The company placed $887,279 of equipment which was under construction at the beginning of the six month period ended September 30, 2009fiscal year ending March 31, 2010 (“fiscal 2010”) into service.

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

 

TechprecisionTechPrecision Corporation (“Techprecision”TechPrecision”) is a Delaware corporation organized in February 2005 under the name Lounsberry Holdings II, Inc. The name was changed to TechprecisionTechPrecision Corporation on March 6, 2006.  TechprecisionTechPrecision is the parent company of Ranor, Inc. (“Ranor”), a Delaware corporation.  TechprecisionTechPrecision and Ranor are collectively referred to as the “Company.”

 

The Company manufactures metal fabricated and machined precision components and equipment.  These products are used in a variety of markets including the alternative energy, medical, nuclear, defense, industrial, and aerospace industries.

 

On February 24, 2006, TechprecisionTechPrecision acquired all stock of Ranor in a transaction which is accounted for as a recapitalization (reverse acquisition), with Ranor being treated as the acquiring company for accounting purposes. The accompanying consolidated financial statements include the accounts of the Company and Ranor as well as a variable interest entity, WM Realty. Intercompany transactions and balances have been eliminated in consolidation.

InThe accompanying consolidated financial statements as of June 30, 2010 and 2009 and for the three months then ended are unaudited, but in the opinion of the management, include all adjustments that are considered necessary for a fair presentation of its respective financial statements in accordance with StatementGAAP. All adjustments are of Financial Accounting Standards (SFAS) No. 165, “Subsequent Events” (SFAS No. 165),a normal, recurring nature, except as otherwise disclosed. The March 31, 2010 Consolidated Balance Sheets were taken from audited financial statements. Certain prior year amounts in the Company performed an evaluationConsolidated Statements of subsequent eventsCash Flows have been reclassified between line items for comparative purposes. The reclassifications did not affect the accompanyingCompany’s cash flows from operating activities or financial statements and notes included in Part 1, Item 1 of this report through November 11, 2009, the date this Report was issued. position.

The Notes to Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in accordance with 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 20092010 Annual Report on Form 10-K.

 

 

In preparing financial statements in conformity with generally accepted accounting principles, 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 financial statements and revenues and expenses during the reported period.  Actual results could differ from those estimates.

 

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, trade accounts receivable, accounts payable, prepaid and accrued expenses, and notes payable, as presented in the balance sheet, approximatesapproximate fair value.

 

Holdings of highly liquid investments with maturities of three months or less, when purchased, are considered to be cash equivalents.  The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. The deposits are maintained in a large regional bank and the amount of federally insured cash deposits was $250,000 as of SeptemberJune 30, 2009 compared to $100,000 as of September 30, 2008.2010 and March 31, 2010.

 

Trade 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. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. 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. There was no bad debt expense recorded for the quarters ended SeptemberJune 30, 20092010 and 2008, respectively.2009.

 

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. 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, 7-15 years; buildings, up to 30 years; and leasehold improvements, 10-20 years.

 

The accounting for the impairment or disposal of long-lived assets requires an assessment of the recoverability of our investment in long-lived assets to be held and used in operations whenever events or circumstances indicate that their carrying amounts may not be recoverable. Such assessment requires that the future cash flows associated with the long-lived assets be estimated over their remaining useful lives. An impairment loss may be required when the future cash flows are less than the carrying value of such assetsassets.

 

 

The Company incurs maintenance costs on all of its major equipment. Costs that extend the life of the asset, materially add to its value, or adapt the asset to a new or different use are separately capitalized in property, plant and equipment and are depreciated over their estimated useful lives. All other repair and maintenance costs are expensed as incurred.

 

Operating leases are charged to operations as paid. Capital leases are capitalized and depreciated over the term of the lease.  A lease is considered a capital lease if one of four criteria are satisfied: 1) the lease contains an option to purchase the property for less than fair market value, 2) transfer of ownership at the end of the lease, 3) the lease term is 75% or more of estimated economic life of leased property, and 4) present value of minimum lease payments is at least 90% of fair value of the leased property to the lessor at the inception of the lease.

 

 

The Company measures the fair value of the Series A preferred stockConvertible Preferred Stock by the amount of cash that was received for their issuance. The Companyissuance and determined that the convertible preferred shares and the accompanying warrants issued are equity instruments.

The Company’s warrants were excluded from derivative accounting because they were indexed to the Company’s own unregistered common stock and are classified in stockholders’ equity. The majority of warrants were exchanged for preferred stock on August 14, 2009.  At June 30, 2010, the Company had 112,500 warrants issued and outstanding.

   

 

Shipping and handling costs are included in cost of sales in the Consolidated Statements of Operations for all periods presented.

 

 

Selling expenses include items such as business travel and advertising costs. Advertising costs are expensed as incurred. General and administrative expenses include items for Company’s administrative functions and include costs for items such as office supplies, insurance, telephone, board fees and corporate consulting costs as well as payroll services.

Stock based compensation represents the cost related to stock-based awards granted to employees. The Company measures stock based compensation cost at 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 employee’s requisite service period. The Company estimates the fair value of stock options using a Black-Scholes valuation model.

 

Basic net income per common share is computed by dividing net income or loss by the weighted average number of shares outstanding during the period. Diluted net income per common share is calculated using net income divided by diluted weighted-average shares. Diluted weighted-average shares include weighted-average shares outstanding plus the dilutive effect of potential common stock issuable in respect of convertible preferred stock, warrants and share-based compensation were calculated using the treasury stock method.

 

 

Revenue and costs are recognized on the units of delivery method. This method recognizes as revenue the contract price of units of the product delivered during each period and the costs allocable to the delivered units as the cost of earned revenue. When the sales agreements provide for separate billing of engineering services, the revenues for those services are recognized when the services are completed. Costs allocable to undelivered units are reported in the balance sheet as costs incurred on uncompleted contracts. Amounts in excess of agreed upon contract price for customer directed changes, constructive 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 reasonably estimated. 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. The Company has written agreements with the customers that specify contract prices and delivery terms. The Company recognizes revenues only when the collection prospects are reasonable.

 

Adjustments to cost estimates are made periodically, and losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined and are reflected as reductions of the carrying value of the costs incurred on uncompleted contracts. Costs incurred on uncompleted contracts consist of labor, overhead, and materials. Work in process is stated at the lower of cost or market and reflect accrued losses, if required, on uncompleted contracts.

 

TheConforming to the authoritative FASB guidance for VIEs, under ASC 810, (see Note 8 for more information related to the VIE), the Company has consolidated WM Realty, a variable interest entity thatwhich entered into a sale and leaseback contract with the Company in 2006, to conform to the authoritative FASB guidance (see Note 9 for more information related to the VIE).2006. The creditors of WM Realty do not have recourse to the general credit of TechPrecision or Ranor.

 

 

Depreciation expense for the sixthree months ended SeptemberJune 30, 2010 and 2009 was $86,754 and 2008 was $199,503 and $267,296,$117,126, respectively. Land and buildings (which are owned by WM Realty, a consolidated entityVIE) are collateral for the $3,200,000 Amalgamated Bank Mortgage Loan described in greater detail under Note 6 Long-Term Debt. Other fixed assets of the Company together with its other personal properties, are collateral for the Sovereign Bank $4,000,000 secured loanterm note, capital expenditure note and revolving line of credit.

 

The Company recognizes revenues based upon the units-of-delivery method (see Note 2). The advance billing and deposits includeincludes down payments for acquisition of materials and progress payments on contracts. The agreements with the buyers of the Company’s products allow the Company to offset the progress payments against the costs incurred. The following table sets forth information as to costs incurred on uncompleted contracts as of SeptemberJune 30, 20092010 and March 31, 2009:2010:  

As of SeptemberJune 30, 20092010 and March 31, 2009,2010, the Company had deferred revenues totaling $1,777,472$60,957 and $3,945,364,$56,375, respectively. Deferred revenues represent the customer prepayments on their contracts. The cost incurred on uncompleted contracts in excess of progress billings on June 30, 2010 and March 31, 2010 are net of allowances for losses on uncompleted contracts of $40,499 and $172,413, respectively.

On February 24, 2006, Ranor entered into a loan and security agreement with Sovereign Bank.Bank (the “bank”).  Pursuant to the agreement, as amended, the bank provided Ranor with a secured term loan of $4,000,000 (“Term Note”) and also extended to Ranor a revolving line of credit of up $1,000,000 the (“Revolving$2,000,000 (the “Revolving Note”).  On January 29, 2007, the loan and security agreement was amended, adding a capital expenditure line of credit facility of $3,000,000 to the above two debt facilities the (“CapEx(the “CapEx Note”). On March 29, 2010, the bank agreed to extend to Ranor a loan facility (the “Staged Advance Note”) in the amount of up to $1,900,000 for the purpose of acquiring a gantry mill machine. Significant terms associated with the Sovereign debt facilities are summarized below.

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 which converts from a fixed rate of 9% to a variable rate on February 28, 2011.  From February 28, 2011 until maturity the Term Notenote will bear interest at the Prime Rateprime rate plus 1.5%, payable on a quarterly basis.   Principal of $142,857, plus interest is payable in quarterly installments, of $142,857, plus interest, with a final payment due on March 1, 2013.

The Term Note is subject to various covenants that include the following: the loan collateral comprises all personal property of Ranor, including cash, accounts receivable inventories, equipment, financial and intangible assets.  The company must also maintain a ratio of earnings available to cover fixed charges of at least 120% of the fixed charges for the rolling four quarters, tested at the end of each fiscal quarter.  Additionally the Company must also maintain an interest coverage ratio of at least 2.12:1 at the end of each fiscal quarter. Ranor’s obligations under the notes to the bank are guaranteed by Techprecision. The company isTechPrecision.

As of June 30 2010 and March 31, 2010, the Company was in compliance with all debt covenants.  The ratio of earnings to cover fixed charges as of June 30, 2010 was 360% and the covenantsinterest coverage ratio for the three months then ended was 10:1.  In the event of default, the lending bank may choose to accelerate payment of any amounts outstanding under this agreement.  the Note and, under certain circumstances, the bank may be entitled to cancel the facility.  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 obtain alternate financing to satisfy any accelerated payment obli gation.

The Revolving Note bears interest at a variable rate determined as the Prime Rate, plus 1.5% annually on any outstanding balance.   The borrowing amount underlimit on the Revolving Note has been 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 $1,000,000.   The agreement has been amended several times with the effect of increasing the maximum available borrowing limit to $2,000,000 as of September 30, 2009.$2,000,000.   There were no borrowings outstanding under this facility as of SeptemberJune 30, 20092010 and 2008.March 31, 2010.  The Company pays an unused credit line fee of .25%0.25% on the average unused credit line amount in the previous month. The Company received notice from facility was renewed with the bank on July 30, 2010 and the maturity date was changed to July 31, 2011.

The initial borrowing limit under the Capital Expenditure Note was $500,000 and has been amended several times resulting in a borrowing limit of $3,000,000 available under the facility as of SeptemberNovember 30, 2009.  The facility iswas subject to renewal on an annual basis.  On November 30, 2009, the Company elected not to renew this facility when it terminated as the Company plans to finance any future equipment financing needs on a specific basis rather than under a blanket revolving line of credit. Under the facility, the Company maywas permitted to borrow 80% of the original purchase cost of qualifying capital equipment.  The current rate of interest rate is based on LIBOR plus 3%.  The Company is obligated to make interest only payments monthly on any borrowings through November 30, 2009 and on December 1, 2009 any outstanding borrowingsPrincipal and interest will bepayments are due and payable monthly based on a five year amortization schedule.  There was $919,297 borrowed$796,723 outst anding under this facility at SeptemberJune 30, 2009.   2010. 

The Company usedbank may loan to Ranor, during a one year period expiring on March 29, 2011, amounts up to $1,900,000 for the proceedspurpose of acquiring a gantry mill machine. The machine will serve as collateral for the loan. The total aggregate amount of advances under this agreement should not exceed 80% of the actual purchase price of the gantry mill machine. All advances provide for a payment of interest only monthly through February 28, 2011, and thereafter no further borrowings will be permitted under this facility. The interest rate is LIBOR plus 4%. Beginning on April 1, 2011, Ranor is obligated to pay principal and interest sufficient to amortize the outstanding balance on a five year schedule. On March 29, 2010, Ranor drew down $556,416 under this facility to finance the initial deposit on the purchase of qualifying equipment during the six months ended  September 30, 2009.mill machine. TechPrecision has g uaranteed the payment and performance from and by Ranor.

The mortgage loan is an obligation of WM Realty. The mortgage has a term of 10 years, maturing OctoberNovember 1, 2016, and carries an annual interest rate of 6.7%6.85% with monthly interest and principal payments of $20,955.  The amortization is based on a 30 year term. WM Realty has the right to repay the mortgage note upon payment of a prepayment premium of 5% of the amount prepaid if

In connection with the mortgage financing of the real estate owned by WM Realty, Mr. Andrew Levy, a director and principal shareholder, executed a limited guaranty.  Pursuant to the limited guaranty, Mr. Levy personally guaranteed the lender the payment of any loss resulting from WM Realty’s fraud or misrepresentation in connection with the loan documents, misapplication of rent and insurance proceeds, failure to pay taxes and other defaults resulting from his or WM Realty’s misconduct.

During 2007, the Company also leased certain office equipment under a non-cancelable capital lease. This lease will expire in 2012, and future minimum payments under this lease for annual periods ending on SeptemberJune 30, 20102011 and 2012 are $15,564 for 2011 - - $15,564, and $9,070 through April 2012.$12,970, respectively. Interest payments included in the above total $3,047$1,577 and the present value of all future minimum lease payments total $37,160.$26,957. Lease payments for capital lease obligations for the sixthree months ended SeptemberJune 30, 20092010 totaled $6,552.

 

For the three and six months ended SeptemberJune 30, 20092010 and 2008,2009, the Company recorded Federal and State income tax expense of $550,388$431,102 and $1,871,968, and $366,703 and $2,936,218,a tax benefit of $183,685, respectively. The estimated annual effective tax ratesrate for the sixthree months ended SeptemberJune 30, 2009 and September 30, 2008 were 30% and 42%, respectively.2010 was 38.25%. The difference between the provision for income taxes and the income tax determined by applying the statutory federal income tax rate of 34% and the State of Massachusetts income tax rate of 9.5% was due primarily to differences in the lives and methods used to depreciate and/or amortize our property and equipment, timing differences of expenses related compensated absences,deductions for domestic production activities, share based compensation, and net operating loss carryforwards, and operating losses that occurred during the period.carryforwards.  

At of June 30, 2010, the Company’s federal net operating loss carry-forward was approximately $1,780,714.$1.9 million. If not utilized, the federal net operating loss carry-forward of Ranor and TechprecisionTechPrecision will expire in 2025 and 2027, respectively. Furthermore, because of over fifty percent change in ownership as a consequence of the reverse acquisition in February 2006, as a result of the application of Section 382 of the Internal Revenue Code, the amount of net operating loss carry forward used in any one year in the future is substantially limited.

On February 24, 2006, WM Realty borrowed $3,300,000 to finance the purchase of Ranor’s real property. WM Realty purchased the real property for $3,000,000 and leased the property on which Ranor’s facilities are located pursuant to a net lease agreement. The property was appraised on October 31, 2005 at $4,750,000.  The Company advanced $226,808 to WM Realty to pay closing costs, which advance was repaid when WM Realty refinanced the mortgage in October 2006. WM Realty was formed solely for this purpose; its partners are stockholders of the Company. The Company considers WM Realty a variable interest entity as defined by the FASB, and therefore has consolidated its operations into the Company.

 

On October 4, 2006, WM Realty placed a new mortgage of $3.2 million on the property and the then existing mortgage of $3.1 million was paid off. The new mortgage has a term of ten years, bears interest at 6.75% per annum, and provides for monthly payments of principal and interest of $20,595$20,955 (See Note 6). In connection with the new mortgage, Andrew Levy, a director and principal shareholder, and the managing member of WM Realty, executed a limited guaranty.guarantee. pursuant to which Mr. Levy guaranteed the lender the payment of any loss resulting from WM Realty’s fraud or misrepresentation in connection with the loan documents, misapplication of rent and insurance proceeds, failure to pay taxes and other defaults resulting from his or WM Realty’s misconduct. 

 

The only assets of WM Realty available to settle its obligations are $49,542$51,007 of cash and real property acquired from Ranor, Inc. at a cost of $3,000,000 less $321,551$388,574 of accumulated depreciation.  The real property has a net carrying cost of $1,135,959$1,112,075 on Techprecision’sTechPrecision’s consolidated balance sheet. There is also a loan receivable due from a related party for $30,000. The only liability of WM Realty is the carrying amount of mortgage payable to Amalgamated Bank for $3,099,465.  

 

WM Realty had a deficit equity balance of $369,662$345,839 on SeptemberJune 30, 2009. During2010. For the three and six months ended SeptemberJune 30, 2010 and 2009, WM Realty had a net income of $64,060$35,965 and $64,060,$30,894, and capital distributions of $46,873$55,373 and $92,248.$45,375, respectively.

The Company has 10,000,000 authorized shares of preferred stock and the 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 seriesSeries A convertible preferred stock (“series A preferred stock”).Convertible Preferred Stock.

Each share of seriesSeries A preferred stockConvertible 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 September 30,December 31, 2009, each share of seriesSeries A preferred stockConvertible Preferred Stock was convertible into 1.3072 shares of common stock, with an effective conversion price of $.2180.

In addition to the conversion rights described above, the certificate of designation for the seriesSeries A preferred stockPreferred Stock provides that the holder of the seriesSeries A preferred stockPreferred Stock or its affiliates will not be entitled to convert the seriesSeries A preferred stockPreferred 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.