EXPLANATORY NOTE

 

We are filing this Amendment No. 1 (this “Form 10-Q/A”) to amend our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2019, which was filed with the United States Securities and Exchange Commission (“SEC”) on May 15, 2019 (the “Original Filing”). This Form 10-Q/A includes restated unaudited consolidated financial statements as of and for the three months ended March 31, 2019.

 

As previously described in our Current Report on Form 8-K filed with the SEC on June 27, 2019, our Audit and Finance Committee of the Board of Directors (the “Audit Committee”), after considering the recommendation of management, concluded that the unaudited consolidated financial statements as of and for the three months ended March 31, 2019 included in the Original Filing should no longer be relied upon and would be restated through the filing of this Form 10-Q/A. 

 

As previously disclosed, we identified certain misstatements in our previously filed unaudited interim financial statements for the first quarter of 2019 which required restatement. These misstatements arose as a result of the implementation of a new enterprise resource planning system (“ERP system”) at our Sypris Electronics segment effective January 1, 2019. Due to data entry processing errors following this transition, certain vendor invoices related to raw material inventory receipts in the first quarter of 2019 for the Sypris Electronics segment were incorrectly recorded in the second quarter of 2019. These errors resulted in an understatement of accounts payable and cost of sales of approximately $786,000 as of and for the quarter ended March 31, 2019.  Promptly upon identifying the error, the Company undertook a review of its systems and processes related to the transition to the new ERP system, as well as a review of certain accounting entries in the first quarter. The Company also corrected other immaterial accounting errors affecting the first quarter of 2019 discovered through this review related to the ERP system transition.  To correct all misstatements as reflected in this Form 10-Q/A, the Company recognized an incremental net loss of $731,000 for the three months ended March 31, 2019. As a result, net loss increased from $2,305,000 as reported in the Original Filing to $3,036,000 and net loss per share increased from $0.11 to $0.15 for the three months ended March 31, 2019. Cash flows from operating activities did not change as a result of the restatement. See Note 3 (Restatement of Previously Reported Financial Statements) to the Company’s financial statements in Part I, Item 1 of this Form 10-Q/A for further details.

 

The information in this Form 10-Q/A not only restates the unaudited consolidated financial statements that were contained in the Original Filing, but also amends other information contained in the Original Filing affected by the corrections described above. Therefore, this Form 10-Q/A should be read together with the Original Filing. Additionally, except for the restatement and related matters, this Form 10-Q/A does not reflect events occurring after the date of the Original Filing and should be read in conjunction with our filings with the SEC subsequent to the date of the Original Filing. These corrections had no impact on the Company’s Sypris Technologies reportable business segment.

 

The following items in the Original Filing have been revised in this Form 10-Q/A:

 

Part I - Item 1 - Financial Statements

Part I - Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

Part I - Item 4 - Controls and Procedures

Part II - Item 1A - Risk Factors

Part II - Item 6 - Exhibits

 

Pursuant to the rules of the SEC, Part II - Item 6 of the Original Filing has been amended to include the currently-dated certifications from our chief executive officer and chief financial officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. These certifications are included in this Form 10-Q/A as Exhibits 31(i)-1, 31(i)-2, and 32.1.

 

 

Table of Contents

 

Part I.

Financial Information

	Item 1.	Financial Statements
		Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and April 1, 2018	2
		Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2019 and April 1, 2018	3
		Consolidated Balance Sheets at March 31, 2019 and December 31, 2018	4
		Consolidated Cash Flow Statements for the Three Months Ended March 31, 2019 and April 1, 2018	5
		Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2019 and April 1, 2018	6
		Notes to Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23
	Item 4.	Controls and Procedures	23

Part II.	Other Information

	Item 1.	Legal Proceedings	24

	Item 1A.	Risk Factors	24
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
	Item 3.	Defaults Upon Senior Securities	25
	Item 4.	Mine Safety Disclosures	25
	Item 5.	Other Information	25
	Item 6.	Exhibits	25

Signatures			26

 

 

Part I.     Financial Information

Item 1.     Financial Statements

 

Sypris Solutions, Inc.

Consolidated Statements of Operations

(in thousands, except for per share data)

(Unaudited)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

Sypris Solutions, Inc.

Consolidated Statements of Comprehensive Loss

(in thousands)

(Unaudited)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

Sypris Solutions, Inc.

Consolidated Balance Sheets

(in thousands, except for share data)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

Sypris Solutions, Inc.

Consolidated Cash Flow Statements

(in thousands)

(Unaudited)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

Sypris Solutions, Inc.

Consolidated Statements of Stockholders’ equity

(in thousands)

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

Sypris Solutions, Inc.

Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

We are a diversified provider of truck components, oil and gas pipeline components and aerospace and defense electronics. We offer a wide range of manufactured products, often under multi-year sole-source contracts.

 

We are organized into two business segments, Sypris Technologies and Sypris Electronics. Sypris Technologies, which is comprised of Sypris Technologies, Inc. and its subsidiaries, generates revenue primarily from the sale of forged, machined, welded and heat-treated steel components primarily for the heavy commercial vehicle and high-pressure energy pipeline applications. Sypris Electronics, which is comprised of Sypris Electronics, LLC, generates revenue primarily through circuit card and full “box build” manufacturing, high reliability manufacturing, systems assembly and integration, design for manufacturability and design to specification work.

 

We focus on those markets where we believe we have the expertise, qualifications and leadership position to sustain a competitive advantage. We target our resources to support the needs of industry participants that embrace technological innovation and flexibility, coupled with multi-year contractual relationships, as a strategic component of their supply chain management. These contracts, many of which are sole-source by part number, have historically created opportunities to invest in leading-edge processes or technologies to help our customers remain competitive. The productivity and innovation that can result from such investments helps to differentiate us from our competition when it comes to cost, quality, reliability and customer service.

 

Sypris Technologies Outlook

 

The Sypris Technologies segment continues to migrate from its historical, concentrated dependence upon the commercial vehicle markets to a more diversified base of customers who place value on our innovation, flexibility and lean manufacturing capabilities. During 2016, the continued strength of the U.S. dollar, the tightening of margins in certain sectors of the commercial vehicle markets and the generally softening of certain key market segments led the Company to reevaluate the strategic importance of each of its customers to the Company’s long-term success. In connection with this reevaluation process, the Company and Meritor determined not to renew their supply agreement for certain of Meritor’s domestic, forged axle shafts beginning in 2017. The Company has also not renewed its business with Eaton. However, the Company continues to supply component parts to Sistemas Automotrices de Mexico, S.A de C.V. (“Sistemas”), Meritor’s joint venture in Mexico, and continues to supply axle shafts to Meritor’s Brazilian subsidiary. During the fourth quarter of 2018, the Company entered into a new three-year agreement to supply axle shafts, as well as a number of other product lines, to Sistemas for periods of up to six years from the commencement of production.

 

The oil and gas markets, served by our Tube Turns® brand of engineered product lines, have strengthened along with the overall economy, and domestic pipeline projects continue to be active with U.S. domestic gas and oil production increasing in 2018 and the first quarter of 2019.

 

We are pursuing new business in a wide variety of markets from light automotive to refrigeration valves to new energy related product lines to achieve a more balanced portfolio across our customers, markets and products. We have recently announced new program awards in each of these markets that have contributed to revenue growth for Sypris Technologies in 2018 and the first quarter of 2019. We believe these opportunities provide a solid multi-year foundation for growth and that additional prospective business may result in increased revenue going forward.

 

Sypris Electronics Outlook

 

In the past few years, we have faced challenges within Sypris Electronics, such as the uncertainty in the worldwide macroeconomic climate and its impact on aerospace and defense spending patterns globally over the last several years, as well as the emergence of new competitors to our manufacturing capabilities.

 

However, we have recently announced new program awards for Sypris Electronics that contributed to revenue in 2018, with certain programs continuing into 2019. In addition to program awards related to weapons systems, electronic warfare and infrared countermeasures in our traditional aerospace and defense markets, we have also been awarded programs related to the communication and navigation markets which align with our advanced capabilities for delivering products for complex, high cost of failure platforms. The National Defense Authorization Act for Fiscal Year 2019 provides nearly $700 billion in funding for the U.S. Department of Defense, which is expected to support program growth and market expansion for the remainder of 2019 for aerospace and defense participants. We expect to compete for follow-on business opportunities on future builds of several existing programs, as our competitiveness is enhanced by the reduction in our overhead structure following our relocation into a new manufacturing facility at the beginning of 2017.

 

 

In the near term, certain electronic component shortages and extensive lead-time issues are prevalent in many of the segments in the electronic manufacturing industry that we serve. This had a negative impact on our segment revenues and gross profit in the first quarter. We are working with our customers to qualify alternative components or suppliers to mitigate the impact on our business. We expect that these issues will be resolved for some component shortages in the next 6 to 9 months, but these and other shortages may persist as a challenge beyond 2019. The majority of our aerospace and defense programs require specific components that are sole-sourced to specific suppliers; therefore, the resolution of supplier constraints requires coordination with our customers or the end-users of the products. As a result, there can be no assurance that we will be successful in addressing these shortages and issues.

 

Strategic Actions

 

The Company completed a number of strategic actions during the past three years in response to the nonrenewal of its supply agreement with certain Tier I automotive customers primarily due to global pricing constraints, the downturn in the commercial vehicle market beginning in the fourth quarter of 2015 and other market and economic factors impacting the Company during this period. Strategic actions taken included: (i) the initiation of the exit of the Broadway Plant (see discussion below), (ii) the sale of the Company’s SioMetrics, Cyber Range, Information Security Solutions and Data Systems product lines (the “CSS business”) in 2016, (iii) the sale and leaseback of the Company’s facility in Toluca, Mexico in 2016, (iv) the sale of the Company’s manufacturing facility in Morganton, North Carolina in 2015, (v) the capacity reallocation of certain oil and gas industry components to Mexico, (vi) the relocation of its Sypris Electronics operation to a new facility, and (vii) reductions in employment costs through senior management pay reductions. Using a portion of the proceeds generated from asset sales noted above, the Company paid off all of its most senior, secured debt consisting of a “Term Loan” and “Revolving Credit Facility” in August 2016. During this period, the Company also received the benefit of cash infusions from Gill Family Capital Management, Inc. (“GFCM”) in the form of secured promissory note obligations totaling $6.5 million in principal, scheduled to mature in part in 2021, 2023 and 2025 (See Note 12 to the consolidated financial statements in this Form 10-Q).

 

The Company has reduced its reliance on certain of its traditional Tier 1 customers that represent the primary suppliers to the original equipment manufacturers (“OEMs”) in the commercial vehicle markets, while targeting to replace these customers with more diversified, longer-term relationships, especially among the OEMs and others who place a higher value on the Company’s innovation, flexibility and core commitment to lean manufacturing principles. Among the customer programs not being renewed were (i) a supply agreement with Meritor that expired on January 1, 2017 and (ii) the Company’s business with Eaton, both of which utilized production at the Company’s Broadway Plant. As a result of these decisions, the Company experienced a significant reduction in its commercial vehicle revenues in 2017 (See Note 8 to the consolidated financial statements in this Form 10-Q).

 

On February 21, 2017, the Board of Directors approved a modified exit or disposal plan with respect to the Broadway Plant, which was substantially complete as of the end of 2017. The Company has relocated certain assets from the Broadway Plant to other manufacturing facilities as needed to serve its existing and targeted customer base and identified underutilized or non-core assets for disposal. Management expects to use a portion of the proceeds from the sale of any underutilized or non-core assets to help fund costs of transferring any additional equipment from the Broadway Plant. Management is currently evaluating options for the real estate and any remaining assets in the Broadway Plant.

 

Our failure or inability to realize these key financial objectives could materially and adversely impair the Company’s ability to operate, its cash flows, financial condition and ongoing results.

 

 

Results of Operations

 

The table below compares our segment and consolidated results for the first quarter of 2019 to the first quarter of 2018. It presents the results for each period, the change in those results from 2018 to 2019 in both dollars and as a percentage, as well as the results for each period as a percentage of net revenue.

 

●

The first two columns in the table show the absolute results for each period presented.

 

●

The columns entitled “Year Over Year Change” and “Year Over Year Percentage Change” show the change in results, both in dollars and percentages. These two columns show favorable changes as positive and unfavorable changes as negative. For example, when our net revenue increases from one period to the next, that change is shown as a positive number in both columns. Conversely, when expenses increase from one period to the next, that change is shown as a negative number in both columns.

 

●

The last two columns in the table show the results for each period as a percentage of net revenue. In these two columns, the cost of sales and gross profit for each segment are given as a percentage of that segment’s net revenue. These amounts are shown in italics.

 

In addition, as used in the table, “NM” means “not meaningful.”

 

Three Months Ended March 31, 2019 Compared to Three Months Ended April 1, 2018

 

														Year Over
										Year Over				Year				Results as Percentage of
										Year				Percentage				Net Revenue for the Three
		Three Months Ended,								Change				Change				Months Ended
		March 31,				April 1,				Favorable				Favorable				March 31,				April 1,
		2019				2018				(Unfavorable)				(Unfavorable)				2019				2018
		(Restated)																(Restated)
		(in thousands, except percentage data)
Net revenue:
Sypris Technologies		$	16,141			$	14,507			$	1,634				11.3	%			82.5	%			72.7	%
Sypris Electronics			3,423				5,435				(2,012	)			(37.0	)			17.5				27.3
Total			19,564				19,942				(378	)			(1.9	)			100.0				100.0
Cost of sales:
Sypris Technologies			13,837				12,400				(1,437	)			(11.6	)			85.7				85.5
Sypris Electronics			4,867				5,511				644				11.7				142.2				101.4
Total			18,704				17,911				(793	)			(4.4	)			95.6				89.8
Gross profit (loss):
Sypris Technologies			2,304				2,107				197				9.3				14.3				14.5
Sypris Electronics			(1,444	)			(76	)			(1,368	)			(1,800.0	)			(42.2	)			(1.4	)
Total			860				2,031				(1,171	)			(57.7	)			4.4				10.2
Selling, general and administrative			3,454				3,148				(306	)			(9.7	)			17.6				15.8
Severance, relocation and other costs			98				509				411				80.7				0.5				2.6
Operating loss			(2,692	)			(1,626	)			(1,066	)			(65.6	)			(13.7	)			(8.2	)
Interest expense, net			217				213				(4	)			(1.9	)			1.1				1.1
Other expense (income), net			51				(84	)			(135	)			NM				0.3				(0.4	)
Loss before taxes			(2,960	)			(1,755	)			(1,205	)			(68.7	)			(15.1	)			(8.8	)
Income tax expense, net			76				40				(36	)			(90.0	)			0.4				0.2
Net loss		$	(3,036	)		$	(1,795	)		$	(1,241	)			(69.1	)			(15.5	)%			(9.0	)%

 

Net Revenue. Sypris Technologies primarily derives its revenue from the sale of forged and finished steel components and subassemblies and high-pressure closures and other fabricated products. Net revenue for Sypris Technologies increased 11.3%, or $1.6 million, for the first quarter of 2019 compared to the first quarter of 2018. The net revenue growth for the quarter was primarily attributable to increased sales volume of $1.6 million with customers in the commercial vehicle market. Additionally, price increases on one of our commercial vehicle programs implemented during the fourth quarter of 2018 resulted in an increase of $0.3 million for the three months ended March 31, 2019. The growth for the year was partially offset by a decline in energy related product sales of $0.3 million.

 

 

Sypris Electronics derives its revenue primarily from circuit card and full “box build” manufacturing, high reliability manufacturing and systems assembly and integration. Net revenue for Sypris Electronics decreased $2.0 million to $3.4 million in the first quarter of 2019 compared to $5.4 million in the first quarter of 2018. Revenue for the first quarter of 2019 was primarily affected by shortages of certain electronic components and extensive lead-time issues in the electronic manufacturing industry. The first quarter of 2019 was also impacted by shipments accelerated into the fourth quarter of 2018 as the Company planned for the implementation of a new ERP system effective in January.

 

Gross Profit. Sypris Technologies’ gross profit increased $0.2 million to $2.3 million in the first quarter of 2019 as compared to $2.1 million in the first quarter of 2018. The net increase in sales volume over the prior period resulted in higher gross profit of $0.2 million. Additionally, gross profit was positively impacted by a price increase on a commercial vehicle program implemented during the fourth quarter of 2018. These increases were partially offset by additional start-up costs on new programs including wage and fringe related costs.

 

Sypris Electronics’ gross profit decreased $1.3 million to a loss of $1.4 million in the first quarter of 2019 as compared to a loss of $0.1 million for the first quarter of 2018.  The decrease in gross profit was primarily as a result of lower volumes during the quarter, driving an increase in unabsorbed overhead.  Program mix also factored into the decrease, as the Company experienced declines on certain higher margin legacy programs.  The lower volumes on the legacy programs were partially offset by a new program which launched during 2018, which is still in the ramp-up phase and the margin performance is lower than what is expected after full run rates are achieved. 

 

Selling, General and Administrative. Selling, general and administrative expense increased $0.3 million to $3.5 million in the first quarter of 2019 as compared to $3.2 million for the same period in 2018 primarily as a result of higher employee medical insurance claim expenses during the period as compared to the prior year and consultation costs associated with the Company’s new ERP implementation effective in January.

 

Severance, Relocation and Other Costs. Severance, relocation and other costs were $0.1 million for the first quarter of 2019 as compared to $0.5 million for the first quarter of 2018. The charges for the first quarter of 2019 were primarily related to mothball costs associated with the closure of the Broadway plant. The charges for the first quarter of 2018 included $0.1 million in equipment relocation costs and $0.4 million in other costs primarily related to mothball costs associated with the closure of the Broadway plant.

 

Liquidity and Capital Resources

 

Gill Family Capital Management Note. The Company has received the benefit of cash infusions from GFCM in the form of secured promissory note obligations totaling $6.5 million in principal as of March 31, 2019 and December 31, 2018 (the “Note”). GFCM is an entity controlled by the Company’s chairman, president and chief executive officer, Jeffrey T. Gill and one of our directors, R. Scott Gill.  GFCM, Jeffrey T. Gill and R. Scott Gill are significant beneficial stockholders of the Company. As of March 31, 2019, our principal commitment under the Note was $2.5 million due on April 1, 2021, $2.0 million on April 1, 2023 and the balance on April 1, 2025.  The Note allows for up to an 18-month deferral of payment for up to 60% of the interest due on the notes maturing in April of 2021 and 2023, and provide for a first security interest in substantially all of the Company’s assets, including those in Mexico.

 

Finance Lease Obligations. On March 9, 2016, the Company completed the sale of its 24-acre Toluca property for 215 million Mexican Pesos, or approximately $12.2 million in U.S. dollars. Simultaneously, the Company entered into a ten-year lease of the 9 acres and buildings currently occupied by the Company and needed for its ongoing business in Toluca. As a result of the Toluca Sale-Leaseback, the Company has a capital lease obligation of $2.6 million for the building as of March 31, 2019.

 

In January 2018, the Company entered into a capital lease for $1.3 million for new production equipment installed at its Sypris Electronics facility during 2017. The balance of the lease obligation as of March 31, 2019 was $0.6 million.

 

In February 2019, the Company entered into a capital lease for $0.3 million for new machinery at its Sypris Technologies facility in the U.S. The balance of the lease obligation as of March 31, 2019 was $0.3 million.

 

Purchase Commitments. We had purchase commitments totaling approximately $9.8 million at March 31, 2019, primarily for inventory and manufacturing equipment.

 

 

Cash Balance. At March 31, 2019, we had approximately $5.7 million of cash and cash equivalents, of which $1.2 million was held in jurisdictions outside of the U.S. that, if repatriated, could result in withholding taxes.

 

We have projected that our cash and cash equivalents will be sufficient to allow us to continue operations for the next 12 months. Significant changes from our current forecasts, including, but not limited to: (i) meaningful shortfalls in projected revenue or sales proceeds from underutilized or non-core equipment, (ii) unexpected costs or expenses, and/or (iii) operating difficulties which cause unexpected delays in scheduled shipments, could require us to seek additional funding or force us to make further reductions in spending, extend payment terms with suppliers, liquidate assets where possible and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations and future prospects.

 

Cash Flows

 

Operating Activities. Net cash used in operating activities was $4.5 million in the first quarter of 2019, as compared to $0.6 million used in the same period of 2018.  The aggregate decrease in accounts receivable in 2019 resulted in a source of cash of $0.8 million.  The investment in inventory in 2019 resulted in a usage of cash of $2.6 million.  The increase in inventory primarily relates to the new program revenue growth for Sypris Electronics.  A significant portion of the inventory receipts were funded through prepayments from customers of Sypris Electronics in the second half of 2018.  Additionally, there was a decrease in accounts payable during the quarter, which resulted in a usage of cash of $1.2 million.  Accrued and other liabilities increased during the first quarter of 2019, resulting in a source of cash of $0.4 million, primarily as a result of additional prepayments from customers of Sypris Electronics.

 

Investing Activities. Net cash used in investing activities was $0.3 million for capital expenditures for the first quarter of 2019 as compared to neutral for the first quarter of 2018. Net cash used in investing activities for the first quarter of 2018 includes proceeds of $0.4 million from the sale of idle assets by Sypris Technologies during the period offset by capital expenditures of $0.4 million.

 

Financing Activities. Net cash used in financing activities was $0.2 million for the first quarter of 2019 and was comprised of capital lease payments of $0.1 million and payments of $0.1 million for minimum statutory tax withholdings on stock-based compensation. Net cash used in financing activities in the first quarter of 2018 was $0.4 million and was comprised of capital lease payments.

 

Critical Accounting Policies

 

See the information concerning our critical accounting policies included under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. There have been no significant changes in our critical accounting policies during the three months ended March 31, 2019, with the exception of leases. See Note 5, “Leases,” to the consolidated financial statements included in this Report.

 

Forward-looking Statements

 

This Form 10-Q/A, and our other oral or written communications, may contain “forward-looking” statements. These statements may include our expectations or projections about the future of our business, industries, business strategies, prospects, potential acquisitions, liquidity, financial condition or financial results and our views about developments beyond our control, including domestic or global economic conditions, government spending, industry trends and market developments. These statements, including those outlined in management’s recovery plan, are based on management’s views and assumptions at the time originally made, and, except as required by law, we undertake no obligation to update these statements, even if, for example, they remain available on our website after those views and assumptions have changed. There can be no assurance that our expectations, projections or views will come to pass, and undue reliance should not be placed on these forward-looking statements.

 

A number of significant factors could materially affect our specific business operations and cause our performance to differ materially from any future results projected or implied by our prior statements.  Many of these factors are identified in connection with the more specific descriptions contained throughout this report.  Other factors which could also materially affect such future results currently include: the quantitative effects of the restatement of our previously issued unaudited consolidated interim financial statements as of and for the quarter ended March 31, 2019; the effectiveness of our internal control over financial reporting and our disclosure controls and procedures; our failure to achieve targeted gains and cash proceeds from the anticipated sale of certain equipment; our failure to return to profitability on a timely basis by steadily increasing our revenues from profitable contracts with a diversified group of customers, which would cause us to continue to use existing cash resources or other assets to fund operating losses; dependence on, retention or recruitment of key employees; the cost, quality, timeliness, efficiency and yield of our operations and capital investments, including the impact of tariffs, product recalls or related liabilities, employee training, working capital, production schedules, cycle times, scrap rates, injuries, wages, overtime costs, freight or expediting costs; cost, quality and availability of raw materials such as steel, component parts (especially electronic components), natural gas or utilities; inventory valuation risks including excessive or obsolescent valuations or price erosions of raw materials or component parts on hand or other potential impairments, non-recoverability or write-offs of assets or deferred costs; other potential weaknesses in internal controls over financial reporting and enterprise risk management; disputes or litigation involving governmental, supplier, customer, employee, creditor, stockholder, product liability or environmental claims; the fees, costs and supply of, or access to, debt, equity capital, or other sources of liquidity; our reliance on a few key customers, third party vendors and sub-suppliers; continued shortages and extensive lead-times for electronic components; breakdowns, relocations or major repairs of machinery and equipment, especially in our Toluca Plant; our failure to successfully complete final contract negotiations with regard to our announced contract “orders”, “wins” or “awards”; volatility of our customers’ forecasts, scheduling demands and production levels which negatively impact our operational capacity and our effectiveness to integrate new customers or suppliers, and in turn cause increases in our inventory and working capital levels; the costs of compliance with our auditing, regulatory or contractual obligations; labor relations; strikes; union negotiations; pension valuation, health care or other benefit costs; our inability to patent or otherwise protect our inventions or other intellectual property from potential competitors; adverse impacts of new technologies or other competitive pressures which increase our costs or erode our margins; U.S. government spending on products and services that Sypris Electronics provides, including the timing of budgetary decisions; changes in licenses, security clearances, or other legal rights to operate, manage our work force or import and export as needed; risks of foreign operations; currency exchange rates; war, terrorism, or political uncertainty; cyber security threats and disruptions; failure to adequately insure or to identify environmental or other insurable risks; unanticipated or uninsured disasters, losses or business risks; inaccurate data about markets, customers or business conditions; or unknown risks and uncertainties and the risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

 

 

Item 3.     Quantitative and Qualitative Disclosures about Market Risk

 

We are a smaller reporting company as defined in Item 10(f)(1) of Regulation S-K and thus are not required to provide the quantitative and qualitative disclosures about market risk specified in Item 305 of Regulation S-K.

 

Item 4.     Controls and Procedures

 

(a)

Evaluation of disclosure controls and procedures.

 

We have established disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that information relating to the Company is accumulated and communicated to management, including our principal officers as appropriate to allow timely decisions regarding required disclosure. In connection with the Original Filing, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2019 and concluded that our disclosure controls and procedures were effective as of March 31, 2019. In connection with the filing of this Form 10-Q/A, our Chief Executive Officer and Chief Financial Officer re-evaluated the conclusions regarding the effectiveness of our disclosure controls and procedures and concluded that our disclosure controls and procedures were not effective as of March 31, 2019 due to material weaknesses in our internal control over financial reporting as described below.

 

As described in the Explanatory Note to this Form 10-Q/A, the Company identified misstatements in the previously-reported quarter ended March 31, 2019. The misstatements were the result of improperly designed controls around the implementation of a new ERP system at our Sypris Electronics segment effective January 1, 2019. Due to data entry processing errors that were made following this transition to the new ERP system, certain vendor invoices related to raw material inventory receipts in the first quarter of 2019 for the Sypris Electronics segment were incorrectly recorded in the second quarter of 2019. These errors resulted in an understatement of accounts payable and cost of sales as of and for the quarter ended March 31, 2019. 

 

In connection with the restatement of Company’s financial statements for the quarter ended March 31, 2019, the Company identified two material weaknesses in internal controls over financial reporting that arose from the new ERP system implementation. The two material weaknesses are:

 

●

The ineffective design and implementation of effective controls with respect to the ERP system transition. Specifically, we did not maintain adequate control over user access within the ERP system to restrict access to accounting period changes in the financial reporting modules.  Additionally, we did not exercise sufficient oversight over the ERP system transition, design effective controls over the ERP implementation to ensure appropriate data conversion and data integrity, or provide sufficient end user training to our employees to ensure that our employees could effectively operate the system and carry out their responsibilities.

●

Inadequate process level and monitoring controls in the area of accounting close and financial reporting. Specifically, we did not have appropriate controls around the review of account reconciliations, and related cut-off, and monitoring of the accounting close cycle.

 

The Audit Committee, the Board of Directors, and management are committed to maintaining a strong internal control environment.  As a result, the Company has been actively engaged in developing and implementing remediation plans to address the material weaknesses outlined above. The remediation efforts include the following:

 

●

User Access – We have restricted the ability of accounting personnel to modify data entry fields that relate to previously closed accounting periods for accounts payable processing.

●

Oversight – We have established a plan to address the control deficiencies arising from our ERP system conversions, including additional training for accounting personnel and a more formal review and documentation process around financial reporting.

●

Accounting Close and Financial Reporting – We have implemented additional analysis and review procedures related to the cost of goods sold variance accounts on a monthly basis and additional controls over the closing of accounting periods within the ERP system.  We have hired additional qualified personnel to assist management with its financial statement close process and to provide additional oversight of our financial reporting.

 

Management believes the foregoing remedial efforts will effectively remediate the material weaknesses, but the material weaknesses cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. As the Company continues to evaluate and work to improve its internal control over financial reporting, management may determine to take additional measures to address control deficiencies or determine to modify the remediation efforts described above.

 

(b)

Changes in internal controls.

 

Beginning January 1, 2019, we implemented the updated guidance on lease accounting.  In connection with the adoption of this standard, we implemented changes to our disclosure controls, procedures related to lease accounting as well as the associated control activities within. 

 

On January 1, 2019, we implemented an ERP system at Sypris Electronics. The implementation resulted in the two material weaknesses identified above. We believe we have developed an appropriate plan to remediate and have begun our remediation efforts related to the material weaknesses.

 

Other than the updates and remediation efforts described above, here were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

Part II.     Other Information

 

Item 1.     Legal Proceedings

 

We are involved from time to time in litigation and other legal or environmental proceedings incidental to our business. Neither we, nor any of our subsidiaries, are currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding currently threatened against us. 

 

Item 1A.  Risk Factors

 

Information regarding risk factors appears in Part I — Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements,” in this Form 10-Q/A, and in Part I — Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.  There have been no material changes during the fiscal quarter from the risk factors disclosed in our Annual Report on Form 10-K other than with respect to the risk factors discussed below.

 

Implementation of our new enterprise resource planning system has adversely impacted and could continue to negatively affect our business.

 

We rely extensively on our information technology (“IT”) systems to assist us in managing our business and summarizing our operational results. On January 1, 2019 we deployed a new ERP system at Sypris Electronics. The new ERP system was implemented to position the Company for long-term growth, further enhance operating efficiencies and provide more effective management of our business operations, including sales order processing, inventory control, purchasing and supply chain management, and financial reporting. Implementing the new ERP system has been costly and has required, and may continue to require, the investment of significant personnel and financial resources. In addition to the risks inherent in the conversion to any new IT system, including the loss of information, disruption to our normal operations, and changes in accounting procedures, the implementation of our new ERP system has resulted in reporting disruptions related to maintaining an effective internal control environment.

 

Failure to properly or adequately address any issues with our new ERP system could result in increased costs and the diversion of management’s and employees’ attention and resources and could materially adversely affect our operating results, internal control over financial reporting and ability to manage our business effectively. While the ERP system is intended to further improve and enhance our information management systems, the ongoing implementation of this new ERP system exposes us to the risks of integrating that system with our existing systems and processes, including possible continued disruption of our financial reporting.

 

We have identified two material weaknesses in our internal control over financial reporting which, if not remediated, could result in material misstatements of our financial statements.

 

We recently identified material weaknesses in internal control over financial reporting that pertain to our ERP system conversion that took place on January 1, 2019 involving (1) the ineffective design and implementation of effective controls with respect to the ERP system conversion, and (2) inadequate or ineffective process level and monitoring controls in the area of accounting close and financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

Although we have developed and are implementing a plan to remediate these material weaknesses and believe, based on our evaluation to date, that these material weaknesses will be remediated in a timely fashion, we cannot ensure that this will occur within a specific timeframe. These material weaknesses will not be remediated until all necessary internal controls have been implemented, tested and determined to be operating effectively. In addition, we may need to take additional measures to address the material weaknesses or modify the planned remediation steps, and we cannot be certain that the measures we have taken, and expect to take, to improve our internal controls will be sufficient to address the issues identified, to ensure that our internal controls are effective or to ensure that the identified material weaknesses will not result in an additional material misstatement of our financial statements. Moreover, we cannot ensure that we will not identify additional material weaknesses in our internal control over financial reporting in the future.

 

If we are unable to remediate the material weaknesses, our ability to record, process and report financial information accurately, and to prepare financial statements within the time periods specified by the rules and forms of the SEC, could be adversely affected. This failure could negatively affect the market price and trading liquidity of our common stock, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties and materially and adversely impact our business and financial condition.

 

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table summarizes the shares of common stock that were repurchased by the Company – all from its current or former employees – during the first quarter ended March 31, 2019 (dollars in thousands except per share data): 

 

										Total Number of				Maximum
		Total				Average				Shares Purchased				Dollar Value of Shares
		Number				Price				as a Part of				that May Yet Be
		of Shares				Paid per				Publicly Announced				Purchased Under the
Period		Purchased (a)				Share				Plans or Programs				Plans or Programs
1/1/2019 – 1/27/2019			43,979			$	1.12				—			$	—
1/28/2019 – 2/24/2019			—			$	—				—			$	—
2/25/2019 – 3/31/2019			—			$	—				—			$	—

 

(a)

The total number of shares purchased includes shares of stock withheld for the payment of withholding taxes upon the vesting of restricted stock. Common shares withheld to satisfy tax withholding obligations were immediately cancelled.

 

 

 

Item 3.

Defaults Upon Senior Securities

 

None.

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

Item 5.

Other Information

 

None.

 

Item 6.     Exhibits

 

Exhibit
Number		Description
31(i)-1		CEO certification pursuant to Section 302 of Sarbanes - Oxley Act of 2002.
31(i)-2		Principal Financial Officer certification pursuant to Section 302 of Sarbanes - Oxley Act of 2002.
32		CEO and Principal Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

				SYPRIS SOLUTIONS, INC
				(Registrant)
Date:	August 9, 2019		By:	/s/ Anthony C. Allen
				(Anthony C. Allen)
				Vice President & Chief Financial Officer
Date:	August 9, 2019		By:	/s/ Rebecca R. Eckert
				(Rebecca R. Eckert)
				Controller (Principal Accounting Officer)

 

26

Exhibit 31(i).1

 

 

CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002

 

 

 

I, Jeffrey T. Gill, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q/A of Sypris Solutions, Inc.;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.	The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

Date:	August 9, 2019		By:	/s/ Jeffrey T. Gill
				Jeffrey T. Gill
				President & Chief Executive Officer

 

Exhibit 31(i).2

 

 

CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002

 

 

 

I, Anthony C. Allen, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q/A of Sypris Solutions, Inc.;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.	The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

Date:	August 9, 2019		By:	/s/ Anthony C. Allen
				Anthony C. Allen
				Vice President & Chief Financial Officer

 

Exhibit 32

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

 

In connection with the Quarterly Report of Sypris Solutions, Inc. (the Company) on Form 10-Q/A for the period ending March 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the Report), each of the undersigned hereby certifies, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Sypris Solutions, Inc., that to his knowledge:

 

	(1)	The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and
	(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

Date:	August 9, 2019		By:	/s/ Jeffrey T. Gill
				Jeffrey T. Gill
				President & Chief Executive Officer
Date:	August 9, 2019		By:	/s/ Anthony C. Allen
				Anthony C. Allen
				Vice President & Chief Financial Officer

 

 

 

 

 

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Sypris Solutions, Inc. and will be retained by Sypris Solutions, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Form 10-Q/A and shall not be considered filed as part of the Form 10-Q/A.