CPS Technologies Corp. — Q1 2020 Form 10-Q
Reporting period: Fiscal quarter ended March 28, 2020; comparisons are with the quarter ended March 30, 2019. Financial statements are unaudited. CPS supplies custom advanced-material components and packages for electronics, power generation, transportation, defense, and other markets.
Financial performance
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $6.512 million | $5.270 million; up 24% |
| Gross profit / margin | $1.550 million / 24% | $159,000 / 3% |
| Operating income (loss) | $622,000 | ($744,000) |
| Net income (loss) | $602,000; $0.05 per basic and diluted share | ($744,000); ($0.06) per share |
| Operating cash flow | ($234,000) | ($481,000) |
| Capital expenditures | $108,000 | $116,000 |
Management attributed the revenue increase to higher unit volume (about one-third of the increase) and price changes. Gross-margin improvement reflected increased sales and a $202,000 reduction in manufacturing expenses; SG&A rose modestly to $929,000, largely due to sales commissions.
Balance sheet, debt, and liquidity
- At March 28, 2020, cash was $122,000; accounts receivable were $5.959 million and inventory was $3.595 million. Receivables and inventory increased from year-end 2019.
- Current assets were $9.904 million and current liabilities $5.454 million. Total assets were $11.612 million, total liabilities $5.614 million, and stockholders’ equity $5.998 million.
- Borrowings on the $2.5 million revolving line of credit were $1.578 million, up $328,000 during the quarter. The borrowing base permitted an additional $922,000 at quarter-end. The facility is secured by receivables and other assets, bears interest at LIBOR plus 6.5%, includes a demand note callable by the lender, and has financial covenants that CPS reported it met.
- A $208,000 equipment purchase was financed with a five-year note at 6.47%; $206,000 remained outstanding at quarter-end, including current and long-term portions.
- Management’s “net cash” measure—cash less bank borrowings—was negative $1.455 million, compared with negative $1.116 million at December 28, 2019. Operating cash use reflected working-capital needs, including higher receivables and inventory; increased payables and deferred revenue partly offset these uses.
- Days sales outstanding increased from 67 days at year-end to 77 days. Management cited higher quarter-end sales and a larger share of sales to a customer with longer payment terms.
Outlook, risks, and notable items
- CPS provided no numerical earnings or revenue guidance. Management expected to fund operations through the remainder of 2020 with existing cash and bank borrowings.
- The company remained open as part of the Defense Industrial Base. COVID-19 had not materially affected Q1 results, but management expected a negative, at least modest, effect in upcoming quarters. Risks included customer shutdowns or supply disruptions, higher freight costs, and absenteeism leading to labor inefficiencies and overtime. Demand was described as strong at the time of filing.
- CPS said it continued to rely on a limited number of customers; loss of a major customer could require additional financing. It also cautioned that insufficient revenue, inability to raise capital, or failure to reduce discretionary spending could materially impair its objectives.
- The CARES Act tax provisions allowed use and carryback of net operating losses and recovery of alternative minimum tax credits. CPS reduced its deferred-tax valuation allowance by $216,000 through utilization of deferred tax assets and recorded no income-tax provision for the quarter.
- The company reported no legal proceedings and no material changes to the risk factors in its 2019 Form 10-K. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether strong customer demand continued and how COVID-19 affected orders, customer supply chains, and operating costs after quarter-end.
- Collection of receivables, DSO trends, inventory conversion, and the working-capital cash requirements associated with growth.
- Availability and terms of the callable, asset-secured credit line, covenant compliance, and the company’s ability to fund operations.
- Whether the Q1 improvement in gross margin and operating profitability was sustained, including the contribution of pricing versus unit volume and manufacturing efficiencies.
- The assumptions and realizability underlying deferred tax assets and the reported valuation-allowance reduction.