TPCS 10-Q Quarterly Report Dec. 31, 2012 | Alphaminr
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TPCS 10-Q Quarter ended Dec. 31, 2012

Balance Sheet
Cash Flow
Income Statement
TECHPRECISION CORP
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10-Q 1 tpcs10q.htm TECHPRECISION CORP. FORM 10-Q tpcs10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2012
OR
o 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 0-51378
TECHPRECISION CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
51-0539828
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
3477 Corporate  Parkway, Center Valley, PA
18034
(Address of principal executive offices)
(Zip Code)
(484) 693-1700
(Registrant’s telephone number, including area code)

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.
Yes
x
No
o

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
x
No
o
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
o
Accelerated filer
o
Non-Accelerated Filer
o
Smaller reporting company
x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
x

The number of shares of the Registrant’s common stock, par value $.0001 per share, issued and outstanding at February 8, 2013 was 19,558,176.




TABLE OF CONTENTS


Page
PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
CONSOLIDATED STATEMENTS OF CASH FLOWS
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 4.
CONTROLS AND PROCEDURES
PART II.
OTHER INFORMATION
ITEM 1A.
RISK FACTORS
ITEM 6.
EXHIBITS
SIGNATURES











CONSOLIDATED BALANCE SHEETS
December 31, 2012
(Unaudited)
March 31, 2012
ASSETS
Current assets:
Cash and cash equivalents
$ 2,013,621 $ 2,823,485
Accounts receivable, less allowance for doubtful accounts of $25,010 and $25,010
3,491,693 4,901,791
Costs incurred on uncompleted contracts, in excess of progress billings
4,901,686 3,910,026
Inventories- raw materials
474,254 373,544
Income taxes receivable
1,426,405 1,751,169
Current deferred taxes
994,659 1,020,208
Other current assets
1,712,012 1,486,954
Total current assets
15,014,330 16,267,177
Property, plant and equipment, net
7,253,692 7,395,445
Noncurrent deferred taxes
61,009 118,005
Other noncurrent assets, net
95,767 270,630
Total assets
$ 22,424,798 $ 24,051,257
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable
$ 2,449,458 $ 1,361,611
Accrued expenses
1,441,062 2,424,695
Accrued taxes payable
203,210 159,987
Deferred revenues
921,992 799,413
Current maturity of long-term debt
937,094 1,358,933
Total current liabilities
5,952,816 6,104,639
Long-term debt, including capital leases
5,178,951 5,776,294
Commitments and contingent liabilities (see Note 16)
Stockholders’ Equity:
Preferred stock- par value $.0001 per share, 10,000,000 shares authorized,
of which 9,890,980 are designated as Series A Convertible Preferred Stock,
with 5,837,998 and 7,035,982 shares issued and outstanding at December 31, 2012
and March 31, 2012, (liquidation preference of $1,663,829 and $2,005,254
at December 31, 2012 and March 31, 2012)
1,376,696 1,637,857
Common stock -par value $0.0001 per share, authorized, 90,000,000 shares
issued and outstanding, 19,558,176 shares at December 31, 2012 and
17,992,177 at March 31, 2012
1,956 1,799
Additional paid in capital
5,119,077 4,412,075
Accumulated other comprehensive loss
(250,100 ) (223,584 )
Retained earnings
5,045,402 6,342,177
Total stockholders’ equity
11,293,031 12,170,324
Total liabilities and stockholders’ equity
$ 22,424,798 $ 24,051,257
The accompanying notes are an integral part of the financial statements.

1


CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Three months ended
December 31,
Nine months ended
December 31,
2012
2011
2012
2011
Net sales
$
7,293,877
$
10,864,011
$
22,518,168
$
27,187,618
Cost of sales
5,409,770
10,124,081
17,590,257
22,105,308
Gross profit
1,884,107
739,930
4,927,911
5,082,310
Selling, general and administrative
2,293,810
1,924,095
6,218,409
5,610,744
Loss from operations
(409,703
)
(1,184,165
)
(1,290,498
)
(528,434
)
Other (expense) income
(29,095
)
16,373
(26,585
)
16,373
Interest expense
(64,919
)
(77,547
)
(219,403
)
(214,769
)
Interest income
1,454
4,316
4,335
14,723
Total other expense, net
(92,560
)
(56,858
)
(241,653
)
(183,673
)
Loss before income taxes
(502,263
)
(1,241,023
)
(1,532,151
)
(712,107
)
Income tax expense (benefit)
43,224
(92,682
)
(235,375
)
142,871
Net loss
$
(545,487
)
$
(1,148,341
)
$
(1,296,776
)
$
(854,978
)
Other comprehensive income (loss), before tax:
Change in unrealized gain (loss) on cash flow hedges
25,359
4,507
(53,783
)
(417,422
)
Foreign currency translation adjustments
(8,059
)
(5,586
)
6,052
12,597
Other comprehensive income (loss), before tax
17,300
(1,079
)
(47,731
)
(404,825
)
Net tax expense (benefit) of other comprehensive income (loss) items
10,004
1,815
(21,215
)
(168,095
)
Other comprehensive income (loss), net of tax
7,296
(2,894
)
(26,516
)
(236,730
)
Comprehensive loss
$
(538,191
)
$
(1,151,235
)
$
(1,323,292
)
$
(1,091,708
)
Net loss per share (basic)
$
(0.03
)
$
(0.07
)
$
(0.07
)
$
(0.05
)
Net loss per share (diluted)
$
(0.03
)
$
(0.07
)
$
(0.07
)
$
(0.05
)
Weighted average number of shares outstanding (basic)
19,089,289
17,072,721
18,773,080
16,364,844
Weighted average number of shares outstanding (diluted)
19,089,289
17,072,721
18,773,080
16,364,844
The accompanying notes are an integral part of the financial statements.
2


CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
December 31,
2012
2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
$
(1,296,776
)
$
(854,978
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization
624,763
370,289
Stock based compensation expense
448,608
372,385
Deferred income taxes
103,760
91,188
Provision for contract losses
20,000
566,397
Changes in operating assets and liabilities:
Accounts receivable
1,409,395
40,998
Costs incurred on uncompleted contracts, in excess of progress billings
(991,660
)
(2,414,331
)
Inventories – raw materials
(100,916
)
437,494
Other current assets
(225,459
)
(226,468
)
Taxes receivable
324,764
(869,047
)
Other noncurrent assets
141,039
(224,376
)
Accounts payable
1,086,040
218,335
Accrued expenses
(1,058,854
)
(184,455
)
Accrued taxes payable
43,224
157,703
Deferred revenues
122,579
(228,074
)
Net cash provided by (used in) operating activities
650,507
(2,746,940
)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment
(395,367
)
(2,342,542
)
Net cash used in investing activities
(395,367
)
(2,342,542
)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercised stock options
--
35,511
Tax expense from share-based compensation
--
(1,030
)
Repayments of long-term debt, including capital lease
(1,065,558
)
(1,111,239
)
Borrowings of long-term debt
--
1,699,397
Net cash (used in) provided by financing activities
(1,065,558
)
622,639
Effect of exchange rate on cash and cash equivalents
554
11,913
Net decrease in cash and cash equivalents
(809,864
)
(4,454,930
)
Cash and cash equivalents, beginning of period
2,823,485
7,541,000
Cash and cash equivalents, end of period
$
2,013,621
$
3,086,070
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid during the year for:
Interest expense
$
219,403
$
246,938
Income taxes
$
--
$
764,306

3

SUPPLEMENTAL INFORMATION – NONCASH INVESTING AND FINANCING TRANSACTIONS:
Nine months ended December 31, 2012

For the nine months ended December 31, 2012, the Company issued 1,565,999 shares of common stock in connection with the conversion of 1,197,984 shares of Series A Convertible Preferred Stock.
The Company recorded a liability of $259,960 (net of tax of $169,335) to reflect the fair value of an interest rate swap contract in connection with a tax exempt bond financing transaction.

For the nine months ended December 31, 2012, Ranor entered into a capital lease arrangement for $46,378 for new office equipment.

Nine months ended December 31, 2011

For the nine months ended December 31, 2011, the Company issued 2,030,072 shares of common stock in connection with the conversion of 1,553,000 shares of Series A Convertible Preferred Stock.

The Company placed $2,172,420 of equipment into service which was under construction at the beginning of the fiscal year ended March 31, 2011.

Also, the Company recorded a liability of $243,844 (net of tax of $164,400) to reflect the fair value of an interest rate swap contract in connection with a tax-exempt bond financing transaction.


The accompanying notes are an integral part of the financial statements.
4


TECHPRECISION CORPORATION
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. On November 4, 2010, TechPrecision announced it completed the formation of a wholly foreign owned enterprise, Wuxi Critical Mechanical Components Co., Ltd., or WCMC, to meet growing demand for local manufacturing of components in China. TechPrecision, WCMC and Ranor are collectively referred to as the “Company,” “we,” “us,” or “our.” The Company manufactures large scale metal fabricated and machined precision components and equipment. These products are used in a variety of markets including the Alternative Energy, Medical, Nuclear, Commercial, and Defense and Aerospace industries.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation and Classification
The accompanying consolidated financial statements include the accounts of TechPrecision, WCMC and Ranor. Intercompany transactions and balances have been eliminated in consolidation.
The accompanying consolidated balance sheet as of December 31, 2012, the consolidated statements of operations and comprehensive loss for the three and nine-month periods ended December 31, 2012 and 2011, and the consolidated statements of cash flows for the nine months ended December 31, 2012 and 2011 are unaudited, but in the opinion of management, include all adjustments that are necessary for a fair presentation of the Company’s financial statements for interim periods in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. All adjustments are of a normal, recurring nature, except as otherwise disclosed. The consolidated balance sheet as of March 31, 2012 was derived from audited financial statements. In order to conform to the current year presentation, the provision for contract losses and accrued expenses on the consolidated statement of cash flows have been adjusted to conform to the current year presentation.

The Notes to Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC, for Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These notes should be read in conjunction with the notes to consolidated financial statements of the Company in Item 8 of the Company’s Annual Report on Form 10-K for the year ended March 31, 2012, or 2012 Form 10-K.

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 accounts receivable, contract accounting, inventories, 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. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements.
Fair Value Measurements
We account for fair value of financial instruments under the Financial Accounting Standard Board’s (FASB) Accounting Standards Codification (ASC) authoritative guidance which defines fair value and establishes a framework to measure fair value and the related disclosures about fair value measurements. 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.
5


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 consolidated balance sheet, approximates fair value due to the short-term nature of these instruments.

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. The Company’s China subsidiary also maintains a bank account in a large national bank in China subject to People’s Republic of China, or PRC, banking regulations. Cash on deposit with a large national China-based bank was $396,171 and $692,524 at December 31, 2012 and March 31, 2012, respectively.

Foreign currency translation

The majority of the Company’s business is transacted in U.S. dollars; however, the functional currency of the Company’s China subsidiary is the local currency, the Chinese Yuan Renminbi. In accordance with ASC No. 830, Foreign Currency Matters , foreign currency translation adjustments of subsidiaries operating outside the U.S. are included in stockholders’ equity as a component of accumulated other comprehensive loss, a separate component of equity. Foreign currency transaction gains and losses are recognized in the determination of net income (loss) as incurred.

Accounts receivable and allowance for doubtful accounts
Accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its 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, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Current earnings are also charged with an allowance for sales returns based on historical experience. Historically, the level of uncollectible accounts has not been significant. There was bad debt expense of $0 for the nine months ended December 31, 2012 and 2011, respectively.
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
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.

Interest is capitalized for assets that are constructed or otherwise produced for the Company’s own use, including assets constructed or produced for the Company 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. The Company uses 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.

In accordance with ASC No. 360, Property, Plant & Equipment , the Company's 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. There were no impairments recorded for the nine months ended December 31, 2012 and 2011.



6


Operating Leases
Operating leases are charged to operations on a straight-line basis over the term of the lease. The Company leases its office facilities for various terms under long-term, non-cancelable lease agreements. The leases expire at various dates through 2016 and provide for renewal options ranging from three months to five years. In the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties.
Derivative Financial Instruments

The Company is exposed to various risks such as fluctuating interest rates, foreign exchange rates and increasing commodity prices. To manage these market risks, we may periodically enter into derivative financial instruments such as interest rate swaps, options and foreign exchange contracts for periods consistent with and for notional amounts equal to or less than the related underlying exposures. We do not purchase or hold any derivative financial instruments for speculation or trading purposes.
All derivative instruments are recognized in the financial statements and measured at fair value regardless of the purpose or intent of holding them. At December 31, 2012 and March 31, 2012, the Company had two interest rate swap transactions designated as cash flow hedges, each with an effective date of January 3, 2011. For our cash flow hedges, the effective portion of the derivative’s gain or loss is initially reported in stockholders’ equity as a component of accumulated other comprehensive loss and is subsequently reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. The ineffective portion of the gain or loss of a cash flow hedge is reported in earnings immediately.
The Company formally documents the hedging relationship and its risk management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions.
The Company will discontinue hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk, the derivative expires, is sold, terminated, exercised, or management determines to remove the designation of a cash flow hedge. See Note 8 for additional disclosure related to interest rate swaps.

Convertible Preferred Stock and Warrants
The Company measures the fair value of the Series A Convertible Preferred Stock by the amount of cash that was received for their issuance. The Company has determined that the convertible preferred shares and warrants issued are equity instruments. The holders of the Series A Convertible Preferred Stock have no right higher than the common stockholders other than the liquidation preference in the event of liquidation of the Company.

The Company’s warrants were excluded from derivative accounting because they are indexed to the Company’s unregistered common stock and are classified in stockholders’ equity.

Selling, General, and Administrative Expense
Selling, general and administrative expenses include items such as executive compensation, business travel and advertising costs. Selling, general and administrative expenses amounted to $6.2 million and $5.6 million for the nine months ended December 31, 2012 and 2011, respectively. Advertising costs are expensed as incurred. Other general and administrative expenses include items for the Company’s administrative functions and for items such as office rent, supplies, insurance, legal, accounting, tax, telephone and other outside services.

Stock Based Compensation

Stock based compensation represents the cost related to stock based awards granted to the Board of Directors and employees. The Company measures stock based compensation cost at the grant date based on the estimated fair value of the award and recognizes the cost as expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. The Company estimates the fair value of stock options using a Black-Scholes valuation model.

Excess tax benefits of awards that are recognized in equity related to stock option exercises are reflected as financing cash inflows. Stock based compensation cost that has been included in loss from operations amounted to $448,608 and $372,385 for the nine months ended December 31, 2012 and 2011, respectively. See Note 13 for additional disclosures related to stock based compensation.
7



Net Loss per Share of Common Stock
Basic net loss per common share is computed by dividing net income or loss by the weighted-average number of shares outstanding during the period. Diluted net loss per common share is calculated using net loss divided by diluted weighted-average shares. Diluted weighted-average shares include weighted-average shares outstanding plus the dilutive effect of convertible preferred stock, stock options and warrants calculated using the treasury stock method. See Note 13 for additional disclosures related to stock based compensation.

Revenue Recognition

We account for revenues and earnings using the percentage-of-completion method of accounting. Under this method, we recognize contract revenue and gross profit as the work progresses, either as the products are produced and delivered, or as services are rendered. We determine progress toward completion on production contracts based on either input measures, such as labor hours incurred, or output measures, such as units 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.
We 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 during the performance of the combined contracts.
Costs allocable to undelivered units are reported in the consolidated balance sheet as costs incurred on uncompleted contracts. Amounts in excess of 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 relating to the claim 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 ranges that would result in the lowest profit margin (the lowest contract revenue estimate and the highest contract cost estimate) is used.

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
In accordance with ASC No. 740, Income Taxes , 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. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being 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.

Recent Accounting Pronouncements

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities . ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position, and to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under International Financial Reporting Standards, or IFRS. The new standards are effective for annual periods beginning January 1, 2013, and interim periods within those annual periods. Retrospective application is required. The Company will implement the provisions of ASU 2011-11 as of April 1, 2013 and do not anticipate that it will have a material impact on reported financial position and results of operations.
8


NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
December 31,
2012
March 31,
2012
Land
$
110,113
$
110,113
Building and improvements
3,345,662
3,345,662
Machinery equipment, furniture and fixtures
8,477,009
8,102,700
Equipment under capital leases
46,378
56,242
Total property, plant and equipment
11,979,162
11,614,717
Less: accumulated depreciation
(4,725,470
)
(4,219,272
)
Total property, plant and equipment, net
$
7,253,692
$
7,395,445

Depreciation expense for the three and nine months ended December 31, 2012 and 2011 was $194,925 and $583,574, and, $132,119 and $357,341, respectively.

NOTE 4 - COSTS INCURRED ON UNCOMPLETED CONTRACTS
December 31,
2012
March 31,
2012
Cost incurred on uncompleted contracts, beginning balance
$
10,879,743
$
7,958,153
Plus: Total cost incurred on contracts during the period
12,606,514
31,104,174
Less: cost of sales, during the period
(17,590,257
)
(28,182,584
)
Cost incurred on uncompleted contracts, ending balance
$
5,896,000
$
10,879,743
Billings on uncompleted contracts, beginning balance
$
6,969,717
$
5,104,301
Plus: Total billings incurred on contracts, during the period
16,542,765
35,132,194
Less: Contracts recognized as revenue, during the period
(22,518,168
)
(33,266,778
)
Billings on uncompleted contracts, ending balance
$
994,314
$
6,969,717
Cost incurred on uncompleted contracts, ending balance
$
5,896,000
$
10,879,743
Billing on uncompleted contracts, ending balance
(994,314
)
(6,969,717
)
Cost incurred on uncompleted contracts, in excess of progress billings
$
4,901,686
$
3,910,026
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 December 31, 2012 and March 31, 2012, the Company had deferred revenues totaling $921,992 and $799,413, respectively. Deferred revenues represent customer prepayments on their contracts and completed contracts on which all revenue recognition criteria were not met.   The Company records provisions for losses within costs of sales in its consolidated statement of operations and comprehensive loss. The Company also receives advance billings and deposits representing down payments for acquisition of materials and progress payments on contracts. The agreements with our customers allow the Company to offset the progress payments against the costs incurred.

NOTE 5 – OTHER CURRENT ASSETS
December 31,
2012
March 31,
2012
Payments advanced to suppliers
$
371,186
$
77,000
Prepaid taxes, maintenance renewals
36,752
34,785
Prepaid insurance
195,815
220,496
Collateral deposits (see Note 8)
1,054,324
1,052,500
Other
53,935
102,173
Total
$
1,712,012
$
1,486,954
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NOTE 6 – OTHER NONCURRENT ASSETS
December 31,
2012
March 31,
2012
Collateral deposit (see Note 8)
$
30,213
$
171,252
Deferred loan costs, net of amortization
65,554
99,378
Total
$
95,767
$
270,630

NOTE 7 - ACCRUED EXPENSES
December 31,
2012
March 31,
2012
Accrued compensation
$
464,179
$
970,088
Interest rate swaps market value
429,295
375,512
Provision for contract losses
224,918
887,458
Other
322,670
191,637
Total
$
1,441,062
$
2,424,695

NOTE 8 – LONG-TERM DEBT
The following debt obligations were outstanding as of:
December 31,
2012
March 31,
2012
Sovereign Bank Secured Term Note due March, 2013
$
142,857
$
571,429
Sovereign Bank Capital Expenditure Note due November 2014
324,576
490,292
Sovereign Bank Staged Advance Note due March 2016
389,491
445,133
MDFA Series A Bonds due January 2021
3,825,000
4,002,083
MDFA Series B Bonds due January 2018
1,392,857
1,624,999
Obligation under capital lease
41,264
1,291
Total long-term debt
6,116,045
7,135,227
Principal payments due within one year
(937,094
)
(1,358,933
)
Principal payments due after one year
$
5,178,951
$
5,776,294

On February 24, 2006, the Company entered into a loan and security agreement, or the Loan Agreement, with Sovereign Bank, or the Bank, which has since been amended as further described below. Pursuant to the Loan Agreement, as amended, the Bank provided the Company with a secured term loan of $4.0 million, or the Term Note, and a revolving line of credit of up to $2.0 million, or Revolving Note. On January 29, 2007, the Loan Agreement was amended, adding a capital expenditure line of credit facility of $3.0 million, or Capital Expenditure Note. On March 29, 2010, the Bank agreed to extend to the Company a loan facility, or Staged Advance Note, in the amount of up to $1.9 million for the purpose of acquiring a gantry mill machine.

On December 30, 2010, the Company completed a $6.2 million tax exempt bond financing with the Massachusetts Development Finance Authority, or the MDFA, pursuant to which the MDFA sold to the Bank MDFA Revenue Bonds, Ranor Issue, Series 2010A in the original aggregate principal amount of $4.25 million, or Series A Bonds, and MDFA Revenue Bonds, Ranor Issue, Series 2010B in the original aggregate principal amount of $1.95 million, or Series B Bonds together with the Series A Bonds, the Bonds. The proceeds of such sales were loaned to the Company under the terms of a Mortgage Loan and Security Agreement, dated as of December 1, 2010, by and among the Company, MDFA and the Bank (as Bond owner and Disbursing Agent), or the MLSA.

In connection with the December 30, 2010 bond financing, the Company executed an Eighth Amendment to the Loan Agreement, or Eighth Amendment. The Eighth Amendment incorporated borrowing of the Bond proceeds into the borrowings covered by the Loan Agreement. The MLSA provides for customary events of default, including any event of default under the Loan Agreement described above. Subject to lapse of any applicable cure period, a default under the MLSA would cause the acceleration of all outstanding obligations of the Company under the MLSA. Under the MLSA and the Eighth Amendment, the Company was required, as of the end of each fiscal quarter, to meet certain financial covenants applicable while the Bonds remain outstanding, including, among other things, that the ratio of earnings available to cover fixed charges will be greater than or equal to 120%; the interest coverage ratio will equal or exceed 2:1; and that the Company’s leverage ratio will be less than or equal to 3:1.

On August 8, 2011, an appraisal was completed on the Westminster, Massachusetts property assigning a value of $4.8 million to such property. The Series A Bonds require that the loan-to-value ratio not exceed 75%, indicating a maximum loan amount of $3.6 million.
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The bond balance exceeded such maximum loan amount at December 31, 2011 by approximately $490,000. On October 28, 2011, the Company and the Bank agreed to resolve the collateral shortfall by establishing a separate interest bearing restricted cash account in the amount of $490,000 which is pledged as additional collateral to the debt and restricted from use for any other purpose. The required restricted balance is being amortized down at the current monthly debt principal amount of $17,708. At December 31, 2012, the restricted cash is classified as a collateral deposit in other current and noncurrent assets of $212,500 and $30,213, respectively.

At December 31, 2011, we were in compliance with our leverage ratio bank covenant. However, we did not meet the ratio of earnings available to cover fixed charges or the interest coverage ratio covenants. In February 2012, the Company executed a Tenth Amendment and obtained a waiver of the breach of such covenants from the Bank, which waiver covered the breach that otherwise would have occurred in connection with the covenant testing for the third quarter ended December 31, 2011 and waived the ratio of earnings available to cover fixed charges covenant at March 31, 2012. This waiver did not apply to any future covenant testing dates.

On July 6, 2012, the Company executed an Eleventh Amendment and obtained a waiver for failure to comply with the fixed charge coverage ratio and the interest coverage ratio covenants at March 31, 2012. The Eleventh Amendment also waived the covenant testing requirements related to the ratio of earnings available to cover fixed charges and the interest coverage ratio for the fiscal quarters ended June 30, 2012 and September 30, 2012. The leverage ratio covenant remained in effect, and must not be greater than 2:1. The Company was in compliance with the leverage ratio covenant at September 30, 2012, as the actual leverage ratio was 1:1. Although there was no testing of the covenant to comply with the ratio of earnings available to cover fixed charges and the interest coverage covenants for the fiscal quarters ended June 30 and September 30, 2012, the Bank required that the Company have earnings before interest and taxes (EBIT) greater than $1 for the fiscal quarter ended September 30, 2012. The Company reported EBIT of $14,286 for the fiscal quarter ended September 30, 2012 and, therefore, was in compliance with this covenant. The $1 EBIT covenant at September 30, 2012 is not applicable to any future periods as testing of all covenants resumes on December 31, 2012 according to the terms of the Eleventh Amendment.

Under the Eleventh Amendment the covenants were revised such that the Company was not to permit earnings available for fixed charges to be less than 125%, the interest coverage ratio to be less than 2:1, and the leverage ratio to be greater than 2:1 at any time, tested quarterly. Also, in connection with the Eleventh Amendment, the Company paid the Bank a fee of $10,000 and made a collateral deposit of $840,000 to cover estimated principal and interest on its obligation. The collateral deposit was included in other current assets at December 31, 2012 and March 31, 2012. This collateral was to be released to the Company upon successful compliance with all debt covenant tests. The earliest date this could have occurred was December 31, 2012, the first date the Company would have been again subject to testing of all of the financial covenants. The Eleventh Amendment also revised covenant testing to provide that the ratio of earnings available to cover fixed charges and the interest coverage ratio covenant testing was to resume at December 31, 2012 on a trailing six month basis, and continue at March 31, 2013 on a trailing nine month basis and quarterly thereafter on a trailing twelve month basis beginning on June 30, 2013.
On February 14, 2013, the Company executed a Twelfth Amendment and obtained a waiver for failure to comply with the fixed charge coverage ratio and the interest coverage ratio covenants at December 31, 2012. The actual fixed charge ratio at December 31, 2012 was negative 41% and the actual interest coverage ratio was negative 256% as the Company reported an operating loss for the three months ended December 31, 2012. The leverage ratio covenant remained in effect (and must not be greater than 2:1). The Company was in compliance with the leverage ratio covenant at December 31, 2012, as the actual leverage ratio was 1:1. The Twelfth Amendment revised the covenant to provide that the ratio of earnings available to cover fixed charges and the interest ratio coverage covenant testing will resume at March 31, 2013 on a trailing three month basis, and continue at June 30, 2013 on a trailing six month basis, at September 30, 2013 on a trailing nine month basis, and quarterly thereafter on a trailing twelve month basis beginning at December 31, 2013. Also, in connection with the Twelfth Amendment, the Company paid the Bank a fee of $7,500 and is required to continue to maintain a collateral deposit of $840,000 to cover estimated principal and interest on its obligation. The $840,000 collateral will be released to the Company upon successful compliance with all debt covenant tests for the period ended June 30, 2013.  The earliest this could occur is March 31, 2013, the first date the Company will again be subject to testing of all financial covenants.
Without the execution of the Twelfth Amendment for the applicable periods and the Company's determination that it expects to be in compliance for each of the next four quarterly periods, the Company would have been required to reclassify all of its long-term debt as a current liability. In addition, if the lender had demanded repayment and caused the debt to be considered a short-term obligation, the Company may have been unable to pay the obligation because the Company does not have existing facilities or sufficient cash on hand to satisfy these obligations. In the event of default (which default may occur in connection with a non-waived breach), the Bank may choose to accelerate payment of any long-term debt outstanding and, under certain circumstances, the Bank may be entitled to cancel the facilities. If the Company were unable to obtain a waiver for a breach of covenant and the Bank accelerated the payment of any outstanding amounts, such acceleration may cause the Company’s cash position to deteriorate or, if cash on hand were insufficient to satisfy any payment due, may require the Company to seek alternate financing to satisfy any accelerated payment obligation.  T he Company believes it will achieve compliance with all of the revised covenants quarterly through at least December 31, 2013.
Obligations under the Term Note, Revolving Note, Capital Expenditure Note and Staged Advance Note are guaranteed by the Company. Collateral securing such notes comprises all personal property of the Company, including cash, accounts receivable, inventories, equipment, financial and intangible assets.
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Term Note:

The Term Note issued on February 24, 2006 has a term of 7 years with an initial fixed interest rate of 9%. The interest rate on the Term Note converted from a fixed rate of 9% to a variable rate on February 28, 2011. From February 28, 2011 until maturity the Term Note will bear interest at the Prime Rate plus 1.5%, payable on a quarterly basis. Principal is payable in quarterly installments of $142,857, plus interest, with a final payment due on March 1, 2013.

MDFA Series A and B Bonds:

On December 30, 2010, the Company and Ranor completed a $6.2 million tax exempt bond financing with the MDFA pursuant to which the MDFA sold to the Bank MDFA Revenue Bonds, Ranor Issue, Series 2010A in the original aggregate principal amount of $4.25 million (Series A Bonds) and MDFA Revenue Bonds, Ranor Issue, Series 2010B in the original aggregate principal amount of $1.95 million (Series B Bonds) and loaned the proceeds of such sale to Ranor under the terms of the MLSA, dated as of December 1, 2010, by and among the Company, Ranor, MDFA and the Bank.
The proceeds from the sale of the Series A Bonds were used to finance the Ranor facility acquisition and 19,500 sq. ft. expansion of Ranor’s manufacturing facility located in Westminster, Massachusetts, and the proceeds from the sale of the Series B Bonds were used to finance acquisitions of qualifying manufacturing equipment installed at the Westminster facility. Under the MLSA and related documents, the Westminster facility secures, and the Company further guarantees, Ranor’s obligations to the Bank and subsequent holders of the Bonds.
The initial rate of interest on the Bonds was 1.96% for a period from the bond date to and including January 31, 2011, and the interest rate thereafter is 65% times the sum of 275 basis points plus one-month LIBOR. The Company is required to make monthly payments of $17,708 and $23,214 with respect to the Loans beginning on February 1, 2011 until the maturity date or earlier redemption of each Bond. The Series A Bonds and the Series B Bonds will mature on January 1, 2021 and January 1, 2018, respectively. The Bonds are redeemable pursuant to the MLSA prior to maturity, in whole or in part, on any payment date in accordance with the terms of the MLSA.
In connection with the Bond financing, the Company and the Bank entered into the International Swap and Derivatives Association, Inc. 2002 Master Agreement, dated December 30, 2010, or ISDA Master Agreement, pursuant to which the variable interest rates applicable to the Bonds were swapped for fixed interest rates of 4.14% on the Series A Bonds and 3.63% on the Series B Bonds. Under the ISDA Master Agreement, the Company and the Bank entered into two swap transactions, each with an effective date of January 3, 2011. The notional amount of outstanding fair value interest rate swaps totaled $5.3 and $5.6 million at December 31, 2012 and March 31, 2012, respectively. These derivative instruments, which are designated as cash flow hedges, are carried on the Company’s consolidated balance sheet at fair value with the effective portion of the gain or loss on the derivative reported in stockholders’ equity as a component of accumulated other comprehensive loss and subsequently reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The swaps will terminate on January 4, 2021 and January 2, 2018, respectively. The fair value of the interest rate swaps contracts were measured using market based level 2 inputs. The method employed to calculate the values conforms to the industry convention for calculation of such values. The swap’s market value can be calculated any time by comparing the fixed rate set at the inception of the transaction and the “swap replacement rate,” which represents the market rate for an offsetting interest rate swap with the same Notional Amounts and final maturity date. The market value is then determined by calculating the present value interest differential between the contractual swap and the replacement swap. The termination value is the sum of the present value interest differential as described above plus the accrued interest due at termination.
Revolving Note:

The Company and the Bank agreed to extend the maturity date of the revolving credit facility to July 29, 2012 under the Ninth Amendment to the Loan Agreement. The maturity date of the revolving credit facility was extended to January 31, 2013 under the Eleventh Amendment, and was extended further to July 31, 2013 under the Twelfth Amendment. The Revolving Note bears interest at a variable rate determined as the Prime Rate, plus 1.5% annually on any outstanding balance.   The borrowing limit on the Revolving Note is limited to the sum of 70% of the Company’s eligible accounts receivable plus 40% of eligible inventory up to a maximum borrowing limit of $2.0 million.   There were no borrowings outstanding under this facility as of December 31, 2012 and 2011.  As of December 31, 2012, $2.0 million was available for us to borrow. The Company pays an unused credit line fee of 0.25% on the average unused credit line amount in the previous month.

Capital Expenditure Note:

The initial borrowing limit under the Capital Expenditure Note was $0.5 million and has been amended several times resulting in a borrowing limit of $3.0 million. On November 30, 2009, the Company elected not to renew this facility when it terminated. Borrowings outstanding under this facility were converted to a note when the facility terminated. The current rate of interest is LIBOR plus 3%. Principal and interest payments are due monthly based on a five year amortization schedule. The Capital Expenditure Note matures on November 30, 2014.

12


Staged Advance Note:

The Bank made certain loans to the Company limited to a cap of $1.9 million for the purpose of acquiring a gantry mill machine. The machine serves as collateral for the loan. The total aggregate amount of advances under this agreement could not exceed 80% of the actual purchase price of the gantry mill machine. All advances provided for a payment of interest only monthly through February 28, 2011, and thereafter, no further borrowings were permitted under this facility. The current interest rate is LIBOR plus 4%. Beginning on April 1, 2011, the Company was obligated to pay principal and interest sufficient to amortize the outstanding balance on a five year schedule. The Staged Advance Note matures on March 1, 2016.

Capital Lease:

The Company entered into a new capital lease in April 2012 in the amount of $46,378 for certain office equipment. The lease term is for 63 months, bears interest at 6.0% and requires monthly payments of principal and interest of $860.
NOTE 9 - INCOME TAXES

For the nine months ended December 31, 2012 and 2011, the Company recorded an income tax benefit of $235,375 and income tax expense of $142,871, respectively. At the end of each interim period, the Company makes an estimate of its annual U.S. and PRC expected effective tax rates and applies these rates to its respective year-to-date taxable income or loss.

In assessing the recoverability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The Company has 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 jurisdiction, the reversal of deferred tax liabilities, tax planning strategies and other factors prior to the expiration date of the carry-forwards.  A change in the estimates used to make this determination could require a reduction in deferred tax assets if they are no longer considered realizable.

As of March 31, 2012, the Company’s federal net operating loss carryforward was approximately $1.25 million. If not utilized, the federal net operating loss carryforward will begin to expire in 2025. Under Section 382 of the Internal Revenue Code, we are substantially limited with regard to the amount of certain net operating loss carry forward that we may use in any given year in the future due to prior changes in our ownership.

The Internal Revenue Code provides for a limitation on the annual use of net operating loss carryforwards following certain ownership changes that could limit the Company’s ability to utilize these carryforwards on a yearly basis. The Company experienced an ownership change in connection with the acquisition of Ranor. Accordingly, the Company’s ability to utilize the aforementioned carryforwards is limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes. Therefore, the Company may not be able to take full advantage of these carryforwards for Federal or state income tax purposes.

The Company files income tax returns in the U.S. federal jurisdiction, and various state jurisdictions. The Company’s foreign subsidiary files separate income tax returns in the foreign jurisdiction in which it is located.  Tax years 2008 and forward remain open for examination.  The Company recognizes interest and penalties accrued related to income tax liabilities in selling, general and administrative expense in its Consolidated Statements of Operations and Comprehensive Loss.

NOTE 10- RELATED PARTY TRANSACTIONS
On November 15, 2010, WCMC leased approximately 1,000 sq. ft. of office space from an affiliate of Cleantech Solutions International, or CSI, to serve as its primary corporate offices in Wuxi, China. The lease had an initial two-year term and rent under the lease with the CSI affiliate was approximately $17,000 on an annual basis. This lease has been renewed on a monthly basis going forward. In addition to leasing property from an affiliate of CSI, the Company subcontracts fabrication and machining services from CSI through their manufacturing facility in Wuxi, China and such subcontracted services are overseen by Company personnel co-located at CSI in Wuxi, China.
We view CSI as a related party because a holder of an approximate 18% fully diluted equity interest in CSI, also holds an approximate 36% fully diluted equity interest in the Company. WCMC is also subcontracting manufacturing services from other Chinese manufacturing companies on comparable terms as those it has with CSI. For the nine months ended December 31, 2012 and 2011, the Company paid approximately $1.1 million and $1.5 million to CSI for manufacturing services, respectively.

13



NOTE 11 - PROFIT SHARING PLAN
Ranor has a 401(k) profit sharing plan that covers substantially all Ranor employees who have completed 90 days of service. Ranor retains the option to match employee contributions. The Company’s contributions were $15,503 and $15,213 for the nine months ended December 31, 2012 and 2011, respectively.

NOTE 12 - CAPITAL STOCK

Preferred Stock
The Company has 10,000,000 authorized shares of preferred stock and the Board of Directors of TechPrecision, or Board of Directors, has broad power to create one or more series of preferred stock and to designate the rights, preferences, privileges and limitation of the holders of such series. The Board of Directors has 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 the failure of the Company to meet the levels of earnings before interest, taxes, depreciation and amortization for the years ended March 31, 2006 and 2007, the conversion rate changed, and, at December 31, 2009, each share of Series A Convertible Preferred Stock was convertible into 1.3072 shares of common stock, with an effective conversion price of $0.218.  Based on the current conversion ratio, there were 7,631,431 and 9,197,436 common shares underlying the Series A Convertible Preferred Stock as of December 31, 2012 and March 31, 2012, respectively.
In addition to the conversion rights described above, the certificate of designation for the Series A Convertible Preferred Stock provides that the holder of the series A preferred stock or its affiliates will not be entitled to convert the Series A Convertible Preferred Stock into shares of common stock or exercise warrants to the extent that such conversion or exercise would result in beneficial ownership by the investor and its affiliates of more than 4.9% of the shares of common stock outstanding after such exercise or conversion. This provision cannot be amended.
No dividends are payable with respect to the Series A Convertible Preferred Stock and no dividends are payable on common stock while Series A Convertible Preferred Stock is outstanding. The common stock will not be redeemed while preferred stock is outstanding.
The holders of the Series A Convertible Preferred Stock have no voting rights. However, so long as any shares of Series A Convertible Preferred Stock are outstanding, the Company shall not, without the affirmative approval of the holders of 75% of the outstanding shares of Series A Convertible Preferred Stock then outstanding, (a) alter or change adversely the powers, preferences or rights given to the Series A Convertible Preferred Stock, (b) authorize or create any class of stock ranking as to dividends or distribution of assets upon liquidation senior to or otherwise pari passu with the Series A Convertible Preferred Stock, or any of preferred stock possessing greater voting rights or the right to convert at a more favorable price than the Series A Convertible Preferred Stock, (c) amend its certificate of incorporation or other charter documents in breach of any of the provisions hereof, (d) increase the authorized number of shares of Series A Convertible Preferred Stock, or (e) enter into any agreement with respect to the foregoing.
Upon any liquidation the Company is required to pay $0.285 for each share of Series A Convertible Preferred Stock. The payment will be made before any payment to holders of any junior securities and after payment to holders of securities that are senior to the Series A Convertible Preferred Stock. Also, under the terms of the purchase agreement, the investor has the right of first refusal in the event that the Company seeks to raise additional funds through a private placement of securities, other than exempt issuances. The percentage of shares that investor may acquire is based on the ratio of shares held by the investor plus the number of shares issuable upon conversion of Series A Convertible Preferred Stock owned by the investor to the total of such shares.
On August 14, 2009, our Board adopted a resolution authorizing and directing that the designated shares of Series A Convertible Preferred Stock be increased from 9,000,000 to 9,890,980.

During the nine months ended December 31, 2012 and 2011, 1,197,984 and 1,553,000 shares of Series A Convertible Preferred Stock were converted into 1,565,999 and 2,030,072 shares of common stock, respectively. The Company had 5,837,998 and 7,035,982 shares of Series A Convertible Preferred Stock outstanding at December 31, 2012 and March 31, 2012, respectively.

Common Stock Purchase Warrants
On February 15, 2011, the Company entered into a contract with a third party pursuant to which the Company issued two-year warrants to purchase 100,000 shares of common stock at an exercise price of $1.65 per share.   Using the Black-Scholes options pricing formula assuming a risk free rate of 0.30%, volatility of 79%, a term of one year, and the price of the common stock on February 15, 2011 of $1.65 per share, the value of the warrant was calculated at $0.51 per share issuable upon exercise of the warrant, or a total of $51,428. Since the warrant permitted delivery of unregistered shares, the Company has the control in settling the contract by issuing equity. The cost of warrants was charged to selling, general and administrative. At December 31, 2012 and March 31, 2012 there were 100,000 warrants issued and outstanding.
14

Common Stock
The Company had 90,000,000 authorized common shares at December 31 and March 31, 2012.  The Company had 19,558,176 and 17,992,177 shares of common stock outstanding at December 31, 2012 and March 31, 2012, respectively. For the nine months ended December 31, 2012, the Company issued 1,565,999 shares of common stock in connection with Series A Convertible Preferred Stock conversions.
NOTE 13 - STOCK BASED COMPENSATION
In 2006, the directors adopted, and the stockholders approved, the 2006 long-term incentive plan, or the Plan, covering 1,000,000 shares of common stock. On August 5, 2010, the Plan was amended to increase the maximum number of shares of common stock that may be issued to an aggregate of 3,000,000 shares. On September 15, 2011, the directors adopted and the shareholders approved an amendment to increase the maximum number of shares of common stock that may be issued to an aggregate of 3,300,000 shares. The Plan provides for the grant of incentive and non-qualified options, stock grants, stock appreciation rights and other equity-based incentives to employees, including officers, and consultants. The Plan is to be administered by a committee of not less than two directors each of whom is to be an independent director. In the absence of a committee, the Plan is administered by the Board of Directors. Independent directors are not eligible for discretionary options.

Pursuant to the Plan, each newly elected independent director receives at the time of his election, a five-year option to purchase 50,000 shares of common stock at the market price on the date of his or her election.  In addition, the Plan provides for the annual grant of an option to purchase 10,000 shares of common stock on July 1st of each year following the third anniversary of the date of his or her first election.

On April 26, 2012, the Company granted stock options to an employee to purchase 50,000 shares of common stock at an exercise price of $0.70 per share, the fair market value on the date of grant. The options will vest in equal amounts over three years on the anniversary of the grant date.

On July 2, 2012, the Company granted stock options to certain current board directors to purchase 20,000 shares of common stock at an exercise price of $0.61 per share, the fair market value on the date of grant. Fifty percent of the options will vest after six months, and fifty percent will vest after eighteen months.

On December 5, 2012, the Company granted stock options to a newly appointed board director to purchase 50,000 shares of common stock at an exercise price of $1.02 per share, the fair market value on the date of grant. Sixty percent of the options will vested immediately, and twenty percent will vest after twelve and twenty four months, respectively.

The fair market value 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 risk-free interest rate was selected based upon the five-year U.S. Treasury yields. The Company uses the simplified method for all grants to estimate the expected term 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. Because of our limited stock option exercise activity we did not rely on our historical exercise data. The assumptions utilized for option grants during the nine months ended December 31, 2012 ranged from 103.5% to 106.1% for volatility, a risk free interest rate from 0.061% to 0.083%, and expected term of approximately six years. At December 31, 2012, there were 418,506 shares of common stock were available for grant under the Plan.

The following table summarizes activity for the nine months ended December 31, 2012:
Number Of Options
Weighted
Average
Exercise Price
Aggregate
Intrinsic Value
Weighted
Average
Remaining
Contractual Life (in years)
Outstanding at 3/31/2012
2,415,666
$
1.040
$
107,375
7.71
Granted
120,000
$
0.818
Forfeited
(51,666
)
$
--
Exercised
--
$
--
Outstanding at 12/31/2012
2,484,000
$
1.027
$
883,224
7.11
Vested at 12/31/2012 or expected to vest
2,484,000
$
1.027
$
883,224
7.11
Exercisable at 12/31/2012
1,594,666
$
0.895
$
652,425
5.19
15


At December 31, 2012, there was $589,214 of total unrecognized compensation cost related to stock options. These costs are expected to be recognized over the next three years. The total fair value of shares vested during the nine months ended December 31, 2012 was $717,863.

The following is a summary of the status of the Company’s stock options outstanding but not vested for the nine months ended December 31, 2012:
Number of
Options
Weighted
Average
Exercise Price
Outstanding at 3/31/2012
1,489,000
$
1.205
Granted
120,000
$
0.818
Vested
(668,000
)
$
1.080
Forfeited
(51,666
)
$
1.650
Outstanding at 12/31/2012
889,334
$
1.263

NOTE 14 - CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company maintains bank account balances, which, at times, may exceed insured limits. The Company has not experienced any losses with these accounts and believes that it is not exposed to any significant credit risk on cash.

At December 31, 2012, there were accounts receivable balances outstanding from six customers comprising 83% of the total receivables balance; the largest balance from a single customer represented 27% of our receivables balance, while the smallest balance from a single customer making up this group was 8%.  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:
December 31, 2012
March 31, 2012
Customer
Dollars
Percent
Dollars
Percent
A
$
946,738
27
%
$
426,083
9
%
B
$
445,934
13
%
$
726,908
15
%
C
$
441,087
13
%
$
219,305
4
%
D
$
427,851
12
%
$
561,927
11
%
E $ 380,899 11 % $ 691,677 14 %
F
$
271,367
8
%
$
1,160,957
24
%

The Company has 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 revenue for the nine months ended:
December 31, 2012
December 31, 2011
Customer
Dollars
Percent
Dollars
Percent
A
$
4,932,574
22
%
$
--
--
%
B
$
3,361,526
15
%
$
2,777,631
10
%
C
$
3,268,739
15
%
$
--
--
%
D
$
2,736,642
12
%
$
10,446,139
38
%

NOTE 15 – SEGMENT INFORMATION

We consider our business to consist of one segment - metal fabrication and precision machining. A significant amount of our operations, assets and customers are located in the United States. The following table presents our geographic information (net sales and net property, plant and equipment) by the country in which the legal subsidiary is domiciled and assets are located:
Net Sales
Property, Plant and Equipment, Net
Nine months
ended
December 31, 2012
Nine months
ended
December 31, 2011
December 31,
2012
March 31,
2012
United States
$
19,650,626
$
24,008,367
$
7,230,484
$
7,363,002
China
$
2,867,542
$
3,179,251
$
23,208
$
32,443

16



NOTE 16 – COMMITMENTS

Leases

On November 17, 2010, the Company entered into a lease agreement to lease approximately 3,200 sq. ft. of office space in Center Valley, Pennsylvania to be used as the Company’s corporate headquarters.  The Company took possession of the office space on April 1, 2011.  Under the lease, the Company’s payment obligations were deferred until the fifth month after it takes possession, at which time the Company will pay annual rent of approximately $58,850 in equal monthly installments, subject to upward adjustments during each subsequent year of the term of the Lease.  In addition to base rent, the Company will pay to the landlord certain operating expenses and other fees in accordance with the terms of the lease.  Payment of base rent and other fees under the lease may be accelerated if the Company fails to satisfy its payment obligations in a timely manner, or otherwise defaults on its obligations under the lease. The lease expires sixty-four months after the date of the lease. The Company may elect to renew the lease for an additional five-year term. The lease contains customary representations and covenants regarding occupancy, maintenance and care of the property.
At December 31, 2012, we recorded a liability for deferred rent of $16,764 reflecting the difference between the expense recorded in the consolidated statement of operations and comprehensive loss and the monthly rent cash payments paid to the lessor.

On November 15, 2010 and June 15, 2011, the Company entered into certain leases for approximately 1,000 sq. ft. of office space in Wuxi, China. The annual rental cost is approximately $27,000 and the leases expired on November 14, 2012 and will be renewed going forward on a monthly basis. We also lease apartment space for certain expatriate employees who live and work in China. The annual rental cost is approximately $42,000 and the leases will expire on various dates during the fiscal year ending March 31, 2013.
Rent expense for all operating leases for the nine months ended December 31, 2012 and December 31, 2011 was $137,001 and $136,553, respectively.  Future minimum lease payments required under non-cancellable operating leases in the aggregate, at December 31, 2012, totaled $242,160. The totals for each annual period ended on December 31 were: 2013- $59,513, 2014- $61,104, 2015- $62,693 and 2016- $58,850.

Employment Agreements

The Company has employment agreements with its executive officers. Such agreements provide for minimum salary levels, adjusted annually, as well as for incentive bonuses that are payable if specified company goals are attained.

Severance Agreement

On February 8, 2012, the Company’s President and General Manager for its Ranor operation in the U.S. retired. In connection with the above event, the Company was required to provide severance and certain post-employment benefits. As such, the Company recorded a charge of $226,945 associated with this event. A balance of $76,458 remains outstanding at December 31, 2012, and is included in accrued expenses on the consolidated balance sheet.

During the second quarter of fiscal 2013, Ranor was required to provide severance in connection with certain employee terminations. As such, the Company recorded a charge of $74,917 associated with this event. At December 31, 2012, a balance of $17,896 remained outstanding and is included in accrued expenses in the consolidated balance sheet.

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 dilutive potential common shares. The following table provides a reconciliation of the numerators and denominators reflected in the basic and diluted earnings per share computations, as required.

Three months ended Dec. 31, 2012
Three months ended Dec. 31, 2011
Nine months ended Dec. 31, 2012
Nine months ended Dec. 31, 2011
Basic EPS
Net Loss
$
(545,487
)
$
(1,148,341)
$
(1,296,776
)
$
(854,978
)
Weighted average number of shares outstanding
19,089,289
17,072,721
18,773,080
16,364,844
Basic Loss per share
$
(0.03
)
$
(0.07)
$
(0.07
)
$
(0.05
)
Diluted EPS
Net Loss
$
(545,487
)
$
(1,148,341)
$
(1,296,776
)
$
(854,978
)
Dilutive effect of stock options, warrants and preferred stock
--
--
--
--
Diluted weighted average shares
19,089,289
17,072,721
18,773,080
16,364,844
Diluted Loss per share
$
(0.03
)
$
(0.07)
$
(0.07
)
$
(0.05
)

17

All potential common share equivalents that have an anti-dilutive effect (i.e. those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. For the three and nine month periods ended December 31, 2012 and 2011, there were 5,053,475 and 4,325,006 shares, and 4,734,449 and 12,442,306 shares, respectively, of potentially anti-dilutive stock options, warrants and convertible preferred stock, none of which were included in the EPS calculations above.
NOTE 18 – SUBSEQUENT EVENTS

On February 11, 2013, the Company received a $1,401,091 of federal tax loss carryback refund. This carryback refund was requested by the Company in conjunction with the filing of it March 31, 2012 federal tax return and represents a partial refund of federal taxes paid for the tax years ended March 31, 2011 and 2010. The carryback refund offsets the tax loss reported for the period ended March 31, 2012 against taxes paid for the prior two years.

On February 14, 2013, the Company executed a Twelfth Amendment and obtained a waiver for failure to comply with the fixed charge coverage ratio and the interest coverage ratio covenants at December 31, 2012. The leverage ratio covenant will remain in effect. The Company was in compliance with the leverage ratio covenant at December 31, 2012. Without the execution of the Twelfth Amendment, the Company would have been required to reclassify all of its long-term debt as a current liability at December 31, 2012. Additionally, the Bank required that the Company continue to maintain $840,000 in a restricted cash account pledged as additional collateral. This amount equals the total due for the next two quarters of debt service. This collateral will be released back to the Company upon successful compliance with all debt covenant tests. The ratio of earnings available to cover fixed charges and the interest coverage covenant testing will resume at March 31, 2013 on a trailing three month basis, and continue at June 30, 2013 on a trailing six month basis and September 30, 2013 on a trailing nine month basis and quarterly thereafter on a trailing twelve month basis beginning on December 31, 2013. Under the Twelfth Amendment, the Company shall not permit earnings available for fixed charges to be less than 125%, interest coverage to be less than 2:1, and the leverage ratio to be greater than 2:1 at any time, tested quarterly. The Company believes that it will remain in compliance with all of the revised covenants through at least December 31, 2013.

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

We offer a full range of services required to transform raw materials into precise finished products. Our manufacturing capabilities include: fabrication operations (cutting, press and roll forming, assembly, welding, heat treating, blasting and painting) and machining operations including CNC (computer numerical controlled) horizontal and vertical milling centers. We also provide support services to our manufacturing capabilities: manufacturing engineering (planning, fixture and tooling development, manufacturing), quality control (inspection and testing), materials procurement, production control (scheduling, project management and expediting) and final assembly. All U.S. manufacturing is done in accordance with our written quality assurance program, which meets specific national and international codes, standards, and specifications. Ranor holds several certificates of authorization issued by the American Society of Mechanical Engineers and the National Board of Boiler and Pressure Vessel Inspectors. The standards used are specific to the customers’ needs, and our manufacturing operations are conducted in accordance with these standards.

During the fiscal year ended March 31, 2012, or fiscal 2012, we brought our WCMC subsidiary online to meet shifting demands from key customers, and simultaneously had to weather slowdowns in our Alternative Energy business. The impact on our Ranor facility was significant, as manufacturing for their largest customer was transferred to China. To replace that transferred business we backfilled our Ranor facility with orders from existing and new customers that required domestic production capacity. Also during fiscal 2012, weaker market demand for our services in the Alternative Energy industry impacted sales in that sector and were 28% lower than in fiscal 2011. However, we were successful in increasing sales to customers in the Commercial and Nuclear sectors, which more than offset the lower sales volume with Alternative Energy customers. We concluded fiscal 2012, with an order backlog of $22.4 million. Our backlog as of December 31, 2012 was approximately $21.9 million.

We historically have experienced, and continue to experience, customer concentration. Our six largest customers collectively accounted for 78% of our revenue for fiscal 2013. For the first nine months of fiscal 2013 and 2012, our single largest customer accounted for approximately 22% and 38% of reported net sales, respectively. In any year, it is likely that five to seven significant customers (albeit not always the same customers from year to year) will account for revenues ranging from 4% to 29% individually, and up to 90% in aggregate of our total annual revenues.
18


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

For the three months ended December 31, 2012, our net sales and net loss were $7.3 million and $0.5 million as compared with net sales of $10.9 million and net loss of $1.1 million for the three months ended December 31, 2011. For the nine months ended December 31, 2012, our net sales and net loss were $22.5 million and $1.3 million, and as compared with net sales of $27.2 million and net loss of $0.9 million, respectively. Our gross margins for the three and nine months ended December 31, 2012 and 2011 were 25.8% and 21.9%, and 6.8% and 18.7%, respectively. Gross margins for the three and nine month periods ended December 30, 2011 were negatively impacted by contract losses incurred on first article and prototyping projects at Ranor. As the majority of the contract loss projects were completed during the first half of fiscal 2013, we expect gross margins will recover to historical levels during the balance of fiscal 2013.
Because our revenues are derived from the sale of goods manufactured pursuant to a contract, and we do not sell from inventory, it is necessary for us to constantly seek new contracts. There may be a time lag between our completion of one contract and commencement of work on another contract. During such periods, we may continue to incur overhead expense but with lower revenue resulting in lower operating margins. Furthermore, changes in either the scope of an existing contract or related delivery schedules may impact the revenue we receive under the contract and the allocation of manpower. Although we provide manufacturing services for large governmental programs, we usually do not work directly for the government or its agencies. Rather, we perform our services for large governmental contractors and large utility companies. However, our business is dependent in part on the continuation of governmental programs which require our services and products.
Growth Strategy
Our strategy is to leverage our core competence as a manufacturer of high-precision, large-scale metal fabrications and machined components to expand our business into areas that have shown increasing demand and which we believe could generate higher margins. In November 2010, we announced the formation of WCMC. This subsidiary was formed to respond to an existing customer’s desire to migrate their supply chain nearer to their end market within China. Since the formation of WCMC, we have received numerous inquiries from current and potential customers for precision, large scale fabricated and machined metal components and systems in Asia. Based on the initial interest expressed, we believe there are attractive opportunities to expand our WCMC operations. During the fiscal 2012, WCMC provided initial production volumes on a single product line and completed first article production on four other product lines. After qualifying manufacturing capacity for five product lines on behalf of four customers in China, WCMC has received production volume orders for the production of sapphire chambers in fiscal 2013. Through the period ended December 31, 2012, WCMC shipped $2.0 million of production units for sapphire chambers.

Rising energy demands along with increasing environmental concerns are likely to drive demand in the Alternative Energy industry, particularly the solar, wind and nuclear power industries. Because of our capabilities and the nature of the equipment required by companies in the Alternative Energy industries, we are uniquely qualified to deliver services in this sector. We also expect to market our services for medical device applications where customer requirements demand strict tolerances and an ability to manufacture complex heavy equipment.

Nuclear Energy

As a result of both the increased prices of oil and gas and the resulting greenhouse gas emissions, nuclear power may become an increasingly important source of energy. In January 2010, the Obama administration increased the level of government-backed debt guarantees as an incentive to support the construction of new nuclear plants in the U.S. The 2011 nuclear tragedy in Japan has bolstered demand for advanced nuclear reactor designs with passive safety systems. Over the next 10 years, 26 nuclear power plants are scheduled to be built in China, six in the United States and five in Europe (including three in the United Kingdom). Because Ranor is one of the few facilities in the United States that has the certifications required to produce the necessary components for these plants, this pipeline of new nuclear projects creates a significant opportunity. Because of our manufacturing capabilities, our certification from the American Society of Mechanical Engineers and our historic relationships with suppliers in the nuclear power industry, we believe that we are well positioned to benefit from any increased activity in the nuclear sector. However, we cannot assure you that we will be able to develop any significant business from the nuclear industry.

Defense and Aerospace

During the fiscal years ended March 2012 and 2011, our sales to customers in the defense and aerospace sectors comprised approximately 25% of our annual sales. We believe that budget and cost containment initiatives by the U.S. Government may drive prime contractors to increase their levels of outsourcing and subcontracting.

19


Accordingly, we maintain active dialogues with existing and prospective defense related customers on programs where our unique manufacturing capabilities might provide these prime government contractors with opportunities to source additional manufacturing through our Ranor division in Massachusetts.

Medical Industry

We have been exploring potential business applications focused in the Medical industry. Our proton beam therapy customer received U.S Food and Drug Administration, or FDA, clearance on June 11, 2012 for their proton beam therapy system and we believe we are positioned to benefit from this development with increased production orders as they begin marketing their regulated product. On January 7, 2013 we announced that a five-year agreement was signed to exclusively produce complete product assemblies for Proton Beam cancer treatment equipment in the U.S. and Asia. We expect this agreement will result in $115.0 million in new orders over a five year period. Our efforts also include the development and fabrication of transportation/storage solutions for radioactive isotopes and the development and fabrication of critical components for proton beam therapy machines designed to be utilized in the treatment of cancer.

In March 2012, our radioactive isotope customer received approval from the U.S. Nuclear Regulatory Commission, or NRC, to market its Type B transportation containers. Now that our radioactive isotope customer has received regulatory approval we are working on initial production orders during fiscal 2013 as they launch their Type B transportation containers in the market.

LED Lighting/Enabled Products

Growing global demand for LED lighting and LED enabled products has increased the worldwide demand for Heat Exchanger Method (HEM) sapphire, a core component in high-end LED products. Accordingly, many polysilicon companies, including our customer GTAT, are expanding into the field of HEM sapphire and existing players in the HEM sapphire industry are expanding their production capacity. The production of HEM sapphire requires robust high temperature furnaces much like those we have been producing for the processing of polysilicon within the solar industry. Accordingly, we believe the HEM sapphire field is a growing sector where our manufacturing expertise and experience with similar products for the solar industry can be directly leveraged. We are in active dialogue with both existing customers and potential customers regarding our capability and capacity to manufacture furnaces for the HEM sapphire industry in both the U.S. and Asia. In February 2012, WCMC received a purchase agreement from an existing customer for up to $9.5 million in sapphire chamber orders over the term of the purchase agreement which contemplates orders being placed under the agreement from March 2012 through February 2013. As of December 31, 2012, we have delivered $2.0 million of sapphire chambers under this purchase agreement. We are also working on qualifying manufacturing capacity for other customers who also have developed engineering designs for sapphire growth chambers.

Solar Power

Historically we have participated in the multi-crystalline segment of the solar industry through the manufacturing support we have provided GTAT. Increasingly, GTAT and other companies are focusing on production innovations that will improve the production efficiency and cost competitiveness of mono-crystalline solar cells. To diversify our customer and sector concentration within the solar industry, we are in active discussions with various companies focused on enabling production equipment for mono-crystalline solar cells and believe these efforts will provide us with broader capacity and customer diversification in the future. During fiscal 2012, we completed manufacture of initial mono-crystalline furnaces for three separate customers with the goal of qualifying our production capacity in the U.S. and China for these customers and subsequent production volume orders.

During fiscal 2012, we expanded into the polysilicon field through receipt of a $4.8 million order to manufacture polysilicon reactor chambers for an existing customer. Polysilicon reactor chambers operate upstream of the solar equipment we have historically manufactured. Accordingly, this order presents an opportunity to further diversify our product portfolio within the solar sector. The initial production units covered by this order are expected to ship in the fourth quarter of fiscal 2013.
Expansion of Manufacturing Capabilities

In addition to the expansion of our existing manufacturing capabilities, we may, from time to time, pursue opportunistic acquisitions to increase and strengthen our manufacturing, marketing, product development and customer diversification. During fiscal 2012, we completed a 19,500 sq. ft. expansion of our Westminster, Massachusetts facility at a cost of $1.7 million. The building expansion was completed and placed into service in December, 2011. We also completed the installation of a new $2.4 million gantry mill machine during the year and it was placed in service during January 2012. A portion of the proceeds from the December 2010 municipal bond financing were utilized to finance the building expansion and final payments on the gantry machine.

Critical Accounting Policies

The preparation of our consolidated financial statements and related disclosures in conformity with generally accepted accounting principles in the United States requires management to make assumptions, estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 2 to the Consolidated Financial Statements describe the significant accounting policies used in preparation of the consolidated financial statements.
20

We rely on historical experience and other assumptions we believe to be reasonable in making our estimates. We continually evaluate our estimates, including those related to contract accounting, inventories, recovery of long-lived assets, income taxes and the valuation of equity transactions. These estimates and assumptions require management’s most difficult, subjective or complex judgments. Actual financial results of the operations could differ materially from such estimates.

Revenue Recognition

We account for revenues and earnings in our business using the percentage-of-completion method of accounting. Percentage-of-completion is considered the revenue recognition model that best reflects the economics for our custom contracts.  We recognize contract revenue under this method as the work progresses, either as the products are produced and delivered, or as services are rendered. We determine progress toward completion on production contracts based on either input measures, such as labor hours incurred, or output measures, such as units 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 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 during the performance of the combined contracts. We may segment a single contract or group of contracts when a clear economic decision has been made during contract negotiations that would produce different rates of profitability for each element or phase of the contract.

Costs allocable to undelivered units are reported in the consolidated balance sheet as costs incurred on uncompleted contracts. Amounts in excess of 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. The unit of delivery method requires the existence of a contract to provide the persuasive evidence of an arrangement and determinable seller’s price, delivery of the product and reasonable collection prospects. We have written agreements with the customers that specify contract prices and delivery terms. We recognize revenues only when the collectability is reasonably assured.

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 ranges that would result in the lowest profit margin (the lowest contract revenue estimate and the highest contract cost estimate) are used.
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.

As of March 31, 2012, our federal net operating loss carry-forward was approximately $1.25 million. If not utilized, the federal net operating loss carry-forward will begin to expire in 2025. 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 carry forward used in any one year in the future is substantially limited.

New Accounting Pronouncements

See Note 2, Significant Accounting Policies, in the Notes to our Consolidated Financial Statements.
Results of Operations

Our results of operations are affected by a number of external factors including the availability of raw materials, commodity prices (particularly steel), macroeconomic factors, including the availability of capital that may be needed by our customers, and political, regulatory and legal conditions in the United States and foreign markets.


21



Our results of operations are also affected by our success in booking new contracts and when we are able to recognize the related revenue, delays in customer acceptances of our products, delays in deliveries of ordered products and our rate of progress toward fulfillment of our obligations under our contracts.
A delay in deliveries or cancellations of orders would cause us to have inventories in excess of our short-term needs, and may delay our ability to recognize, or prevent us from recognizing, revenue on contracts in our order backlog. At December 31, 2012, our purchase order backlog was $21.9 million compared with $22.4 million at March 31, 2012.
Three Months Ended December 31, 2012 and 2011

The following table sets forth information from our statements of operations for the three months ended:
December 31, 2012
December 31, 2011
Changes
Period Ended December 31,
2012 to 2011
(dollars in thousands)
Amount
Percent
Amount
Percent
Amount
Percent
Net sales
$
7,293
100
%
$
10,864
100
%
$
(3,571
)
(33
)%
Cost of sales
5,409
74
%
10,124
93
%
(4,715
)
(47
)%
Gross profit
1,884
26
%
740
7
%
1,144
155
%
Selling, general and administrative
2,293
31
%
1,924
18
%
369
19
%
Loss from operations
(409
)
(6
)%
(1,184
)
(11
)%
(775
)
(66
)%
Interest expense
(65
)
(1
)%
(77
)
--
%
(12
)
(16
)%
Other income
(28
)
--
%
20
--
%
48
nm
%
Total other expense, net
(93
)
(1
)%
(57
)
--
%
36
63
%
Loss before income taxes
(502
)
nm
%
(1,241
)
nm
%
(739
)
nm
%
Income tax expense (benefit)
43
nm
%
(93
)
nm
%
136
nm
%
Net Loss
$
(545
)
nm
%
$
(1,148
)
nm
%
$
(603
)
nm
%
nm - not meaningful

Net Sales

Net sales decreased by $3.6 million, or 33%, to $7.3 million for the three months ended December 31, 2012 when compared to the same period last year.  This decrease in net sales was due primarily to lower shipments to our Alternative Energy customers in China. Net sales to Alternative Energy customers decreased by $3.8 million compared with the same quarter in fiscal 2012. Net sales in the third quarter of last year included $3.4 million of solar furnace production completed during the second quarter for which the customer delayed delivery until the third quarter. As a result, the highest sales volume reported last year was in the third quarter.  Also, net sales to our new Poly Silicon customer were lower than forecasted in the fiscal 2013 quarter due to customer change orders that extended the production cycle and deferred revenue into fourth quarter of fiscal 2013.

Net sales increased by $1.7 million in our Medical markets, reflecting fulfilled new orders for proton beam therapy equipment. These increases were partially offset by a net sales decrease of $1.7 million in the Commercial markets. Net sales to Nuclear markets increased by $0.2 million.

Cost of Sales and Gross Margin

Our cost of sales for the three months ended December 31, 2012 decreased by $4.7 million to $5.4 million, or 47%, from $10.1 million for the same period in fiscal 2012. The decrease in the cost of sales was principally due to a decrease in the unit volume of shipments to our customers. Gross profit was $1.9 million and $0.7 million for the three month periods ended December 31, 2012 and December 31, 2011, respectively. Gross margins were 25.8% and 6.8% for the same comparable periods, respectively.

Gross margin in any reporting period is impacted by the mix of services we provide on projects completed within that period. Gross margins during fiscal 2013 increased because of a reduction in contract losses for first article production and prototyping at Ranor. Gross margin in the prior year third quarter was negatively impacted by $0.6 million of contract losses. Ranor’s production mix shifted to a greater volume of prototyping and first article production during fiscal 2012 as we redeployed open U.S. production capacity because of the transfer of solar production chambers to China for our largest customer.
22

Selling, General and Administrative Expenses
Selling, general and administrative, or SG&A, expenses for the three months ended December 31, 2012 increased by $0.4 million or 19%.  SG&A was 31% as a percentage of net sales during the third quarter of fiscal 2013, compared with 18% of net sales for the same period in fiscal 2012.  SG&A for the quarter ended December 31, 2012 included $145,000 of nonrecurring executive search fees, $50,000 of increased severance costs, and a $42,000 increase in share based compensation. Additionally, professional fees were $162,000 higher, but this increase was partially offset by a $50,000 reduction in travel related expenses when compared to fiscal 2012.

Interest Expense

Interest expense decreased by 16% for the three months ended December 31, 2012 when compared with the same period in fiscal 2012.  This decrease in interest expense was due to lower average levels of long-term debt which offset the absence of capitalized interest in fiscal 2013 when compared with the same prior year quarter.

Income Taxes

For the three months ended December 31, 2012, we recorded a tax expense of $43,224 compared with a tax benefit of $92,682 for the comparable three month period ended December 31, 2011. We did not record a tax benefit during the period in connection with our U.S. pretax losses because it is more likely than not that any tax benefit would not be realized and subject to valuation allowance.

Our future effective tax rate would be affected if earnings were lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. We regularly assess the effects resulting from these factors to determine the adequacy of our provision for income taxes.

Net Loss
Our net loss was $545,587 or $0.03 per share basic and fully diluted respectively, for the three months ended December 31, 2012, compared to net loss of $1.1 million or $0.07 per share basic and fully diluted, for the three months ended December 31, 2011.

Nine Months Ended December 31, 2012 and 2011

The following table sets forth information from our statements of operations for the nine months ended December 31, 2012 and 2011:
December 31, 2012
December 31, 2011
Changes
Period Ended December 31,
2012 to 2011
(dollars in thousands)
Amount
Percent
Amount
Percent
Amount
Percent
Net sales
$ 22,518 100 % $ 27,188 100 % $ (4,670 ) (17 )%
Cost of sales
17,590 78 % 22,105 81 % (4,515 ) (20 )%
Gross profit
4,928 22 % 5,083 19 % (155 ) (3 )%
Selling, general and administrative
6,218 28 % 5,611 21 % 607 11 %
Loss from operations
(1,290 ) (6 )% (528 ) (2 )% 762 nm %
Interest expense
(219 ) (1 )% (215 ) (1 )% 4 2 %
Other income
(23 ) -- % 31 -- % 54 nm %
Total other expense, net
(242 ) (1 )% (184 ) (1 )% 58 32 %
Loss before income taxes
(1,532 ) nm % (712 ) nm % 820 nm %
Income tax (benefit) expense
(235 ) nm % 143 nm 378 nm %
Net Loss
$ (1,297 ) nm % (855 ) nm % $ 442 nm %
nm - not meaningful

Net Sales

Net sales decreased by $4.7 million, or 17%, to $22.5 million for the nine months ended December 31, 2012 compared with the same period last year.  Net sales to Alternative Energy customers decreased by $5.4 million during the period ended December 31, 2012 when compared with the same period one year ago, as demand for solar chambers continued to be weak. Net sales decreased by $4.8 million in the Commercial markets as certain prototype units, in production for most of fiscal 2012, shipped in the early part of fiscal 2013. These net sales decreases were offset by increases of $3.9 million in our Medical markets, reflecting fulfilled new orders for new proton beam therapy equipment. Also, shipments to customers in the Defense and Aerospace and the Nuclear markets increased by $1.1 million and $0.5 million, respectively.
23


Cost of Sales and Gross Margin

Our cost of sales for the nine months ended December 31, 2012 decreased by $4.5 million to $17.6 million, or 20%, from $22.1 million for the same period in fiscal 2012. Gross profit was $4.9 million compared with $5.1 million for the nine month period ended December 31, 2012 and December 31, 2011, respectively. Gross profit for the nine months period ended December 31, 2012 was lower than the prior year due to additional contract losses of $0.3 million incurred on first article and prototype contracts. Gross margins were 21.9% and 18.7% for the same comparable nine month periods, respectively.

Gross margin in any reporting period is impacted by the mix of services we provide on projects completed within that period. Gross margins during fiscal 2013 increased because of improved throughput for first article production and prototyping at Ranor. The production mix at Ranor shifted to a greater volume of prototyping and first article production during fiscal 2012 as we redeployed open U.S. production capacity because of the transfer of solar production chambers to China for our largest customer.

Selling, General and Administrative Expenses
SG&A expenses for the nine months ended December 31, 2012 were $6.2 million compared to $5.6 million for the same period in fiscal 2012, representing an increase of $0.6 million or 11%.  SG&A was 28% and 21% as a percentage of net sales for the same period in fiscal 2013 and 2012, respectively.  The primary driver of the increase was non-recurring search fees of $304,000 and $115,000 of expenses related to severance benefits and outside advisory services. Also, share based compensation was $76,000 higher than the prior year. Additionally, professional fees increased by $283,000, but this increase in expense was partially offset by $170,000 of reduced travel related costs when compared to the same nine month period in fiscal 2012. Travel related costs were higher last year due to startup activities in the first full year for our China subsidiary.

Interest Expense

Interest expense increased by 2% for the nine months ended December 31, 2012 when compared with the same period in fiscal 2012.  The increase in interest expense is primarily due to the absence of capitalized interest in fiscal 2013. We recorded capitalized interest of approximately $40,000 during the nine months ended December 31, 2011 in connection with our expansion project at Ranor.

Income Taxes

For the nine months ended December 31, 2012, we recorded a tax benefit of $235,375 compared to income tax expense of $142,871 for federal and state taxes when compared to the nine months ended December 31, 2011. The tax benefit for the nine months ended December 31, 2012 was primarily the result of pretax losses from operations recorded at the U.S. federal statutory tax rates. Our U.S. Federal tax benefit remained unchanged from that recorded at September 30, 2012 because of the expectation that it would be more likely than not that any additional tax benefit would not be realized and subject to valuation allowance.

Our future effective tax rate would be affected if earnings were lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. We regularly assess the effects resulting from these factors to determine the adequacy of our provision for income taxes.

Net Loss
Our net loss was $1.3 million or $0.07 per share basic and fully diluted respectively, for the nine months ended December 31, 2012, compared to net loss of $0.9 million, or $0.05 per share basic and fully diluted, for the nine months ended December 31, 2011.
Liquidity and Capital Resources

At December 31, 2012, we had working capital of $9.1 million compared with working capital of $10.2 million at March 31, 2012, a decrease of $1.1 million or 11%. The following table sets forth the changes in the components of our working capital:
(dollars in thousands)
December 31,
2012
March 31,
2012
Change
Amount
Percentage
Change
Cash and cash equivalents
$
2,013
$
2,823
$
(810
)
(29
)%
Accounts receivable, net
$
3,491
$
4,902
$
(1,411
)
(29
)%
Costs incurred on uncompleted contracts
$
4,902
$
3,910
$
992
25
%
Inventory - raw materials
$
474
$
374
$
100
27
%
Other current assets
$
1,712
$
1,487
$
225
15
%
Income taxes receivable
$
1,426
$
1,751
$
(325
)
(19
)%
Current deferred tax assets
$
995
$
1,020
$
(25
)
(2
)%
Accounts payable
$
2,449
$
1,361
$
1,088
80
%
Accrued expenses
$
1,441
$
2,425
$
(984
)
(41
)%
Accrued taxes payable
$
203
$
160
$
43
27
%
Deferred revenues
$
922
$
799
$
123
15
%
Current maturity of long-term debt
$
937
$
1,359
$
(422
)
(31
)%
24


The following table summarizes our primary cash flows for the periods presented:
(dollars in thousands)
December 31,
2012
December 31,
2011
Change
Amount
Cash flows provided by (used in):
Operating activities
$
651
$
(2,747
)
$
3,398
Investing activities
(395
)
(2,343
)
1,948
Financing activities
(1,066
)
623
(1,689
)
Effects of foreign exchange rates on cash
--
12
(12
)
Net decrease in cash and cash equivalents
$
(810
)
$
(4,455
)
$
3,645

Operating activities

For the nine months ended December 31, 2012, cash provided by operations was $0.7 million as compared with cash used in operations of $2.7 million for the comparable fiscal 2012 period, a change of $3.4 million. Cash provided by operations in fiscal 2013 includes   receipt of approximately $3.0 million in customer deposits reflecting an increase in customer advances on orders and manufacturing activity. This amount was partially offset by our net loss and increased spending on completed projects and uncompleted projects in progress for the remaining volume mix of manufacturing activity related to new production projects which began in fiscal 2012. As all of our production activity is supported by firm orders from customers, the balance of costs incurred on uncompleted contracts will be billed and collected from customers as production billing milestones are achieved and when the orders are completed and delivered to the customer. Customers are billed for costs incurred on uncompleted projects in accordance with predetermined billing schedules or upon delivery of the customer orders. We also received $0.6 million of federal income tax refunds during fiscal 2013. We collected $1.4 million of federal tax carryback refunds in the fourth quarter of fiscal 2013.

Investing activities

During the nine months ended December 31, 2012, we paid $395,367 primarily for new equipment installed at our manufacturing facility in Westminster, MA.

Financing activities

Net cash used in financing activities was $1.1 million during the nine months ended December 31, 2012 as compared with net cash provided by financing activities of $622,639 for the same period in fiscal 2012. The primary use of cash under financing activities in fiscal 2013 and 2012 related to repayment of long-term debt. In fiscal 2012 we borrowed an additional $1.9 million under the bond financing agreement to fund the ongoing plant and equipment expansion at our Westminster, Massachusetts facility.
Debt Facilities

On December 30, 2010, the Company completed a $6.2 million tax exempt bond financing with the MDFA pursuant to which the MDFA sold to the Bank the Series A Bonds and the Series B Bonds.  The Bank then loaned the proceeds of such sale to the Company under the terms of the MLSA.
The proceeds from the sale of the Series A Bonds were used to finance the Ranor facility acquisition and used to finance the 19,500 sq. ft. expansion of Ranor’s manufacturing facility located in Westminster, MA.  The proceeds of the sale of the Series B Bonds were used to finance acquisitions of qualifying manufacturing equipment installed at the Westminster facility.  Under the MLSA and related documents, the Westminster facility secures, and the Company further guarantees the Company’s obligations to the Bank and subsequent holders of the Bonds. As of December 31, 2012 there was $3.8 million and $1.4 million outstanding under the Series A and Series B bonds, respectively.

In connection with the December 30, 2010 financing, we executed an Eighth Amendment to the Loan Agreement. The Eighth Amendment incorporated borrowing of the Bond proceeds into the borrowings covered by the Loan Agreement. Under the MLSA and the Eighth Amendment, we must meet certain financial covenants applicable while the Bonds remain outstanding. As of December 31, 2011, we were in compliance with the leverage ratio. However we did not meet the ratio of earnings available to cover fixed charges or the interest coverage covenants.
In February 2012, we executed a Tenth Amendment and obtained a waiver of the breach of such covenants from the Bank, which waiver covered the breach that otherwise would have occurred in connection with the covenant testing for the third quarter ended December 31, 2011 and waived the fixed charge covenant at March 31, 2012.
25


On July 6, 2012, the Company executed an Eleventh Amendment and obtained a waiver for failure to comply with the fixed charge coverage ratio and the interest coverage ratio covenants at March 31, 2012. The Eleventh Amendment also waived the covenant testing requirements related to the ratio of earnings available to cover fixed charges and the interest coverage ratio for the fiscal quarters ended June 30, 2012 and December 31, 2012. The leverage ratio covenant remained in effect, and must not be greater than 2:1. The Company was in compliance with the leverage ratio covenant at September 30, 2012 as the actual leverage ratio was 1:1. Although there was no testing of the covenant to comply with the ratio of earnings available to cover fixed charges and the interest coverage covenants for the fiscal quarters ended June 30 and September 30, 2012, the Bank required that the Company have earnings before interest and taxes (EBIT) greater than $1 for the fiscal quarter ended September 30, 2012. The Company reported EBIT of $14,286 for the fiscal quarter ended September 30, 2012 and therefore was in compliance with this covenant.  The $1 EBIT covenant at September 30, 2012 is not applicable to any future periods as testing of all covenants resumes on December 31, 2012 according to the terms of the Eleventh Amendment.

Under the Eleventh Amendment the covenants were revised such that the Company was not to permit earnings available for fixed charges to be less than 125%, the interest coverage ratio to be less than 2:1, and the leverage ratio to be greater than 2:1 at any time, tested quarterly. Also, in connection with the Eleventh Amendment, the Company paid the Bank a fee of $10,000 and made a collateral deposit of $840,000 to cover estimated principal and interest on its obligation. The collateral deposit included in other current assets at December 31, 2012 and March 31, 2012. This collateral was to be released to the Company upon successful compliance with all debt covenant tests. The earliest date this has occured is December 31, 2012, the first date the Company would have again been subject to testing of all of the financial covenants. The Eleventh Amendment also revised covenant testing to provide that the ratio of earnings available to cover fixed charges and the interest coverage ratio covenant testing was to resume at December 31, 2012 on a trailing six month basis, and continue at March 31, 2013 on a trailing nine month basis and quarterly thereafter on a trailing twelve month basis beginning on June 30, 2013.
The Company did not meet the earnings available for fixed charges or interest coverage covenants at December 31, 2012 as it had an operating loss of $1.3 million for the nine month period ended. The actual ratios for earnings available for fixed charges and interest coverage at December 31, 2012 were negative 41% and negative 256%, respectively.

On February 14, 2013, the Company executed the Twelfth Amendment and obtained a waiver for failure to comply with the fixed charge coverage ratio and interest coverage ratio covenants at December 31, 2012. In connection with the Twelfth Amendment, the Company paid the Bank a fee of $7,500 and extended the pledge of the $840,000 collateral deposit established by the Eleventh Amendment through June 30, 2013. This collateral will be released to the Company upon successful compliance with all debt covenant tests at June 30, 2013. The Twelfth Amendment also revised covenant testing to provide that the ratio of earnings available to cover fixed charges and the interest coverage ratio covenant testing at March 31, 2013 be tested on a trailing three month basis, a trailing six month basis at June 30, 2013, and a trailing nine month basis at September 30, 2013, and at December 31, 2013 and each quarter thereafter, on a trailing twelve month basis.

Without the execution of the Twelfth Amendment for the applicable periods and the Company's determination that it expects to be in compliance for each of the next four quarterly periods, the Company would have been required to reclassify all of its long-term debt as a current liability. In addition, if the lender had demanded repayment and caused the debt to be considered a short-term obligation, the Company may have been unable to pay the obligation because the Company does not have existing facilities or sufficient cash on hand to satisfy these obligations. In the event of default (which default may occur in connection with a non-waived breach), the Bank may choose to accelerate payment of any long-term debt outstanding and, under certain circumstances, the Bank may be entitled to cancel the facilities. If the Company were unable to obtain a waiver for a breach of covenant and the Bank accelerated the payment of any outstanding amounts, such acceleration may cause the Company’s cash position to deteriorate or, if cash on hand were insufficient to satisfy any payment due, may require the Company to seek alternate financing to satisfy any accelerated payment obligation. The Company believes it will achieve compliance with all of the revised covenants quarterly through at least December 31, 2013.
We believe that the $2.0 million revolving credit facility that was extended through July 31, 2013 by the Twelfth Amendment, all of which was available and unused as of December 31, 2012, our capacity to access equipment-specific financing, plus our current cash balance of $2.0 million and ability to generate cash from operations, will be sufficient to enable us to satisfy our cash requirements for the foreseeable future. Nevertheless, it is possible that we may require additional funds to the extent that we upgrade or expand our manufacturing facilities.

Obligations under the Term Note, Revolving Note, Capital Expenditure Note and Staged Advance Note are guaranteed by us. Collateral securing such notes comprises all personal property of ours, including cash, accounts receivable, inventories, equipment, financial and intangible assets.
The term note issued on February 24, 2006 has a term of seven years with an initial fixed interest rate of 9%.  The interest rate on the term note converted from a fixed rate of 9% to a variable rate on February 28, 2011.  From February 28, 2011 until maturity the term note will bear interest at the prime rate plus 1.5%, payable on a quarterly basis.   Principal is payable in quarterly installments of $142,857 plus interest, with a final payment due on March 1, 2013.  The balance outstanding on the term note as of December 31, 2012 was $142,857.

We also had a $3.0 million capital expenditure facility which was available until November 30, 2009.   The capital expenditure facility was not renewed upon its expiration on November 30, 2009. Borrowings available under this facility were converted to a note when the facility terminated. Principal and interest payments are due monthly based on a five year amortization schedule.  The current rate of interest is based on LIBOR, plus 3%.  Any unpaid balance on the capital expenditures facility is to be paid on November 30, 2014.  As of December 31, 2012, there was $324,576 outstanding under this facility.

26


The Bank made certain loans to the Company limited to a cap of $1.9 million for the purpose of acquiring a gantry mill machine. The machine serves as collateral for the loan. The total aggregate amount of advances under this agreement could not exceed 80% of the actual purchase price of the gantry mill machine. All advances provided for a payment of interest only monthly through February 28, 2011, and thereafter no further borrowings were permitted under this facility. The current interest rate is LIBOR plus 4%. Beginning on April 1, 2011, the Company was obligated to pay principal and interest sufficient to amortize the outstanding balance on a five year schedule. As of December 31, 2012, there was $389,491 outstanding under this facility.

The securities purchase agreement pursuant to which we sold Series A Convertible Preferred Stock to Barron Partners provides Barron Partners with a right of first refusal on future equity financings, which may affect our ability to raise funds from other sources if the need arises. In the event that we make an acquisition, we may require additional financing for the acquisition. We have no commitment from any party for additional funds, however, the terms of our agreement with Barron Partners, particularly the right of first refusal, may impair our ability to raise capital in the equity markets to the extent that potential investors would be reluctant to negotiate a financing when another party has a right to match the terms of the financing. We have no off-balance sheet assets or liabilities.

Evaluation of Disclosure Controls and Procedures

As of December 31, 2012, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act.
Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits to the SEC is recorded, processed, summarized and reported, within the time periods specified in SEC rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were designed and operating effectively as of December 31, 2012, to provide reasonable assurance that information required to be disclosed by the Company in 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 is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls

During the quarter ended December 31, 2012, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
27

There have been no material changes to the risk factors discussed in Part I, "Item 1A. Risk Factors," in the 2012 Form 10-K.  You should carefully consider the risks described in our 2012 Form 10-K which could materially affect our business, financial condition or future results.  The risks described in our 2012 Form 10-K are not the only risks we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.  If any of the risks actually occur, our business, financial condition and/or results of operations could be negatively affected.


Exhibit No.
Description
4.1
Twelfth Amendment to Loan Agreement dated February 14, 2013 by and between Ranor, Inc. and Sovereign Bank, N.A. (Exhibit 10.1 to our current report on Form 8-K, filed with the Commission on February 19, 2013 and incorporated herein by reference).
31.1
31.2
32.1

101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
28



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

TECHPRECISION CORPORATION
(Registrant)
Dated:  February 19, 2013
By:
/s/ James S. Molinaro
James S. Molinaro
Chief Executive Officer
/s/ Richard F. Fitzgerald
Richard F. Fitzgerald
Chief Financial Officer
(duly authorized officer and principal
financial officer)

29




101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document





30
TABLE OF CONTENTS