CPS Technologies Corp. — Q1 2018 Form 10-Q
Business and period: CPS supplies metal-matrix composites and related components to electronics, power-generation, automotive, and other markets. The unaudited quarter ended March 31, 2018; comparison is with the fiscal quarter ended April 1, 2017. Amounts below are in U.S. dollars.
Financial performance
- Revenue: $4.16 million, up 46% from $2.85 million, primarily from higher baseplate sales. Management also cited assuming responsibility for the plating process for a major customer; price changes were insignificant.
- Gross profit and margin: $143,873, compared with a gross loss of $80,392. The filing describes gross margin as 3% of sales; higher volume was partly offset by increased manufacturing costs.
- Operating and net results: Operating loss was $764,244 versus $1.05 million. Net loss was $574,186 versus $604,402; basic and diluted loss per share was $0.04 versus $0.05. SG&A declined 7% to $908,117, though excluding $100,000 of prior-year one-time costs, it increased 5%.
- Cash flow: Operating activities used $1.07 million, compared with $499,000 in the prior-year quarter. Capital expenditures were $142,750. Cash declined by $1.21 million to $130,580 from $1.34 million at year-end.
- Liquidity and working capital: Current assets were $6.83 million and current liabilities $2.73 million; the reported current ratio was 2.5. Net inventory rose to $3.01 million from $2.11 million. Receivables rose; the balance sheet reports $3.58 million, while MD&A reports $3.592 million. DSO increased to 78 days from 70.
- Debt and financing: No borrowings were outstanding on the $1.5 million revolving credit line at quarter-end, and the borrowing base permitted the full amount. The facility was due to mature at the end of May 2018 and carried interest at prime plus 1%. CPS exceeded its net-loss covenant; the bank granted a one-time waiver on May 14, 2018. Current-ratio and liabilities-to-tangible-net-worth covenants were met.
Material changes, outlook, and risks
- Management attributed increased receivables and inventory to taking responsibility for plating finished product for a major customer. Consigned inventory at customer locations increased to $1.252 million from $742,000.
- Management expected existing cash and, if needed, bank borrowings to fund working-capital needs for the remainder of 2018 and cash requirements for the foreseeable future. This was qualified by the risk that insufficient revenue or spending reductions could impair the company’s ability to meet obligations. No specific revenue or earnings guidance was provided.
- CPS depends on a limited number of customers; losing one could require additional external financing. Cash was low at quarter-end, and the company had an operating loss and substantial working-capital use.
- Customer claim: A European customer alleged nonconforming nickel plating on baseplates. The customer estimated its claim at $1.0 million as of April 11, 2018, reserving the right to seek additional damages. Some affected baseplates were reworked; a small portion of roughly 15,000 baseplates assembled into modules during the affected period may be impacted. CPS said the financial impact could not then be quantified and recorded no liability; insurance claims had been submitted. Legal proceedings were possible.
- Other items: CPS adopted ASC 606 with no material financial-statement impact or opening-equity adjustment. Its new Norton facility lease runs through February 2021; disclosed operating lease obligations totaled approximately $520,000. The company said ASU 2016-02 on leases could materially increase reported assets and liabilities, depending on leases and renewals.
Important facts for investors to verify
- Resolution, coverage, and ultimate cost of the nickel-plating claim, including any additional customer damages or legal action.
- Status and renewal or replacement terms of the revolving credit line, and compliance with its financial covenants after the one-time waiver.
- Whether cash generation and working-capital management improve, especially receivables, DSO, inventory, and customer consignment levels.
- The receivables discrepancy between the balance sheet ($3.582 million) and MD&A ($3.592 million).
- Progress in sales and profitability, including the sustainability of baseplate growth and the very low reported gross margin.