CPS Technologies Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter ended September 28, 2019; comparisons are with the quarter ended September 29, 2018. The nine-month period is also compared with the corresponding 2018 period. CPS supplies advanced materials, including metal-matrix composites, and assembles electronic housings and packages.
Financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $4.387 million | $6.116 million | $16.024 million | $15.500 million |
| Gross profit (margin) | $223 thousand (5%) | $964 thousand (16%) | $1.557 million (10%) | $1.713 million (11%) |
| Operating loss | $479 thousand | $19 thousand | $966 thousand | $1.109 million |
| Net loss | $496 thousand | $14 thousand | $990 thousand | $845 thousand |
| Basic and diluted loss per share | $0.04 | $0.00 | $0.07 | $0.06 |
Q3 revenue fell 28%, primarily because of lower baseplate sales, partly offset by higher hermetic-package sales. Management attributed the sharp gross-margin decline mainly to lower volume against a cost base with significant fixed manufacturing costs. Nine-month revenue rose 3%, primarily due to increased housing and package sales; lower gross margin was attributed largely to product mix. SG&A declined 29% in Q3 and 11% year to date, including lower sales commissions and outside professional-services costs.
Cash, liquidity, and balance sheet
- Cash was $470 thousand at September 28, 2019, versus $629 thousand at December 29, 2018. The company reported $413 thousand drawn on its line of credit, leaving net cash of $57 thousand.
- Nine-month operating cash use was $321 thousand, compared with $1.822 million in 2018; investing cash use was $250 thousand, and financing provided $413 thousand. Cash declined by $159 thousand during the period.
- Current assets were $6.230 million and current liabilities $2.736 million. Accounts receivable were $2.796 million; net inventory was $2.791 million. Total liabilities were $2.795 million and stockholders’ equity $4.962 million.
- In September, CPS replaced its $1.25 million Santander facility with a $2.5 million revolving facility from Massachusetts Business Development Corporation. It is secured by receivables and other assets, bears interest at LIBOR plus 6.5%, and includes a demand note permitting the lender to call the loan at any time. The agreement provides that $500 thousand remains locked until the stated earnings projection is met. At quarter-end, the borrowing base permitted an additional $1.335 million of borrowing.
- Management said cash and borrowing availability should fund working capital for the remainder of 2019 and believed cash plus borrowing, if needed, would cover foreseeable requirements, while cautioning that this was not assured if revenue or spending targets were missed.
Management commentary, risks, and unusual items
- Days sales outstanding rose to 57 days from 45 at 2018 year-end. Management said the change in customer prompt-payment discounts may increase DSO; it estimated DSO would have been 71 days in Q3 if customers paid on undiscounted terms.
- Inventory declined from $3.193 million at year-end, reflecting lower production following reduced customer sales projections. Inventory held at outside plating vendors was $835 thousand, down from $1.556 million.
- CPS depends on a limited number of customers; management warned losing a major customer could require additional financing. It also identified insufficient revenue, inability to raise capital, and failure to reduce discretionary spending as potential threats to its objectives and ability to meet obligations.
- A European customer’s nickel-plating claim, initially estimated by the customer at $1.0 million with possible additional damages, was settled through an offer accepted in July 2019. The settlement is covered by insurance, and management does not expect CPS to incur a loss.
- CPS adopted lease accounting ASC 842 in 2019, recognizing a $310 thousand right-of-use asset and lease liability at adoption. The filing says adoption did not materially affect operating results or liquidity.
- No formal financial guidance is provided. Management expected the new credit facility and ending prompt-payment discounts to support liquidity and have a positive earnings effect. Forward-looking statements remain subject to risks; the filing reports no material changes to the risk factors in the 2018 Form 10-K.
Important facts for investors to verify
- Whether revenue and production recover after the Q3 decline, and whether fixed-cost absorption improves gross margins.
- Customer concentration, order forecasts, and the impact of the product mix on margins.
- Cash burn, borrowing availability, financial-covenant compliance, and the lender’s demand-call rights and $500 thousand borrowing restriction.
- Receivables collection and DSO trends following the change in customer discount policy.
- Whether the insured plating settlement fully resolves the customer matter without further claims or company costs.