

   2017   2016   $ Change   % Change 
Other income  $1,456   $6,824   $(5,368)   (79)%
Interest expense  $(82,920)  $(114,012)  $31,092    27%
Amortization of debt issue costs  $(17,494)  $(69,256)  $51,762    75%

 

14 

 

 

Interest expense and amortization of debt issue costs for the three months ended September 30, 2017 were lower when compared to the three months ended September 30, 2016. The decrease in interest expense is primarily due to lower interest rates in connection with our debt refinancing transactions completed in fiscal 2017. Amortization of debt issue costs for the three months ended September 30, 2017 decreased when compared to the three months ended September 30, 2016 because of lower debt issue costs in connection with our new debt refinancing transaction completed in fiscal 2017.

 

Income Taxes

 

For the three months ended September 30, 2017 we recorded tax expense of $245,516, compared to tax expense of $11,505 for the three months ended September 30, 2016, an increase of $234,011. The lower tax expense for the three months ended September 30, 2016 was primarily the result of the utilization of net operating losses and the associated reduction in the valuation allowance which had been provided for this deferred tax asset. The three months ended September 30, 2016 tax provision reflects an accrual for the alternative minimum tax.

 

The valuation allowance on deferred tax assets at September 30, 2017 and March 31, 2017 was approximately $1.5 million. We believe that it is more likely than not that the benefit from certain state and foreign NOL carryforwards and other deferred tax assets will not be realized. In recognition of this risk, we continue to provide a valuation allowance on these items. In the event future taxable income is below management’s estimates or is generated in tax jurisdictions different than projected, the Company could be required to increase the valuation allowance for deferred tax assets. This would result in an increase in the Company’s effective tax rate.

 

Net Income

 

As a result of the foregoing, for the three months ended September 30, 2017, our net income was $368,186, or $0.01 per share basic and fully diluted, compared with net income of $546,082, or $0.02 per share basic and fully diluted, for the three months ended September 30, 2016.

 

Six Months Ended September 30, 2017 and 2016

 

The following table sets forth information from our Condensed Consolidated Statements of Operations and Comprehensive Income, in dollars and as a percentage of revenue:  

   September 30, 2017   September 30, 2016  

Changes Period

Ended

September 30, 2017 to 2016

 
(dollars in thousands)  Amount   Percent   Amount   Percent   Amount   Percent 
Net sales  $10,419    100%  $8,301    100%  $2,118    26%
Cost of sales   7,246    69%   5,292    64%   1,954    37%
Gross profit   3,173    31%   3,009    36%   164    5%
Selling, general and administrative   1,640    16%   1,628    20%   12    1%
Income from operations   1,533    15%   1,381    16%   152    11%
Other income   2    -%   7    -%   (5)   (71)%
Interest expense   (209)   (2)%   (376)   (5)%   167    44%
Total other expense, net   (207)   (2)%   (369)   (4)%   162    44%
Income before income taxes   1,326    13%   1,012    12%   314    31%
Income tax expense   533    5%   21    -%   512    nm%
Net income  $793    8%  $991    12%  $(198)   (20)%

nm - not meaningful

 

Net Sales

 

Generally, increases and decreases in net sales reflect changes in product mix as our customers gauge their demand for new product components. Our shipments in the six months ended September 30, 2017 included orders for new and repeat business from existing key customers. Customer acceptance and the timing of delivery dates play a significant role as to when we can recognize revenue in any given period. For the six months ended September 30, 2017, net sales increased by $2.1 million, or 26%, to $10.4 million when compared to $8.3 million for the six months ended September 30, 2016.  Net sales in our defense market increased by $2.5 million in the six months ended September 30, 2017 when compared to the six months ended September 30, 2016, primarily on higher shipments of new product components to one of our largest defense customers.  Net sales in our energy market increased by $1.4 million when compared to the six months ended September 30, 2016, primarily on a higher shipment volume of nuclear plant components. Net sales in our precision industrial market decreased by $1.8 million when compared to the three months ended September 30, 2016 on lower shipments of large scale medical device components.

 

15 

 

 

Cost of Sales and Gross Margin

 

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, 2017 increased by $1.9 million compared to the six months ended September 30, 2016 primarily on higher sales volume, higher estimates for contract losses and higher amounts of unabsorbed overhead. Gross profit increased by $0.2 million for the six months ended September 30, 2017 when compared to the six months ended September 30, 2016.  Gross margin in any reporting period is impacted by the mix of products and services we provide on projects completed within that period. Gross margins were 30.5% and 36.3% for the six months ended September 30, 2017 and 2016, respectively. Lower gross margin for the six months ended September 30, 2017 were the result of higher amounts of unabsorbed overhead costs caused by a time lag between contract deliveries and the startup schedule for new contract projects.

 

Selling, General and Administrative Expenses

 

Total SG&A expenses increased by approximately $12,000 for the six months ended September 30, 2017 compared to the six months ended September 30, 2016, primarily the result of higher share based compensation almost entirely offset by lower outside advisory services.   

 

Other Income (Expense)

 

The following table reflects other income, interest expense and amortization of debt issue costs for the six months ended September 30: 

 

   2017   2016   $ Change   % Change 
Other income  $1,547   $7,575   $(6,028)   (80)%
Interest expense  $(172,158)  $(286,429)  $114,271    40%
Amortization of debt issue costs  $(37,038)  $(90,049)  $53,011    59%

 

Interest expense and amortization of debt issue costs for the six months ended September 30, 2017 were lower when compared to the six months ended September 30, 2016. The decrease in interest expense and is primarily due to lower interest rates in connection with the debt refinancing transactions completed in fiscal 2017. Amortization of debt issue costs in connection with our refinanced debt were also lower for the six months ended September 30, 2017 when compared to the six months ended September 30, 2016.

 

Income Taxes

 

For the six months ended September 30, 2017 we recorded tax expense of $533,151, compared to tax expense of $20,958 for the six months ended September 30, 2016. The lower effective tax rate for the six months ended September 30, 2016 was the result of the utilization of net operating losses and the associated reduction in the valuation allowance which had been provided for this deferred tax asset. The six months ended September 30, 2016 tax provision reflects an accrual for the alternative minimum tax.

 

The valuation allowance on deferred tax assets at September 30, 2017 and March 31, 2017 was approximately $1.5 million. We believe that it is more likely than not that the benefit from certain state and foreign NOL carryforwards and other deferred tax assets will not be realized. In recognition of this risk, we continue to provide a valuation allowance on these items. In the event future taxable income is below management’s estimates or is generated in tax jurisdictions different than projected, the Company could be required to increase the valuation allowance for deferred tax assets. This would result in an increase in the Company’s effective tax rate.

 

Net Income

 

As a result of the foregoing, for the six months ended September 30, 2017, our net income was $792,688, or $0.02 per share basic and fully diluted, compared with net income of $991,385, or $0.04 per share basic and fully diluted, for the six months ended September 30, 2016.

 

EBITDA Non-GAAP Financial Measure

 

To complement our condensed consolidated statements of operations and comprehensive income and condensed consolidated statements of cash flows, we use EBITDA, a non-GAAP financial measure. Net income is the financial measure calculated and presented in accordance with U.S. GAAP that is most directly comparable to EBITDA. We believe EBITDA provides our board of directors, management and investors with a helpful measure for comparing our operating performance with the performance of other companies that have different financing and capital structures or tax rates. We also believe that EBITDA is a measure frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry, and is a measure contained in our debt covenants. However, while we consider EBITDA to be an important measure of operating performance, EBITDA and other non-GAAP financial measures have limitations, and investors should not consider them in isolation or as a substitute for analysis of our results as reported under U.S. GAAP.

 

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We define EBITDA as net income plus interest, income taxes, depreciation and amortization. Net income was $368,168 for the three months ended September 30, 2017, as compared to $546,082 for the three months ended September 30, 2016. EBITDA, a non-GAAP financial measure, was $0.9 million for the three months ended September 30, 2017 and 2016. Net income was $792,688 for the six months ended September 30, 2017, as compared to $991,385 for the six months ended September 30, 2016. EBITDA, a non-GAAP financial measure, was $1.9 million for the six months ended September 30, 2017, as compared to $1.7 million for the six months ended September 30, 2016.

 

The following table provides a reconciliation of EBITDA to net income, the most directly comparable U.S. GAAP measure reported in our condensed consolidated financial statements:

 

(dollars in thousands) 

Three months

ended

September 30,

2017

  

Three months

ended

September 30,

2016

  

Change

Amount

 
Net income  $368   $546   $(178)
Income tax expense   246    12    234 
Interest expense (1)   100    183    (83)
Depreciation   180    177    3 
EBITDA  $894   $918   $(24)

 

(dollars in thousands) 

Six months

ended

September 30,

2017

  

Six months

ended

September 30,

2016

  

Change

Amount

 
Net income  $793   $991   $(198)
Income tax expense   533    21    512 
Interest expense (1)   209    376    (167)
Depreciation   351    353    (2)
EBITDA  $1,886   $1,741   $145 

(1)       Includes amortization of debt issue costs.

 

Liquidity and Capital Resources

 

At September 30, 2017, we had cash and cash equivalents of $2.5 million. Net cash provided by operating activities for the six months ended September 30, 2017 was $0.5 million, compared to net cash provided by operating activities for the six months ended September 30, 2016 of $1.4 million. Net cash used in investing activities was $0.8 million for the six months ended September 30, 2017. At September 30, 2017, we had working capital of $5.7 million as compared with working capital of $5.0 million at March 31, 2017. The table below presents selected liquidity and capital measures as of:

 

(dollars in thousands) 

September 30,

2017

  

March 31,

2017

  

Change

Amount

 
Cash and cash equivalents  $2,490   $3,066   $(576)
Working capital  $5,667   $4,979   $688 
Total debt  $5,429   $5,781   $(352)
Total stockholders’ equity  $8,915   $7,970   $945 

 

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

 

(dollars in thousands) 

September 30,

2017

  

September 30,

2016

  

Change

Amount

 
Cash flows provided by (used in):               
Operating activities  $542   $1,429   $(887)
Investing activities   (765)   (115)   (650)
Financing activities   (353)   192    (545)
Net (decrease) increase in cash  $(576)  $1,506   $(2,082)

  

At September 30, 2017 we were in compliance with all financial covenants contained in all of our debt agreements. 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.

 

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Operating activities

 

Our primary sources of cash are from accounts receivable collections, customer advance payments and project progress payments. Our customers make advance payments and progress payments under the terms of each manufacturing contract. Our cash flows can fluctuate significantly from period to period as the composition of our receivables collections mix changes between advance payments and customer payments made after shipment of finished goods. Cash provided by operations for the six months ended September 30, 2017 was $0.5 million compared with cash provided by operations of $1.4 million for the six months ended September 30, 2016. The six month period ended September 30, 2017 was marked by a change in the customer project mix which resulted in less cash collected from customer advances and progress payments.

 

Investing activities

 

Net cash used in investing activities totaled $0.8 million for the six months ended September 30, 2017. We expended $0.8 million for new factory machinery and equipment, offset in part by $80,000 in proceeds from the sale of certain machinery and equipment.

 

Financing activities

 

For the six months ended September 30, 2017, net cash used in financing activities was $0.4 million of monthly principal payments in connection with our debt obligations. 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 $3.0 million from our MLSA with People's. In connection with the People’s MLSA, $2.7 million of the proceeds were disbursed as payment in full for the principal obligations under our previous Loan and Security Agreement with Utica LeaseCo, LLC. We also paid $145,995 in loan closing costs for our outstanding debt during the six months ended September 30, 2016.

 

All of the above activity resulted in a net decrease in cash of $0.6 million for the six months ended September 30, 2017 compared with an increase in cash of $1.5 million for the six months ended September 30, 2016.

 

Off-Balance Sheet Arrangements

 

We do not currently have, and have not had during the six months ended September 31, 2017, any off-balance sheet assets, liabilities or arrangements.

  

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures.

 

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are controls and procedures that are designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and includes controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

As of the end of the period covered by this report, an evaluation was carried out, 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. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2017, our disclosure controls and procedures were effective at a reasonable assurance level.

 

Inherent Limitations Over Internal Controls

 

The Company’s internal control over financial reporting is designed under the supervision of our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles, or GAAP. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods is subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

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Changes in Internal Control over Financial Reporting

 

For the quarter ended September 30, 2017, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION.

 

Item 1. Legal Proceedings.

 

Class Action Lawsuit

 

There have been no material changes to the legal proceedings discussed in Item 3. "Legal Proceedings," in the 2017 Form 10-K.

 

Item 6. Exhibits.

 

Exhibit No.   Description
 3.1     Certificate of Incorporation of the Registrant (incorporated herein by reference to Exhibit 3.1 to our registration statement on Form SB-2, filed with the Commission on August 28, 2006).

3.2   Amended and Restated By-laws of the Registrant (incorporated herein by reference to Exhibit 3.1 to our Current Report on Form 8-K, filed with the Commission on February 3, 2014).

3.3   Certificate of Designation for Series A Convertible Preferred Stock of the Registrant (incorporated herein by reference to Exhibit 3.1 to our Current Report on Form 8-K, filed with the Commission on March 3, 2006)
3.4   Certificate of Amendment to Certificate of Designation for Series A Convertible Preferred Stock of the Registrant (incorporated herein by reference to Exhibit 3.5 to our Quarterly Report on Form 10-Q, filed with the Commission on November 12, 2009).
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101   The following financial information from this Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at September 30, 2017 and March 31, 2017; (ii) the Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended September 30, 2017 and 2016; (iii) the Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2017 and 2016; and (v) the Notes to the Condensed Consolidated Financial Statements.

 

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    TechPrecision Corporation
     
November 13, 2017 By: /s/ Thomas Sammons
    Thomas Sammons
    Chief Financial Officer
    (principal financial officer)
    (duly authorized officer)

 

 

 

 

 

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