UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 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 |
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $.0001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
| ¨ | Yes | x | No |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
| ¨ | Yes | x | No |
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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 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 aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of September 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $12.7 million.
The number of shares outstanding of the registrant’s common stock as of June 8, 2017 was 28,824,593.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant’s 2017 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year are incorporated by reference in Part III of this Form 10-K, or, in the event that the registrant does not prepare and file such proxy statement within such time period, such information will be provided by an amendment to this report containing the applicable disclosures within 120 days after the close of the fiscal year covered by this report.
TABLE OF CONTENTS
Our Business
We are a manufacturer of precision, large-scale fabricated and machined metal components and systems. We offer a full range of services required to transform raw materials into precision finished products. We sell these finished products to customers in three main industry groups: defense, energy and precision industrial. The finished products are used in a variety of markets including: defense, aerospace, nuclear, medical and precision industrial. Our mission is to be the leading end-to-end service provider to our markets by furnishing custom, fully integrated solutions for complete products that require custom fabrication, precision machining, assembly, integration, inspection, non-destructive evaluation and testing.
We work with our customers to manufacture products in accordance with the customers’ drawings and specifications. Our work complies with specific national and international codes and standards applicable to our industry. We believe that we have earned our reputation through outstanding technical expertise, attention to detail, and a total commitment to quality and excellence in customer service.
About Us
We are a Delaware corporation, organized in 2005 under the name Lounsberry Holdings II, Inc. On February 24, 2006, we acquired all of the issued and outstanding capital stock of our wholly-owned subsidiary Ranor, Inc., or Ranor. Ranor, together with its predecessors, has been in continuous operation since 1956. Since February 24, 2006, our primary business has been the business of Ranor. On March 6, 2006, following the acquisition of Ranor, we changed our corporate name to TechPrecision Corporation. Our acquisition of Ranor was accounted for as a reverse acquisition.
Wuxi Critical Mechanical Components Co., Ltd., or WCMC, a limited company organized under the laws of the People’s Republic of China, or China, located in Wuxi City, Jiangsu Province, China, is our other wholly-owned subsidiary.
Our executive offices are located at 1 Bella Drive, Westminster, Massachusetts 01473, and our telephone number is (978) 874-0591. Our website is www.techprecision.com. Information on our website, or any other website, is not incorporated by reference in this annual report.
References in this annual report to “the Company,” “we,” “us,” “our” and similar words refer to TechPrecision Corporation and its subsidiaries, Ranor and WCMC, unless the context indicates otherwise, while references to “TechPrecision” refer to TechPrecision Corporation and not its subsidiaries.
General
Our manufacturing operations within the United States are situated on approximately 65 acres in North Central Massachusetts. Our 145,000 square foot facility houses state-of-the-art equipment which gives us the capability to manufacture products as large as 100 tons. We offer a full range of services required to transform raw material 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, and manufacturing), quality control (inspection and testing), materials procurement, production control (scheduling, project management and expediting), and final assembly.
All U.S. based manufacturing is done in accordance with our written quality assurance program, which meets specific national codes, 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 customer’s needs, and we have implemented such standards into our manufacturing operations.
Our operations in China are conducted through WCMC. Since 2011, WCMC, through its subcontractors, has historically provided large-scale precision component fabrication and machining solutions. At March 31, 2017, we did not have any open customer orders for WCMC in our backlog. We are evaluating how we will utilize the WCMC entity moving forward.
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Products
We manufacture a wide variety of products pursuant to customer contracts and based on individual customer needs. We also provide manufacturing engineering services to assist customers in optimizing their engineering designs for manufacturing efficiency. We do not design the products we manufacture, but rather manufacture according to “build-to-print” requirements specified by our customers. Accordingly, we do not distribute the products that we manufacture on the open market and we do not market any specific products on an on-going basis. We do not own the intellectual property rights to any proprietary marketed product, and we do not manufacture products in anticipation of orders. Manufacturing operations do not commence on any project before we receive a customer’s purchase order. All contracts cover specific products within the capability of our resources.
Although our focus is to provide long-term integrated solutions to our customers on continuous production programs, our activities include a variety of both custom-based and production-based requirements. The custom-based work is typically either a prototype or unique, one-of-a-kind product. The production-based work is repeat work or a single product with multiple quantity releases.
Changes in market demand for our manufacturing expertise can be significant and sudden and require us to be able to adapt to the collective needs of the customers and industries that we serve. Understanding this dynamic, we have developed the capability to transform our workforce to manufacture products for customers across different industries.
We serve our customers in the defense, aerospace, nuclear, medical and precision industrial markets. Examples of products we have manufactured within such industries during recent years include, but are not limited to custom components for ships and submarines, aerospace equipment, components for nuclear power plants and components for large scale medical systems.
Source of Supply
Our manufacturing operations are partly dependent on the availability of raw materials. Most of our contracts with customers require the use of customer-supplied raw materials in the manufacture of their product. Accordingly, raw material requirements vary with each contract and are dependent upon customer requirements and specifications. We have established relationships with numerous suppliers. When we do buy raw materials, we endeavor to establish alternate sources of material supply to reduce our dependency on any one supplier.
Our projects include the manufacturing of products from various traditional as well as specialty metal alloys. These materials may include, but are not limited to: steel, nickel, monel, inconel, aluminum, stainless steel, and other alloys. Certain of these materials are subject to long-lead time delivery schedules. In the fiscal year ended March 31, 2017, or fiscal 2017, two suppliers accounted for 10% or more of our purchased material. In the fiscal year ended March 31, 2016, or fiscal 2016, no single supplier accounted for 10% or more of our purchased material.
Marketing
While we have significant customer concentration, we endeavor to broaden our customer base as well as the industries we serve. We market to our existing customer base and also initiate contacts with new potential customers through various sources including personal contacts and customer referrals. A significant portion of our business is the result of competitive bidding processes and a significant portion of our business is from contract negotiation. We believe that the reputation we have developed with our current customers represents an important part of our marketing effort.
Requests for quotations received from customers are reviewed to determine the specific requirements and our ability to meet such requirements. Quotations are prepared by estimating the material and labor costs and assessing our current backlog to determine our delivery commitments. Competitive bid quotations are submitted to the customer for review and award of contract. Negotiation bids typically require the submission of additional information to substantiate the quotation. The bidding process can range from several weeks for a competitive bid to several months for a negotiation bid before the customer awards a contract.
Research and Product Development
Many of our customers generate drawings illustrating their projected unit design and technology requirements. Our research and product development activities are limited and focused on delivering robust production solutions to such projected unit design and technology requirements. We follow this product development methodology in all our major product lines. We incurred no expenses for research and development in fiscal 2017 and fiscal 2016.
Principal Customers
A significant portion of our business is generated by a small number of major customers. The balance of our business consists of discrete projects for numerous other customers. As industry and market demand changes, our major customers may also change. Our ten largest customers generated approximately 98% and 96% of our total revenue in fiscal 2017 and fiscal 2016, respectively. Our group of largest customers can change from year to year. However, our largest single customer in fiscal 2017 and fiscal 2016 was the same prime defense contractor and accounted for 41% and 21% of our net sales during fiscal 2017 and fiscal 2016, respectively. Our defense and aerospace customers are engaged in the development, delivery and support of advanced defense, security and aerospace systems. We also serve customers who supply components to the nuclear power industry; and we build components and major assemblies for large scale medical systems being installed at certain medical institutions throughout North America.
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We historically have experienced, and continue to experience, customer concentration. A significant loss of business from our largest customer or a combination of several of our significant customers could result in lower operating profitability and/or operating losses if we are unable to replace such lost revenue from other sources. The revenue derived from all of our customers in the designated industry groups for the fiscal years ended March 31, 2017 and 2016 are displayed in the table below:
| (dollars in thousands) | 2017 | 2016 | ||||||||||||||
| Net Sales | Amount | Percent | Amount | Percent | ||||||||||||
| Defense | $ | 14,466 | 78 | % | $ | 12,260 | 73 | % | ||||||||
| Energy | $ | 1,822 | 10 | % | $ | 3,496 | 21 | % | ||||||||
| Precision Industrial | $ | 2,262 | 12 | % | $ | 1,098 | 6 | % | ||||||||
The following table displays revenue generated by individual customers in specific industry sectors that accounted for 10% or more of our revenue in either fiscal 2017 or fiscal 2016:
| (dollars in thousands) | 2017 | 2016 | ||||||||||||||
| Net Sales | Amount | Percent | Amount | Percent | ||||||||||||
| Defense Customer 1 | $ | 7,516 | 41 | % | $ | 3,519 | 21 | % | ||||||||
| Defense Customer 2 | $ | 2,424 | 13 | % | $ | 2,958 | 18 | % | ||||||||
| Energy Customer 1 | $ | * | * | % | $ | 1,802 | 11 | % | ||||||||
| Precision Industrial Customer 1 | $ | 2,166 | 12 | % | $ | * | * | % | ||||||||
* Revenue from the customer in this market was less than 10% of our total revenue during the period.
At March 31, 2017, we had a backlog of orders totaling approximately $15.8 million. We expect to deliver the backlog over the course of the next two fiscal years. The comparable backlog at March 31, 2016 was $19.8 million. There was no revenue generated by WCMC in fiscal 2017 or fiscal 2016. At March 31, 2017, we did not have any open customer orders for WCMC in our backlog.
Competition
We face competition from both domestic and foreign manufacturers in the manufacture of metal fabricated and machined precision components and equipment. The industry in which we compete is fragmented with no one dominant player. We compete against companies that are both larger and smaller in size and capacity. Some competitors may be better known, have greater resources at their disposal, and have lower production costs. For certain products, being a domestic manufacturer may play a role in determining whether we are awarded a certain contract. For other products, we may be competing against foreign manufacturers who have a lower cost of production. If a contracting party has a relationship with a vendor and is required to place a contract for bids, the preferred vendor may provide or assist in the development of the specification for the product which may be tailored to that vendor’s products. In such event, we would be at a disadvantage in seeking to obtain that contract. We believe that customers focus on such factors as the quality of work, the reputation of the vendor, the perception of the vendor’s ability to meet the required schedule, and price in selecting a vendor for their products.
Government Regulations
Although we have a limited number of contracts with government agencies, a significant portion of our manufacturing services are provided as a subcontractor to prime government contractors. Such prime government contractors are subject to government procurement and acquisition regulations which give the government the right to terminate these contracts for convenience, certain renegotiation rights, and rights of inspection. Any government action which affects our customers who are prime government contractors would affect us.
Because of the nature and use of our products, we are subject to compliance with quality assurance programs, compliance with which is a condition for our ability to bid on government contracts and subcontracts. We believe we are in compliance with all of these programs.
We are also subject to laws and regulations applicable to manufacturing operations, such as federal and state occupational health and safety laws, and environmental laws, which are discussed in more detail below under “Environmental Compliance.” WCMC operates under a business license granted by the appropriate government authorities in China. WCMC must operate under the terms and scope of that license in order to maintain its right to conduct business operations in China.
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Environmental Compliance
We are subject to compliance with U.S. federal, state and local environmental laws and regulations that involve the use, disposal and cleanup of substances regulated by those laws and the filing of reports with environmental agencies, and we are subject to periodic inspections to monitor our compliance. We believe that we are currently in compliance with applicable environmental regulations. As part of our normal business practice we are required to develop and file reports and maintain logbooks that document all environmental issues within our organization. We may engage outside consultants to assist us in keeping current on developments in environmental regulations. Expenditures for environmental compliance purposes during fiscal 2017 and 2016 were not material.
Intellectual Property Rights
Presently, we have no registered intellectual property rights other than certain trademarks for our name and other business and marketing materials. In the course of our business we develop know-how for use in the manufacturing process. Although we have non-disclosure policies in place with respect to our personnel and in our contractual relationships, we cannot assure you that we will be able to protect our intellectual property rights with respect to this know-how.
Personnel
As of March 31, 2017, we had approximately 102 employees, of whom all are full time employees, 23 are salaried and 79 are hourly. None of our employees is represented by a labor union.
Our business, results of operations and financial condition and the industry in which we operate are subject to various risks. We have listed below (not necessarily in order of importance or probability of occurrence) the most significant risk factors applicable to us, but they do not constitute all of the risks that may be applicable to us. New risks may emerge from time to time, and it is not possible for us to predict all potential risks or to assess the likely impact of all risks. More information concerning certain of these risks is contained in other sections of this annual report on Form 10-K, including in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
We face strong competition in our markets.
We face competitive pressures from both domestic and foreign manufacturers in each of the markets we serve. No one company dominates the industry in which we operate. Our competitors include international, national, and local manufacturers, some of whom may have greater financial, manufacturing, marketing and technical resources than we do, or greater penetration in or familiarity with a particular geographic market than we have.
Some competitors may be better known or have greater resources at their disposal, and some may have lower production costs. For certain products, being a domestic manufacturer may play a role in determining whether we are awarded a certain contract. For other products, we may be competing against foreign manufacturers who have a lower cost of production. If a contracting party has a relationship with a vendor and is required to place a contract for bids, the preferred vendor may provide or assist in the development of the specification for the product which may be tailored to that vendor’s products. In such event, we would be at a disadvantage in seeking to obtain that contract. We believe that customers focus on such factors as quality of work, reputation of the vendor, perception of the vendor’s ability to meet the required schedule, and price in selecting a vendor for their products. Some of our customers have moved manufacturing operations or product sourcing overseas, which can negatively impact our sales. To remain competitive, we will need to invest continuously in our manufacturing capabilities and customer service, and we may need to reduce our prices, particularly with respect to customers in industries that are experiencing downturns, which may adversely affect our results of operations. We cannot provide assurance that we will be able to maintain our competitive position in each of the markets that we serve.
Because most of our contracts are individual purchase orders and not long-term agreements, there is no guarantee that we will be able to generate a similar amount of revenue in the future.
We must bid or negotiate each of our contracts separately, and when we complete a contract, there is generally no continuing source of revenue under that contract. As a result, we cannot assure you that we will have a continuing stream of revenue from any contract. Our failure to generate new business on an ongoing basis would materially impair our ability to operate profitably. Because a significant portion of our revenue is derived from services rendered for the defense, aerospace, nuclear, medical and precision industrial markets, our operating results may suffer from conditions affecting these industries, including any budgeting, economic or other trends that have the effect of reducing the requirements for our services.
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Because of our dependence on a limited number of customers, our failure to generate major contracts from a small number of customers may impair our ability to operate profitably.
We have, in the past, 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. For the year ended March 31, 2017 our largest customer accounted for 41% of our revenue and our three largest customers accounted for approximately 65% of our revenue. For the year ended March 31, 2016, our three largest customers accounted for approximately 49% of our revenue, with the largest accounting for 21% of our revenue. In addition, our backlog at March 31, 2017 was $15.8 million, of which 84% was attributable to five customers.
As a result, we may have difficulty operating profitably if there is a default in payment by any of our major customers, we lose an existing order, or we are unable to generate orders from new customers. Furthermore, to the extent that any one customer accounts for a large percentage of our revenue, the loss of that customer could materially affect our ability to operate profitably. Since one customer accounted for 41% of our revenue in the fiscal year ended March 31, 2017, the loss of this customer could have a material adverse effect upon our business and may impair our ability to operate profitably. We anticipate that our dependence on a limited number of customers in any given fiscal year will continue for the foreseeable future. There is always a risk that existing customers will elect not to do business with us in the future or will experience financial difficulties. Furthermore, certain of our customers are early stage companies and are dependent on the equity capital markets to finance their purchase of our products.
As a result, these customers could experience financial difficulties or business reversals, or lose orders or anticipated orders, which would reduce or eliminate the need for the products which they ordered from us, and as a result they could be unable or unwilling to fulfill their contracts with us. There is also a risk that our customers will attempt to impose new or additional requirements on us that reduce the profitability of the orders placed by those customers with us. Further, even if the orders are not changed, these orders may not generate margins equal to our recent historical or targeted results. If we do not develop relationships with new customers, we may not be able to increase, or even maintain, our revenue, and our financial condition, results of operations, business and/or prospects may be materially adversely affected.
Our backlog figures may not accurately predict future sales or recognizable revenue.
We expect to fill most items of backlog within the following 12 months. However, because orders may be rescheduled or canceled and a significant portion of our net sales is derived from a small number of customers, backlog is not necessarily indicative of future sales levels. Moreover, we cannot be sure of when during the future 12-month period we will be able to recognize revenue corresponding to our backlog nor can we be certain that revenues corresponding to our backlog will not fall into periods beyond the 12-month horizon.
Any decrease in the availability, or increase in the cost, of raw materials could materially affect our earnings.
The availability of certain critical raw materials, such as steel, nickel, monel, inconel, aluminum, stainless steel, and other alloys, is subject to factors that are not within our control. At any given time, we may be unable to obtain an adequate supply of these critical raw materials on a timely basis, at prices and other terms acceptable to us, or at all.
If suppliers increase the price of critical raw materials or are unwilling or unable to meet our demand, we may not have alternative sources of supply. In addition, to the extent that we have existing contracts or have quoted prices to customers and accepted customer orders for products prior to purchasing the necessary raw materials, we may be unable to raise the price of products to cover all or part of the increased cost of the raw materials.
The manufacture of some of our products is a complex process and requires long lead times. As a result, we may experience delays or shortages in the supply of raw materials. If we are unable to obtain adequate and timely deliveries of required raw materials, we may be unable to timely manufacture sufficient quantities of products. This could cause us to lose sales, incur additional costs, delay new product introductions or suffer harm to our reputation.
In addition, costs of certain critical raw materials have been volatile due to factors beyond our control. Raw material costs are included in our contracts with customers but in some cases we are exposed to changes in raw material costs from the time purchase orders are placed to when we purchase the raw materials for production. Changes in business conditions could adversely affect our ability to recover rapid increases in raw material costs and may adversely affect our results of operations.
All of our manufacturing and production is situated in a single location in Massachusetts, which increases our exposure to significant disruption to our business as a result of unforeseeable developments in a single geographic area.
We operate a single manufacturing and production facility in Westminster, Massachusetts. It is possible that we could experience prolonged periods of reduced production due to unforeseen catastrophic events occurring in or around our manufacturing and production facility in Massachusetts. As a result, we may be unable to shift manufacturing capabilities to alternate locations, accept materials from suppliers, meet customer shipment needs or address other severe consequences that may be encountered, and we may suffer damage to our reputation. Our financial condition and results of our operations could be materially adversely affected were such events to occur.
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Our manufacturing processes are complex, must constantly be upgraded to remain competitive and depend upon critical, high cost equipment for which there may be only limited or no production alternatives.
It is possible that we could experience prolonged periods of reduced production due to unplanned equipment failures, and we could incur significant repair or replacement costs in the event of those failures. It is also possible that operations could be disrupted due to other unforeseen circumstances such as power outages, explosions, fires, floods, accidents and severe weather conditions.
We must make regular capital investments and changes to our manufacturing processes to lower production costs, improve productivity, manufacture new or improved products and remain competitive. We may not be in a position to take advantage of business opportunities or respond to competitive pressures if we fail to update, replace or make additions to our equipment or our manufacturing processes in a timely manner. The cost to repair or replace much of our equipment or facilities could be significant. We cannot be certain that we will have sufficient internally generated cash or acceptable external financing to make necessary capital expenditures in the future.
Our production facilities are energy-intensive and we rely on third parties to supply energy consumed at our production facilities.
The prices for and availability of electricity, natural gas, oil and other energy resources are subject to volatile market conditions. These market conditions often are affected by political and economic factors beyond our control. Disruptions or lack of availability in the supply of energy resources could temporarily impair our ability to operate our production facility. Further, increases in energy costs, or changes in costs relative to energy costs paid by competitors, may adversely affect our profitability. To the extent that these uncertainties cause suppliers and customers to be more cost sensitive, increased energy prices may have an adverse effect on our results of operations and financial condition.
The dangers inherent in our operations and the limits on insurance coverage could expose us to potentially significant liability costs and materially interfere with the performance of our operations.
The fabrication of large steel structures involves operating hazards that can cause personal injury or loss of life, severe damage to and destruction of property and equipment and suspension of operations. The failure of such structures during and after installation can result in similar injuries and damages. Although we believe that our insurance coverage is adequate, there can be no assurance that we will be able to maintain adequate insurance in the future at rates we consider reasonable or that our insurance coverage will be adequate to cover future claims that may arise. Claims for which we are not fully insured may adversely affect our working capital and profitability. In addition, changes in the insurance industry have generally led to higher insurance costs and decreased availability of coverage. The availability of insurance that covers risks we and our competitors typically insure against may decrease, and the insurance that we are able to obtain may have higher deductibles, higher premiums and more restrictive policy terms.
Our operating results may fluctuate significantly from quarter to quarter. While we recorded a net profit in fiscal 2016 and fiscal 2017, we recorded a net loss in fiscal 2015. We cannot be certain that we will maintain profitability in the future.
Our operating results historically have been difficult to predict and have at times significantly fluctuated from quarter to quarter due to a variety of factors, many of which are outside of our control. As a result of these factors, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our operating expenses do not always vary directly with revenue and may be difficult to adjust in the short term. As a result, if revenue for a particular quarter is below our expectations, we may not be able to proportionately reduce operating expenses for that quarter, and therefore such a revenue shortfall would have a disproportionate effect on our operating results for that quarter.
Demand in our end-use markets can be cyclical, impacting the demand for the products we produce.
Demand in our end-use markets, including companies in the defense, aerospace, industrial, and nuclear industries, can be cyclical in nature and sensitive to general economic conditions, competitive influences and fluctuations in inventory levels throughout the supply chain. Our sales are sensitive to the market conditions present in the industries in which the ultimate consumers of our products operate, which in some cases have been highly cyclical and subject to substantial downturns.
As a result of the cyclical nature of these markets, we have experienced, and in the future we may experience, significant fluctuations in our sales and results of operations with respect to a substantial portion of our total product offering, and such fluctuations could be material and adverse to our overall financial condition, results of operations and liquidity.
We could be adversely affected by reductions in defense spending.
Because certain of our products are used in a variety of military applications, including ships and submarines, we derive a significant portion of our revenue from the defense industry. In fiscal 2017, 78% of our revenue was derived from customers in the defense industry, and in fiscal 2016, 73% of our revenue was derived from customers in the defense industry. Although many of the programs under which we sell products to prime U.S. government contractors extend several years, they are subject to annual funding through congressional appropriations. Changes in military strategy and priorities, or reductions in defense spending, may affect current and future funding of these programs and could reduce the demand for our products, which could adversely affect our financial position, results of operations and cash flows.
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Failure to obtain and retain skilled technical personnel could adversely affect our operations.
Our production facilities require skilled personnel to operate and provide technical services and support for our business. Competition for the personnel required for our business intensifies as activity increases. In periods of high utilization, it may become more difficult to find and retain qualified individuals, and there can be no assurance that we will be successful in attracting and retaining qualified personnel to fulfill our current or future needs. This could increase our costs or have other adverse effects on our operations.
The extensive environmental, health and safety regulatory regimes applicable to our manufacturing operations create potential exposure to significant liabilities.
The nature of our manufacturing business subjects our operations to numerous and varied federal, state, local and international laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health. Failure to comply with these laws and regulations, or with the permits required for our operations, could result in fines or civil or criminal sanctions, third party claims for property damage or personal injury, and investigation and cleanup costs. Potentially significant expenditures could be required in order to comply with environmental laws that may be adopted or imposed in the future.
We have used, and currently use, certain substances that are considered hazardous, extremely hazardous or toxic under worker safety and health laws and regulations. Although we implement controls and procedures designed to reduce continuing risk of adverse impacts and health and safety issues, we could incur substantial cleanup costs, fines and civil or criminal sanctions, and third party property damage or personal injury claims as a result of violations, non-compliance or liabilities under these regulatory regimes.
As a manufacturing business, we also must comply with federal and state environmental laws and regulations which relate to the manner in which we store and dispose of materials and the reports that we are required to file. We cannot assure you that we will not incur additional costs to maintain compliance with environmental laws and regulations or that we will not incur significant penalties for failure to be in compliance.
We are subject to regulations related to conflict minerals which could adversely impact our business.
We are subject to SEC rules regarding disclosure of the use of tin, tantalum, tungsten, gold and certain other minerals, known as conflict minerals, in products manufactured by public companies. These rules require that public companies conduct due diligence to determine whether such minerals originated from the Democratic Republic of Congo, or the DRC, or an adjoining country and whether such minerals helped finance the armed conflict in the DRC. These rules require ongoing due diligence efforts, along with annual conflict minerals reports. There are costs associated with complying with these disclosure requirements, including costs to determine the origin of conflict minerals used in our products.
In addition, these rules could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers offering conflict-free minerals, we cannot be sure that we will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices. Also, we may face reputational challenges if the due diligence procedures we implement do not enable us to verify the origins for all conflict minerals or to determine that such minerals are DRC conflict-free. We may also encounter challenges to satisfy customers that may require all of the components of products purchased to be certified as DRC conflict-free because our supply chain is complex. If we are not able to meet customer requirements, customers may choose to disqualify us as a supplier.
We currently do not use any conflict minerals in the production of our products, but from time to time we may receive a customer order necessitating the use of conflict minerals. In the event we produce any products utilizing conflict minerals, we will be required to comply with the rules discussed above.
Changes in delivery schedules and order specifications may affect our revenue stream.
Although we perform manufacturing services pursuant to orders placed by our customers, we have in the past experienced delays in the scheduling and changes in the specification of our products. These changes may result from a number of factors, including a determination by the customer that the product specifications need to be changed after receipt of an initial product or prototype. As a result of these changes, we may suffer a delay in the recognition of revenue from projects and may incur contract losses. We cannot assure you that our results of operations will not be affected in the future by delays or changes in specifications or that we will ever be able to recoup revenue which was lost as a result of the delays or changes. Further, if we cannot allocate our personnel to a different project, we will continue to incur expenses relating to the initial project, including labor and overhead. Thus, if orders are postponed, our results of operations would be impacted by our need to maintain staffing and other expense generating aspects of production for the postponed projects, even though they were not fully utilized, and revenue associated with the project will not be recognized, during this period. We cannot assure that our operating results will not decline in future periods as a result of changes in customers’ orders.
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Negative economic conditions may adversely impact the demand for our services and the ability of our customers to meet their obligations to us on a timely basis. Any disputes with customers could also have an adverse impact on our income and cash flows.
Negative economic conditions, including tightening of credit in financial markets, may lead businesses to postpone spending, which may impact our customers, causing them to cancel, decrease or delay their existing and future orders with us. Declines in economic conditions may further impact the ability of our customers to meet their obligations to us on a timely basis. If customers are unable to meet their obligations to us on a timely basis, it could adversely impact the realization of receivables, the valuation of inventories and the valuation of long lived assets. Additionally, we may be negatively affected by contractual disputes with customers, which could have an adverse impact on our income and cash flows.
If our customers successfully assert product liability claims against us due to defects in our products, our operating results may suffer and our reputation may be harmed.
Due to the circumstances under which many of our products are used and the fact that some of our products are relied upon by our customers in their facilities or operations, we face an inherent risk of exposure to claims in the event that the failure, use or misuse of our products results, or is alleged to result, in bodily injury, property damage or economic loss. We have been subject to claims in the past, and we may be subject to claims in the future. A successful product liability claim or series of claims against us, or a significant warranty claim or series of claims against us could materially decrease our liquidity and impair our financial condition.
Our business may be impacted by external factors that we may not be able to control.
War, civil conflict, terrorism, natural disasters and public health issues including domestic or international pandemic have caused and could cause damage or disruption to domestic or international commerce by creating economic or political uncertainties. Additionally, the volatility in the financial markets and disruptions or downturns in other areas of the global or U.S. economies could negatively impact our business. These events could result in a decrease in demand for our products, make it difficult or impossible to deliver orders to customers or receive materials from suppliers, affect the availability or pricing of energy sources or result in other severe consequences that may or may not be predictable. As a result, our business, financial condition and results of operations could be materially adversely affected.
We maintain a substantial amount of outstanding indebtedness, which could impair our ability to operate our business and react to changes in our business, remain in compliance with debt covenants and make payments on our debt.
Our level of indebtedness could have important consequences, including, without limitation:
| · | increasing our vulnerability to general economic and industry conditions because our debt payment obligations may limit our ability to use our cash to respond to or defend against changes in the industry or the economy; |
| · | requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities; |
| · | limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; |
| · | limiting our ability to pursue our growth strategy, including restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; |
| · | placing us at a disadvantage compared to our competitors who are less leveraged and may be better able to use their cash flow to fund competitive responses to changing industry, market or economic conditions; and |
| · | making us more vulnerable in the event of a downturn in our business, our industry or the economy in general. |
In addition, our current credit facilities contain, and any future credit facilities will likely contain, covenants and other provisions that restrict our operations. These restrictive covenants and provisions could limit our ability to obtain future financings, make needed capital expenditures, withstand a future downturn in our business, or the economy in general, or otherwise conduct necessary corporate activities, and may prevent us from taking advantage of business opportunities that arise in the future.
If we refinance our credit facilities, we cannot guarantee that any new credit facility will not contain similar covenants and restrictions.
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Any deterioration or disruption of the credit and capital markets may adversely affect our access to sources of funding.
Disruptions in the credit markets have severely restricted access to capital for companies. When credit markets deteriorate or are disrupted, our ability to incur additional indebtedness to fund a portion of our working capital needs and other general corporate purposes, or to refinance maturing obligations as they become due, may be constrained. This risk could be exacerbated by future deterioration in the Company’s credit ratings. In addition, if the counterparty backing our existing credit facilities were unable to perform on its commitments, our liquidity could be impacted, which could adversely affect funding of working capital requirements and other general corporate purposes. In the event that we need to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time, if at all. Our inability to obtain financing on terms and within a time acceptable to us could have an adverse impact on our operations, financial condition, and liquidity.
Our common stock is quoted on the OTC Markets which may have an unfavorable impact on our stock price and liquidity.
Our common stock is quoted on the OTC Markets. The OTC Markets is a significantly more limited market than the New York Stock Exchange or NASDAQ. The quotation of our shares on the OTC Markets may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future.
Our stock price may fluctuate significantly.
The stock market can experience significant volatility, and the volatility of stocks often does not relate to the operating performance of the companies represented by the stock. The market price of our common stock could be subject to significant fluctuations because of general market conditions and because of factors specifically related to our businesses.
Factors that could cause volatility in the market price of our common stock include market conditions affecting our customers’ businesses, including the level of mergers and acquisitions activity, and actual and anticipated fluctuations in our quarterly operating results, rumors relating to us or our competitors, actions of stockholders, including sales of shares by our directors and executive officers, additions or departures of key personnel, and developments concerning current or future strategic alliances or acquisitions.
These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock at a profit and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, even if the lawsuit is without merit, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.
The issuance of shares of our common stock as compensation may dilute the value of existing stockholders and may affect the market price of our stock.
We may use, and have in the past used, stock options, stock grants and other equity-based incentives to provide motivation and compensation to our directors, officers, employees and key independent consultants. The award of any such incentives will result in immediate and potentially substantial dilution to our existing stockholders and could result in a decline in the value of our stock price. The exercise of these options and the sale of stock issued upon such exercise or pursuant to stock grants may have an adverse effect upon the price of our stock.
We may be subject to penny stock regulations and restrictions and you may have difficulty selling shares of our common stock.
The SEC has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. Our common stock is a “penny stock” and is subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market, thus possibly making it more difficult for us to raise additional capital.
For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.
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There can be no assurance that our common stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.
Trading volume of our common stock has fluctuated from time to time and is typically low, which may make it difficult for investors to sell their shares at times and prices that investors feel are appropriate.
To date, the trading volume of our common stock has fluctuated, and there is typically a low volume of trading in our common stock. Generally, lower trading volumes adversely affect the liquidity of our common stock, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and reduction in security analysts’ and the media’s coverage of us. This may result in lower prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid and asked prices for our common stock.
Because of our cash requirements and restrictions in our debt agreements, we may be unable to pay dividends.
In view of the cash requirements of our business, we expect to use any cash flow generated by our business to finance our operations and growth and to service our indebtedness. Further, we are subject to certain affirmative and negative covenants under our debt agreements which restrict our ability to declare or pay any dividend or other distribution on equity, purchase or retire any equity, or alter our capital structure.
The rights of the holders of our common stock may be impaired by the potential issuance of preferred stock.
Our certificate of incorporation gives our board of directors the right to create new series of preferred stock. As a result, the board of directors may, without stockholder approval, issue preferred stock with voting, dividend, conversion, liquidation or other rights that are superior to the rights associated with our common stock, which could adversely affect the voting power and equity interest of the holders of our common stock. Preferred stock, which could be issued with the right to more than one vote per share, could be utilized as a method of discouraging, delaying or preventing a change of control. The possible impact on takeover attempts could adversely affect the price of our common stock.
If securities analysts do not publish research or reports about our business, if they issue unfavorable commentary or downgrade their rating on our common stock, or if we fail to meet projections and estimates of earnings developed by such analysts, the price of our common stock could decline.
The trading market for our common stock will rely in part on the research and reports that securities analysts publish about us and our business. The price of our common stock could decline if one or more analysts downgrade their rating on our common stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.
In addition, although we do not make projections relating to our future operating results, our operating results may fall below the expectations of securities analysts and investors. In this event, the market price of our common stock would likely be adversely affected.
We are limited by our inability to use a short form registration statement on Form S-3, which may affect our ability to access the capital markets, if needed.
A Registration Statement on Form S-3 permits an eligible issuer to incorporate by reference its past and future filings and reports made under the Securities Exchange Act of 1934, as amended, or the Exchange Act. In addition, Form S-3 enables eligible issuers to conduct primary offerings "off the shelf" under Rule 415 of the Securities Act of 1933, as amended, or the Securities Act. The shelf registration process under Form S-3 combined with the ability to incorporate information on a forward basis, allows issuers to avoid additional delays and interruptions in the offering process and to access the capital markets in a more expeditious and efficient manner than raising capital in a standard offering on Form S-1.
To be eligible to use Form S-3 for a registered offering of our securities to investors, either (1) the aggregate market value of our common stock held by non-affiliates would have to exceed $75 million or (2) our common stock would have to be listed and registered on a national securities exchange. Currently, we do not meet either of those eligibility requirements and are therefore precluded from using a Form S-3 in connection with a registered offering of our securities to investors.
Due to our present inability to use Form S-3, if we wanted to conduct a registered offering of securities to investors, we will be required to use long form registration and may experience delays. In addition, our ability to undertake certain types of financing transactions may be limited or unavailable to us without the ability to use Form S-3. Furthermore, because of the delay associated with long form registration and the limitations on the financing transactions we may undertake, the terms of any financing transaction we are able to conduct may not be advantageous to us or may cause us not to obtain capital in a timely fashion to execute our business strategies and continue to operate as a going concern.
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Laws and regulations governing international operations, including the FCPA, may require us to develop and implement costly compliance programs and the failure to comply with such laws may result in substantial penalties.
We must comply with laws and regulations relating to international business operations. The creation and implementation of compliance programs for international business practices is costly and such programs are difficult to enforce, particularly where reliance on third parties is required.
The Foreign Corrupt Practices Act, or FCPA, prohibits any U.S. individual or business from paying, authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, for the purpose of influencing any act or decision of the foreign official in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with certain accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the company, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations. The anti-bribery provisions of the FCPA are enforced primarily by the U.S. Department of Justice.
Compliance with the FCPA is expensive and difficult, particularly in countries in which corruption is a recognized problem. The failure to comply with laws governing international business practices may result in substantial penalties, including suspension or debarment from government contracting. Violation of the FCPA can result in significant civil and criminal penalties. Indictment alone under the FCPA can lead to suspension of the right to do business with the U.S. government until the pending claims are resolved. Conviction of a violation of the FCPA can result in long term disqualification as a government contractor.
The termination of a government contract or customer relationship as a result of our failure to satisfy any of our obligations under laws governing international business practices would have a negative impact on our operations and harm our reputation and ability to procure government contracts. The SEC also may suspend or bar issuers from trading securities on U.S. exchanges for violations of the FCPA’s accounting provisions.
We currently maintain an office in China. Accordingly, we, through our WCMC subsidiary, are subject to other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. China also strictly prohibits bribery of government officials. Violations of Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition.
Our revenues may include international sales, which are associated with various risks.
Risks associated with international sales include without limitation: political and economic instability, including weak conditions in the world’s economies; difficulty in collecting accounts receivable; unstable or unenforced export controls; changes in legal and regulatory requirements; policy changes affecting the markets for our products; changes in tax laws and tariffs; and exchange rate fluctuations (which may affect sales to international customers and the value of profits earned on international sales when converted into U.S. dollars). Any of these factors could materially adversely affect our results for the period in which they occur.
Our ability to repatriate cash to the United States from China may be limited by foreign country laws regulating the distribution of cash and earnings.
Any restrictions on currency exchanges may limit our ability to use future revenue generated by WCMC in Chinese yuan renminbi, or RMB, to fund any business activities outside China or to make dividends or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, particularly the restriction that foreign enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents at those banks in China authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB in the future.
Item 1B. Unresolved Staff Comments.
None.
We own approximately 145,000 square feet of office and manufacturing space at 1 Bella Drive, Westminster, Massachusetts. Our current facilities in Westminster are adequate for our present operational requirements. Our loans from the Commerce Bank and Trust Company are secured by a first lien on all personal and real property of Ranor, including our space in Westminster, Massachusetts.
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In November 2015, we leased approximately 1,000 square feet of office space in Wuxi City, Jiangsu Province, China, which currently houses WCMC. The lease has a two-year term and base rent of approximately $4,000 annually.
Class Action Lawsuit
On or about February 26, 2016, nine former employees (“Plaintiffs”) of Ranor filed a complaint in the Massachusetts Superior Court, Worcester County, against former and current executive officers of Ranor, alleging violations of the Massachusetts Wage Act, breach of contract and conversion. Plaintiffs claim that Ranor’s modification to its personal time off (“PTO”) policy in April 2014 caused these employees to forfeit earned PTO. Plaintiffs purport to assert their claims on behalf of a class of all current and former employees of Ranor who were affected by the modification to Ranor’s PTO policy. The pre-trial discovery phase ended on June 21, 2017. No trial date has been set.
Item 4. Mine Safety Disclosures
Not applicable to the registrant.
Item 4A. Executive Officers of the Registrant
The following table sets forth certain information concerning our executive officers.
| Name | Age | Position |
| Alexander Shen | 55 | Chief Executive Officer |
| Thomas Sammons | 62 | Chief Financial Officer |
Alexander Shen was appointed Chief Executive Officer of TechPrecision on November 14, 2014. Since June 2014, Mr. Shen has served as President of our Ranor subsidiary, and he also serves as president of our WCMC subsidiary. Mr. Shen has experience in a broad range of industries including metal fabrication, automotive, contract manufacturing, safety and security, and industrial distribution. Prior to joining us, Mr. Shen served in 2013 as President of SIB Development and Consulting, a firm specializing in fixed, monthly cost reduction. Mr. Shen served as President of Tydenbrooks Security Products Group, a security products company, from July 2011 to December 2012. Mr. Shen served as President and Chief Executive Officer of Burgon Tool Steel Company between January 2009 and June 2011, and served as Chief Executive Officer of Ryerson Mexico & Vice President – International for Ryerson, Inc., a multi-national distributor and processor of metals, from 2007 to 2009. Mr. Shen was Division General Manager & Chief Operating Officer at Sumitomo Electric Group from 1998 to 2007, focused on automotive electrical and electronic products. Prior to 1998, he had a 10-year career at the Automotive Division of Alcoa Inc. with roles of increasing responsibility. Mr. Shen began his career with General Motors, moving to Chrysler, before joining Alcoa Inc. His career includes multiple international management roles in Japan, China, Mexico, and Europe, and he is fluent in the Chinese and Japanese languages and cultures. Mr. Shen holds a B.S. in Engineering from Michigan State University.
Thomas Sammons became our Chief Financial Officer in October 2015. Mr. Sammons has also served as Vice President, Finance, of Ranor, Inc. since March 9, 2015. Prior to joining TechPrecision, Mr. Sammons served as the financial controller of Xchanging Services, Inc., an international provider of technology-enabled business processing, technology and procurement services, from February 2012 through February 2015 and as international controller and business unit controller at Ryerson, Inc., from May 2005 through January 2012. Mr. Sammons holds certifications as a Certified Management Accountant and a Certified Financial Manager and received his B.S. in Business Administration from SUNY, Empire State College and an M.B.A. from Cornell University.
There are no family relationships among any directors or executive officers.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is traded on the OTCQB Market under the symbol “TPCS”. The following table sets forth the high and low bid quotations per share of our common stock as reported on the OTCQB Market for the last two completed fiscal years. The quarterly high and low bid quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
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| High | Low | |||||||
| Fiscal year ended March 31, 2017 | ||||||||
| 4th Quarter (three months ended March 31, 2017) | $ | 0.99 | $ | 0.49 | ||||
| 3rd Quarter (three months ended December 31, 2016) | $ | 0.60 | $ | 0.42 | ||||
| 2nd Quarter (three months ended September 30, 2016) | $ | 0.59 | $ | 0.33 | ||||
| 1st Quarter (three months ended June 30, 2016) | $ | 0.42 | $ | 0.18 | ||||
| Fiscal year ended March 31, 2016 | ||||||||
| 4th Quarter (three months ended March 31, 2016) | $ | 0.23 | $ | 0.15 | ||||
| 3rd Quarter (three months ended December 31, 2015) | $ | 0.24 | $ | 0.13 | ||||
| 2nd Quarter (three months ended September 30, 2015) | $ | 0.26 | $ | 0.07 | ||||
| 1st Quarter (three months ended June 30, 2015) | $ | 0.11 | $ | 0.06 | ||||
As of June 8, 2017, we had approximately 1,723 record holders of our common stock. We have not paid dividends on our common stock since our incorporation in 2005, and the covenants in our debt agreements have prohibited us from paying dividends. We plan to retain future earnings, if any, for use in our business and do not anticipate paying dividends on our common stock in the foreseeable future.
For certain information concerning securities authorized for issuance under our 2016 long-term incentive plan, see “Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
Item 6. Selected Financial Data
As a smaller reporting company, we have elected not to provide the information required by this Item.
Item 7. 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 audited consolidated financial statements and the related notes, which appear elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K, 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, as they relate to us, 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 |
| · | those risks discussed in “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K, as well as those described in any other filings which we make with the SEC. |
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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 Annual Report on Form 10-K, 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.
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. 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.
All of our sales recorded for fiscal 2017 were generated in the U.S. There were no sales generated from WCMC, our subsidiary in China, during fiscal 2017. At March 31, 2017, we did not have any open customer orders for WCMC in our backlog. We are evaluating how to utilize the WCMC entity moving forward.
We historically have experienced, and continue to experience, customer concentration. For fiscal 2017 and fiscal 2016, our largest customer accounted for approximately 41% and 21% of reported net sales, respectively. For fiscal 2017, we had six customers, who each generated in excess of $1.0 million in revenue for the Company, which accounted for approximately 91% of our revenue, in the aggregate. Our sales order backlog at March 31, 2017 was approximately $15.8 million compared with a backlog of $19.8 million at March 31, 2016.
Recent Developments
On April 17, 2015, the Company, through Ranor, entered into that certain Assignment of Claim Agreement, or the Assignment Agreement, with Citigroup Financial Products, Inc., or 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 GT Advanced Technologies, or GTAT, a customer Ranor had been involved with in arbitration proceedings. Pursuant to the Assignment Agreement, Citigroup paid to Ranor an initial amount equal to $507,835, which was 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 was recognized as a $1,122,287 gain in our statement of operations for the fiscal year ended March 31, 2017.
On April 26, 2016 we entered into that certain Master Loan and Security Agreement No. 4180, or the MLSA, with People’s Capital and Leasing Corp., or People’s. The proceeds from the MLSA totaled $3,377,500 and were used to pay off amounts outstanding under our previous Loan and Security Agreement with Utica LeaseCo., LLC, or Utica (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources”).
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On December 21, 2016 we closed that certain Loan Agreement, or the Commerce Loan Agreement, with Commerce Bank and Trust Company, or Commerce. Pursuant to the Commerce Loan Agreement, Commerce made a term loan to Ranor in the amount of $2,850,000 and made available to Ranor a revolving line of credit in the amount of $1,000,000. Proceeds of $2,394,875 from the term loan were disbursed to Revere High Yield Fund, LP, or Revere, as payment in full of Ranor’s indebtedness owed to Revere pursuant to a prior agreement with Revere (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources”).
For fiscal 2017, our net sales and net income were $18.6 million and $5.1 million, respectively, compared with net sales of $16.9 million and net income of $1.4 million, for fiscal 2016. Our gross margins for fiscal 2017 were 32.9% compared with gross margins of 32.6% in fiscal 2016. We generated $1.7 million of cash from operating activities in fiscal 2017 and had a cash balance of $3.1 million at March 31, 2017.
Strategy
We aim to establish our expertise in program and project management and develop and expand a repeatable customer business model in all of our markets. We concentrate our sales and marketing activities on customers under three main industry groups, defense, energy and precision industrial. Our strategy is to leverage our core competence as a manufacturer of high-precision, large-scale metal fabrications and machined components to optimize profitability of our current business and expand with key customers into markets that have shown increasing demand.
Defense
Our Ranor subsidiary performs precision fabrication and machining for the defense and aerospace industries, delivering defense components meeting our customers’ stringent design specifications, as well as quality and safety manufacturing standards specifically for defense component fabrication and machining. Ranor has in recent years delivered components consisting of critical sonar housings and fairings, missile tubes, and other critical components. In addition, the team at Ranor has successfully developed new, effective approaches to fabrication that continue to be utilized at our facility and at our customer’s own defense component manufacturing facilities. We have endeavored to increase our business development efforts with large prime defense contractors. Based upon these efforts, we believe there are additional opportunities to secure increased business with existing and new defense contractors who are actively looking to increase outsourced content on certain defense programs over the next several years. We believe that the military quality certifications Ranor maintains and its ability to offer fabrication and manufacturing services at a single facility position it as an attractive outsourcing partner for prime contractors looking to increase outsourced production.
Energy
The power generation businesses among our energy market customers are impacted by pricing and demand for various forms of energy (e.g. coal, natural gas, oil, and nuclear), and our customers are typically dependent upon the need for new construction, maintenance, and overhaul and repair by nuclear energy providers. Also, changes in regulation may impact demand and supply. As such, we cannot assure you that we will be able to develop any significant business from the nuclear industry. However, our Ranor subsidiary has the certifications required to produce the necessary components for new nuclear power plants. Because of our manufacturing capabilities, our certification from the American Society of Mechanical Engineers and our historic relationships with suppliers in the nuclear power industry, we believe that we are well positioned to benefit from any increased activity in the nuclear sector.
Precision Industrial
We serve a number of different customers in our precision industrial group. Included in this group is a key customer who installs proprietary proton beam radiotherapy systems. We manufacture components for these large scale medical systems for this customer. The customers within this market are impacted primarily by general economic conditions which may include changes in consumer consumption or demand for commercial construction for infrastructure.
Critical Accounting Policies
Revenue and Related Cost Recognition
We have written agreements or purchase orders with our customers that specify contract prices and delivery terms. Revenue recognition requires the existence of a contract to provide the persuasive evidence of an arrangement and a determinable selling price, delivery of the product and reasonable collection prospects. The Company manufactures components under production-type contracts in a production process which meets our customer’s specifications. We account for revenues and earnings using the percentage of completion units of delivery method of accounting. Under this method, we recognize contract revenue and gross profit when the products are produced and delivered, or when services are rendered. We determine progress toward completion on production contracts based on output measures, such as units delivered, or in some cases, input measures, such as labor hours incurred. In fiscal 2017 and 2016, all of our revenue was recognized under the units of delivery method.
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We may combine contracts for accounting purposes when they are negotiated as a package with an overall profit margin objective. These essentially represent an agreement to do a single project for a single customer, involve interrelated construction activities with substantial common costs, and are performed concurrently or sequentially. When a group of contracts is combined, revenue and profit are earned when the products are produced and delivered.
Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability are recognized in the period in which the revisions are determined. Costs incurred on uncompleted contracts consist of labor, overhead, and materials. Work in process is stated at the lower of cost or market.
Costs allocable to undelivered units are reported in the consolidated balance sheet as costs incurred on uncompleted contracts. Amounts in excess of the agreed upon contract price for customer directed changes, construction changes, customer delays or other causes of additional contract costs are recognized in contract value if it is probable that a claim for such amounts will result in additional revenue and the amounts can be reliably estimated. Revenues from such claims are recorded only to the extent that contract costs have been incurred.
Revisions in cost and profit estimates are reflected in the period in which the facts requiring the revision become known and are estimable. When we can only estimate a range of revenues and costs, we use the most likely estimate within the range. If we cannot determine which estimate in the range is most likely, the amounts within the range that would result in the lowest profit margin is used (the lowest contract revenue estimate and the highest contract cost estimate).
In some situations, it may be impractical for us to estimate either specific amounts or ranges of contract revenues and costs. However, if we can at least determine that we will not incur a loss, a zero profit model is adopted. The zero profit model results in the recognition of an equal amount of revenues and costs. This method is only used if more precise estimates cannot be made and its use is discontinued when such estimates are obtainable. When we obtain more precise estimates, the change is treated as a change in an accounting estimate.
Income Taxes
We provide for federal and state income taxes currently payable, as well as those deferred because of temporary differences between reporting income and expenses for financial statement purposes versus tax purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recoverable. The effect of the change in the tax rates is recognized as income or expense in the period of the change. A valuation allowance is established, when necessary, to reduce deferred income taxes to the amount that is more likely than not to be realized.
In assessing the recoverability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. If we determine that it is more likely than not that certain future tax benefits may not be realized, a valuation allowance will be recorded against deferred tax assets that are unlikely to be realized. Realization of the remaining deferred tax assets will depend on the generation of sufficient taxable income in the appropriate jurisdiction, the reversal of deferred tax liabilities, tax planning strategies and other factors prior to the expiration date of the carryforwards. A change in the estimates used to make this determination could require a reduction in the valuation allowance for deferred tax assets if they become realizable.
For fiscal 2017, the Company has recorded a deferred tax asset of $3.4 million, which includes the benefit of $2.7 million in loss carryforwards, which expire in varying amounts between 2026 and 2036. Realization is dependent on generating sufficient taxable income prior to the expiration of the loss carryforwards. Although the realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. Our tax accounts for fiscal 2016 included a full valuation allowance on our deferred tax assets.
As of March 31, 2017, our federal net operating loss carryforward was approximately $6.6 million. If not utilized, the federal net operating loss carryforward will expire in 2035. Furthermore, because of the over fifty-percent change in ownership as a consequence of the reverse acquisition of Ranor in February 2006, the amount of net operating loss carryforward used in any one year in the future is substantially limited. This limitation applies to net operating losses accumulated prior to the ownership change in February 2006.
New Accounting Pronouncements
See Note 2, Significant Accounting Policies, in the Notes to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
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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.
Years Ended March 31, 2017 and 2016
The following table sets forth information from our Consolidated Statements of Operations and Comprehensive Income, in dollars and as a percentage of revenue:
| 2017 | 2016 | Changes Year Ended March 31, 2017 to 2016 | ||||||||||||||||||||||
| (dollars in thousands) | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||
| Net sales | $ | 18,550 | 100 | % | $ | 16,854 | 100 | % | $ | 1,696 | 10 | % | ||||||||||||
| Cost of sales | 12,454 | 67 | % | 11,360 | 67 | % | 1,094 | 10 | % | |||||||||||||||
| Gross profit | 6,096 | 33 | % | 5,494 | 33 | % | 602 | 11 | % | |||||||||||||||
| Selling, general and administrative | 4,336 | 24 | % | 3,385 | 20 | % | 951 | 28 | % | |||||||||||||||
| Gain from claims assignment settlement | (1,122 | ) | (6 | )% | — | — | (1,122 | ) | nm | |||||||||||||||
| Income from operations | 2,882 | 15 | % | 2,109 | 13 | % | 773 | 37 | % | |||||||||||||||
| Other income | 8 | — | % | 1 | — | % | 7 | nm | ||||||||||||||||
| Interest expense | (644 | ) | (3 | )% | (752 | ) | (5 | )% | 108 | 14 | % | |||||||||||||
| Total other expense, net | (636 | ) | (3 | )% | (751 | ) | (5 | )% | 115 | 15 | % | |||||||||||||
| Income before income taxes | 2,246 | 12 | % | 1,358 | 8 | % | 888 | 65 | % | |||||||||||||||
| Income tax benefit | (2,834 | ) | (15 | )% | — | — | % | (2,834 | ) | nm | ||||||||||||||
| Net income | $ | 5,080 | 27 | % | $ | 1,358 | 8 | % | $ | 3,722 | nm | |||||||||||||
nm – not meaningful
Net Sales
Our shipments in fiscal 2017 included orders for new and repeat business from existing key customers. Generally, increases and decreases in net sales reflect changes in product mix as our customers gauge their demand for new components. Customer acceptance and the timing of delivery dates play a significant role as to when we can recognize revenue in any given period. For fiscal 2017, net sales increased by $1.7 million, or 10%, to $18.6 million compared to fiscal 2016. Net sales in our defense market, increased by $2.2 million in fiscal 2017 compared to fiscal 2016, primarily on higher shipments of new product components to our largest defense customers. Net sales in our precision industrial market increased by $1.2 million when compared to fiscal 2016, primarily on a higher shipment volume of medical components. Net sales in our energy market decreased by $1.7 million when compared to fiscal 2016 as a result of a slower order flow as our customers gauge their demand for new components. Our backlog in the energy market has increased by $1.3 million from March 31, 2016 to March 31, 2017.
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Cost of Sales and Gross Margin
Cost of sales consists primarily of raw materials, parts, labor, overhead, and subcontracting costs. Gross margin in any reporting period is impacted by the mix of products and services we provide on projects completed within that period. Our cost of sales for fiscal 2017 increased by $1.1 million compared to fiscal 2016 primarily on higher sales volume. Gross margins were 32.9% for fiscal 2017 and 32.6% for fiscal 2016. Gross profit was $6.1 million in fiscal 2017, or $0.6 million higher compared to fiscal 2016. New contract losses totaled $0.1 million in fiscal 2017, and are included in cost of sales.
Selling, General and Administrative Expenses
Total SG&A expenses increased by $1.0 million for fiscal 2017, primarily the result of non-cash share based compensation totaling $1.2 million for fiscal 2017, as the Company remunerated its board members and CEO for past services. Stock based compensation totaled $88,041 for fiscal 2016. Professional fees increased by $0.4 million, primarily for outside advisory services rendered in connection with the Company’s Annual Meeting in December 2016 and the expansion of the size of our board of directors. Salaries and related expenses decreased by $0.5 million because of lower headcount in fiscal 2017 when compared with fiscal 2016.
Gain from Claims Assignment Settlement
The Company entered into the Assignment Agreement with Citigroup on April 17, 2015. 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. On November 8, 2016, Ranor’s unsecured claim in GTAT’s bankruptcy was fully allowed without objection. As a result, we recorded a one-time gain of $1.1 million for the fiscal year ended March 31, 2017, representing all of the proceeds received as a settlement under the Assignment Agreement.
Other Income (Expense)
The following table reflects other income, interest expense and amortization of debt issue costs for the fiscal years ended March 31:
| 2017 | 2016 | $ Change | % Change | |||||||||||||
| Other income | $ | 8,439 | $ | 1,229 | $ | 7,210 | nm | |||||||||
| Interest expense | $ | (542,741 | ) | $ | (512,199 | ) | $ | (30,542 | ) | (6 | )% | |||||
| Amortization of debt issue costs | $ | (101,280 | ) | $ | (240,081 | ) | $ | 138,801 | 58 | % | ||||||
nm – not meaningful
The amount of interest expense recorded in future years is expected to be lower due to lower interest rates in connection with our debt refinancing transactions. Interest expense in fiscal 2016 included the reversal of deferred interest expense for $240,741, which reduced total interest expense recorded in fiscal 2016. We avoided the payment of the deferred interest when we refinanced our long-term debt in fiscal 2017.
Income Taxes
For the year ended March 31, 2017 we recorded a tax benefit of $2.8 million, which included current tax expense of $37,361 and deferred tax expense $0.8 million, net of the release of a valuation allowance of $3.6 million. The release of the valuation allowance was based on the weight of positive evidence at the balance sheet date, primarily the result of improving business performance and financial trends and achieving sustained profitability in certain tax jurisdictions.
Our future effective tax rate will be affected if earnings are lower than anticipated in tax jurisdictions with lower statutory rates and higher than anticipated in tax jurisdictions with higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. We regularly assess the effects resulting from these factors to determine the adequacy of our provision for income taxes.
Net Income
As a result of the foregoing, for fiscal 2017, our net income was $5.1 million or $0.18 per share basic and fully diluted, compared with net income of $1.4 million, or $0.05 per share basic and fully diluted, for fiscal 2016.
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Liquidity and Capital Resources
On December 21, 2016 we closed the Commerce Loan Agreement with Commerce Bank. Pursuant to the Commerce Loan Agreement, Commerce made a term loan to Ranor in the amount of $2,850,000 and made available to Ranor a revolving line of credit in the amount of $1,000,000. Starting on January 20, 2017, payments on the term loan 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. Advances under the revolving line of credit 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 any revolving 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 revolving credit facility will be payable monthly in arrears. All outstanding loans under the revolving credit facility will mature on December 21, 2018. There were no amounts outstanding under the revolving credit facility at March 31, 2017.
In connection with the Commerce Loan Agreement, $2,394,875 of the proceeds from the term loan were disbursed to Revere as payment in full of Ranor’s indebtedness owed to Revere pursuant to a prior agreement with Revere. Ranor retained $426,467 of the proceeds from the term loan for general corporate purposes. The balance of the proceeds from the term loan were used to pay loan-related expenses.
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. 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 Company covenants to maintain a debt service coverage ratio, or 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. 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 an additional 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 loan in monthly installments of $7,399 for principal and interest over 60 months. The additional 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.
The Company, through Ranor, entered into the Assignment Agreement with Citigroup on April 17, 2015. 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 was 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 was recognized as a $1,122,287 gain in the three months ended December 31, 2016.
At March 31, 2017, we had cash and cash equivalents of $3.1 million. Net cash provided by operating activities was $1.7 million for fiscal 2017. Net cash provided by operating activities for fiscal 2016 was $1.0 million. We believe that the Company is in material compliance with all covenants, including financial covenants, contained in all of its 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.
At March 31, 2017, we had working capital of $5.0 million as compared with working capital of $0.5 million at March 31, 2016. The table below presents selected liquidity and capital measures as of:
| (dollars in thousands) | March 31, 2017 | March 31, 2016 | Change Amount | |||||||||
| Cash and cash equivalents | $ | 3,066 | $ | 1,332 | $ | 1,734 | ||||||
| Working capital | $ | 4,979 | $ | 510 | $ | 4,469 | ||||||
| Total debt | $ | 5,781 | $ | 4,735 | $ | 1,046 | ||||||
| Total stockholders’ equity | $ | 8,214 | $ | 1,728 | $ | 6,486 | ||||||
The following table summarizes our primary cash flows for the periods presented:
| (dollars in thousands) | March 31, 2017 | March 31, 2016 | Change Amount | |||||||||
| Cash flows provided by (used in): | ||||||||||||
| Operating activities | $ | 1,730 | $ | 1,048 | $ | 682 | ||||||
| Investing activities | (788 | ) | (222 | ) | (566 | ) | ||||||
| Financing activities | 792 | (830 | ) | 1,622 | ||||||||
| Net increase (decrease) in cash | $ | 1,734 | $ | (4 | ) | $ | 1,738 | |||||
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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 fiscal 2017 was $1.7 million compared with cash provided by operations of $1.0 million for the fiscal 2016. Cash provided by operations for the fiscal years 2017 and 2016 were augmented by payments of $614,452 and $507,835, respectively, received under the Assignment Agreement with Citigroup.
Investing activities
Fiscal 2017 was marked by a year of increased investment in the Company’s plant and equipment. Net cash used in investing activities totaled $787,808, primarily for new factory machinery and auto equipment during the fiscal year ended March 31, 2017.
Fiscal 2016 cash outflows for capital spending was $17,600 for new equipment. In addition, in fiscal 2016, we spent $204,064 to replace all of the fluorescent lighting in our fabrication and machine shops with LED lighting. The project was completed as planned in accordance with all applicable terms and conditions.
Financing activities
Net cash provided by financing activities was $792,434 for the fiscal year ended March 31, 2017. In fiscal 2017 we received proceeds from our MLSA with People’s and Term Loan with Commerce of $3,377,500 and $2,850,000, respectively. 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 our previous Loan and Security Agreement with Utica. In connection with the Commerce Loan Agreement, $2,250,000 of the proceeds from Term Loan were disbursed to Revere, as payment in full of Ranor’s indebtedness owed to Revere. In addition, in fiscal 2017, we paid $198,449 in loan closing costs and $527,358 for monthly principal payments on our outstanding debt.
In fiscal 2016, net cash used in financing activities was $0.8 million. In fiscal 2016 we used $0.9 million to meet our normal monthly debt obligations, and $0.1 million on costs in connection with our long-term debt refinancing program. In addition, our LED lighting project qualified for a capital incentive grant of $146,000 and a financing component of $58,064 (included in accrued expenses current and noncurrent) for a total of $204,064.
All of the above activity resulted in a net increase in cash of $1.7 million in fiscal 2017 compared with a decrease in cash of $4,159 in fiscal 2016. Collateral securing such notes comprises all personal and real property of TechPrecision and Ranor, including cash, accounts receivable, inventories, equipment, financial and intangible assets.
The following table sets forth information as of March 31, 2017 as to our contractual obligations:
| Payments due by period | ||||||||||||||||||||
| (dollars in thousands) | Total | Less than 1 Year | 2-3 Years | 4-5 Years | After 5 Years | |||||||||||||||
| Debt and capital lease obligations | $ | 5,781 | $ | 717 | $ | 1,612 | $ | 3,452 | $ | — | ||||||||||
| Interest on debt and capital leases | 1,179 | 359 | 544 | 276 | — | |||||||||||||||
| Employee compensation | 1,185 | 1,185 | — | — | — | |||||||||||||||
| Purchase obligations | 890 | 890 | — | — | — | |||||||||||||||
| Non-cancellable operating leases | 2 | 2 | — | — | — | |||||||||||||||
| Total | $ | 9,037 | $ | 3,153 | $ | 2,156 | $ | 3,728 | $ | — | ||||||||||
Off-Balance Sheet Arrangements
We do not currently have, and have not had during the fiscal year ended March 31, 2017, any off-balance sheet assets, liabilities or arrangements.
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EBITDA Non-GAAP Financial Measure
To complement our consolidated statements of operations and comprehensive income and 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 GAAP.
We define EBITDA as net income plus interest, income taxes, depreciation and amortization. Net income was $5.1 million for the year ended March 31, 2017, as compared to $1.4 million for the year ended March 31, 2016. EBITDA, a non-GAAP financial measure, was $3.6 million for the year ended March 31, 2017, as compared to $2.9 million for the year ended March 31, 2016. Net income and EBITDA increased $3.7 million and $0.7 million, respectively, over the prior period.
The following table provides a reconciliation of EBITDA to net income, the most directly comparable GAAP measure reported in our consolidated financial statements:
| (dollars in thousands) | Year ended March 31, 2017 | Year ended March 31, 2016 | Change Amount | |||||||||
| Net income | $ | 5,080 | $ | 1,358 | $ | 3,722 | ||||||
| Income tax benefit | (2,834 | ) | (1 | ) | (2,833 | ) | ||||||
| Interest expense (1) | 644 | 752 | (108 | ) | ||||||||
| Depreciation | 689 | 748 | (59 | ) | ||||||||
| EBITDA | $ | 3,579 | $ | 2,857 | $ | 722 | ||||||
| (1) | Includes amortization of debt issue costs. |
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
As a smaller reporting company, we have elected not to provide the information required by this Item.
Item 8. Financial Statements and Supplementary Data.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the
Board of Directors and Stockholders
of TechPrecision Corporation
We have audited the accompanying consolidated balance sheets of TechPrecision Corporation (the “Company”) as of March 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TechPrecision Corporation, as of March 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Marcum LLP
Marcum LLP
Philadelphia, Pennsylvania
June 29, 2017
| 22 |
TECHPRECISION CORPORATION
CONSOLIDATED BALANCE SHEETS
| March 31, 2017 | March 31, 2016 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 3,066,156 | $ | 1,332,166 | ||||
| Accounts receivable, net | 1,870,672 | 2,022,480 | ||||||
| Costs incurred on uncompleted contracts, in excess of progress billings | 2,097,221 | 2,395,642 | ||||||
| Inventories - raw materials | 141,792 | 128,595 | ||||||
| Other current assets | 422,096 | 530,808 | ||||||
| Total current assets | 7,597,937 | 6,409,691 | ||||||
| Property, plant and equipment, net | 4,912,202 | 4,814,184 | ||||||
| Deferred income taxes | 3,393,110 | 684,270 | ||||||
| Other noncurrent assets, net | 100,000 | 176,344 | ||||||
| Total assets | $ | 16,003,249 | $ | 12,084,489 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 365,308 | $ | 996,065 | ||||
| Accrued expenses | 893,415 | 1,804,485 | ||||||
| Income taxes payable | — | 9,032 | ||||||
| Advanced claims payment | — | 507,835 | ||||||
| Billings on uncompleted contracts, in excess of related costs | 642,831 | 1,629,018 | ||||||
| Current portion of long-term debt | 717,481 | 953,106 | ||||||
| Total current liabilities | 2,619,035 | 5,899,541 | ||||||
| Long-term debt, including capital leases | 4,874,721 | 3,735,410 | ||||||
| Deferred income taxes | 521,430 | 684,270 | ||||||
| Noncurrent accrued expenses | 17,742 | 37,097 | ||||||
| Commitments and contingent liabilities (see Note 15) | ||||||||
| Stockholders’ Equity: | ||||||||
| Common stock - par value $.0001 per share, 90,000,000 shares authorized, 28,824,593 shares issued and outstanding at March 31, 2017, and 27,324,593 shares issued and outstanding at March 31, 2016 | 2,882 | 2,732 | ||||||
| Additional paid in capital | 8,258,820 | 7,094,749 | ||||||
| Accumulated other comprehensive income | 19,328 | 21,568 | ||||||
| Accumulated deficit | (310,709 | ) | (5,390,878 | ) | ||||
| Total stockholders’ equity | 7,970,321 | 1,728,171 | ||||||
| Total liabilities and stockholders’ equity | $ | 16,003,249 | $ | 12,084,489 | ||||
See accompanying notes to the consolidated financial statements.
| 23 |
TECHPRECISION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
| Years ended March 31, | ||||||||
| 2017 | 2016 | |||||||
| Net sales | $ | 18,550,674 | $ | 16,853,952 | ||||
| Cost of sales | 12,454,542 | 11,360,206 | ||||||
| Gross profit | 6,096,132 | 5,493,746 | ||||||
| Selling, general and administrative | 4,336,987 | 3,385,009 | ||||||
| Gain from claims assignment settlement | (1,122,287 | ) | — | |||||
| Income from operations | 2,881,432 | 2,108,737 | ||||||
| Other income | 8,439 | 1,229 | ||||||
| Interest expense | (644,021 | ) | (752,280 | ) | ||||
| Total other expense, net | (635,582 | ) | (751,051 | ) | ||||
| Income before income taxes | 2,245,850 | 1,357,686 | ||||||
| Income tax benefit | (2,834,319 | ) | (768 | ) | ||||
| Net income | $ | 5,080,169 | $ | 1,358,454 | ||||
| Other comprehensive loss, before tax: | ||||||||
| Foreign currency translation adjustments | $ | (2,240 | ) | $ | (1,993 | ) | ||
| Other comprehensive loss, before tax | (2,240 | ) | (1,993 | ) | ||||
| Other comprehensive loss, net of tax | $ | (2,240 | ) | $ | (1,993 | ) | ||
| Comprehensive income | $ | 5,077,929 | $ | 1,356,461 | ||||
| Net income per share (basic) | $ | 0.18 | $ | 0.05 | ||||
| Net income per share (diluted) | $ | 0.18 | $ | 0.05 | ||||
| Weighted average number of shares outstanding (basic) | 27,908,155 | 26,392,514 | ||||||
| Weighted average number of shares outstanding (diluted) | 28,611,074 | 26,572,737 | ||||||
See accompanying notes to the consolidated financial statements.
| 24 |
TECHPRECISION CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Preferred Stock Outstanding | Preferred Stock | Common Stock Outstanding | Par Value | Additional Paid in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (accumulated deficit) | Total Stockholders’ Equity | |||||||||||||||||||||||||
| Balance 3/31/2015 | 1,927,508 | $ | 524,210 | 24,669,958 | $ | 2,467 | $ | 6,487,589 | $ | 23,561 | $ | (6,749,332 | ) | $ | 288,495 | |||||||||||||||||
| Share based compensation | 88,041 | 88,041 | ||||||||||||||||||||||||||||||
| Restricted shares issued, net of shares returned for withholding taxes | 135,000 | 13 | (4,839 | ) | (4,826 | ) | ||||||||||||||||||||||||||
| Conversion of preferred stock | (1,927,508 | ) | (524,210 | ) | 2,519,635 | 252 | 523,958 | — | ||||||||||||||||||||||||
| Net Income | 1,358,454 | 1,358,454 | ||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax benefit ($0) | (1,993 | ) | (1,993 | ) | ||||||||||||||||||||||||||||
| Balance 3/31/2016 | — | $ | — | 27,324,593 | $ | 2,732 | $ | 7,094,749 | $ | 21,568 | $ | (5,390,878 | ) | $ | 1,728,171 | |||||||||||||||||
| Share based compensation | 384,221 | 384,221 | ||||||||||||||||||||||||||||||
| Common stock awards | 1,500,000 | 150 | 779,850 | 780,000 | ||||||||||||||||||||||||||||
| Net Income | 5,080,169 | 5,080,169 | ||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax benefit ($0) | (2,240 | ) | (2,240 | ) | ||||||||||||||||||||||||||||
| Balance 3/31/2017 | — | $ | — | 28,824,593 | $ | 2,882 | $ | 8,258,820 | $ | 19,328 | $ | (310,709 | ) | $ | 7,970,321 | |||||||||||||||||
See accompanying notes to the consolidated financial statements.
| 25 |
TECHPRECISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended March 31, | ||||||||
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income | $ | 5,080,169 | $ | 1,358,454 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation | 689,293 | 747,553 | ||||||
| Amortization of debt issue costs | 101,280 | 240,081 | ||||||
| Loss on disposal of equipment | 62,140 | — | ||||||
| Stock based compensation expense | 1,164,221 | 88,041 | ||||||
| Change in contract losses | (304,465 | ) | (69,014 | ) | ||||
| Deferred income taxes | (2,871,680 | ) | — | |||||
| Gain from claims assignment settlement – noncash portion | (507,835 | ) | — | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 151,808 | (1,196,117 | ) | |||||
| Costs incurred on uncompleted contracts, in excess of progress billings | 298,421 | (387,398 | ) | |||||
| Inventories – raw materials | (13,197 | ) | 6,217 | |||||
| Other current assets | 108,692 | 7,411 | ||||||
| Other noncurrent assets and liabilities | 7,978 | (193,906 | ) | |||||
| Accounts payable | (630,757 | ) | (668,295 | ) | ||||
| Accrued expenses | (611,076 | ) | 180,687 | |||||
| Accrued taxes payable | (9,032 | ) | 9,032 | |||||
| Billings on uncompleted contracts, in excess of related costs | (986,187 | ) | 417,512 | |||||
| Advanced claims payment | — | 507,835 | ||||||
| Net cash provided by operating activities | 1,729,773 | 1,048,093 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchases of property, plant and equipment | (787,808 | ) | (17,600 | ) | ||||
| Capital expenditures for lighting project | — | (204,064 | ) | |||||
| Net cash used in investing activities | (787,808 | ) | (221,664 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Deferred loan costs | (198,449 | ) | (100,472 | ) | ||||
| Proceeds from lighting project grant | — | 204,064 | ||||||
| Borrowings of long-term debt | 6,227,500 | — | ||||||
| Repayment of long-term debt | (5,236,617 | ) | (933,651 | ) | ||||
| Net cash provided by (used in) financing activities | 792,434 | (830,059 | ) | |||||
| Effect of exchange rate on cash and cash equivalents | (409 | ) | (529 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | 1,733,990 | (4,159 | ) | |||||
| Cash and cash equivalents, beginning of period | 1,332,166 | 1,336,325 | ||||||
| Cash and cash equivalents, end of period | $ | 3,066,156 | $ | 1,332,166 | ||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION | ||||||||
| Cash paid during the year for: | ||||||||
| Interest expense | $ | 789,743 | $ | 683,871 | ||||
| Income taxes | $ | 65,000 | $ | — | ||||
See accompanying notes to the consolidated financial statements.
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SUPPLEMENTAL INFORMATION – NONCASH INVESTING AND FINANCING TRANSACTIONS:
Year Ended March 31, 2017
On January 3, 2017, the Company entered into a new capital lease for office equipment. The transaction increased gross Property, Plant and Equipment and Debt obligations recorded under the capital lease by $54,376.
Year Ended March 31, 2016
For the year ended March 31, 2016, the Company issued 2,519,635 shares of common stock in connection with the conversion of 1,927,508 shares of Series A Convertible Preferred Stock. The stock conversions increased Common Stock and Additional Paid-in-Capital by $252 and $523,958, respectively.
For the year ended March 31, 2016, the Company classified certain machinery and equipment as held for sale in the amount of $123,900.
See accompanying notes to the consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
TechPrecision Corporation, or TechPrecision, is a Delaware corporation organized in February 2005 under the name Lounsberry Holdings II, Inc. The name was changed to TechPrecision Corporation on March 6, 2006. 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. 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 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The accompanying consolidated financial statements include the accounts of TechPrecision, WCMC and Ranor. Intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
In preparing the consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reported period. We continually evaluate our estimates, including those related to contract accounting, accounts receivable, inventories, the recovery of long-lived assets, income taxes and the valuation of equity transactions. We base our estimates on historical and current experiences and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates.
Cash and cash equivalents
Holdings of highly liquid investments with maturities of three months or less, when purchased, are considered to be cash equivalents. U.S. based deposits are maintained in a large regional bank. Our China subsidiary also maintains a bank account in a large national bank in China subject to People’s Republic of China (PRC) banking regulations. Cash on deposit with a large national China-based bank was $14,805 and $8,115 at March 31, 2017 and 2016, respectively.
Foreign currency translation
The majority of our business is transacted in U.S. dollars; however, the functional currency of our subsidiary in China is the local currency, the Chinese Yuan Renminbi. In accordance with ASC No. 830, Foreign Currency Matters (ASC 830), foreign currency translation adjustments of subsidiaries operating outside the United States are accumulated in other comprehensive income, a separate component of equity. Foreign currency transaction gains and losses are recognized in the determination of net income.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are stated at the amount we expect to collect. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. Based on management’s assessment, we provide for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances which remain outstanding after reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Historically, the level of uncollectible accounts has not been significant. There was no bad debt expense recorded for the years ended March 31, 2017 and 2016.
Inventories
Inventories - raw materials is stated at the lower of cost or market determined by the first-in, first-out (FIFO) method.
Property, plant and equipment, net
Property, plant and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are accounted for on the straight-line method based on estimated useful lives. The amortization of leasehold improvements is based on the shorter of the lease term or the useful life of the improvement. Amortization of assets recorded under capital leases is included under depreciation expense. Betterments and large renewals, which extend the life of the asset, are capitalized whereas maintenance and repairs and small renewals are expensed as incurred. The estimated useful lives are: machinery and equipment, 5-15 years; buildings, 30 years; and leasehold improvements, 2-5 years. Upon sale or retirement of machinery and equipment, costs and related accumulated depreciation are eliminated and gains or losses are recognized in the statement of operations.
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Interest is capitalized for assets that are constructed or otherwise produced for our own use, including assets constructed or produced for us by others for which deposits or progress payments have been made. Interest is capitalized to the date the assets are available and ready for use. When an asset is constructed in stages, interest is capitalized for each stage until it is available and ready for use. We use the interest rate incurred on funds borrowed specifically for the project. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. There was $7,158 of interest cost capitalized in fiscal 2017.
In accordance with ASC No. 360, Property, Plant & Equipment (ASC 360), our property, plant and equipment is tested for impairment when triggering events occur and, if impaired, written-down to fair value based on either discounted cash flows or appraised values. The carrying amount of an asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group.
Debt Issuance Costs
Costs incurred in connection with obtaining financing for long-term debt are capitalized and presented as a reduction of the carrying amount of the related debt. Costs incurred in connection with obtaining financing for revolving credit facilities and lines of credit are capitalized and presented as deferred financing costs. Loan acquisition costs are being amortized using the effective interest method over the term of the loan.
Operating Leases
Operating leases are charged to operations on a straight-line basis over the term of the lease. We lease certain office space in China under a long-term, non-cancelable operating lease agreement. The lease expires in October 2017.
Fair Value Measurements
We account for fair value of financial instruments which defines fair value and establishes a framework to measure fair value and the related disclosures about fair value measurements in accordance with ASC No. 820, Fair Value Measurement (ASC 820). The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. The FASB establishes a fair value hierarchy used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories: Level 1: Inputs based upon quoted market prices for identical assets or liabilities in active markets at the measurement date; Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and Level 3: Inputs that are management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instruments’ valuation. In addition, we will measure fair value in an inactive or dislocated market based on facts and circumstances and significant management judgment. We will use inputs based on management estimates or assumptions, or make adjustments to observable inputs to determine fair value when markets are not active and relevant observable inputs are not available.
The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses, as presented in the balance sheet, approximates fair value due to the short-term nature of these instruments. The carrying value of short and long-term borrowings approximates their fair value. The Company’s short-term and long-term debt is all privately held with no public market for this debt and is considered to be Level 3 under the fair value hierarchy.
Research and Development
We charge research and development costs associated with the design and development of new products to expense when incurred. We incurred no research and development expense in fiscal 2017 or fiscal 2016.
Selling, General, and Administrative
Selling, general and administrative (SG&A) expenses include items such as executive compensation and benefits, professional fees, business travel and office costs. Advertising costs are nominal and expensed as incurred. Other general and administrative expenses include items for our administrative functions and include costs for items such as office rent, supplies, insurance, legal, accounting, tax, telephone and other outside services. SG&A consisted of the following for the fiscal years ended March 31:
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| 2017 | 2016 | |||||||
| Salaries and related expenses | $ | 2,795,376 | $ | 2,234,830 | ||||
| Professional fees | 1,008,223 | 597,833 | ||||||
| Other general and administrative | 533,388 | 552,346 | ||||||
| Total Selling, General and Administrative | $ | 4,336,987 | $ | 3,385,009 | ||||
Stock Based Compensation
Stock based compensation represents the cost related to stock based awards granted to our board of directors and employees. We measure stock based compensation cost at the grant date based on the estimated fair value of the award and recognize the cost as expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. We estimate the fair value of stock options using a Black-Scholes valuation model. Stock based compensation is included in selling, general and administrative expense amounted to $1,164,221 and $88,041 for the fiscal years ended March 31, 2017 and 2016, respectively. See Note 12 – Stock Based Compensation for additional disclosures related to stock based compensation.
Net Income per Share of Common Stock
Basic net income per common share is computed by dividing net income by the weighted average number of shares outstanding during the year. Diluted net income per common share is calculated using net income divided by diluted weighted-average shares. Diluted weighted-average shares include weighted-average shares outstanding plus the dilutive effect of convertible preferred stock and stock options calculated using the treasury stock method. See Note 17 – Earnings per Share for additional disclosures related to net income per share.
Revenue and Related Cost Recognition
We have written agreements or purchase orders with our customers that specify contract prices and delivery terms. Revenue recognition requires the existence of a contract to provide the persuasive evidence of an arrangement and a determinable selling price, delivery of the product and reasonable collection prospects. The Company manufactures components under production-type contracts in a production process which meets our customer’s specifications. We account for revenues and earnings using the percentage of completion units of delivery method of accounting. Under this method, we recognize contract revenue and gross profit when the products are produced and delivered, or when services are rendered. We determine progress toward completion on production contracts based on output measures, such as units delivered, or in some cases, input measures, such as labor hours incurred. In fiscal 2017 and 2016, all of our revenue was recognized under the units of delivery method.
We may combine contracts for accounting purposes when they are negotiated as a package with an overall profit margin objective. These essentially represent an agreement to do a single project for a single customer, involve interrelated construction activities with substantial common costs, and are performed concurrently or sequentially. When a group of contracts is combined, revenue and profit are earned when the products are produced and delivered.
Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability are recognized in the period in which the revisions are determined. Costs incurred on uncompleted contracts consist of labor, overhead, and materials. Work in process is stated at the lower of cost or market. We record provisions for contract losses within costs of sales in our Consolidated Statement of Operations and Comprehensive Income.
Costs allocable to undelivered units are reported in the consolidated balance sheet as costs incurred on uncompleted contracts. Amounts in excess of the agreed upon contract price for customer directed changes, construction changes, customer delays or other causes of additional contract costs are recognized in contract value if it is probable that a claim for such amounts will result in additional revenue and the amounts can be reliably estimated. Revenues from such claims are recorded only to the extent that contract costs have been incurred.
Revisions in cost and profit estimates are reflected in the period in which the facts requiring the revision become known and are estimable. When we can only estimate a range of revenues and costs, we use the most likely estimate within the range. If we cannot determine which estimate in the range is most likely, the amounts within the range that would result in the lowest profit margin is used (the lowest contract revenue estimate and the highest contract cost estimate).
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In some situations, it may be impractical for us to estimate either specific amounts or ranges of contract revenues and costs. However, if we can at least determine that we will not incur a loss, a zero profit model is adopted. The zero profit model results in the recognition of an equal amount of revenues and costs. This method is only used if more precise estimates cannot be made and its use is discontinued when such estimates are obtainable. When we obtain more precise estimates, the change is treated as a change in an accounting estimate.
Shipping and Handling Costs
Shipping and handling costs are included in cost of sales. Shipping and handling costs billed to customers in connection with the sale are included in net sales.
Income Taxes
In accordance with ASC No. 740, Income Taxes (ASC 740), income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. We recognize the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
Reclassifications
Certain reclassifications of prior-year financial information presented herein for comparative purposes have been reclassified to conform with current-year presentation. The reclassifications had no impact on 2016 net income.
New Accounting Standards
New Accounting Standards Recently Adopted
In April 2015, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update (ASU) No. 2015-03, Simplifying the Presentation of Debt Issue Costs. The new guidance requires entities to present debt issue costs in the balance sheet as a direct reduction to the related debt liability rather than as a deferred cost (i.e., an asset) as required by past guidance. The new guidance does not change the recognition or measurement of debt issuance costs. The Company adopted the standard retrospectively in the first quarter of the fiscal year ended March 31, 2017, or fiscal 2017. Debt issuance costs related to revolving credit facilities and lines of credit will continue to be capitalized and presented as deferred financing costs. At March 31, 2016, long-term debt obligations were previously reported in the consolidated balance sheets as $3,782,752 with the associated $47,342 reported as deferred financing costs included in other assets. The fiscal 2016 unamortized debt issuance costs are now presented as a direct reduction of long-term debt obligations in these consolidated financial statements.
Issued Standards Not Yet Adopted
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 Consolidated Financial Statements and disclosures by comparing our current revenue recognition policy with the requirements of the new standard. It is possible that our current practices may no longer be viable 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 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 do not plan to early adopt the standard.
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 a final 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 Consolidated Financial Statements and disclosures.
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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.
In March 2016, the FASB issued 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. The new guidance eliminates additional paid-in capital pools and requires excess tax benefits and tax deficiencies to be recorded in the Statement of Operations and Comprehensive Income. The standard is effective for fiscal years beginning after December 15, 2016 with early adoption permitted if all provisions are adopted within the same period. The guidance is required to be applied on either a prospective, modified retrospective, or retrospective basis depending on the provisions applied. This new guidance will not have a significant impact on our Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Income, Consolidated Statements of Cash Flows 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 have not determined the impact ASU 2016-02 will have on our Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Income, Consolidated Statements of Cash Flows 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. Current guidance requires inventory to be measured at the lower of cost or market where market could be replacement cost, net realizable value or net realizable value less an approximately normal profit margin. The guidance is effective for periods beginning after December 15, 2016 with early adoption permitted. The guidance is required to be applied prospectively. This guidance will not have a significant impact on our Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Income, Consolidated Statements of Cash Flows and disclosures.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following as of March 31:
| 2017 | 2016 | |||||||
| Land | $ | 110,113 | $ | 110,113 | ||||
| Building and improvements | 3,252,908 | 3,252,908 | ||||||
| Machinery equipment, furniture and fixtures | 8,601,199 | 8,418,243 | ||||||
| Construction in progress | 487,331 | — | ||||||
| Equipment under capital leases | 54,376 | 65,568 | ||||||
| Total property, plant and equipment | 12,505,927 | 11,846,832 | ||||||
| Less: accumulated depreciation | (7,593,725 | ) | (7,032,648 | ) | ||||
| Total property, plant and equipment, net | $ | 4,912,202 | $ | 4,814,184 | ||||
Depreciation expense, which includes amortization of equipment under capital leases, for the years ended March 31, 2017 and 2016 was $689,293 and $747,553, respectively. On March 31, 2017 and 2016 we classified certain machinery and equipment as assets held for sale. See Note 6 – Other Noncurrent Assets.
Capitalized leases included in machinery and equipment were $54,376 and $65,568 at March 31, 2017 and 2016, respectively. Accumulated depreciation on all property, plant and equipment accounted for as capitalized leases was $2,719 and $42,443 at March 31, 2017 and 2016, respectively.
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We capitalize interest on borrowings 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 year ended March 31, 2017 was $7,158.
In fiscal 2016, the Company purchased LED lighting which qualified for a capital incentive grant of $146,000 and a financing component of $58,064 (included in accrued expenses current and non- current) for total funds received of $204,064. The net cost of the purchase of the LED lighting of $58,064 is recorded in property, plant and equipment.
NOTE 4 - COSTS INCURRED ON UNCOMPLETED CONTRACTS
The following table sets forth information as to costs incurred on uncompleted contracts as of March 31:
| 2017 | 2016 | |||||||
| Cost incurred on uncompleted contracts, beginning balance | $ | 5,491,605 | $ | 4,068,488 | ||||
| Total cost incurred on contracts during the year | 12,501,752 | 12,783,323 | ||||||
| Less cost of sales, during the year | (12,454,542 | ) | (11,360,206 | ) | ||||
| Cost incurred on uncompleted contracts, ending balance | $ | 5,538,815 | $ | 5,491,605 | ||||
| Billings on uncompleted contracts, beginning balance | $ | 3,095,963 | $ | 2,060,244 | ||||
| Plus: Total billings incurred on contracts, during the year | 18,896,305 | 17,889,671 | ||||||
| Less: Contracts recognized as revenue, during the year | (18,550,674 | ) | (16,853,952 | ) | ||||
| Billings on uncompleted contracts, ending balance | $ | 3,441,594 | $ | 3,095,963 | ||||
| Cost incurred on uncompleted contracts, ending balance | $ | 5,538,815 | $ | 5,491,605 | ||||
| Billings on uncompleted contracts, ending balance | 3,441,594 | 3,095,963 | ||||||
| Costs incurred on uncompleted contracts, in excess of progress billings | $ | 2,097,221 | $ | 2,395,642 | ||||
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 March 31, 2017 and 2016, we had billings in excess of costs totaling $642,831 and $1,629,018, respectively. Billings on uncompleted contracts represent customer prepayments on their contracts and completed contracts on 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 5 – OTHER CURRENT ASSETS
Other current assets included the following as of March 31:
| 2017 | 2016 | |||||||
| Payments advanced to suppliers | $ | 107,591 | $ | 182,305 | ||||
| Prepaid insurance | 229,132 | 236,300 | ||||||
| Collateral deposits | — | 85,252 | ||||||
| Other | 85,373 | 26,951 | ||||||
| Total | $ | 422,096 | $ | 530,808 | ||||
NOTE 6 – OTHER NONCURRENT ASSETS
Other noncurrent assets included the following as of March 31:
| 2017 | 2016 | |||||||
| Assets held for sale | $ | 100,000 | $ | 123,900 | ||||
| Prepaid loan costs | — | 52,444 | ||||||
| Total | $ | 100,000 | $ | 176,344 | ||||
At March 31, 2017 and 2016, we classified certain machinery and equipment of $100,000 and $123,900, respectively, to assets held for sale. This amount approximates fair value net of selling costs. In fiscal 2017, we wrote down certain machinery held for sale by $43,900, and subsequently sold this machinery in May 2017. We also classified other equipment in fiscal 2017 for $20,000 to assets held for sale. We expect to sell this remaining fixed asset before the end of fiscal 2018.
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NOTE 7 - ACCRUED EXPENSES
Accrued expenses included the following as of March 31:
| 2017 | 2016 | |||||||
| Accrued compensation | $ | 568,766 | $ | 872,114 | ||||
| Provision for contract losses | 148,699 | 464,785 | ||||||
| Accrued interest expense | 9,155 | 296,344 | ||||||
| Accrued professional fees | 142,648 | 117,981 | ||||||
| Other | 24,147 | 53,261 | ||||||
| Total | $ | 893,415 | $ | 1,804,485 | ||||
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. Our contract loss provision at March 31, 2016 included approximately $0.5 million for estimated contract losses in connection with a certain customer purchase agreement.
NOTE 8 – DEBT
Long-term debt included the following as of March 31:
| 2017 | 2016 | |||||||
| Commerce Term Loan due January 2022 | $ | 2,828,844 | $ | — | ||||
| People’s Equipment Loan Facility due April 2021 | 2,884,982 | — | ||||||
| Utica Credit Loan Note due November 2018 | — | 2,459,259 | ||||||
| Revere Term Loan and Notes due January 2018 | — | 2,250,000 | ||||||
| Obligations under capital leases | 67,353 | 26,599 | ||||||
| Total debt | $ | 5,781,179 | $ | 4,735,858 | ||||
| Less: debt issue costs unamortized | $ | 188,977 | $ | 47,342 | ||||
| Total debt, net | $ | 5,592,202 | $ | 4,688,516 | ||||
| Less: Current portion of long-term debt | $ | 717,481 | $ | 953,106 | ||||
| Total long-term debt, net | $ | 4,874,721 | $ | 3,735,410 | ||||
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, collectively, 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 March 31, 2017.
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 covenants (a) to cause its balance sheet leverage to be less than or equal to 3.50 to 1.00 for the fiscal year ending March 31, 2017, 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 $1,000,000 for the fiscal year ending March 31, 2017, $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. Compliance with the foregoing covenants will be tested annually commencing March 31, 2017. At March 31, 2017, the DSCR and the leverage ratio was 2.86 to 1.00 and 1.00 to 1.00, respectively. 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.
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The Commerce Loans may be accelerated upon the occurrence of an “Event of Default” (as defined in the Commerce Loan Agreement). Events of Default include (i) the failure to pay any monthly installment payment before the tenth day following the due date of such payment; (ii) the failure of Ranor or TechPrecision to observe, perform or pay any obligations under the Commerce Loan Agreement or any other obligation to Commerce; (iii) the failure of Ranor or TechPrecision to pay any indebtedness in excess of $100,000 (other than the Commerce Loans) when due; (iv) any representation or warranty of Ranor or TechPrecision in the Commerce Loan Agreement and related documents, or the Loan Documents, being proven to have been incorrect, in any material respect, when made; (v) the failure of Ranor to discharge any attachment, levy or distraint on its property; (vi) any default by Ranor or TechPrecision under any of the collateral security documents executed in connection with the Commerce Loan Agreement past any applicable grace period; (vii) the failure of Ranor or TechPrecision to file or pay taxes when due, unless such taxes are being contested in a manner permitted under the Loan Documents; (viii) a change in ownership or control of Ranor or change in management of Ranor where either the chief executive officer or chief financial officer as of December 21, 2016 is replaced without Commerce’s prior consent; (ix) Ranor or TechPrecision ceasing to do business as a going concern, making an assignment for the benefit of creditors, or commencing a bankruptcy or other similar insolvency proceeding; and (x) the entry of a judgment against Ranor or TechPrecision in excess of $150,000. Some of the Events of Default are subject to certain cure periods.
In connection with the Commerce Loan Agreement, $2,394,875 of the proceeds from Term Loan were disbursed to Revere High Yield Fund, LP, or Revere, as payment in full of Ranor’s indebtedness owed to Revere pursuant that certain Term Loan and Security Agreement, dated as of December 22, 2014, by and between Ranor and Revere, as amended, or the TLSA. Ranor retained $426,467 of the proceeds from the Term Loan for general corporate purposes. Unamortized debt issue costs at March 31, 2017 were $77,198.
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 No. 4180, as supplemented with Schedule No. 001, or, together, the MLSA, with People’s Capital and Leasing Corp., or People’s. The MLSA is dated and effective as of March 31, 2016. 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. 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. 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.
In connection with the MLSA, $2,653,353 of the proceeds from the People’s Loan were disbursed to Utica Leaseco, LLC, or Utica, as payment in full for principal and interest under the existing Loan and Security Agreement, or LSA. People’s retained a holdback in the amount of $182,763. The holdback was released to Ranor on July 6, 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. Unamortized debt issue costs at March 31, 2017 were $111,778.
On October 4, 2016, TechPrecision and Ranor became committed to Schedule No. 002 to the MLSA, or Schedule 2. Pursuant to Schedule 2, People’s made an additional loan in the amount of $365,852, or the Additional People’s Loan, 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 of $7,399 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.
On December 21, 2016, TechPrecision and Ranor closed on an Amendment to the MLSA, or the MLSA Amendment, with People’s. The MLSA Amendment, dated as of December 20, 2016, amends the definition of “Permitted Liens” under the MLSA to include the liens held by Commerce pursuant to the terms of the Commerce Loan Agreement and to delete the reference to the liens held by Revere.
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Term Loan and Security Agreement
On December 22, 2014, TechPrecision, Ranor and Revere entered into the Term Loan and Security Agreement, or TLSA. Pursuant to the TLSA, Revere loaned an aggregate of $2.25 million to Ranor under the First Loan Note in the aggregate principal amount of $1.5 million and the Second Loan Note in the aggregate principal amount of $750,000. The First Loan Note was collateralized by a secured interest in Ranor's Massachusetts facility and certain machinery and equipment at Ranor. The Second Loan Note was collateralized by a secured interest in certain accounts, inventory and equipment of Ranor. Payments under the TLSA, the First Loan Note and the Second Loan Note were due as follows: (a) payments of interest only on advanced principal on a monthly basis on the first day of each month from February 1, 2015 until December 31, 2015 with an annual interest rate on the unpaid principal balance of the First Loan Note and the Second Loan Note equal to 12% per annum and (b) the principal balance plus accrued and unpaid interest payable on December 31, 2015. Ranor's obligations under the TLSA, the First Loan Note and the Second Loan Note were guaranteed by TechPrecision pursuant to a Guaranty Agreement with Revere. Ranor utilized approximately $1.45 million of the proceeds of the First Loan Note and Second Loan Note to pay off bond obligations owed to Santander Bank, N.A. plus breakage fees on a related interest swap of $217,220 under the loan agreement with Santander Bank, N.A. The remaining proceeds of the First Loan Note and the Second Loan Note were retained by the Company for general corporate purposes.
On December 31, 2015, TechPrecision, Ranor and Revere entered into a Note and Other Loan Documents Modification Agreement to the TLSA, or the First Modification Agreement. The First Modification Agreement extended the maturity date of the TLSA and the Notes from December 31, 2015 to January 22, 2016 and provided that Ranor agreed to waive its right to extend the maturity date of the TLSA and the Notes by six months as set forth in the TLSA. In connection with its entry into the First Modification Agreement, Ranor paid an exit fee of $67,500 to Revere.
On January 22, 2016, TechPrecision, Ranor and Revere entered into the Second Modification Agreement, which further amended the TLSA. 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) twelve (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.
Pursuant to the TLSA, as amended by the Second Modification Agreement, Ranor was subject to certain affirmative and negative covenants, including a minimum cash balance covenant which required 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 $786,212 at March 31, 2016. We were in compliance with all covenants under the TLSA at March 31, 2016.
The obligations under the TLSA were paid in full prior to the maturity date on December 21, 2016.
Loan and Security Agreement
On May 30, 2014, TechPrecision and Ranor entered into the Loan and Security Agreement, or LSA, with Utica. Pursuant to the LSA, Utica agreed to loan $4.15 million to Ranor under a Credit Loan Note, which was collateralized by a first secured interest in certain machinery and equipment at Ranor. Payments under the LSA and the Credit Loan Note were due in monthly installments with an interest rate on the unpaid principal balance of the Credit Loan Note equal to 7.5% plus the greater of 3.3% or the six-month LIBOR interest rate, as described in the Credit Loan Note. Ranor’s obligations under the LSA and the Credit Loan Note were guaranteed by TechPrecision. At March 31, 2016, the rate of interest on the debt under the LSA was 10.8%.
Pursuant to the LSA, Ranor was subject to certain restrictive covenants which, among other things, restricted Ranor’s ability to (1) declare or pay any dividend or other distribution on its equity, purchase or retire any of its equity, or alter its capital structure; (2) make any loan or guaranty or assume any obligation or liability; (3) default in payment of any debt in excess of $5,000 to any person; (4) sell any of the collateral outside the normal course of business; and (5) enter into any transaction that would materially or adversely affect the collateral or Ranor’s ability to repay the obligations under the LSA and the Credit Loan Note. The restrictions contained in these covenants were subject to certain exceptions specified in the LSA and in some cases could have been waived by written consent of Utica. Any failure to comply with the covenants outlined in the LSA without waiver by Utica or certain other provisions in the LSA would constitute an event of default, pursuant to which Utica could have accelerated the repayment of the loan. In connection with the execution of the LSA, the Company paid approximately $0.24 million in fees and associated costs and utilized approximately $2.65 million of the proceeds of the Credit Loan Note to pay off, or complete a refinancing of, debt obligations owed to Santander Bank N.A. under a loan agreement. We retained approximately $1.27 million of the proceeds of the Credit Loan Note for general corporate purposes.
The obligations under the LSA and the Credit Loan Note were paid in full prior to the maturity date on April 26, 2016.
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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 expire in September 2018.
The maturities of all of our debt including the capital lease are as follows: 2018: $717,481, 2019: $799,744, 2020: $811,896, 2021: $935,893 and 2022: $2,516,165.
NOTE 9 - INCOME TAXES
We account for income taxes under the provisions of FASB ASC 740, Income Taxes. The following table reflects income (loss) from continuing operations by location, and the provision and benefit for income taxes and the effective tax rate for the applicable fiscal years ended March 31:
| 2017 | 2016 | |||||||
| U.S. operations | $ | 2,268,906 | $ | 1,409,487 | ||||
| Foreign operations | (23,056 | ) | (51,801 | ) | ||||
| Income from operations before tax | 2,245,850 | 1,357,686 | ||||||
| Income tax benefit | (2,834,319 | ) | (768 | ) | ||||
| Net income | $ | 5,080,169 | $ | 1,358,454 | ||||
The income tax benefit consists of the following as of March 31:
| 2017 | 2016 | |||||||
| Current | ||||||||
| Federal | $ | 37,361 | $ | 9,032 | ||||
| State | — | (9,800 | ) | |||||
| Total Current | $ | 37,361 | $ | (768 | ) | |||
| Deferred | ||||||||
| Federal | (2,320,258 | ) | — | |||||
| State | (551,422 | ) | — | |||||
| Total Deferred | $ | (2,871,680 | ) | $ | (768 | ) | ||
| Income tax benefit | $ | (2,834,319 | ) | $ | (768 | ) | ||
Reconciliation between income taxes computed at the U.S. federal statutory rate to the actual tax benefit for income taxes reported in the Consolidated Statements of Operations and Comprehensive Income for fiscal years ended March 31:
| 2017 | 2016 | |||||||
| Federal statutory income tax | $ | 763,589 | $ | 461,613 | ||||
| State income tax, net of federal benefit | 41,603 | (6,468 | ) | |||||
| Change in valuation allowance | (3,580,148 | ) | (485,846 | ) | ||||
| Stock based compensation | — | 23,096 | ||||||
| Other | (59,363 | ) | 6,887 | |||||
| Income tax benefit | $ | (2,834,319 | ) | $ | (768 | ) | ||
We adopted the new presentation of deferred taxes requiring deferred income tax assets and liabilities to be classified as noncurrent in our Consolidated Balance Sheets in the fourth quarter of fiscal 2016, on a prospective basis. The following table summarizes the components of deferred income tax assets and liabilities:
| 2017 | 2016 | |||||||
| Deferred Tax Assets: | ||||||||
| Compensation | $ | 162,571 | $ | 307,427 | ||||
| Loss on uncompleted contracts | 58,409 | 180,521 | ||||||
| Foreign currency translation adjustment | 5,508 | 5,455 | ||||||
| Other liabilities not currently deductible | 364,569 | 265,455 | ||||||
| Share based compensation awards | 245,811 | 92,744 | ||||||
| Net operating loss carryforward | 4,093,968 | 4,950,542 | ||||||
| Valuation allowance | (1,537,726 | ) | (5,117,874 | ) | ||||
| Total Deferred Tax Assets | $ | 3,393,110 | $ | 684,270 | ||||
| Deferred Tax Liabilities: | ||||||||
| Accelerated depreciation | $ | (521,430 | ) | $ | (684,270 | ) | ||
| Total Deferred Tax Liabilities | $ | (521,430 | ) | $ | (684,270 | ) | ||
| Net Deferred Tax Asset | $ | 2,871,680 | $ | — | ||||
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In assessing the recoverability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. We have determined that it is more likely than not that certain future tax benefits may not be realized. Accordingly, a valuation allowance has been recorded against deferred tax assets that are unlikely to be realized. Realization of the remaining deferred tax assets will depend on the generation of sufficient taxable income in the appropriate jurisdictions, the reversal of deferred tax liabilities, tax planning strategies and other factors prior to the expiration date of the carryforwards. A change in the estimates used to make this determination could require an increase in deferred tax assets if they become realizable.
The valuation allowance on deferred tax assets at March 31, 2017 was $1.5 million as compared to $5.1 million at March 31, 2016, a decrease of $3.6 million. The decrease was primarily related to the release of a valuation allowance on deferred tax assets which are no longer required primarily as a result of achieving sustained profitability in certain tax jurisdictions. 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 have provided a valuation allowance of $1.5 million 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.
The following table summarizes carryforwards of net operating losses and tax credits as of March 31, 2017:
| Amount | Begins to Expire: | |||||||
| Federal net operating losses | $ | 6,589,720 | 2026 | |||||
| Federal alternative minimum tax credits | $ | 122,578 | Indefinite | |||||
| State net operating losses | $ | 26,022,238 | 2032 | |||||
The Internal Revenue Code provides for a limitation on the annual use of net operating loss carryforwards following certain ownership changes that could limit our ability to utilize these carryforwards on a yearly basis. We experienced an ownership change in connection with the acquisition of Ranor in 2006. Accordingly, our ability to utilize certain carryforwards relating to 2006 and prior is limited. Our remaining pre-2006 net operating losses total approximately $1.2 million. As such, at March 31, 2017, we have approximately $5.4 million of post-2006 losses available for carryforward, without limitation. U.S. tax laws limit the time during which these carryforwards may be applied against future taxes. Therefore, we may not be able to take full advantage of these carryforwards for Federal or state income tax purposes.
We have not accrued any penalties with respect to uncertain tax positions. We file income tax returns in the U.S. federal jurisdiction and various U.S. state jurisdictions. Our foreign subsidiary files separate income tax returns in China, the foreign jurisdiction in which it is located. Tax years 2013 and forward remain open for examination. We recognize interest and penalties accrued related to income tax liabilities in selling, general and administrative expense in our Consolidated Statements of Operations and Comprehensive Income.
NOTE 10 - 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. Our contributions were $82,189 and $61,302 for the years ended March 31, 2017 and 2016, respectively.
NOTE 11 - CAPITAL STOCK
Common Stock
We had 90,000,000 authorized shares of common stock at March 31, 2017 and March 31, 2016. There were 28,824,593 and 27,324,593 shares of common stock outstanding at March 31, 2017 and March 31, 2016, respectively.
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Preferred Stock
We have 10,000,000 authorized shares of preferred stock and our board of directors has broad power to create one or more series of preferred stock and to designate the rights, preferences, privileges and limitations of the holders of such series. Our board of directors had created one series of preferred stock - the Series A Convertible Preferred Stock.
Each share of Series A Convertible Preferred Stock was initially convertible into one share of common stock. As a result of our failure to meet certain levels of earnings before interest, taxes, depreciation and amortization for the years ended March 31, 2006 and 2007, the conversion rate changed, and each share of Series A Convertible Preferred Stock became convertible into 1.3072 shares of common stock, with an effective conversion price of $0.218.
On September 24, 2015, 1,927,508 shares of Series A Convertible Preferred Stock were converted into 2,519,635 shares of common stock. There were no shares of Series A Convertible Preferred Stock outstanding at March 31, 2017 and 2016, as the last outstanding shares of Series A Convertible Preferred Stock were converted into shares of common stock in fiscal 2016.
NOTE 12 - STOCK BASED COMPENSATION
Our board of directors, upon the recommendation of the 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, or the Annual Meeting, on December 8, 2016. The 2016 Plan succeeds the 2006 Plan and applies to awards granted after the Annual Meeting. We have designed the 2016 Plan to reflect our commitment to having best practices in both compensation and corporate governance. The 2016 Plan provides for a share reserve of 5,000,000 shares of common stock.
The 2016 Plan authorizes the award of incentive and non-qualified stock options, restricted stock awards, restricted stock units, and performance awards to employees, directors, consultants, and other individuals who provide services to TechPrecision or its affiliates. The purposes of the 2016 Plan are to: (a) enable TechPrecision and its affiliated companies to recruit and retain highly qualified employees, directors and consultants; (b) provide those employees, directors and consultants with an incentive for productivity; and (c) provide those employees, directors and consultants with an opportunity to share in the growth and value of the Company. Subject to adjustment as provided in the 2016 Plan, the maximum number of shares of common stock that may be issued in respect of awards under the 2016 Plan is 5,000,000 shares (inclusive of awards issued under the 2006 Long-Term Incentive Plan, or the 2006 Plan, that remained outstanding as of the effective date of the 2016 Plan), all of which shares may be issued in respect of incentive stock options. On December 8, 2016, there were 1,958,500 shares underlying awards issued under the 2006 Plan that remained outstanding. The 2006 Plan expired under its own terms in February 2016. Awards granted under the 2006 Plan will remain outstanding until expiration or settlement. Shares of our common stock subject to awards that expire unexercised or are otherwise forfeited shall again be available for awards under the 2016 Plan.
On March 31, 2017, in connection with a consulting agreement with our retiring directors, we granted stock options to the retiring members of our board of directors to collectively purchase 66,668 shares of common stock at an exercise price of $0.75 per share, the fair market value on the date of grant. All of the options granted vested immediately and will expire on the second anniversary of the grant date. The fair value of the options is $24,350 and was expensed on March 31, 2017.
On December 27, 2016, in recognition of performance and to increase the alignment of his interests with those of our stockholders, TechPrecision granted to Alexander Shen, TechPrecision’s Chief Executive Officer, a non-qualified stock option to purchase 1,000,000 shares of our common stock at an exercise price of $0.50, the closing price of our common stock on the date of the grant. The grant was made under the 2016 Plan and a Non-Qualified Stock Option Award Agreement, dated December 27, 2016, from TechPrecision to Mr. Shen. The option was immediately vested and exercisable with respect to 666,667 shares of common stock and will become vested and exercisable with respect to the remaining 333,333 shares on December 27, 2017, provided that Mr. Shen remains in continuous service as an employee of the Company through such vesting date. The options have a remaining weighted average contract life of nine years. The fair value of the options is $418,995 and $314,350 was expensed in the fiscal year ended March 31, 2017. At March 31, 2017, there was $133,117 of total unrecognized compensation cost related to the stock options, and these costs are expected to be recognized over the next twelve months.
On July 1, 2015, we granted stock options to members of our board of directors to collectively purchase 30,000 shares of common stock at an exercise price of $0.10 per share, the fair market value on the date of grant. Fifty percent of the options vested upon the six month anniversary of the grant date while the remaining fifty percent of the options vested upon the eighteen month anniversary of the grant date.
On August 12, 2015, we granted stock options to our chief executive officer to purchase in total 1,000,000 shares of common stock at an exercise price of $0.08 per share, the fair market value on the date of grant. One third of the options vested on the date of the grant, one third of the options vested on the first anniversary of the grant date, and the final one third of the options will vest on the second anniversary of the grant date.
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On January 21, 2016, we granted stock options to our chief financial officer to purchase in total 500,000 shares of common stock at an exercise price of $0.17 per share, the fair market value on the date of grant. One third of the options vested on the date of the grant, one third of the options vested on the first anniversary of the grant date, and the final one third of the options will vest on the second anniversary of the grant date.
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 presented range from 110.2% to 123.8% for volatility, 1.93% to 2.07% for the risk free interest rate, and approximately two to six years for the expected life. At March 31, 2017, there were 1,997,332 shares available for grant under the 2016 Plan.
The following table summarizes information about options for the most recent annual income statements presented:
| Number Of | Weighted Average | Aggregate Intrinsic | Weighted Average Remaining Contractual Life | |||||||||||||
| Options | Exercise Price | Value | (in years) | |||||||||||||
| Outstanding at 3/31/2015 | 1,190,500 | $ | 1.049 | $ | 21,600 | 5.18 | ||||||||||
| Granted | 1,530,000 | $ | 0.110 | |||||||||||||
| Exercised | (135,000 | ) | $ | 0.080 | ||||||||||||
| Forfeited | (187,000 | ) | $ | 0.841 | ||||||||||||
| Outstanding at 3/31/2016 | 2,398,500 | $ | 0.711 | $ | 183,900 | 7.90 | ||||||||||
| Granted | 1,066,668 | $ | 0.516 | 250,000 | ||||||||||||
| Expired | (440,000 | ) | $ | 0.770 | ||||||||||||
| Forfeited | (22,500 | ) | $ | 0.912 | ||||||||||||
| Outstanding at 3/31/2017 | 3,002,668 | $ | 0.387 | $ | 1,246,600 | 5.72 | ||||||||||
| Vested or expected to vest at 3/31/2017 | 3,002,668 | $ | 0.387 | $ | 1,246,600 | 5.72 | ||||||||||
| Exercisable and vested at 3/31/2017 | 2,169,334 | $ | 0.434 | $ | 843,266 | 5.72 | ||||||||||
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 fourth quarter of fiscal 2017 and fiscal 2016 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 March 31, 2017. This amount changes based on the fair market value of the Company’s common stock. The total intrinsic value of options exercised for the year ended March 31, 2016 was $10,800.
The following table summarizes the status of our stock options outstanding but not vested for the year ended March 31, 2017:
| Number of Options | Weighted Average Exercise Price | |||||||
| Outstanding at 3/31/2015 | 112,500 | $ | 0.664 | |||||
| Granted | 1,530,000 | $ | 0.110 | |||||
| Forfeited | (40,000 | ) | $ | 0.670 | ||||
| Vested | (574,166 | ) | $ | 0.216 | ||||
| Outstanding at 3/31/2016 | 1,028,334 | $ | 0.117 | |||||
| Granted | 1,066,668 | $ | 0.516 | |||||
| Forfeited | (13,333 | ) | $ | 0.670 | ||||
| Vested | (1,248,335 | ) | $ | 0.352 | ||||
| Outstanding at 3/31/2017 | 833,334 | $ | 0.266 | |||||
| 40 |
The total fair value of shares vested during the year was $439,835. Other information relating to stock options outstanding at March 31, 2017 is as follows:
| Range of Exercise Prices: | Options Outstanding |
Weighted Average Remaining Contractual Term |
Weighted Average Exercise Price |
Options Exercisable |
Weighted Average Exercise Price |
||||||||||||||||
| $0.01-$1.00 | 2,821,668 | 6.40 | $ | 0.31 | 1,988,334 | $ | 0.33 | ||||||||||||||
| $1.01-$1.96 | 181,000 | 3.28 | $ | 1.60 | 181,000 | $ | 1.60 | ||||||||||||||
| Totals | 3,002,668 | 2,169,334 | |||||||||||||||||||
Restricted Stock Awards
In December 2014, each non-employee director waived any compensation owed to them for their service to the Company. On November 10, 2016, our board of directors determined that it would grant shares of common stock to each of our directors as compensation for their service to the Company during the period from January 1, 2014 to November 10, 2016. Accordingly, our board of directors granted 600,000 shares of common stock to Mr. Leonard Anthony, 250,000 shares of common stock to each of Mr. Philip Dur and Mr. Michael Holly, and 200,000 shares of common stock to Mr. Robert Isaman and Mr. Andrew Levy. The grant of shares of common stock to Mr. Anthony also recognizes his uncompensated service as Executive Chairman of the Company during the period from January 1, 2014 to November 17, 2014. The Company recorded an expense of $780,000 in connection with these grants of shares of common stock, based on the closing market price of our common stock on the date of grant.
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 March 31, 2017, there were accounts receivable balances outstanding from three customers comprising 83% 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:
| March 31, 2017 | March 31, 2016 | |||||||||||||||
| Customer | Dollars | Percent | Dollars | Percent | ||||||||||||
| A | $ | 961,463 | 51 | % | $ | 834,501 | 41 | % | ||||||||
| B | $ | 406,428 | 22 | % | $ | 315,699 | 16 | % | ||||||||
| C | $ | 187,410 | 10 | % | $ | * | * | % | ||||||||
| D | $ | * | * | % | $ | 225,415 | 11 | % | ||||||||
*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 for the fiscal year ended:
| March 31, 2017 | March 31, 2016 | |||||||||||||||
| Customer | Dollars | Percent | Dollars | Percent | ||||||||||||
| A | $ | 7,515,795 | 41 | % | $ | 3,519,258 | 21 | % | ||||||||
| B | $ | 2,324,504 | 13 | % | $ | 2,958,232 | 18 | % | ||||||||
| C | $ | 2,166,171 | 12 | % | $ | * | * | % | ||||||||
| D | $ | * | * | % | $ | 1,802,148 | 11 | % | ||||||||
*less than 10% of total
NOTE 14 – SEGMENT INFORMATION
We consider our business to consist of one segment - metal fabrication and precision machining. All of our operations, assets and customers are located in the United States.
NOTE 15 – COMMITMENTS
Operating Leases
We lease approximately 1,000 square feet of office space in Wuxi, China. The annual rental cost is approximately $4,000 and the lease expires in October 2017. The lease can be renewed on an annual basis.
| 41 |
Rent expense for all operating leases for the fiscal years ended March 31, 2017 and 2016 was $3,738 and $21,206, respectively.
Future minimum lease payments required under non-cancellable operating leases at March 31, 2017 totaled $1,983.
Expiration of a Lease
The Company leased approximately 1,100 square feet located at 992 Old Eagle School Road, Wayne, Pennsylvania, pursuant to an office lease with GPX Wayne Office Properties, L.P., or GPX Wayne. On June 30, 2016, this office lease expired under its own terms and was not renewed. Other than as described above, there is no relationship between the Company and GPX Wayne.
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 March 31, 2017 for future executive salaries during the fiscal year ending March 31, 2018, including severance for our former chief financial officer and fiscal 2017 bonuses payable after March 31, 2017, was approximately $0.8 million. The aggregate commitment at March 31, 2017 was approximately $0.4 million for accrued payroll, vacation and holiday pay for the remainder of our employees.
Purchase Commitments
As of March 31, 2017, we had $0.9 million in purchase obligations outstanding, which primarily consisted of contractual commitments to purchase new machinery and equipment.
Class Action Lawsuit
On or about February 26, 2016, nine former employees of Ranor filed a complaint in the Massachusetts Superior Court, Worcester County, against former and current executive officers of Ranor, alleging violations of the Massachusetts Wage Act, breach of contract and conversion. Plaintiffs claim that Ranor’s modification to its personal time off, or PTO, policy in April 2014 caused these employees to forfeit earned PTO. Plaintiffs purport to assert their claims on behalf of a class of all current and former employees of Ranor who were affected by the modification to Ranor’s PTO policy. The pre-trial discovery phase ended on June 21, 2017. No trial date has been set.
NOTE 16 – CLAIM ASSIGNMENT SETTLEMENT
On April 17, 2015, we entered into an Assignment of Claim Agreement, or the Assignment Agreement, with Citigroup Financial Products, Inc., or Citigroup, whereby we sold, transferred, conveyed and assigned to Citigroup all of Ranor’s right, title and interest in Ranor’s $3,740,956 unsecured claim against GT Advanced Technologies, Inc., or GTAT, in connection with GTAT’s bankruptcy. Pursuant to the Assignment Agreement, on April 21, 2015, Citigroup paid to Ranor an initial amount equal to $507,835, which was 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 was fully and finally allowed against GTAT without objection. On November 7, 2016, GTAT’s legal counsel notified Citigroup that Ranor’s unsecured claim in GTAT’s bankruptcy 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 was recognized as a gain of $1,122,287 in the Statement of Operations and Comprehensive Income for the three months ended December 31, 2016.
NOTE 17 - 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.
| March 31, 2017 | March 31, 2016 | |||||||
| Basic EPS | ||||||||
| Net Income | $ | 5,080,169 | $ | 1,358,454 | ||||
| Weighted average shares | 27,908,155 | 26,392,514 | ||||||
| Basic Income per share | $ | 0.18 | $ | 0.05 | ||||
| Diluted EPS | ||||||||
| Net Income | $ | 5,080,169 | $ | 1,358,454 | ||||
| Dilutive effect of stock options | 702,919 | 180,223 | ||||||
| Diluted weighted average shares | 28,611,074 | 26,572,737 | ||||||
| Diluted Income per share | $ | 0.18 | $ | 0.05 | ||||
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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. There were 1,472,668 of potential common stock equivalents that were out-of-the-money and were not included in the EPS calculations above for the year ended March 31, 2017. For the year ended March 31, 2016 there were 1,368,500 of potentially anti-dilutive stock options, none of which were included in the EPS calculations above.
NOTE 18 – SELECTED QUARTERLY INFORMATION (UNAUDITED)
The following table sets forth certain unaudited quarterly data for each of the four quarters in the years ended March 31, 2017 and 2016. The data has been derived from our unaudited consolidated financial statements that, in management’s opinion, include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of such information when read in conjunction with the Consolidated Financial Statements and Notes thereto. Net Income for each of the periods presented includes contract losses and unabsorbed overhead that increased cost of goods sold and lowered gross profit. The results of operations for any quarter are not necessarily indicative of the results of operations for any future period.
| (in thousands, except for per share data) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| Year ended March 31, 2017 | ||||||||||||||||
| Net Sales | $ | 4,644 | $ | 3,656 | $ | 5,319 | $ | 4,931 | ||||||||
| Gross Profit | $ | 1,535 | $ | 1,474 | $ | 2,052 | $ | 1,035 | ||||||||
| Net Income | $ | 445 | $ | 546 | $ | 992 | $ | 3,097 | ||||||||
| Basic Income per share | $ | 0.02 | $ | 0.02 | $ | 0.03 | $ | 0.11 | ||||||||
| Diluted Income per share | $ | 0.02 | $ | 0.02 | $ | 0.03 | $ | 0.11 | ||||||||
| Year ended March 31, 2016 | ||||||||||||||||
| Net Sales | $ | 4,374 | $ | 4,103 | $ | 3,507 | $ | 4,869 | ||||||||
| Gross Profit | $ | 1,283 | $ | 1,408 | $ | 1,072 | $ | 1,731 | ||||||||
| Net Income | $ | 206 | $ | 255 | $ | 12 | $ | 885 | ||||||||
| Basic Income per share | $ | 0.01 | $ | 0.01 | $ | 0.00 | $ | 0.03 | ||||||||
| Diluted Income per share | $ | 0.01 | $ | 0.01 | $ | 0.00 | $ | 0.03 | ||||||||
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.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 March 31, 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.
| 43 |
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.
Management’s Report of Internal Control over Financial Reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2017 based on the 1992 framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework. Based on that assessment, management concluded that, as of March 31, 2017, the Company’s internal control over financial reporting is effective based on the criteria established in Internal Control - Integrated Framework.
Changes in Internal Control over Financial Reporting
For the quarter ended March 31, 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.
Not Applicable.
| Item 10. | Directors, Executive Officers and Corporate Governance |
| a) | Directors of the Registrant. | |
| Information with respect to Directors of the Company will be set forth under the heading “Election of Directors” in the Company’s Proxy Statement for the 2017 Annual Meeting of Stockholders and is incorporated herein by reference. |
| b) | Executive Officers of the Registrant. | |
| Information with respect to executive officers of the Company is set forth under “Item 4A Executive Officers of the Registrant” in this Annual Report on Form 10-K. |
| c) | Section 16(a) Beneficial Ownership Reporting Compliance. | |
| Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 will be set forth under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for the 2017 Annual Meeting of Stockholders and is incorporated herein by reference. |
| 44 |
| d) | Identification of the Audit Committee. | |
| Information concerning the audit committee of the Company will be set forth under the heading “Committees” in the Company’s Proxy Statement for the 2017 Annual Meeting of Stockholders and is incorporated herein by reference. |
| e) | Audit Committee Financial Expert. | |
| Information concerning the audit committee financial expert of the Company will be set forth under the heading “Committees of the Board” in the Company’s Proxy Statement for the 2017 Annual Meeting of Stockholders and is incorporated herein by reference. |
| f) | Shareholder Nomination Process. | |
| Information concerning any material changes to the way in which security holders may recommend nominees to the Company’s Board of Directors will be set forth under the heading “Stockholders’ Proposals for the 2018 Annual Meeting” in the Company’s Proxy Statement for the 2017 Annual Meeting of Stockholders and is incorporated herein by reference. |
| g) | Code of Ethics for Chief Executive Officer and Senior Financial Officers. | |
| The Company has adopted a Code of Ethics for the principal executive officer, principal financial officer and principal accounting officer of the Company, which may be found on the Company’s website at www.techprecision.com. Any amendments to the Code of Ethics or any grant of a waiver from the provisions of the Code of Ethics requiring disclosure under applicable SEC rules will be disclosed on the Company’s website. |
| Item 11. | Executive Compensation |
Information regarding executive compensation will be set forth under the heading “Executive Compensation” in the Company’s Proxy Statement for the 2017 Annual Meeting of Stockholders and is incorporated herein by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information regarding security ownership of certain beneficial owners and management will be set forth under the heading “Security Ownership of TechPrecision” in the Company’s Proxy Statement for the 2017 Annual Meeting of Stockholders and is incorporated herein by reference.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Information regarding transactions with related persons will be set forth under the headings “Certain Relationships and Related Transactions” and “Independence” in the Company’s Proxy Statement for the 2017 Annual Meeting of Stockholders and is incorporated herein by reference.
| Item 14. | Principal Accountant Fees and Services |
Information regarding fees paid to the Company’s principal accountant will be set forth under the heading “Principal Accountant Fees” in the Company’s Proxy Statement for the 2017 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules.
The following documents are filed as part of this report:
| (1) | Financial Statements, included in Part II, “Item 8. Financial Statements and Supplementary Data”: |
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of March 31, 2017 and 2016
Consolidated Statements of Operations and Comprehensive Income for the years ended March 31, 2017 and 2016
Consolidated Statement of Stockholders’ Equity as of March 31, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended March 31, 2017 and 2016
Notes to Consolidated Financial Statements
| (2) | Financial Statement Schedules: |
Financial statement schedules have been omitted because either they are not applicable or the required information is included in the financial statements or the notes thereto.
| (3) | The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed in the Exhibits Index to this Annual Report on Form 10-K. |
None.
| 45 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 | ||
| June 29, 2017 | By: | /s/ Thomas Sammons |
| Thomas Sammons | ||
| Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each person whose signature appears below hereby authorizes Alexander Shen and Thomas Sammons or either of them acting in the absence of the others, as his or her true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution for him or her and in his or her name, place and stead, in any and all capacities to sign any and all amendments to this report, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission.
| Signature | Title | Date | ||
| /s/ Alexander Shen | Chief Executive Officer | June 29, 2017 | ||
| Alexander Shen | (Principal Executive Officer) | |||
| /s/ Thomas Sammons | Chief Financial Officer | June 29, 2017 | ||
| Thomas Sammons | (Principal Financial and Accounting Officer) | |||
| /s/ Richard S. McGowan | Chairman of the Board | June 29, 2017 | ||
| Richard S. McGowan | ||||
| /s/ Robert A. Crisafulli | Director | June 29, 2017 | ||
| Robert A. Crisafulli | ||||
| /s/ Andrew A. Levy | Director | June 29, 2017 | ||
| Andrew A. Levy | ||||
| /s/ Walter M. Schenker | Director | June 29, 2017 | ||
| Walter M. Schenker |
| 46 |
Exhibit Index
| Exhibit No. | Description | |
| 2.1 | Assignment of Claim Agreement, dated April 17, 2015, by and between Ranor, Inc. and Citigroup Financial Products Inc. (incorporated herein by reference to Exhibit 2.1 to our Current Report on Form 8-K, filed with the Commission on April 23, 2015). | |
| 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). | |
| 4.1 | Amended and Restated Term Note in the original principal amount of $1,500,000 in the name of Revere High Yield Fund, LP, dated January 22, 2016 (incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K, filed with the Commission on January 25, 2016). | |
| 4.2 | Amended and Restated Term Note in the original principal amount of $750,000 in the name of Revere High Yield Fund, LP, dated January 22, 2016 (incorporated herein by reference to Exhibit 10.3 to our Current Report on Form 8-K, filed with the Commission on January 25, 2016). | |
| 10.1 | Loan Agreement, dated December 20, 2016, by and between Ranor, Inc. and Commerce Bank & Trust Company (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed with the Commission on December 28, 2016). | |
| 10.2 | Amendment, dated December 20, 2016, to Master Loan and Security Agreement No. 4180, dated as of March 31, 2016, by and between People’s Capital and Leasing Corp. and Ranor, Inc. (incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K, filed with the Commission on December 28, 2016). | |
| 10.3† | Non-Qualified Stock Option Award Agreement, dated as of December 27, 2016, from TechPrecision Corporation to Alexander Shen (incorporated herein by reference to Exhibit 10.3 to our Current Report on Form 8-K, filed with the Commission on December 28, 2016). | |
| 10.4† | TechPrecision Corporation 2016 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q, filed with the Commission on February 14, 2017). | |
| 10.5† | 2006 Long-term Incentive Plan, as restated effective November 22, 2010 (incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q, filed with the Commission on February 14, 2011 and). | |
| 10.6 | Purchase and Sale Agreement, dated December 20, 2010, between WM Realty Management, LLC and Ranor, Inc. (incorporated herein by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q, filed with the Commission on February 14, 2011). | |
| 10.7† | Form of Option Award Agreement for Directors (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the Commission on June 17, 2013). | |
| 10.8† | Form of Restricted Stock Award Agreement (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed with the Commission on March 20, 2014). | |
| 10.9† | Separation, Severance and Release Agreement, dated July 14, 2014, between TechPrecision Corporation and Robert Francis (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed with the Commission on July 18, 2014). | |
| 10.10† | Employment Agreement, dated November 14, 2014, between TechPrecision Corporation and Alexander Shen (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed with the Commission on November 20, 2014). | |
| 10.11 | Lease Agreement, dated June 1, 2015, by and between GPX Wayne Office Properties, L.P. and TechPrecision Corporation (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed with the Commission on June 5, 2015). | |
| 10.12 | Term Loan and Security Agreement, dated December 22, 2014, by and between Revere High Yield Fund, LP and Ranor, Inc. (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed with the Commission on December 29, 2014). | |
| 10.13 | Guaranty Agreement, dated December 22, 2014, by and between TechPrecision Corporation and Revere High Yield Fund LP (incorporated herein by reference to Exhibit 10.4 to our Current Report on Form 8-K, filed with the Commission on December 29, 2014). |
| 47 |
| 10.14 | Note and Other Loan Documents Modification Agreement, dated December 31, 2015, by and between Revere High Yield Fund, LP, Ranor, Inc. and TechPrecision Corporation (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed with the Commission on January 6, 2016). | |
| 10.15 | Note and Other Loan Documents Modification Agreement No. 2, dated January 22, 2016, by and between Revere High Yield Fund, LP, Ranor, Inc. and TechPrecision Corporation (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed with the Commission on January 25, 2016). | |
| 10.16† | Employment Agreement, dated March 31, 2016, between TechPrecision Corporation and Thomas Sammons (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed with the Commission on April 6, 2016). | |
| 10.17 | Master Loan and Security Agreement No. 4180, dated as of March 31, 2016, by and between People’s Capital and Leasing Corp. and Ranor, Inc. (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed with the Commission on May 2, 2016). | |
| 10.18 | Schedule No. 002, dated September 6, 2016, to the Master Loan and Security Agreement No. 4180, dated March 31, 2016, by and between People’s Capital and Leasing Corp. and Ranor, Inc. (incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K, filed with the Commission on October 7, 2016). | |
| 10.19 | Loan Documents Modification Agreement No. 3, dated March 31, 2016, by and among Revere High Yield Fund, LP, Ranor, Inc., and TechPrecision Corporation (incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K, filed with the Commission on May 2, 2016). | |
| 10.20 | Intercreditor and Subordination Agreement, dated as of March 31, 2016, between and among People’s Capital and Leasing Corp., Revere High Yield Fund, LP, and Ranor, Inc. (incorporated herein by reference to Exhibit 10.3 to our Current Report on Form 8-K, filed with the Commission on May 2, 2016). | |
| 10.21 | Mortgagee’s Disclaimer and Consent, dated March 31, 2016, by Revere High Yield Fund, LP in favor of People’s Capital and Leasing Corp. (incorporated herein by reference to Exhibit 10.4 to our Current Report on Form 8-K, filed with the Commission on May 2, 2016). | |
| 10.22 | Termination, Separation and Release Agreement, dated June 14, 2016 between TechPrecision Corporation and Richard F. Fitzgerald (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed with the Commission on June 27, 2016). | |
| 21.1 | List of Subsidiaries. | |
| 23.1 | Consent of Marcum LLP | |
| 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 Annual Report on Form 10-K for the fiscal year ended March 31, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at March 31, 2017 and 2016; (ii) the Consolidated Statements of Operations and Comprehensive Income for the years ended March 31, 2017 and 2016; (iii) the Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2017 and 2016; (iv) the Consolidated Statements of Cash Flows for the years ended March 31, 2017 and 2016; and (v) the Notes to the Consolidated Financial Statements. |
† Management contract or compensatory arrangement or plan.
| 48 |
Exhibit 21.1
SUBSIDIARIES OF THE COMPANY
| State of Incorporation | Stock Ownership | |||||
| Ranor, Inc. | Delaware | 100 | % | |||
| Wuxi Critical Mechanical Components | China | 100 | % | |||
Exhibit 23.1
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We consent to the incorporation by reference in the Registration Statements of TechPrecision Corporation on Form S-8 (File No. 333-215028, 333-214541, 333-177315, and 333-148152) of our report dated June 29, 2017, with respect to our audits of the consolidated financial statements of TechPrecision Corporation as of March 31, 2017 and 2016 and for the years then ended, which report is included in this Annual Report on Form 10-K of TechPrecision Corporation for the year ended March 31, 2017.
/s/ Marcum LLP
Marcum LLP
Philadelphia, Pennsylvania
June 29, 2017
Exhibit 31.1
CERTIFICATION
I, Alexander Shen, certify that:
1. I have reviewed this annual report on Form 10-K of TechPrecision Corporation for the year ended March 31, 2017;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: June 29, 2017 | /s/ Alexander Shen |
| Alexander Shen | |
| Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Thomas Sammons, certify that:
1. I have reviewed this annual report on Form 10-K of TechPrecision Corporation for the year ended March 31, 2017;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: June 29, 2017 | /s/ Thomas Sammons |
| Thomas Sammons | |
| Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report on Form 10-K of TechPrecision Corporation (the “Company”) for the year ended March 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Alexander Shen, the Chief Executive Officer of the Company, and I, Thomas Sammons, the Chief Financial Officer of the Company, do hereby certify pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: June 29, 2017 | /s/ Alexander Shen |
| Alexander Shen | |
| Chief Executive Officer | |
| Dated: June 29, 2017 | /s/ Thomas Sammons |
| Thomas Sammons | |
| Chief Financial Officer |
Document And Entity Information - USD ($) $ in Millions |
12 Months Ended | ||
|---|---|---|---|
Mar. 31, 2017 |
Jun. 08, 2017 |
Sep. 30, 2016 |
|
| Document Information [Line Items] | |||
| Document Type | 10-K | ||
| Amendment Flag | false | ||
| Document Period End Date | Mar. 31, 2017 | ||
| Document Fiscal Year Focus | 2017 | ||
| Document Fiscal Period Focus | FY | ||
| Entity Registrant Name | TECHPRECISION CORP | ||
| Entity Central Index Key | 0001328792 | ||
| Current Fiscal Year End Date | --03-31 | ||
| Entity Well-known Seasoned Issuer | No | ||
| Entity Voluntary Filers | No | ||
| Entity Current Reporting Status | Yes | ||
| Entity Filer Category | Smaller Reporting Company | ||
| Entity Public Float | $ 12.7 | ||
| Trading Symbol | TPCS | ||
| Entity Common Stock, Shares Outstanding | 28,824,593 |
CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares |
Mar. 31, 2017 |
Mar. 31, 2016 |
|---|---|---|
| Common stock, par value (in dollars per share) | $ 0.0001 | $ 0.0001 |
| Common stock, shares authorized | 90,000,000 | 90,000,000 |
| Common stock, shares issued | 28,824,593 | 27,324,593 |
| Common stock, shares outstanding | 28,824,593 | 27,324,593 |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($) |
Total |
Preferred Stock |
Common Stock |
Additional Paid in Capital |
Accumulated Other Comprehensive Income (Loss) |
Retained Earnings (accumulated deficit) |
|---|---|---|---|---|---|---|
| Balance at Mar. 31, 2015 | $ 288,495 | $ 524,210 | $ 2,467 | $ 6,487,589 | $ 23,561 | $ (6,749,332) |
| Balance (in shares) at Mar. 31, 2015 | 1,927,508 | 24,669,958 | ||||
| Share based compensation | 88,041 | 88,041 | ||||
| Restricted shares issued, net of shares returned for withholding taxes | (4,826) | $ 13 | (4,839) | |||
| Restricted shares issued, net of shares returned for withholding taxes (in shares) | 135,000 | |||||
| Conversion of preferred stock | 0 | $ (524,210) | $ 252 | 523,958 | ||
| Conversion of preferred stock (in shares) | (1,927,508) | 2,519,635 | ||||
| Net Income | 1,358,454 | 1,358,454 | ||||
| Other comprehensive loss, net of tax benefit ($0) | (1,993) | (1,993) | ||||
| Balance at Mar. 31, 2016 | 1,728,171 | $ 0 | $ 2,732 | 7,094,749 | 21,568 | (5,390,878) |
| Balance (in shares) at Mar. 31, 2016 | 0 | 27,324,593 | ||||
| Share based compensation | 384,221 | 384,221 | ||||
| Common stock awards | 780,000 | $ 150 | 779,850 | |||
| Common stock awards (in shares) | 1,500,000 | |||||
| Net Income | 5,080,169 | 5,080,169 | ||||
| Other comprehensive loss, net of tax benefit ($0) | (2,240) | (2,240) | ||||
| Balance at Mar. 31, 2017 | $ 7,970,321 | $ 0 | $ 2,882 | $ 8,258,820 | $ 19,328 | $ (310,709) |
| Balance (in shares) at Mar. 31, 2017 | 0 | 28,824,593 |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Parenthetical) - USD ($) |
12 Months Ended | |
|---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
|
| Other comprehensive income (loss), tax benefit | $ 0 | $ 0 |
DESCRIPTION OF BUSINESS |
12 Months Ended | |
|---|---|---|
Mar. 31, 2017 | ||
| DESCRIPTION OF BUSINESS | ||
| DESCRIPTION OF BUSINESS | NOTE 1 - DESCRIPTION OF BUSINESS TechPrecision Corporation, or TechPrecision, is a Delaware corporation organized in February 2005 under the name Lounsberry Holdings II, Inc. The name was changed to TechPrecision Corporation on March 6, 2006. 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. 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. |
SIGNIFICANT ACCOUNTING POLICIES |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||
| SIGNIFICANT ACCOUNTING POLICIES | ||||||||||||||||||||||||||||||||||||||||||
| SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Consolidation The accompanying consolidated financial statements include the accounts of TechPrecision, WCMC and Ranor. Intercompany transactions and balances have been eliminated in consolidation. Use of Estimates in the Preparation of Financial Statements In preparing the consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reported period. We continually evaluate our estimates, including those related to contract accounting, accounts receivable, inventories, the recovery of long-lived assets, income taxes and the valuation of equity transactions. We base our estimates on historical and current experiences and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Cash and cash equivalents Holdings of highly liquid investments with maturities of three months or less, when purchased, are considered to be cash equivalents. U.S. based deposits are maintained in a large regional bank. Our China subsidiary also maintains a bank account in a large national bank in China subject to People’s Republic of China (PRC) banking regulations. Cash on deposit with a large national China-based bank was $14,805 and $8,115 at March 31, 2017 and 2016, respectively. Foreign currency translation The majority of our business is transacted in U.S. dollars; however, the functional currency of our subsidiary in China is the local currency, the Chinese Yuan Renminbi. In accordance with ASC No. 830, Foreign Currency Matters (ASC 830), foreign currency translation adjustments of subsidiaries operating outside the United States are accumulated in other comprehensive income, a separate component of equity. Foreign currency transaction gains and losses are recognized in the determination of net income. Accounts receivable and allowance for doubtful accounts Accounts receivable are stated at the amount we expect to collect. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. Based on management’s assessment, we provide for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances which remain outstanding after reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Historically, the level of uncollectible accounts has not been significant. There was no bad debt expense recorded for the years ended March 31, 2017 and 2016. Inventories Inventories - raw materials is stated at the lower of cost or market determined by the first-in, first-out (FIFO) method. Property, plant and equipment, net Property, plant and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are accounted for on the straight-line method based on estimated useful lives. The amortization of leasehold improvements is based on the shorter of the lease term or the useful life of the improvement. Amortization of assets recorded under capital leases is included under depreciation expense. Betterments and large renewals, which extend the life of the asset, are capitalized whereas maintenance and repairs and small renewals are expensed as incurred. The estimated useful lives are: machinery and equipment, 5-15 years; buildings, 30 years; and leasehold improvements, 2-5 years. Upon sale or retirement of machinery and equipment, costs and related accumulated depreciation are eliminated and gains or losses are recognized in the statement of operations. Interest is capitalized for assets that are constructed or otherwise produced for our own use, including assets constructed or produced for us by others for which deposits or progress payments have been made. Interest is capitalized to the date the assets are available and ready for use. When an asset is constructed in stages, interest is capitalized for each stage until it is available and ready for use. We use the interest rate incurred on funds borrowed specifically for the project. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. There was $7,158 of interest cost capitalized in fiscal 2017. In accordance with ASC No. 360, Property, Plant & Equipment (ASC 360), our property, plant and equipment is tested for impairment when triggering events occur and, if impaired, written-down to fair value based on either discounted cash flows or appraised values. The carrying amount of an asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group. Debt Issuance Costs Costs incurred in connection with obtaining financing for long-term debt are capitalized and presented as a reduction of the carrying amount of the related debt. Costs incurred in connection with obtaining financing for revolving credit facilities and lines of credit are capitalized and presented as deferred financing costs. Loan acquisition costs are being amortized using the effective interest method over the term of the loan. Operating Leases Operating leases are charged to operations on a straight-line basis over the term of the lease. We lease certain office space in China under a long-term, non-cancelable operating lease agreement. The lease expires in October 2017. Fair Value Measurements We account for fair value of financial instruments which defines fair value and establishes a framework to measure fair value and the related disclosures about fair value measurements in accordance with ASC No. 820, Fair Value Measurement (ASC 820). The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. The FASB establishes a fair value hierarchy used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories: Level 1: Inputs based upon quoted market prices for identical assets or liabilities in active markets at the measurement date; Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and Level 3: Inputs that are management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instruments’ valuation. In addition, we will measure fair value in an inactive or dislocated market based on facts and circumstances and significant management judgment. We will use inputs based on management estimates or assumptions, or make adjustments to observable inputs to determine fair value when markets are not active and relevant observable inputs are not available. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses, as presented in the balance sheet, approximates fair value due to the short-term nature of these instruments. The carrying value of short and long-term borrowings approximates their fair value. The Company’s short-term and long-term debt is all privately held with no public market for this debt and is considered to be Level 3 under the fair value hierarchy. Research and Development We charge research and development costs associated with the design and development of new products to expense when incurred. We incurred no research and development expense in fiscal 2017 or fiscal 2016. Selling, General, and Administrative Selling, general and administrative (SG&A) expenses include items such as executive compensation and benefits, professional fees, business travel and office costs. Advertising costs are nominal and expensed as incurred. Other general and administrative expenses include items for our administrative functions and include costs for items such as office rent, supplies, insurance, legal, accounting, tax, telephone and other outside services. SG&A consisted of the following for the fiscal years ended March 31:
Stock Based Compensation Stock based compensation represents the cost related to stock based awards granted to our board of directors and employees. We measure stock based compensation cost at the grant date based on the estimated fair value of the award and recognize the cost as expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. We estimate the fair value of stock options using a Black-Scholes valuation model. Stock based compensation is included in selling, general and administrative expense amounted to $1,164,221 and $88,041 for the fiscal years ended March 31, 2017 and 2016, respectively. See Note 12 – Stock Based Compensation for additional disclosures related to stock based compensation. Net Income per Share of Common Stock Basic net income per common share is computed by dividing net income by the weighted average number of shares outstanding during the year. Diluted net income per common share is calculated using net income divided by diluted weighted-average shares. Diluted weighted-average shares include weighted-average shares outstanding plus the dilutive effect of convertible preferred stock and stock options calculated using the treasury stock method. See Note 17 – Earnings per Share for additional disclosures related to net income per share. Revenue and Related Cost Recognition We have written agreements or purchase orders with our customers that specify contract prices and delivery terms. Revenue recognition requires the existence of a contract to provide the persuasive evidence of an arrangement and a determinable selling price, delivery of the product and reasonable collection prospects. The Company manufactures components under production-type contracts in a production process which meets our customer’s specifications. We account for revenues and earnings using the percentage of completion units of delivery method of accounting. Under this method, we recognize contract revenue and gross profit when the products are produced and delivered, or when services are rendered. We determine progress toward completion on production contracts based on output measures, such as units delivered, or in some cases, input measures, such as labor hours incurred. In fiscal 2017 and 2016, all of our revenue was recognized under the units of delivery method. We may combine contracts for accounting purposes when they are negotiated as a package with an overall profit margin objective. These essentially represent an agreement to do a single project for a single customer, involve interrelated construction activities with substantial common costs, and are performed concurrently or sequentially. When a group of contracts is combined, revenue and profit are earned when the products are produced and delivered. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability are recognized in the period in which the revisions are determined. Costs incurred on uncompleted contracts consist of labor, overhead, and materials. Work in process is stated at the lower of cost or market. We record provisions for contract losses within costs of sales in our Consolidated Statement of Operations and Comprehensive Income. Costs allocable to undelivered units are reported in the consolidated balance sheet as costs incurred on uncompleted contracts. Amounts in excess of the agreed upon contract price for customer directed changes, construction changes, customer delays or other causes of additional contract costs are recognized in contract value if it is probable that a claim for such amounts will result in additional revenue and the amounts can be reliably estimated. Revenues from such claims are recorded only to the extent that contract costs have been incurred. Revisions in cost and profit estimates are reflected in the period in which the facts requiring the revision become known and are estimable. When we can only estimate a range of revenues and costs, we use the most likely estimate within the range. If we cannot determine which estimate in the range is most likely, the amounts within the range that would result in the lowest profit margin is used (the lowest contract revenue estimate and the highest contract cost estimate). In some situations, it may be impractical for us to estimate either specific amounts or ranges of contract revenues and costs. However, if we can at least determine that we will not incur a loss, a zero profit model is adopted. The zero profit model results in the recognition of an equal amount of revenues and costs. This method is only used if more precise estimates cannot be made and its use is discontinued when such estimates are obtainable. When we obtain more precise estimates, the change is treated as a change in an accounting estimate. Shipping and Handling Costs Shipping and handling costs are included in cost of sales. Shipping and handling costs billed to customers in connection with the sale are included in net sales. Income Taxes In accordance with ASC No. 740, Income Taxes (ASC 740), income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. We recognize the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Reclassifications Certain reclassifications of prior-year financial information presented herein for comparative purposes have been reclassified to conform with current-year presentation. The reclassifications had no impact on 2016 net income. New Accounting Standards New Accounting Standards Recently Adopted In April 2015, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update (ASU) No. 2015-03, Simplifying the Presentation of Debt Issue Costs. The new guidance requires entities to present debt issue costs in the balance sheet as a direct reduction to the related debt liability rather than as a deferred cost (i.e., an asset) as required by past guidance. The new guidance does not change the recognition or measurement of debt issuance costs. The Company adopted the standard retrospectively in the first quarter of the fiscal year ended March 31, 2017, or fiscal 2017. Debt issuance costs related to revolving credit facilities and lines of credit will continue to be capitalized and presented as deferred financing costs. At March 31, 2016, long-term debt obligations were previously reported in the consolidated balance sheets as $3,782,752 with the associated $47,342 reported as deferred financing costs included in other assets. The fiscal 2016 unamortized debt issuance costs are now presented as a direct reduction of long-term debt obligations in these consolidated financial statements. Issued Standards Not Yet Adopted 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 Consolidated Financial Statements and disclosures by comparing our current revenue recognition policy with the requirements of the new standard. It is possible that our current practices may no longer be viable 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 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 do not plan to early adopt the standard. 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 a final 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 Consolidated 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. In March 2016, the FASB issued 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. The new guidance eliminates additional paid-in capital pools and requires excess tax benefits and tax deficiencies to be recorded in the Statement of Operations and Comprehensive Income. The standard is effective for fiscal years beginning after December 15, 2016 with early adoption permitted if all provisions are adopted within the same period. The guidance is required to be applied on either a prospective, modified retrospective, or retrospective basis depending on the provisions applied. This new guidance will not have a significant impact on our Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Income, Consolidated Statements of Cash Flows 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 have not determined the impact ASU 2016-02 will have on our Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Income, Consolidated Statements of Cash Flows 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. Current guidance requires inventory to be measured at the lower of cost or market where market could be replacement cost, net realizable value or net realizable value less an approximately normal profit margin. The guidance is effective for periods beginning after December 15, 2016 with early adoption permitted. The guidance is required to be applied prospectively. This guidance will not have a significant impact on our Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Income, Consolidated Statements of Cash Flows and disclosures. |
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PROPERTY, PLANT AND EQUIPMENT, NET |
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| PROPERTY, PLANT AND EQUIPMENT, NET | NOTE 3 - PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment, net consisted of the following as of March 31:
Depreciation expense, which includes amortization of equipment under capital leases, for the years ended March 31, 2017 and 2016 was $689,293 and $747,553, respectively. On March 31, 2017 and 2016 we classified certain machinery and equipment as assets held for sale. See Note 6 – Other Noncurrent Assets. Capitalized leases included in machinery and equipment were $54,376 and $65,568 at March 31, 2017 and 2016, respectively. Accumulated depreciation on all property, plant and equipment accounted for as capitalized leases was $2,719 and $42,443 at March 31, 2017 and 2016, respectively. We capitalize interest on borrowings 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 year ended March 31, 2017 was $7,158. In fiscal 2016, the Company purchased LED lighting which qualified for a capital incentive grant of $146,000 and a financing component of $58,064 (included in accrued expenses current and non- current) for total funds received of $204,064. The net cost of the purchase of the LED lighting of $58,064 is recorded in property, plant and equipment. |
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COSTS INCURRED ON UNCOMPLETED CONTRACTS |
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| COSTS INCURRED ON UNCOMPLETED CONTRACTS | NOTE 4 - COSTS INCURRED ON UNCOMPLETED CONTRACTS The following table sets forth information as to costs incurred on uncompleted contracts as of March 31:
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 March 31, 2017 and 2016, we had billings in excess of costs totaling $642,831 and $1,629,018, respectively. Billings on uncompleted contracts represent customer prepayments on their contracts and completed contracts on 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. |
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OTHER CURRENT ASSETS |
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| OTHER CURRENT ASSETS | NOTE 5 – OTHER CURRENT ASSETS Other current assets included the following as of March 31:
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OTHER NONCURRENT ASSETS |
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| OTHER NONCURRENT ASSETS | NOTE 6 – OTHER NONCURRENT ASSETS Other noncurrent assets included the following as of March 31:
At March 31, 2017 and 2016, we classified certain machinery and equipment of $100,000 and $123,900, respectively, to assets held for sale. This amount approximates fair value net of selling costs. In fiscal 2017, we wrote down certain machinery held for sale by $43,900, and subsequently sold this machinery in May 2017. We also classified other equipment in fiscal 2017 for $20,000 to assets held for sale. We expect to sell this remaining fixed asset before the end of fiscal 2018. |
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ACCRUED EXPENSES |
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| ACCRUED EXPENSES | NOTE 7 - ACCRUED EXPENSES Accrued expenses included the following as of March 31:
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. Our contract loss provision at March 31, 2016 included approximately $0.5 million for estimated contract losses in connection with a certain customer purchase agreement. |
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DEBT |
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| DEBT | NOTE 8 – DEBT Long-term debt included the following as of March 31:
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, collectively, 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 March 31, 2017. 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 covenants (a) to cause its balance sheet leverage to be less than or equal to 3.50 to 1.00 for the fiscal year ending March 31, 2017, 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 $1,000,000 for the fiscal year ending March 31, 2017, $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. Compliance with the foregoing covenants will be tested annually commencing March 31, 2017. At March 31, 2017, the DSCR and the leverage ratio was 2.86 to 1.00 and 1.00 to 1.00, respectively. 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. The Commerce Loans may be accelerated upon the occurrence of an “Event of Default” (as defined in the Commerce Loan Agreement). Events of Default include (i) the failure to pay any monthly installment payment before the tenth day following the due date of such payment; (ii) the failure of Ranor or TechPrecision to observe, perform or pay any obligations under the Commerce Loan Agreement or any other obligation to Commerce; (iii) the failure of Ranor or TechPrecision to pay any indebtedness in excess of $100,000 (other than the Commerce Loans) when due; (iv) any representation or warranty of Ranor or TechPrecision in the Commerce Loan Agreement and related documents, or the Loan Documents, being proven to have been incorrect, in any material respect, when made; (v) the failure of Ranor to discharge any attachment, levy or distraint on its property; (vi) any default by Ranor or TechPrecision under any of the collateral security documents executed in connection with the Commerce Loan Agreement past any applicable grace period; (vii) the failure of Ranor or TechPrecision to file or pay taxes when due, unless such taxes are being contested in a manner permitted under the Loan Documents; (viii) a change in ownership or control of Ranor or change in management of Ranor where either the chief executive officer or chief financial officer as of December 21, 2016 is replaced without Commerce’s prior consent; (ix) Ranor or TechPrecision ceasing to do business as a going concern, making an assignment for the benefit of creditors, or commencing a bankruptcy or other similar insolvency proceeding; and (x) the entry of a judgment against Ranor or TechPrecision in excess of $150,000. Some of the Events of Default are subject to certain cure periods. In connection with the Commerce Loan Agreement, $2,394,875 of the proceeds from Term Loan were disbursed to Revere High Yield Fund, LP, or Revere, as payment in full of Ranor’s indebtedness owed to Revere pursuant that certain Term Loan and Security Agreement, dated as of December 22, 2014, by and between Ranor and Revere, as amended, or the TLSA. Ranor retained $426,467 of the proceeds from the Term Loan for general corporate purposes. Unamortized debt issue costs at March 31, 2017 were $77,198. 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 No. 4180, as supplemented with Schedule No. 001, or, together, the MLSA, with People’s Capital and Leasing Corp., or People’s. The MLSA is dated and effective as of March 31, 2016. 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. 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. 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. In connection with the MLSA, $2,653,353 of the proceeds from the People’s Loan were disbursed to Utica Leaseco, LLC, or Utica, as payment in full for principal and interest under the existing Loan and Security Agreement, or LSA. People’s retained a holdback in the amount of $182,763. The holdback was released to Ranor on July 6, 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. Unamortized debt issue costs at March 31, 2017 were $111,778. On October 4, 2016, TechPrecision and Ranor became committed to Schedule No. 002 to the MLSA, or Schedule 2. Pursuant to Schedule 2, People’s made an additional loan in the amount of $365,852, or the Additional People’s Loan, 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 of $7,399 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. On December 21, 2016, TechPrecision and Ranor closed on an Amendment to the MLSA, or the MLSA Amendment, with People’s. The MLSA Amendment, dated as of December 20, 2016, amends the definition of “Permitted Liens” under the MLSA to include the liens held by Commerce pursuant to the terms of the Commerce Loan Agreement and to delete the reference to the liens held by Revere. Term Loan and Security Agreement On December 22, 2014, TechPrecision, Ranor and Revere entered into the Term Loan and Security Agreement, or TLSA. Pursuant to the TLSA, Revere loaned an aggregate of $2.25 million to Ranor under the First Loan Note in the aggregate principal amount of $1.5 million and the Second Loan Note in the aggregate principal amount of $750,000. The First Loan Note was collateralized by a secured interest in Ranor's Massachusetts facility and certain machinery and equipment at Ranor. The Second Loan Note was collateralized by a secured interest in certain accounts, inventory and equipment of Ranor. Payments under the TLSA, the First Loan Note and the Second Loan Note were due as follows: (a) payments of interest only on advanced principal on a monthly basis on the first day of each month from February 1, 2015 until December 31, 2015 with an annual interest rate on the unpaid principal balance of the First Loan Note and the Second Loan Note equal to 12% per annum and (b) the principal balance plus accrued and unpaid interest payable on December 31, 2015. Ranor's obligations under the TLSA, the First Loan Note and the Second Loan Note were guaranteed by TechPrecision pursuant to a Guaranty Agreement with Revere. Ranor utilized approximately $1.45 million of the proceeds of the First Loan Note and Second Loan Note to pay off bond obligations owed to Santander Bank, N.A. plus breakage fees on a related interest swap of $217,220 under the loan agreement with Santander Bank, N.A. The remaining proceeds of the First Loan Note and the Second Loan Note were retained by the Company for general corporate purposes. On December 31, 2015, TechPrecision, Ranor and Revere entered into a Note and Other Loan Documents Modification Agreement to the TLSA, or the First Modification Agreement. The First Modification Agreement extended the maturity date of the TLSA and the Notes from December 31, 2015 to January 22, 2016 and provided that Ranor agreed to waive its right to extend the maturity date of the TLSA and the Notes by six months as set forth in the TLSA. In connection with its entry into the First Modification Agreement, Ranor paid an exit fee of $67,500 to Revere. On January 22, 2016, TechPrecision, Ranor and Revere entered into the Second Modification Agreement, which further amended the TLSA. 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) twelve (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. Pursuant to the TLSA, as amended by the Second Modification Agreement, Ranor was subject to certain affirmative and negative covenants, including a minimum cash balance covenant which required 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 $786,212 at March 31, 2016. We were in compliance with all covenants under the TLSA at March 31, 2016. The obligations under the TLSA were paid in full prior to the maturity date on December 21, 2016. Loan and Security Agreement On May 30, 2014, TechPrecision and Ranor entered into the Loan and Security Agreement, or LSA, with Utica. Pursuant to the LSA, Utica agreed to loan $4.15 million to Ranor under a Credit Loan Note, which was collateralized by a first secured interest in certain machinery and equipment at Ranor. Payments under the LSA and the Credit Loan Note were due in monthly installments with an interest rate on the unpaid principal balance of the Credit Loan Note equal to 7.5% plus the greater of 3.3% or the six-month LIBOR interest rate, as described in the Credit Loan Note. Ranor’s obligations under the LSA and the Credit Loan Note were guaranteed by TechPrecision. At March 31, 2016, the rate of interest on the debt under the LSA was 10.8%. Pursuant to the LSA, Ranor was subject to certain restrictive covenants which, among other things, restricted Ranor’s ability to (1) declare or pay any dividend or other distribution on its equity, purchase or retire any of its equity, or alter its capital structure; (2) make any loan or guaranty or assume any obligation or liability; (3) default in payment of any debt in excess of $5,000 to any person; (4) sell any of the collateral outside the normal course of business; and (5) enter into any transaction that would materially or adversely affect the collateral or Ranor’s ability to repay the obligations under the LSA and the Credit Loan Note. The restrictions contained in these covenants were subject to certain exceptions specified in the LSA and in some cases could have been waived by written consent of Utica. Any failure to comply with the covenants outlined in the LSA without waiver by Utica or certain other provisions in the LSA would constitute an event of default, pursuant to which Utica could have accelerated the repayment of the loan. In connection with the execution of the LSA, the Company paid approximately $0.24 million in fees and associated costs and utilized approximately $2.65 million of the proceeds of the Credit Loan Note to pay off, or complete a refinancing of, debt obligations owed to Santander Bank N.A. under a loan agreement. We retained approximately $1.27 million of the proceeds of the Credit Loan Note for general corporate purposes. The obligations under the LSA and the Credit Loan Note were paid in full prior to the maturity date on April 26, 2016. 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 expire in September 2018. The maturities of all of our debt including the capital lease are as follows: 2018: $717,481, 2019: $799,744, 2020: $811,896, 2021: $935,893 and 2022: $2,516,165. |
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| INCOME TAXES | NOTE 9 - INCOME TAXES We account for income taxes under the provisions of FASB ASC 740, Income Taxes. The following table reflects income (loss) from continuing operations by location, and the provision and benefit for income taxes and the effective tax rate for the applicable fiscal years ended March 31:
The income tax benefit consists of the following as of March 31:
Reconciliation between income taxes computed at the U.S. federal statutory rate to the actual tax benefit for income taxes reported in the Consolidated Statements of Operations and Comprehensive Income for fiscal years ended March 31:
We adopted the new presentation of deferred taxes requiring deferred income tax assets and liabilities to be classified as noncurrent in our Consolidated Balance Sheets in the fourth quarter of fiscal 2016, on a prospective basis. The following table summarizes the components of deferred income tax assets and liabilities:
In assessing the recoverability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. We have determined that it is more likely than not that certain future tax benefits may not be realized. Accordingly, a valuation allowance has been recorded against deferred tax assets that are unlikely to be realized. Realization of the remaining deferred tax assets will depend on the generation of sufficient taxable income in the appropriate jurisdictions, the reversal of deferred tax liabilities, tax planning strategies and other factors prior to the expiration date of the carryforwards. A change in the estimates used to make this determination could require an increase in deferred tax assets if they become realizable. The valuation allowance on deferred tax assets at March 31, 2017 was $1.5 million as compared to $5.1 million at March 31, 2016, a decrease of $3.6 million. The decrease was primarily related to the release of a valuation allowance on deferred tax assets which are no longer required primarily as a result of achieving sustained profitability in certain tax jurisdictions. 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 have provided a valuation allowance of $1.5 million 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. The following table summarizes carryforwards of net operating losses and tax credits as of March 31, 2017:
The Internal Revenue Code provides for a limitation on the annual use of net operating loss carryforwards following certain ownership changes that could limit our ability to utilize these carryforwards on a yearly basis. We experienced an ownership change in connection with the acquisition of Ranor in 2006. Accordingly, our ability to utilize certain carryforwards relating to 2006 and prior is limited. Our remaining pre-2006 net operating losses total approximately $1.2 million. As such, at March 31, 2017, we have approximately $5.4 million of post-2006 losses available for carryforward, without limitation. U.S. tax laws limit the time during which these carryforwards may be applied against future taxes. Therefore, we may not be able to take full advantage of these carryforwards for Federal or state income tax purposes. We have not accrued any penalties with respect to uncertain tax positions. We file income tax returns in the U.S. federal jurisdiction and various U.S. state jurisdictions. Our foreign subsidiary files separate income tax returns in China, the foreign jurisdiction in which it is located. Tax years 2013 and forward remain open for examination. We recognize interest and penalties accrued related to income tax liabilities in selling, general and administrative expense in our Consolidated Statements of Operations and Comprehensive Income. |
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PROFIT SHARING PLAN |
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| PROFIT SHARING PLAN | ||
| PROFIT SHARING PLAN | NOTE 10 - 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. Our contributions were $82,189 and $61,302 for the years ended March 31, 2017 and 2016, respectively. |
CAPITAL STOCK |
12 Months Ended | |
|---|---|---|
Mar. 31, 2017 | ||
| CAPITAL STOCK | ||
| CAPITAL STOCK | NOTE 11 - CAPITAL STOCK Common Stock We had 90,000,000 authorized shares of common stock at March 31, 2017 and March 31, 2016. There were 28,824,593 and 27,324,593 shares of common stock outstanding at March 31, 2017 and March 31, 2016, respectively. Preferred Stock We have 10,000,000 authorized shares of preferred stock and our board of directors has broad power to create one or more series of preferred stock and to designate the rights, preferences, privileges and limitations of the holders of such series. Our board of directors had created one series of preferred stock - the Series A Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock was initially convertible into one share of common stock. As a result of our failure to meet certain levels of earnings before interest, taxes, depreciation and amortization for the years ended March 31, 2006 and 2007, the conversion rate changed, and each share of Series A Convertible Preferred Stock became convertible into 1.3072 shares of common stock, with an effective conversion price of $0.218. On September 24, 2015, 1,927,508 shares of Series A Convertible Preferred Stock were converted into 2,519,635 shares of common stock. There were no shares of Series A Convertible Preferred Stock outstanding at March 31, 2017 and 2016, as the last outstanding shares of Series A Convertible Preferred Stock were converted into shares of common stock in fiscal 2016. |
STOCK BASED COMPENSATION |
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| STOCK BASED COMPENSATION | NOTE 12 - STOCK BASED COMPENSATION Our board of directors, upon the recommendation of the 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, or the Annual Meeting, on December 8, 2016. The 2016 Plan succeeds the 2006 Plan and applies to awards granted after the Annual Meeting. We have designed the 2016 Plan to reflect our commitment to having best practices in both compensation and corporate governance. The 2016 Plan provides for a share reserve of 5,000,000 shares of common stock. The 2016 Plan authorizes the award of incentive and non-qualified stock options, restricted stock awards, restricted stock units, and performance awards to employees, directors, consultants, and other individuals who provide services to TechPrecision or its affiliates. The purposes of the 2016 Plan are to: (a) enable TechPrecision and its affiliated companies to recruit and retain highly qualified employees, directors and consultants; (b) provide those employees, directors and consultants with an incentive for productivity; and (c) provide those employees, directors and consultants with an opportunity to share in the growth and value of the Company. Subject to adjustment as provided in the 2016 Plan, the maximum number of shares of common stock that may be issued in respect of awards under the 2016 Plan is 5,000,000 shares (inclusive of awards issued under the 2006 Long-Term Incentive Plan, or the 2006 Plan, that remained outstanding as of the effective date of the 2016 Plan), all of which shares may be issued in respect of incentive stock options. On December 8, 2016, there were 1,958,500 shares underlying awards issued under the 2006 Plan that remained outstanding. The 2006 Plan expired under its own terms in February 2016. Awards granted under the 2006 Plan will remain outstanding until expiration or settlement. Shares of our common stock subject to awards that expire unexercised or are otherwise forfeited shall again be available for awards under the 2016 Plan. On March 31, 2017, in connection with a consulting agreement with our retiring directors, we granted stock options to the retiring members of our board of directors to collectively purchase 66,668 shares of common stock at an exercise price of $0.75 per share, the fair market value on the date of grant. All of the options granted vested immediately and will expire on the second anniversary of the grant date. The fair value of the options is $24,350 and was expensed on March 31, 2017. On December 27, 2016, in recognition of performance and to increase the alignment of his interests with those of our stockholders, TechPrecision granted to Alexander Shen, TechPrecision’s Chief Executive Officer, a non-qualified stock option to purchase 1,000,000 shares of our common stock at an exercise price of $0.50, the closing price of our common stock on the date of the grant. The grant was made under the 2016 Plan and a Non-Qualified Stock Option Award Agreement, dated December 27, 2016, from TechPrecision to Mr. Shen. The option was immediately vested and exercisable with respect to 666,667 shares of common stock and will become vested and exercisable with respect to the remaining 333,333 shares on December 27, 2017, provided that Mr. Shen remains in continuous service as an employee of the Company through such vesting date. The options have a remaining weighted average contract life of nine years. The fair value of the options is $418,995 and $314,350 was expensed in the fiscal year ended March 31, 2017. At March 31, 2017, there was $133,117 of total unrecognized compensation cost related to the stock options, and these costs are expected to be recognized over the next twelve months. On July 1, 2015, we granted stock options to members of our board of directors to collectively purchase 30,000 shares of common stock at an exercise price of $0.10 per share, the fair market value on the date of grant. Fifty percent of the options vested upon the six month anniversary of the grant date while the remaining fifty percent of the options vested upon the eighteen month anniversary of the grant date. On August 12, 2015, we granted stock options to our chief executive officer to purchase in total 1,000,000 shares of common stock at an exercise price of $0.08 per share, the fair market value on the date of grant. One third of the options vested on the date of the grant, one third of the options vested on the first anniversary of the grant date, and the final one third of the options will vest on the second anniversary of the grant date. On January 21, 2016, we granted stock options to our chief financial officer to purchase in total 500,000 shares of common stock at an exercise price of $0.17 per share, the fair market value on the date of grant. One third of the options vested on the date of the grant, one third of the options vested on the first anniversary of the grant date, and the final one third of the options will vest on the second anniversary of the grant date. 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 presented range from 110.2% to 123.8% for volatility, 1.93% to 2.07% for the risk free interest rate, and approximately two to six years for the expected life. At March 31, 2017, there were 1,997,332 shares available for grant under the 2016 Plan. The following table summarizes information about options for the most recent annual income statements presented:
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 fourth quarter of fiscal 2017 and fiscal 2016 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 March 31, 2017. This amount changes based on the fair market value of the Company’s common stock. The total intrinsic value of options exercised for the year ended March 31, 2016 was $10,800. The following table summarizes the status of our stock options outstanding but not vested for the year ended March 31, 2017:
The total fair value of shares vested during the year was $439,835. Other information relating to stock options outstanding at March 31, 2017 is as follows:
Restricted Stock Awards In December 2014, each non-employee director waived any compensation owed to them for their service to the Company. On November 10, 2016, our board of directors determined that it would grant shares of common stock to each of our directors as compensation for their service to the Company during the period from January 1, 2014 to November 10, 2016. Accordingly, our board of directors granted 600,000 shares of common stock to Mr. Leonard Anthony, 250,000 shares of common stock to each of Mr. Philip Dur and Mr. Michael Holly, and 200,000 shares of common stock to Mr. Robert Isaman and Mr. Andrew Levy. The grant of shares of common stock to Mr. Anthony also recognizes his uncompensated service as Executive Chairman of the Company during the period from January 1, 2014 to November 17, 2014. The Company recorded an expense of $780,000 in connection with these grants of shares of common stock, based on the closing market price of our common stock on the date of grant. |
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CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS |
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| CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS | 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 March 31, 2017, there were accounts receivable balances outstanding from three customers comprising 83% 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:
*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 for the fiscal year ended:
*less than 10% of total |
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SEGMENT INFORMATION |
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Mar. 31, 2017 | ||
| SEGMENT INFORMATION | ||
| SEGMENT INFORMATION | NOTE 14 – SEGMENT INFORMATION We consider our business to consist of one segment - metal fabrication and precision machining. All of our operations, assets and customers are located in the United States. |
COMMITMENTS |
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| COMMITMENTS | ||
| COMMITMENTS | NOTE 15 – COMMITMENTS Operating Leases We lease approximately 1,000 square feet of office space in Wuxi, China. The annual rental cost is approximately $4,000 and the lease expires in October 2017. The lease can be renewed on an annual basis. Rent expense for all operating leases for the fiscal years ended March 31, 2017 and 2016 was $3,738 and $21,206, respectively. Future minimum lease payments required under non-cancellable operating leases at March 31, 2017 totaled $1,983. Expiration of a Lease The Company leased approximately 1,100 square feet located at 992 Old Eagle School Road, Wayne, Pennsylvania, pursuant to an office lease with GPX Wayne Office Properties, L.P., or GPX Wayne. On June 30, 2016, this office lease expired under its own terms and was not renewed. Other than as described above, there is no relationship between the Company and GPX Wayne. 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 March 31, 2017 for future executive salaries during the fiscal year ending March 31, 2018, including severance for our former chief financial officer and fiscal 2017 bonuses payable after March 31, 2017, was approximately $0.8 million. The aggregate commitment at March 31, 2017 was approximately $0.4 million for accrued payroll, vacation and holiday pay for the remainder of our employees. Purchase Commitments As of March 31, 2017, we had $0.9 million in purchase obligations outstanding, which primarily consisted of contractual commitments to purchase new machinery and equipment. Class Action Lawsuit On or about February 26, 2016, nine former employees of Ranor filed a complaint in the Massachusetts Superior Court, Worcester County, against former and current executive officers of Ranor, alleging violations of the Massachusetts Wage Act, breach of contract and conversion. Plaintiffs claim that Ranor’s modification to its personal time off, or PTO, policy in April 2014 caused these employees to forfeit earned PTO. Plaintiffs purport to assert their claims on behalf of a class of all current and former employees of Ranor who were affected by the modification to Ranor’s PTO policy. The pre-trial discovery phase ended on June 21, 2017. No trial date has been set. |
CLAIM ASSIGNMENT SETTLEMENT |
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| Receivables [Abstract] | ||
| CLAIM ASSIGNMENT SETTLEMENT | NOTE 16 – CLAIM ASSIGNMENT SETTLEMENT On April 17, 2015, we entered into an Assignment of Claim Agreement, or the Assignment Agreement, with Citigroup Financial Products, Inc., or Citigroup, whereby we sold, transferred, conveyed and assigned to Citigroup all of Ranor’s right, title and interest in Ranor’s $3,740,956 unsecured claim against GT Advanced Technologies, Inc., or GTAT, in connection with GTAT’s bankruptcy. Pursuant to the Assignment Agreement, on April 21, 2015, Citigroup paid to Ranor an initial amount equal to $507,835, which was 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 was fully and finally allowed against GTAT without objection. On November 7, 2016, GTAT’s legal counsel notified Citigroup that Ranor’s unsecured claim in GTAT’s bankruptcy 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 was recognized as a gain of $1,122,287 in the Statement of Operations and Comprehensive Income for the three months ended December 31, 2016. |
EARNINGS PER SHARE (EPS) |
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| EARNINGS PER SHARE (EPS) | NOTE 17 - 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.
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. There were 1,472,668 of potential common stock equivalents that were out-of-the-money and were not included in the EPS calculations above for the year ended March 31, 2017. For the year ended March 31, 2016 there were 1,368,500 of potentially anti-dilutive stock options, none of which were included in the EPS calculations above. |
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SELECTED QUARTERLY INFORMATION (UNAUDITED) |
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| SELECTED QUARTERLY INFORMATION (UNAUDITED) | NOTE 18 – SELECTED QUARTERLY INFORMATION (UNAUDITED) The following table sets forth certain unaudited quarterly data for each of the four quarters in the years ended March 31, 2017 and 2016. The data has been derived from our unaudited consolidated financial statements that, in management’s opinion, include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of such information when read in conjunction with the Consolidated Financial Statements and Notes thereto. Net Income for each of the periods presented includes contract losses and unabsorbed overhead that increased cost of goods sold and lowered gross profit. The results of operations for any quarter are not necessarily indicative of the results of operations for any future period.
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SIGNIFICANT ACCOUNTING POLICIES (Policies) |
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| Basis of Presentation and Consolidation | Basis of Presentation and Consolidation The accompanying consolidated financial statements include the accounts of TechPrecision, WCMC and Ranor. Intercompany transactions and balances have been eliminated in consolidation. |
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| Use of Estimates in the Preparation of Financial Statements | Use of Estimates in the Preparation of Financial Statements In preparing the consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reported period. We continually evaluate our estimates, including those related to contract accounting, accounts receivable, inventories, the recovery of long-lived assets, income taxes and the valuation of equity transactions. We base our estimates on historical and current experiences and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. |
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| Cash and cash equivalents | Cash and cash equivalents Holdings of highly liquid investments with maturities of three months or less, when purchased, are considered to be cash equivalents. U.S. based deposits are maintained in a large regional bank. Our China subsidiary also maintains a bank account in a large national bank in China subject to People’s Republic of China (PRC) banking regulations. Cash on deposit with a large national China-based bank was $14,805 and $8,115 at March 31, 2017 and 2016, respectively. |
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| Foreign currency translation | Foreign currency translation The majority of our business is transacted in U.S. dollars; however, the functional currency of our subsidiary in China is the local currency, the Chinese Yuan Renminbi. In accordance with ASC No. 830, Foreign Currency Matters (ASC 830), foreign currency translation adjustments of subsidiaries operating outside the United States are accumulated in other comprehensive income, a separate component of equity. Foreign currency transaction gains and losses are recognized in the determination of net income. |
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| Accounts receivable and allowance for doubtful accounts | Accounts receivable and allowance for doubtful accounts Accounts receivable are stated at the amount we expect to collect. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. Based on management’s assessment, we provide for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances which remain outstanding after reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Historically, the level of uncollectible accounts has not been significant. There was no bad debt expense recorded for the years ended March 31, 2017 and 2016. |
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| Inventories | Inventories Inventories - raw materials is stated at the lower of cost or market determined by the first-in, first-out (FIFO) method. |
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| Property, plant and equipment, net | Property, plant and equipment, net Property, plant and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are accounted for on the straight-line method based on estimated useful lives. The amortization of leasehold improvements is based on the shorter of the lease term or the useful life of the improvement. Amortization of assets recorded under capital leases is included under depreciation expense. Betterments and large renewals, which extend the life of the asset, are capitalized whereas maintenance and repairs and small renewals are expensed as incurred. The estimated useful lives are: machinery and equipment, 5-15 years; buildings, 30 years; and leasehold improvements, 2-5 years. Upon sale or retirement of machinery and equipment, costs and related accumulated depreciation are eliminated and gains or losses are recognized in the statement of operations. Interest is capitalized for assets that are constructed or otherwise produced for our own use, including assets constructed or produced for us by others for which deposits or progress payments have been made. Interest is capitalized to the date the assets are available and ready for use. When an asset is constructed in stages, interest is capitalized for each stage until it is available and ready for use. We use the interest rate incurred on funds borrowed specifically for the project. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. There was $7,158 of interest cost capitalized in fiscal 2017. In accordance with ASC No. 360, Property, Plant & Equipment (ASC 360), our property, plant and equipment is tested for impairment when triggering events occur and, if impaired, written-down to fair value based on either discounted cash flows or appraised values. The carrying amount of an asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group. |
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| Debt Issuance Costs, Policy | Debt Issuance Costs Costs incurred in connection with obtaining financing for long-term debt are capitalized and presented as a reduction of the carrying amount of the related debt. Costs incurred in connection with obtaining financing for revolving credit facilities and lines of credit are capitalized and presented as deferred financing costs. Loan acquisition costs are being amortized using the effective interest method over the term of the loan. |
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| Operating Leases | Operating Leases Operating leases are charged to operations on a straight-line basis over the term of the lease. We lease certain office space in China under a long-term, non-cancelable operating lease agreement. The lease expires in October 2017. |
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| Fair Value Measurements | Fair Value Measurements We account for fair value of financial instruments which defines fair value and establishes a framework to measure fair value and the related disclosures about fair value measurements in accordance with ASC No. 820, Fair Value Measurement (ASC 820). The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. The FASB establishes a fair value hierarchy used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories: Level 1: Inputs based upon quoted market prices for identical assets or liabilities in active markets at the measurement date; Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and Level 3: Inputs that are management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instruments’ valuation. In addition, we will measure fair value in an inactive or dislocated market based on facts and circumstances and significant management judgment. We will use inputs based on management estimates or assumptions, or make adjustments to observable inputs to determine fair value when markets are not active and relevant observable inputs are not available. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses, as presented in the balance sheet, approximates fair value due to the short-term nature of these instruments. The carrying value of short and long-term borrowings approximates their fair value. The Company’s short-term and long-term debt is all privately held with no public market for this debt and is considered to be Level 3 under the fair value hierarchy. |
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| Research and Development | Research and Development We charge research and development costs associated with the design and development of new products to expense when incurred. We incurred no research and development expense in fiscal 2017 or fiscal 2016. |
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| Selling, General, and Administrative | Selling, General, and Administrative Selling, general and administrative (SG&A) expenses include items such as executive compensation and benefits, professional fees, business travel and office costs. Advertising costs are nominal and expensed as incurred. Other general and administrative expenses include items for our administrative functions and include costs for items such as office rent, supplies, insurance, legal, accounting, tax, telephone and other outside services. SG&A consisted of the following for the fiscal years ended March 31:
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| Stock Based Compensation | Stock Based Compensation Stock based compensation represents the cost related to stock based awards granted to our board of directors and employees. We measure stock based compensation cost at the grant date based on the estimated fair value of the award and recognize the cost as expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. We estimate the fair value of stock options using a Black-Scholes valuation model. Stock based compensation is included in selling, general and administrative expense amounted to $1,164,221 and $88,041 for the fiscal years ended March 31, 2017 and 2016, respectively. See Note 12 – Stock Based Compensation for additional disclosures related to stock based compensation. |
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| Net Income (Loss) per Share of Common Stock | Net Income per Share of Common Stock Basic net income per common share is computed by dividing net income by the weighted average number of shares outstanding during the year. Diluted net income per common share is calculated using net income divided by diluted weighted-average shares. Diluted weighted-average shares include weighted-average shares outstanding plus the dilutive effect of convertible preferred stock and stock options calculated using the treasury stock method. See Note 17 – Earnings per Share for additional disclosures related to net income per share. |
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| Revenue and Related Cost Recognition | Revenue and Related Cost Recognition We have written agreements or purchase orders with our customers that specify contract prices and delivery terms. Revenue recognition requires the existence of a contract to provide the persuasive evidence of an arrangement and a determinable selling price, delivery of the product and reasonable collection prospects. The Company manufactures components under production-type contracts in a production process which meets our customer’s specifications. We account for revenues and earnings using the percentage of completion units of delivery method of accounting. Under this method, we recognize contract revenue and gross profit when the products are produced and delivered, or when services are rendered. We determine progress toward completion on production contracts based on output measures, such as units delivered, or in some cases, input measures, such as labor hours incurred. In fiscal 2017 and 2016, all of our revenue was recognized under the units of delivery method. We may combine contracts for accounting purposes when they are negotiated as a package with an overall profit margin objective. These essentially represent an agreement to do a single project for a single customer, involve interrelated construction activities with substantial common costs, and are performed concurrently or sequentially. When a group of contracts is combined, revenue and profit are earned when the products are produced and delivered. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability are recognized in the period in which the revisions are determined. Costs incurred on uncompleted contracts consist of labor, overhead, and materials. Work in process is stated at the lower of cost or market. We record provisions for contract losses within costs of sales in our Consolidated Statement of Operations and Comprehensive Income. Costs allocable to undelivered units are reported in the consolidated balance sheet as costs incurred on uncompleted contracts. Amounts in excess of the agreed upon contract price for customer directed changes, construction changes, customer delays or other causes of additional contract costs are recognized in contract value if it is probable that a claim for such amounts will result in additional revenue and the amounts can be reliably estimated. Revenues from such claims are recorded only to the extent that contract costs have been incurred. Revisions in cost and profit estimates are reflected in the period in which the facts requiring the revision become known and are estimable. When we can only estimate a range of revenues and costs, we use the most likely estimate within the range. If we cannot determine which estimate in the range is most likely, the amounts within the range that would result in the lowest profit margin is used (the lowest contract revenue estimate and the highest contract cost estimate). In some situations, it may be impractical for us to estimate either specific amounts or ranges of contract revenues and costs. However, if we can at least determine that we will not incur a loss, a zero profit model is adopted. The zero profit model results in the recognition of an equal amount of revenues and costs. This method is only used if more precise estimates cannot be made and its use is discontinued when such estimates are obtainable. When we obtain more precise estimates, the change is treated as a change in an accounting estimate. |
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| Shipping and Handling Cost, Policy | Shipping and Handling Costs Shipping and handling costs are included in cost of sales. Shipping and handling costs billed to customers in connection with the sale are included in net sales. |
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| Income Taxes | Income Taxes In accordance with ASC No. 740, Income Taxes (ASC 740), income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. We recognize the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. |
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| Reclassifications | Reclassifications Certain reclassifications of prior-year financial information presented herein for comparative purposes have been reclassified to conform with current-year presentation. The reclassifications had no impact on 2016 net income. |
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| New Accounting Standards | New Accounting Standards New Accounting Standards Recently Adopted In April 2015, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update (ASU) No. 2015-03, Simplifying the Presentation of Debt Issue Costs. The new guidance requires entities to present debt issue costs in the balance sheet as a direct reduction to the related debt liability rather than as a deferred cost (i.e., an asset) as required by past guidance. The new guidance does not change the recognition or measurement of debt issuance costs. The Company adopted the standard retrospectively in the first quarter of the fiscal year ended March 31, 2017, or fiscal 2017. Debt issuance costs related to revolving credit facilities and lines of credit will continue to be capitalized and presented as deferred financing costs. At March 31, 2016, long-term debt obligations were previously reported in the consolidated balance sheets as $3,782,752 with the associated $47,342 reported as deferred financing costs included in other assets. The fiscal 2016 unamortized debt issuance costs are now presented as a direct reduction of long-term debt obligations in these consolidated financial statements. Issued Standards Not Yet Adopted 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 Consolidated Financial Statements and disclosures by comparing our current revenue recognition policy with the requirements of the new standard. It is possible that our current practices may no longer be viable 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 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 do not plan to early adopt the standard. 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 a final 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 Consolidated 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. In March 2016, the FASB issued 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. The new guidance eliminates additional paid-in capital pools and requires excess tax benefits and tax deficiencies to be recorded in the Statement of Operations and Comprehensive Income. The standard is effective for fiscal years beginning after December 15, 2016 with early adoption permitted if all provisions are adopted within the same period. The guidance is required to be applied on either a prospective, modified retrospective, or retrospective basis depending on the provisions applied. This new guidance will not have a significant impact on our Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Income, Consolidated Statements of Cash Flows 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 have not determined the impact ASU 2016-02 will have on our Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Income, Consolidated Statements of Cash Flows 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. Current guidance requires inventory to be measured at the lower of cost or market where market could be replacement cost, net realizable value or net realizable value less an approximately normal profit margin. The guidance is effective for periods beginning after December 15, 2016 with early adoption permitted. The guidance is required to be applied prospectively. This guidance will not have a significant impact on our Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Income, Consolidated Statements of Cash Flows and disclosures. |
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SIGNIFICANT ACCOUNTING POLICIES (Tables) |
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PROPERTY, PLANT AND EQUIPMENT, NET (Tables) |
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COSTS INCURRED ON UNCOMPLETED CONTRACTS (Tables) |
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OTHER CURRENT ASSETS (Tables) |
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OTHER NONCURRENT ASSETS (Tables) |
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ACCRUED EXPENSES (Tables) |
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DEBT (Tables) |
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INCOME TAXES (Tables) |
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| Schedule of reconciliation between federal statutory income tax rate and effective income tax rate |
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STOCK BASED COMPENSATION (Tables) |
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| Summary of information about options for the periods presented |
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| Summary of activity of stock options outstanding but not vested |
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| Stock Based Compensation By Exercise Price Range |
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CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS (Tables) - Customer Concentration Risk |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounts Receivable | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Concentration of credit risk and major customers | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of concentration of risk by factors |
*less than 10% of total |
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| Net sales | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Concentration of credit risk and major customers | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of concentration of risk by factors |
*less than 10% of total |
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EARNINGS PER SHARE (EPS) (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| EARNINGS PER SHARE (EPS) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of reconciliation of the numerators and denominators reflected in the basic and diluted earnings per share computations |
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SELECTED QUARTERLY INFORMATION (UNAUDITED) (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SELECTED QUARTERLY INFORMATION (UNAUDITED) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of unaudited quarterly data |
|
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SIGNIFICANT ACCOUNTING POLICIES - Cash, Accounts Receivables, and PP&E (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
|
| Cash and cash equivalents | ||
| Cash deposit with a large national China-based bank | $ 14,805 | $ 8,115 |
| Property, plant and equipment, net | ||
| Interest cost capitalized | 7,158 | |
| Derivative Financial Instruments | ||
| Long-term Debt and Capital Lease Obligations | $ 4,874,721 | 3,735,410 |
| Debt Issuance Costs, Noncurrent, Net | $ 47,342 | |
| Machinery and equipment | Minimum | ||
| Property, plant and equipment, net | ||
| Estimated useful lives | 5 years | |
| Machinery and equipment | Maximum | ||
| Property, plant and equipment, net | ||
| Estimated useful lives | 15 years | |
| Buildings | ||
| Property, plant and equipment, net | ||
| Estimated useful lives | 30 years | |
| Leasehold improvements | Minimum | ||
| Property, plant and equipment, net | ||
| Estimated useful lives | 2 years | |
| Leasehold improvements | Maximum | ||
| Property, plant and equipment, net | ||
| Estimated useful lives | 5 years |
SIGNIFICANT ACCOUNTING POLICIES - Derivatives, R&D, SG&A, Stock Based Compensation (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
|
| Research and Development | ||
| Expense in connection with the design and development of certain pre-production prototypes and models | $ 0 | $ 0 |
| Selling, General, and Administrative | ||
| Salaries and related expenses | 2,795,376 | 2,234,830 |
| Professional fees | 1,008,223 | 597,833 |
| Other general and administrative | 533,388 | 552,346 |
| Total Selling, General and Administrative | 4,336,987 | 3,385,009 |
| Stock Based Compensation | ||
| Stock based compensation cost | $ 1,164,221 | $ 88,041 |
COSTS INCURRED ON UNCOMPLETED CONTRACTS (Details) - USD ($) |
3 Months Ended | 12 Months Ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2017 |
Dec. 31, 2016 |
Sep. 30, 2016 |
Jun. 30, 2016 |
Mar. 31, 2016 |
Dec. 31, 2015 |
Sep. 30, 2015 |
Jun. 30, 2015 |
Mar. 31, 2017 |
Mar. 31, 2016 |
Mar. 31, 2017 |
Mar. 31, 2016 |
|
| Cost incurred on uncompleted contracts | ||||||||||||
| Cost incurred on uncompleted contracts, beginning balance | $ 5,491,605 | $ 4,068,488 | $ 5,491,605 | $ 4,068,488 | ||||||||
| Total cost incurred on contracts during the year | 12,501,752 | 12,783,323 | ||||||||||
| Less cost of sales, during the year | (12,454,542) | (11,360,206) | ||||||||||
| Cost incurred on uncompleted contracts, ending balance | $ 5,538,815 | $ 5,491,605 | 5,538,815 | 5,491,605 | ||||||||
| Billings on uncompleted contracts | ||||||||||||
| Billings on uncompleted contracts, beginning balance | 3,095,963 | 2,060,244 | 3,095,963 | 2,060,244 | ||||||||
| Plus: Total billings incurred on contracts, during the year | 18,896,305 | 17,889,671 | ||||||||||
| Less: Contracts recognized as revenue, during the year | (4,931,000) | $ (5,319,000) | $ (3,656,000) | (4,644,000) | (4,869,000) | $ (3,507,000) | $ (4,103,000) | (4,374,000) | (18,550,674) | (16,853,952) | ||
| Billings on uncompleted contracts, ending balance | 3,441,594 | 3,095,963 | 3,441,594 | 3,095,963 | ||||||||
| Cost incurred on uncompleted contracts | ||||||||||||
| Cost incurred on uncompleted contracts, ending balance | 5,538,815 | 5,491,605 | 5,491,605 | 4,068,488 | 5,491,605 | 5,491,605 | $ 5,538,815 | $ 5,491,605 | ||||
| Billings on uncompleted contracts, ending balance | $ 3,441,594 | $ 3,095,963 | $ 3,095,963 | $ 2,060,244 | $ 3,095,963 | $ 3,095,963 | 3,441,594 | 3,095,963 | ||||
| Costs incurred on uncompleted contracts, in excess of progress billings | 2,097,221 | 2,395,642 | ||||||||||
| Billings in excess of costs | $ 642,831 | $ 1,629,018 | ||||||||||
OTHER CURRENT ASSETS (Details) - USD ($) |
Mar. 31, 2017 |
Mar. 31, 2016 |
|---|---|---|
| Payments advanced to suppliers | $ 107,591 | $ 182,305 |
| Prepaid insurance | 229,132 | 236,300 |
| Collateral deposits | 0 | 85,252 |
| Other | 85,373 | 26,951 |
| Total | $ 422,096 | $ 530,808 |
OTHER NONCURRENT ASSETS (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
|
| Other Noncurrent Assets [Line Items] | ||
| Assets held for sale | $ 100,000 | $ 123,900 |
| Prepaid loan costs | 0 | 52,444 |
| Total | 100,000 | 176,344 |
| Inventory Write-down | 43,900 | |
| Assets Held-for-sale, Not Part of Disposal Group | 100,000 | 123,900 |
| Machinery And Equipment [Member] | ||
| Other Noncurrent Assets [Line Items] | ||
| Assets held for sale | 100,000 | 123,900 |
| Assets Held-for-sale, Not Part of Disposal Group | 100,000 | $ 123,900 |
| Other Machinery and Equipment [Member] | ||
| Other Noncurrent Assets [Line Items] | ||
| Assets held for sale | 20,000 | |
| Assets Held-for-sale, Not Part of Disposal Group | $ 20,000 |
ACCRUED EXPENSES (Details) - USD ($) |
Mar. 31, 2017 |
Mar. 31, 2016 |
|---|---|---|
| Accrued Expenses | ||
| Accrued compensation | $ 568,766 | $ 872,114 |
| Provision for contract losses | 148,699 | 464,785 |
| Accrued interest expense | 9,155 | 296,344 |
| Accrued professional fees | 142,648 | 117,981 |
| Other | 24,147 | 53,261 |
| Total | $ 893,415 | 1,804,485 |
| Provision for estimated customer purchase agreement losses | $ 500,000 |
DEBT - Long-term Debt (Details) - USD ($) |
Mar. 31, 2017 |
Mar. 31, 2016 |
|---|---|---|
| Long-term Debt | ||
| Total debt | $ 5,781,179 | $ 4,735,858 |
| Less: debt issue costs unamortized | 188,977 | 47,342 |
| Total debt, net | 5,592,202 | 4,688,516 |
| Less: Current portion of long-term debt | 717,481 | 953,106 |
| Total long-term debt, net | 4,874,721 | 3,735,410 |
| Commerce Term Loan Due January 2022 | ||
| Long-term Debt | ||
| Total debt | 2,828,844 | 0 |
| Peoples Equipment Loan Facility Due April 2021 | ||
| Long-term Debt | ||
| Total debt | 2,884,982 | 0 |
| Utica Credit Loan Note due November 2018 | ||
| Long-term Debt | ||
| Total debt | 0 | 2,459,259 |
| Revere Term Loan and Notes due January 2018 | ||
| Long-term Debt | ||
| Total debt | 0 | 2,250,000 |
| Obligations under capital leases | ||
| Long-term Debt | ||
| Total debt | $ 67,353 | $ 26,599 |
DEBT - Term Loan and Security Agreement (Details) - TLSA - USD ($) |
1 Months Ended | |||
|---|---|---|---|---|
Jan. 22, 2016 |
Dec. 22, 2014 |
Mar. 31, 2016 |
Dec. 31, 2015 |
|
| Debt | ||||
| Minimum cash balance requirement | $ 786,212 | |||
| Minimum | ||||
| Debt | ||||
| Minimum cash balance requirement | 640,000 | |||
| Maximum | ||||
| Debt | ||||
| Minimum cash balance requirement | $ 1,000,000 | |||
| Ranor, Inc. | Revere Term Loan and Notes due January 2018 | ||||
| Debt | ||||
| Aggregate principal amount | $ 2,250,000 | |||
| Ranor, Inc. | First Term Loan Note | ||||
| Debt | ||||
| Aggregate principal amount | $ 1,500,000 | |||
| Interest rate (as a percent) | 12.00% | |||
| Ranor, Inc. | Second Loan Note | ||||
| Debt | ||||
| Aggregate principal amount | $ 750,000 | |||
| Interest rate (as a percent) | 12.00% | |||
| Ranor, Inc. | Modification Agreement | ||||
| Debt | ||||
| Exit fee | $ 67,500 | |||
| Ranor, Inc. | Second Modification Agreement | ||||
| Debt | ||||
| Interest rate (as a percent) | 10.00% | |||
| Periodic payment of principal and accrued interest | $ 9,375 | |||
| Ranor, Inc. | Loan agreement with bank | Interest Rate Swap | ||||
| Debt | ||||
| Breakage fee | $ 217,220 | |||
| Ranor, Inc. | Bonds financing | ||||
| Debt | ||||
| Repayment of debt | $ 1,450,000 | |||
DEBT - Loan and Security Agreement (Details) - LSA - USD ($) |
1 Months Ended | |
|---|---|---|
May 30, 2014 |
Mar. 31, 2016 |
|
| Debt | ||
| Fees and associated costs | $ 240,000 | |
| Loan proceeds retained for general corporate purposes | 1,270,000 | |
| Loan agreement with bank | ||
| Debt | ||
| Repayment of debt | 2,650,000 | |
| Ranor, Inc. | ||
| Debt | ||
| Maximum amount of debt that can be defaulted | 5,000 | |
| Ranor, Inc. | Utica Credit Loan Note due November 2018 | ||
| Debt | ||
| Aggregate principal amount | $ 4,150,000 | |
| Stated interest rate to be used as variable interest basis | 7.50% | |
| Interest margin (as a percent) | 3.30% | |
| Variable interest basis | six-month LIBOR | |
| Effective interest rate at end of period (as a percent) | 10.80% |
DEBT - Capital Lease (Details) - USD ($) |
1 Months Ended | |
|---|---|---|
Jan. 31, 2017 |
Mar. 31, 2017 |
|
| Maturities of the long-term debt, including the capital lease | ||
| 2018 | $ 717,481 | |
| 2019 | 799,744 | |
| 2020 | 811,896 | |
| 2021 | 935,893 | |
| 2022 | $ 2,516,165 | |
| Long-term obligations under capital leases | ||
| Debt | ||
| Capital lease term | 60 months | |
| Capital lease interest rate (as a percent) | 7.90% | |
| Capital lease monthly payment | $ 1,169 |
INCOME TAXES - Income Tax Benefit and Reconciliation to Federal Statutory Tax Rate (Details) - USD ($) |
3 Months Ended | 12 Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2017 |
Dec. 31, 2016 |
Sep. 30, 2016 |
Jun. 30, 2016 |
Mar. 31, 2016 |
Dec. 31, 2015 |
Sep. 30, 2015 |
Jun. 30, 2015 |
Mar. 31, 2017 |
Mar. 31, 2016 |
|
| INCOME TAXES | ||||||||||
| Income (loss) from operations before tax | $ 2,245,850 | $ 1,357,686 | ||||||||
| Income tax benefit | (2,834,319) | (768) | ||||||||
| Net income | $ 3,097,000 | $ 992,000 | $ 546,000 | $ 445,000 | $ 885,000 | $ 12,000 | $ 255,000 | $ 206,000 | 5,080,169 | 1,358,454 |
| Current | ||||||||||
| Federal | 37,361 | 9,032 | ||||||||
| State | 0 | (9,800) | ||||||||
| Total Current | 37,361 | (768) | ||||||||
| Deferred | ||||||||||
| Federal | (2,320,258) | 0 | ||||||||
| State | (551,422) | 0 | ||||||||
| Total Deferred | (2,871,680) | 0 | ||||||||
| Income tax benefit | (2,834,319) | (768) | ||||||||
| U.S. operations | ||||||||||
| INCOME TAXES | ||||||||||
| Income (loss) from operations before tax | 2,268,906 | 1,409,487 | ||||||||
| Foreign operations | ||||||||||
| INCOME TAXES | ||||||||||
| Income (loss) from operations before tax | $ (23,056) | $ (51,801) | ||||||||
INCOME TAXES - U.S. Federal Statutory Rate To Actual Tax Benefit For Income Taxes (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
|
| Income Tax [Line Items] | ||
| Federal statutory income tax | $ 763,589 | $ 461,613 |
| State income tax, net of federal benefit | 41,603 | (6,468) |
| Change in valuation allowance | (3,580,148) | (485,846) |
| Stock based compensation | 0 | 23,096 |
| Other | (59,363) | 6,887 |
| Income tax benefit | $ (2,834,319) | $ (768) |
INCOME TAXES - Deferred Taxes (Details) - USD ($) |
Mar. 31, 2017 |
Mar. 31, 2016 |
|---|---|---|
| Deferred Tax Assets: | ||
| Compensation | $ 162,571 | $ 307,427 |
| Loss on uncompleted contracts | 58,409 | 180,521 |
| Foreign currency translation adjustment | 5,508 | 5,455 |
| Other liabilities not currently deductible | 364,569 | 265,455 |
| Share based compensation awards | 245,811 | 92,744 |
| Net operating loss carryforward | 4,093,968 | 4,950,542 |
| Valuation allowance | (1,537,726) | (5,117,874) |
| Total Deferred Tax Assets | 3,393,110 | 684,270 |
| Deferred Tax Liabilities: | ||
| Accelerated depreciation | (521,430) | (684,270) |
| Total Deferred Tax Liabilities | (521,430) | (684,270) |
| Net Deferred Tax Asset | $ 2,871,680 | $ 0 |
INCOME TAXES - Carryforwards and Unrecognized Tax Benefits (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
|
| Changes in unrecognized tax benefits | ||
| Deferred Tax Assets, Valuation Allowance | $ 1,537,726 | $ 5,117,874 |
| Valuation Allowance, Deferred Tax Asset, Increase (Decrease), Amount | 3,600,000 | |
| Valuation Allowance, Operating Loss Carryforwards [Member] | ||
| Changes in unrecognized tax benefits | ||
| Deferred Tax Assets, Valuation Allowance | 1,500,000 | |
| Tax Years 2007 to Current | ||
| Carryforwards of net operating losses and tax credits | ||
| Net operating losses | 5,400,000 | |
| State | ||
| Carryforwards of net operating losses and tax credits | ||
| Net operating losses | 26,022,238 | |
| Federal | ||
| Carryforwards of net operating losses and tax credits | ||
| Net operating losses | 6,589,720 | |
| Alternative minimum tax credits | 122,578 | |
| Ranor, Inc. | Tax Years 2006 And Prior | ||
| Carryforwards of net operating losses and tax credits | ||
| Net operating losses | $ 1,200,000 |
PROFIT SHARING PLAN (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
|
| PROFIT SHARING PLAN | ||
| Matching contributions made by the company | $ 61,302 | |
| Ranor, Inc. | ||
| PROFIT SHARING PLAN | ||
| Eligibility for employer matching contributions, period of service | 90 days | |
| Matching contributions made by the company | $ 82,189 | |
CAPITAL STOCK (Details) |
1 Months Ended | 12 Months Ended | |
|---|---|---|---|
|
Sep. 24, 2015
shares
|
Mar. 31, 2017
$ / shares
shares
|
Mar. 31, 2016
shares
|
|
| Capital stock | |||
| Preferred stock, shares authorized | 10,000,000 | 10,000,000 | |
| Number of authorized common shares | 90,000,000 | 90,000,000 | |
| Number of outstanding common shares | 28,824,593 | 27,324,593 | |
| Minimum | |||
| Capital stock | |||
| Number of series of preferred stock | 1 | ||
| Series A Convertible Preferred Stock | |||
| Capital stock | |||
| Number of series of preferred stock | 1 | ||
| Conversion ratio prior to adjustment | 1 | ||
| Conversion ratio | 1.3072 | ||
| Effective conversion price (in dollars per share) | $ / shares | $ 0.218 | ||
| Shares converted into common stock | 1,927,508 | 1,927,508 | |
| Number of shares of common stock issued for converted preferred stock | 2,519,635 | 2,519,635 | |
| Shares outstanding | 0 | 0 | |
STOCK BASED COMPENSATION - Stock Options Outstanding (Details) - $ / shares |
12 Months Ended | |
|---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
|
| Stock options outstanding but not vested, Number of Options | ||
| Outstanding at the beginning of the period (in shares) | 1,028,334 | 112,500 |
| Granted (in shares) | 1,066,668 | 1,530,000 |
| Forfeited (in shares) | (13,333) | (40,000) |
| Vested (in shares) | (1,248,335) | (574,166) |
| Outstanding at the end of the period (in shares) | 833,334 | 1,028,334 |
| Stock options outstanding but not vested, Weighted Average Exercise Price | ||
| Outstanding at the beginning of the period (in dollars per share) | $ 0.117 | $ 0.664 |
| Granted (in dollars per share) | 0.516 | 0.110 |
| Forfeited (in dollars per share) | 0.670 | 0.670 |
| Vested (in dollars per share) | 0.352 | 0.216 |
| Outstanding at the end of the period (in dollars per share) | $ 0.266 | $ 0.117 |
COMMITMENTS (Details) |
3 Months Ended | 12 Months Ended | |
|---|---|---|---|
|
Jun. 30, 2016
ft²
|
Mar. 31, 2017
USD ($)
ft²
|
Mar. 31, 2016
USD ($)
|
|
| Commitments | |||
| Rent expense for operating lease | $ 3,738 | $ 21,206 | |
| Future minimum lease payments for property and equipment under non-cancellable operating leases | |||
| Future minimum lease payments required under non-cancellable operating leases | 1,983 | ||
| Contractual commitments | |||
| Purchase obligations outstanding to purchase raw materials and supplies at fixed prices | 900,000 | ||
| Employment agreements | |||
| Aggregate annual commitment for future executive salaries during the next fiscal year | 800,000 | ||
| Aggregate commitment for vacation and holiday pay for non-executive employees | $ 400,000 | ||
| GPX Wayne | |||
| Commitments | |||
| Area of land leased (in square feet) | ft² | 1,100 | ||
| Wuxi, China | |||
| Commitments | |||
| Area of land leased (in square feet) | ft² | 1,000 | ||
| Annual rental cost | $ 4,000 | ||
CLAIM ASSIGNMENT SETTLEMENT (Details) - USD ($) |
3 Months Ended | 12 Months Ended | ||||
|---|---|---|---|---|---|---|
Nov. 08, 2016 |
Dec. 31, 2016 |
Mar. 31, 2017 |
Mar. 31, 2016 |
Apr. 21, 2015 |
Apr. 17, 2015 |
|
| Claim Assignment Settlement | ||||||
| Gain (Loss) on Sale of Accounts Receivable | $ 1,122,287 | $ 1,122,287 | $ 0 | |||
| Ranor, Inc. | Assignment of Claim Agreement | ||||||
| Claim Assignment Settlement | ||||||
| Unsecured claim sold and assigned | $ 3,740,956 | |||||
| Ranor, Inc. | Assignment of Claim Agreement | Maximum | ||||||
| Claim Assignment Settlement | ||||||
| Additional amount to be received from the sale and assignment of unsecured claim | $ 614,452 | |||||
| Ranor, Inc. | Assignment of Claim Agreement | Current Liabilities | ||||||
| Claim Assignment Settlement | ||||||
| Initial amount received from the sale and assignment of unsecured claim | $ 507,835 | |||||
| Ranor, Inc. | Citigroup Financial Products Inc | Assignment of Claim Agreement | ||||||
| Claim Assignment Settlement | ||||||
| Proceeds received from the sale and assignment of unsecured claim | $ 614,452 | |||||
EARNINGS PER SHARE (EPS) (Details) - USD ($) |
3 Months Ended | 12 Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2017 |
Dec. 31, 2016 |
Sep. 30, 2016 |
Jun. 30, 2016 |
Mar. 31, 2016 |
Dec. 31, 2015 |
Sep. 30, 2015 |
Jun. 30, 2015 |
Mar. 31, 2017 |
Mar. 31, 2016 |
|
| Basic EPS | ||||||||||
| Net Income | $ 3,097,000 | $ 992,000 | $ 546,000 | $ 445,000 | $ 885,000 | $ 12,000 | $ 255,000 | $ 206,000 | $ 5,080,169 | $ 1,358,454 |
| Weighted average shares | 27,908,155 | 26,392,514 | ||||||||
| Basic Income per share (in dollars per share) | $ 0.11 | $ 0.03 | $ 0.02 | $ 0.02 | $ 0.03 | $ 0.00 | $ 0.01 | $ 0.01 | $ 0.18 | $ 0.05 |
| Diluted EPS | ||||||||||
| Net Income | $ 3,097,000 | $ 992,000 | $ 546,000 | $ 445,000 | $ 885,000 | $ 12,000 | $ 255,000 | $ 206,000 | $ 5,080,169 | $ 1,358,454 |
| Dilutive effect of stock options | 702,919 | 180,223 | ||||||||
| Diluted weighted average shares | 28,611,074 | 26,572,737 | ||||||||
| Diluted Income per share (in dollars per share) | $ 0.11 | $ 0.03 | $ 0.02 | $ 0.02 | $ 0.03 | $ 0.00 | $ 0.01 | $ 0.01 | $ 0.18 | $ 0.05 |
| Antidilutive securities excluded from computation of earnings per share amount (in shares) | 1,472,668 | 1,368,500 | ||||||||
SELECTED QUARTERLY INFORMATION (UNAUDITED) (Details) - USD ($) |
3 Months Ended | 12 Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2017 |
Dec. 31, 2016 |
Sep. 30, 2016 |
Jun. 30, 2016 |
Mar. 31, 2016 |
Dec. 31, 2015 |
Sep. 30, 2015 |
Jun. 30, 2015 |
Mar. 31, 2017 |
Mar. 31, 2016 |
|
| Unaudited quarterly data | ||||||||||
| Net Sales | $ 4,931,000 | $ 5,319,000 | $ 3,656,000 | $ 4,644,000 | $ 4,869,000 | $ 3,507,000 | $ 4,103,000 | $ 4,374,000 | $ 18,550,674 | $ 16,853,952 |
| Gross Profit | 1,035,000 | 2,052,000 | 1,474,000 | 1,535,000 | 1,731,000 | 1,072,000 | 1,408,000 | 1,283,000 | 6,096,132 | 5,493,746 |
| Net Income | $ 3,097,000 | $ 992,000 | $ 546,000 | $ 445,000 | $ 885,000 | $ 12,000 | $ 255,000 | $ 206,000 | $ 5,080,169 | $ 1,358,454 |
| Basic Income per share (in dollars per share) | $ 0.11 | $ 0.03 | $ 0.02 | $ 0.02 | $ 0.03 | $ 0.00 | $ 0.01 | $ 0.01 | $ 0.18 | $ 0.05 |
| Diluted Income per share (in dollars per share) | $ 0.11 | $ 0.03 | $ 0.02 | $ 0.02 | $ 0.03 | $ 0.00 | $ 0.01 | $ 0.01 | $ 0.18 | $ 0.05 |