CPS Technologies Corp. — Q2 2021 Form 10-Q
Business and period: CPS makes custom metal-matrix composite materials, electronic housings and packages, and lightweight armor for electronics, transportation, power generation, defense, and other markets. The unaudited quarter ended June 26, 2021; comparisons are with the quarter ended June 27, 2020. Six-month comparisons are for the respective periods ended on those dates.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $5.862M | $5.758M | $10.728M | $12.270M |
| Gross profit (margin) | $1.352M (23%) | $1.183M (21%) | $2.296M (21%) | $2.734M (22%) |
| Operating income | $253K | $331K | $289K | $952K |
| Net income | $239K | $299K | $270K | $901K |
| Diluted EPS | $0.02 | $0.02 | $0.02 | $0.07 |
- Q2 revenue increased 2%; management attributed the increase mainly to initial armor-panel shipments and higher hermetic-package sales, partly offset by lower baseplate sales to a major customer. Gross margin improved on price increases and product mix.
- Q2 SG&A rose 28% to $1.099M, reflecting the new COO’s compensation and director compensation delayed from Q1. Operating income and net income declined despite higher revenue and gross margin.
- First-half revenue fell 13%, and gross margin declined to 21% from 22%. Management attributed weaker results primarily to COVID-related effects on Q1 2021 compared with Q1 2020, lower revenue and reduced fixed-cost absorption. First-half SG&A increased 13% to $2.007M, including COO and proxy-related costs.
Cash, liquidity and capital
- Cash and equivalents were $3.016M at June 26, versus $195K at December 26, 2020. Current assets were $11.711M and current liabilities $3.131M.
- First-half operating cash flow was negative $130K, versus positive $443K a year earlier; working-capital outflows included a $1.518M increase in trade receivables. Investing cash outflow was $164K. Financing provided $3.114M, primarily from the ATM share offering.
- Trade receivables were $4.432M, up from $2.915M at year-end; days sales outstanding rose from 62 to 69 days, which management linked to increased sales to two customers with longer payment terms. Net inventory rose to $3.989M, partly to support an armor order.
- The company had no borrowings on its $3.0M revolving credit line at period-end; the borrowing base permitted the full $3.0M to be drawn. The line is secured by receivables and other assets, carries a demand feature, and is subject to covenants, which the company reported it met. Equipment notes payable totaled $184K. Operating lease liabilities were $638K.
- Under an ATM agreement with capacity of up to $25M, the company sold 479,289 shares through June 26 for approximately $3.356M gross proceeds; the filing reports approximately $3.138M net proceeds in its notes. Shares outstanding at June 26 were 14,300,548; the filing reports 14,322,617 as of August 6.
Outlook, risks and notable items
- Management expected existing cash to fund operations through the remainder of 2021 and said cash plus potential borrowing should cover requirements for the foreseeable future. It cautioned that this depends on revenue, operational goals and spending; failure to generate sufficient revenue, raise capital or reduce discretionary spending could adversely affect business objectives.
- Sales depend on a limited number of customers; loss of any one could require additional external financing. A major customer reduced Q2 purchases amid lower high-speed rail demand associated with pandemic-related ridership declines. Management said it believed the worst of COVID-19 was behind the company, but warned that variants, vaccination levels and other factors could continue to affect results. Potential pandemic impacts include weaker demand, higher freight costs, absenteeism and overtime.
- The company recognized a $638K right-of-use asset and matching lease liability for its Norton facility lease in March 2021; the lease expires in February 2026, with an option to renew through February 2032.
- No legal proceedings or material changes to previously disclosed risk factors were reported. Management stated disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Investor verification points
- Reconcile the ATM disclosures: the note says 25,267 additional shares were sold after June 26 through August 6 for $153,659 gross proceeds, while MD&A says no additional shares were sold after June 26.
- Verify ATM gross-to-net proceeds, offering costs, remaining capacity and potential dilution, including the reported August 6 share count.
- Track receivables, DSO, inventory levels and cash conversion, particularly given customer concentration and the armor-order inventory build.
- Monitor major-customer demand, pandemic effects, margin recovery and the company’s ability to fund operations if revenue or planned operational goals fall short.
- Assess the availability and terms of the demand-feature credit line, alongside equipment-note payments and lease commitments.