CPS Technologies Corp. — Q3 2021 Form 10-Q
Reporting period: Fiscal quarter ended September 25, 2021; comparisons are with the quarter ended September 26, 2020, and the corresponding nine-month periods. CPS makes custom advanced-material components and assemblies for electronics, power generation, automotive, aerospace and other markets. Financial statements are unaudited.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $5.515 million | $4.452 million | $16.243 million | $16.722 million |
| Gross profit (margin) | $1.139 million (20.7%) | $0.938 million (21.1%) | $3.435 million (21.1%) | $3.671 million (22.0%) |
| Operating income (loss) | $(88,000) | $253,000 | $201,000 | $1.205 million |
| Net income | $2.728 million | $231,000 | $2.998 million | $1.132 million |
| Diluted EPS | $0.18 | $0.02 | $0.21 | $0.09 |
- Q3 revenue rose 24%, attributed mainly to the first armor production order, which began in Q2, and increased aerospace and defense sales. Nine-month revenue fell 3%, which management attributed primarily to the comparison of pre-COVID Q1 2020 with COVID-affected Q1 2021.
- Q3 SG&A increased 79% to $1.227 million, including $327,000 of one-time restructuring costs and higher commissions. Nine-month SG&A rose 31% to $3.234 million, also reflecting CEO transition costs, recruiting and other onboarding expenses.
- The Q3 operating loss contrasts with prior-year operating income; management said the restructuring charge accounted for nearly all of the decline. Nine-month operating income also fell, reflecting the first-quarter comparison and restructuring costs.
- Reported net income includes a $2.8 million income-tax benefit from releasing the deferred-tax-asset valuation allowance. Excluding that benefit, Q3 reported a pretax loss of $72,000; the large increase in net income is not a reflection of comparable operating growth.
Cash, liquidity and capital
- At September 25, cash and equivalents were $3.838 million, versus $195,000 at December 26, 2020. Current assets were $12.775 million and current liabilities $3.950 million. Accounts receivable was $5.032 million, inventory $3.773 million, and deferred revenue $1.151 million.
- Nine-month operating cash flow was $549,000, compared with $682,000 a year earlier. Investing cash outflow was $297,000, mainly equipment purchases; financing provided $3.390 million, including $3.422 million from common-stock issuance. Cash increased by $3.643 million.
- The company had no borrowings on its $3.0 million revolving credit line; its borrowing base allowed approximately $2.6 million of additional borrowing. The line is secured by receivables and other assets, includes a demand note callable by the lender, and its financial covenants were met or waived. Note payable was $169,000, including $45,000 current; operating lease liabilities totaled $613,000.
- Under its ATM agreement, CPS may sell up to $25 million of stock. Through September 25 it had sold approximately 527,000 shares for gross proceeds of about $3.7 million, including about 48,000 shares and $295,000 in Q3. No additional shares were sold after quarter-end through the filing’s disclosure. The offering carries a 3% sales commission.
- Shares outstanding at September 25 were 14,348,451; the cover page reports 14,350,452 shares outstanding as of November 8, 2021.
Outlook, commentary and risks
- Management expected existing cash to fund working-capital needs for the remainder of 2021 and believed cash plus potential borrowings would fund requirements for the foreseeable future. It cautioned that this depends on generating sufficient revenue or reducing discretionary spending; no formal financial guidance was provided.
- Management cited growing underlying demand for metal-matrix composites and CPS’s positioning to serve current and new customers. Results remain sensitive to sales volume because the company has fixed engineering and manufacturing costs and production yields can vary.
- Customer concentration remains a risk: management warned that losing a significant customer could require additional external financing. DSO increased from 62 days at year-end to 82 days, which CPS attributed to advance customer billings for special raw materials not yet reflected in revenue. Inventory turnover also eased to 4.3 times from a 4.5-times 2020 average.
- The company reported no legal proceedings and no material changes to the risk factors in its 2020 Form 10-K. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Investor verification points
- Assess how much reported earnings and EPS depend on the noncash $2.8 million valuation-allowance release, and the assumptions supporting deferred-tax-asset realization.
- Track whether the Q3 revenue recovery, including armor and aerospace/defense orders, continues, and whether margins recover from the nine-month 21.1% level.
- Monitor DSO, customer collections and the conversion of advance billings and deferred revenue into shipments and recognized revenue.
- Review the impact of restructuring and CEO-transition costs on recurring expenses and operating profitability.
- Consider potential dilution from further ATM sales, alongside the company’s cash needs, customer concentration and callable credit-line terms.