CPS Technologies Corporation (CPSH) Q2 2018 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. My name Klose [ph] your operator for today. Thank you for standing by and welcome to the CPS Technology Second Quarter Investor Conference Call. [Operator Instructions] I will not hand over the conference to our speaker, Ralph Norwood, Chief Financial Officer. You may begin, please.

Thank you, operator, and good afternoon everyone. I’m joined on today’s call by Tom Breen, Our Senior Vice President for Sales and Marketing; and Grant Bennett, our CEO. Before we begin the business portion of the call, I would like to point out to all of you that the statements in this conference call that are not strictly historical are forward-looking statements within the meaning of the private securities litigation reform act of 1995 and should be considered as subject to the many uncertainties that exist in CPS’ operations and environment. These uncertainties include economic conditions, market demands, and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statement. Now, I would turn the call over to Grant to offer his perspectives on the results for the second quarter.

Thank you, Ralph and welcome to each of you. Thank you for joining our call. We're pleased to announce revenues of 5.2 million for the second quarter 2018, a 40% increase over revenues of the same period a year ago, and a 26% increase over first quarter 2018 revenues. Revenues in the second quarter were our highest quarterly revenues in over two years. The increase in revenues is a direct result of our growth strategy. In the last year, we've significantly increased our market share with existing customers, particularly with our European baseplate customers. And in addition, as we mentioned in our first quarter conference call, we're now supplying base plates, which have – which are nickel plated or coating of nickel plating rather than un-plated or raw base plates to all of our major customers. Let me comment on three elements of this strategy that effect margins. First, we have implemented more aggressive pricing. Second, as volume has increased, our working capital has increased in the form of rising accounts receivables and inventories. And third, we have been hiring aggressively, primarily direct labor and we've also been investing in our infrastructure. However, the negative impact on margins, we believe is very short-term. Our hiring has caught up with demand. So, we're looking forward we'll have much less over time. The cost of training new employees is starting to taper off and we have now built sufficient buffer inventories as requested by our customers to meet their short-term product mix fluctuations, so that we do not need to increase, but believe over time we can decrease these inventories. Although the increase in the second quarter in revenues is primarily driven by market share gains and base plates, we're also pleased with the progress we've made in other elements of our growth strategy, including market penetration of baseplate opportunities in Japan and China, increased business with U.S. electronics defense contractors, and our opportunities primarily in armor, but other industrial applications. We've mentioned for the past two years that we've had a sustained focus on increasing our business with U.S. electronics defense contractors. These programs tend to have a long design and sell cycle, but they also tend to run for many years and generally have attractive margins. We have booked several new U.S. defense electronics programs this year. We are finding that many of these programs are run from facilities on the West Coast. And on May 23, we issued a press release announcing the hiring of Gregg Weatherman, as a Senior Account Executive. Gregg lives in the Los Angeles area and he’ll significantly increase our in-person presence at our current and other potential West Coast customers. We may comment on armor a little later, but you'll find on our website two press releases, one in June, and one in July, relating to progress with our armor customers and armor programs. Let me just say, we're pleased with the progress in that product line as well. Let me turn the time back to Ralph for more details on the quarterly results.

Thank you, Grant. As Grant mentioned, revenues for the quarter totaled $5.2 million, up 40% from the second quarter a year ago. And this continued the trend from the first quarter, which was up 46% versus the first quarter of last year. In both cases, the increase was primarily due to the sale of baseplates to our European customers. And this reflects the strategy of capturing an increasing share of the business of our major customers. Gross margins for the quarter totaled 12% of revenues, up from 11% in the second quarter a year ago benefiting from the increase in sales volume offset in part by an increase in manufacturing support cost. Selling, general, and administrative cost totaled $931,000, just flat, compared with a year ago, but as most of you will remember, in the second quarter last year, we incurred about $100,000 of additional legal and related cost associated with a proxy contest. If it had not been for these one-time costs last year, SG&A spending would have been up 12% versus the same quarter a year ago. About half of this increase is due to sales commissions associated with higher revenues and the remaining increase was due to greater marketing spending. The company incurred an operating loss for the quarter of $326,000, which compares with an operating loss in the second quarter last year of $519,000. This improvement was due primarily to the increase in sales volume. Turning now to the balance sheet. We ended the quarter with cash of $418,000, but we also had borrowings on our line-of-credit of $900,000. During the quarter, we used cash of about $600000, split evenly between an increase in working capital, and funding for our operating losses. The increase in working capital was driven as Grant indicated by an increase in inventories required to support the growth of the top-line. The majority of the increase in inventories during the quarter were in the form of finished baseplates, plated and un-plated that were only weeks away from being shipped to customers and converted to receivables. Despite this increase, our inventory turnover remained high over six turns over the past year. Our receivables totaled at the end of the quarter $3.4 million, representing 59 days sales outstanding, consistent with historical trends. Our net plant property and equipment was down about $30,000 as depreciation exceeded capital expenditures by this small amount during the quarter. Finally, on the asset side, we ended June with $3.3 million of deferred taxes. This asset will shield us from paying taxes on the next $12 million to $15 million of pre-tax income. Turning to the liability side, payables and accruals in total amounted to $3 million, which is about 10% higher than the first quarter, due to again, increase in the business, and it does not represent any change in the aging of payables. At the end of the quarter, our current ratio was two times, and we had no long-term liabilities. At this time, operator we're ready to take some questions.

[Operator Instructions] Your first question comes from the line of Greg Weaver from Invicta Capital. Your may ask your question.

Hi, good afternoon. Couple of questions here. Mainly, around your gross margins. Could you talk a little bit about how that breaks down your cost of goods sold between like direct materials, direct labor, and overhead and what your utilization is currently?

Sure. Direct labor and materials would be between 55% and 60% depending on the market product involved. As far as factory overhead, if you will the support cost, important point there Greg is to note that we have increased that adding a third shift since the last year and added engineering support as well. That can support substantially higher numbers than we have today.

Right. That’s a pretty good chunk. So, I was trying to get a sense of how flat out your running at this kind of $5 million run rate, but you are saying there is still a lot of capacity to spread that 40% overhead?

That’s correct.

So, you produced a lot more than $5 million because you built inventory as well, right? So, all that inventory is loaded in at the same 11% margin?

Well it’s loaded in at standard cost. Plus, it will be substantial – if we had rolled out that inventory we will have higher margin than that. You know, we put the inventory into our cost.

At direct cost?

Sure. I mean, in the fact, if you added an extra 100 units, the factory overhead for the most part doesn’t change, it’s just the direct labor in material.

So, you expensed all the overhead normally. Dumped some of the overhead into the over-allotment into inventory, you know what I mean, if you overproduce, but you don't run it to the P&L?

Sure. Let me see if I can describe – respond directly to your question.

Just increases absorption, right?

Pardon me.

It would increase absorption by overproducing your revenue?

That’s correct. So that if we were to add an extra 100 units, they would have the variable caused and very little of the factory overhead. Because almost all of that is fixed.

Okay.

So, if you would add another 100 units, let’s say it is a $100 unit, the cost would be about $60 to $65 on that extra 100 units.

So, what’s your total output potential? Your revenue potential on a given quarter now, if you are running three shifts?

We’d have to obviously add direct label people, but we could, Grant, I'd say 50% higher, is that a reasonable number?

Yes. Obviously, without making a complex – it depends on the product makes there would be – depending on the product mix there would be various bottlenecks, but as a general answer from an equipment point-of-view, we certainly could increase by at least 50% over what we’re currently shipping. As these numbers aren't exactly correct, but the second shift is about half the size of the first shift and the third shift is about half the size of the second shift. There are some operations that it just makes tremendous sense to keep running 24 hours a day, but we could expand all three shifts, but in particular the second and third shift in the factory.

Greg, one way to look at this is, going from the first quarter to the second quarter this year, we added 1.1 million in revenue and about 450 million in gross margin. And that would be indicative of I think the growth that you're looking for.

Right.

Incremental. We would add 35% to 40% for every revenue dollar increase.

Okay. That’s helpful, right. Okay great. And then so in the current quarter, there is no – all the price cuts have already taken effect with what we see in this current quarter's revenue?

Yes. As a matter of fact, against last year, there were virtually no price changes. What we did is the extra business was on new products at lower than typical margins.

Okay. And just last question. And so, from an output perspective, mainly the inefficiencies were more in the labor side as opposed to scrap and rework?

That’s correct. We have hired a lot of people and there is obviously a several week training period where the new hire is largely in training rather than actually producing product. So, we're pretty much through that and that will manifest itself in significantly reduced over time.

Got you. Okay. Thank you for your answers. Appreciate it. Good luck.

Thank you.

Your next question comes from the line of Bill Chapman, a Private Investor. You may ask your question.

Thank you. Good afternoon guys. What kind of programs are guys involved in with the defense electronics area?

I’ll comment that some of them are black box programs and then turn the time over to Tom. Tom, do you want to comment?

So, thank you for the question Bill. So, we service that particular market segment through really two principal distribution channels. We do a considerable volume of business with high reliability component suppliers who take our product, buildup their black box, and then sell that in turn to defense contractors, principally in the United States. We do that, we leverage our reputation for the highest quality, and highest reliability products in the market segment and that’s allowed us to capture a large percentage of that business. But we also sell direct and work directly with the engineering design teams of virtually every major U.S. defense contractor and a number of defense contractors around the world for custom designs for - as Grant mentioned earlier, much higher margin lower volume opportunities for very sophisticated high-end products in radar, in microwave, and optical type applications. So, we approach that market segment through those two different channels.

Okay. How large of a market is this for you guys? In terms of revenue?

So, it is, as has been the case for a number of years, the highest percentage of our production volume is in the baseplates business, but very close behind that, and if I can do a Pareto chart would be defense and electronics. When you look at all of the different channels, if we roll them up underneath that broader category, it would be a strong number two?

Okay. Let me ask you on the, what do you anticipate getting meaningful revenue on the silicon carbide? Any thoughts on that please?

When you say silicon carbide, what are your referring to?

That would be like the [indiscernible] one of the companies you're working with?

Silicon carbide integrated circuit?

Yes.

Oh, okay. Let me – this is Grant speaking and then Tom let me have you jump in. So, in the motor controller power module business, the vast majority of integrated circuits today are silicon and European and Japanese producers really dominate that business, but silicon carbide integrated circuits run at a higher temperature and are more efficient. They are still significantly more expensive than silicon integrated circuits, but, there is kind of unanimity of opinion that they will accelerate their penetration and because they are more efficient, as their cost comes down we see that as a real growth area. And because they run at higher temperatures that’s good for us because the problem we address is the coefficient of thermal mismatch between the baseplate and the substrate in the module. What all that background we have very much focused on every major player getting in front of every major player, and getting our product into their development pipeline. So, here in the U.S. we have a very strong relationship with Cree and if you go to – they have put the silicon carbide dye [ph] and module business in a division called [indiscernible] and you go to their website, our base plate will be in. One or more of the products that they are advertising for sale. Likewise, in Europe, the major players who are doing work in this area and that’s primarily Infineon is a very important customer for us. So, the market is certainly growing and we are there, but we also want to say the prices are – can be three, the silicon carbide dye can be as much as three or four times as expensive as silicon. So that penetration is going to take a little bit of time.

Okay. Thanks a lot.

Thank you.

Your next question comes from the line of Fred Milligan, an Investor. You may ask your question.

Well congratulations guys, it seems like you are coming up pretty well. The Navy contract that be talked about in the past that’s held up by – not held up, but under study, is that, can you make any comments about it?

Sure. This is Tom Bree. Thank you for the question. We continue to support the U.S. Navy's successful sea trials for that integrated armor solution, which features over HybidTech Armor strike faces. And we're working very closely with the prime customers on executing a number of additional production transition tasks. Those sea trials continue without any issues and good very successful to date, but we do look at this opportunity representing a potential production revenue stream of perhaps $30 million over 10 years, if it is fully funded by the U.S. Navy. Timing of that is unknown to us at this point. Depending upon the Navy's cadence for completing the sea trials, but we remain quite bullish on the opportunity not just for that existing program, but it’s the potential to other maritime platforms not only in the U.S., but around the world.

These other potentials, do they contain things like $30 million over 10 years?

I will put it in context. The existing platform that we're working on is for aircraft carriers in the U.S. inventory, which brought 10 today, eleventh coming online shortly. Each of those carriers has 10 separate crew served weapons stations on them. So, if you were to take that existing customer and add to it just destroyers in the U.S. inventory who are also quite interested in the application. That starts to align with the numbers I just gave you as potential. That is a relatively tiny percentage of the total number of crew served weapons stations on platforms in the U.S. Navy, including the Coast Guard just in the U.S. And if you look even just on our closest allies because this is explore controlled, [indiscernible] controlled equipment. The rest of the world is substantially larger when you look at all those platforms together. So, that represents a relatively small, small percentage of the platforms available out there to take advantage of this technology.

This is just a new item, but rather doing items that have been in existence for some period of time, is that correct?

You can solve portions of this challenge for the Navy with just putting more and more role hardens feel on a ship. The problem is, it becomes too heavy and too bulky to move even with the type of equipment you can have on an aircraft carrier. What our technology offers is a much lighter weight solution with superior ballistic performance and then when you compare that to other lighter weight composite solutions, which tend to fall apart after just a year or two of being exposed to see water, this is viewed by the Navy as one of the best possible solutions for that particular application.

Very good. Okay, thanks a lot.

Thank you, Fred.

Your next question comes from the line of [indiscernible]. Your line is open. You may ask your question.

Just a soft of a blast from the past, whatever happened to the balls you are making for the fracking business, now that fracking is such a dynamic industry again?

Very good question. So, there are many, many, many different types of balls and our partner Parker Hannifin had come to us to develop with them and then manufacture for them a dissolvable ball that dissolved at a certain rate and in a certain type of oilfield. And the – what they tell us is that simply the markets moved to a different type of ball, primarily non-dissolvable and so that we have been disappointed that the demand is dwindle to 0.

Okay. Just second general question, I know you're not going to make a forecast, but now that revenues have recovered fairly sharply and the company is still not profitable is the path forward to profitability largely driven by, partly not profitable because of pricing, is it a function of more revenue, lower costs or better pricing? Obviously, some combination are up by definition will make you profitable. I'm just trying to understand as you look at things going forward, what is the most significant of those three and within a realistic expectation to get you to profitability?

Walker it’s Ralph, let me give you my comment, and I would add a fourth. The fourth being product mix. For example, the defense contractors in the U.S. we don’t compete with our largest competitor who is a Japanese company and we have higher margins from defense. So, as we increase that area as market share that will help us, but I would put them in the area of volume, one; pricing opportunities down the road, two; and cost reductions, three.

Okay. Thank you.

I would just say a few, Ralph commented on, as currently structured for every additional $1 in revenue maybe $0.35 to $0.40 would fall into gross margin and so you can do a calculation therefore what’s the revenue increase that would move us into profitability and again we don't give guidance, but the let me just say we do believe that the second half of the year revenues will be up, compared to the first half of this year, and you run those numbers, it would imply that profitability is coming very quickly.

Pardon me speakers. You have your next question, comes from the line of Mike Markowski from Overbrook Capital. You may ask your question.

Good afternoon guys. Good quarter. Couple of questions for you. Are you seeing any pricing pressure on the input side for raw materials? And secondly, are you seeing or is there anything out there regarding the tariffs that would impact your customers and all your dealings with China at this point?

The short answer is no to both questions. We do by a lot of aluminum. We happen to use the most common grade of aluminum that’s used for example in automobile engines and that comes from U.S. sources, certainly the tariffs have the potential to impact that, but so far, they haven't. And then, in terms of kind of retaliatory tariffs, we haven't seen those. You know, we do, it’s a little frustrating to me that we are charged an 8.5% import tariff to move product into China, but that’s been there for many years. It’s not new. In Europe, interestingly enough the products we make years ago where charged based on the harmonized tariff code, were charged tariff of about 2.5%, but the European Commission views the power module or the power electronics business as sufficiently strategic that literally the European commission itself voted to exempt components that go into power modules from tariffs. So, we don’t pay any tariffs importing our product into Europe.

Okay. Fair enough. So, something sounds like to keep your eye on, but nothing at this time?

Yes, absolutely, certainly could change even more than once a day.

And then my last question is, looking at the stock story now it certainly seems like, I don't know I'm not sure if you would consider a transformational period for you guys, but you’ve certainly turned a corner, any specific plans to market the story a little bit, maybe get out there in front of some new investors?

We’ve not finalized that decision Mike, but I think there is a good chance this fall that Grant and I would be coming to New York may be to participating in investor conference or two, but no decisions at this point.

Okay.

We have made at least one change in our corporate governance electing a Chairman, and we have also stepped up the pace at which we’re making announcements. Those who know us will know that we’re [indiscernible] and we tend to perform first and talk later, but – and we’re going to kind of stay in that mode, but we’re – we do feel we’re – there is more things that we can and will talk about as we go forward. So, I think you’ll see the pace this year in terms of press releases is significantly ahead maybe even twice the pace last year and at a minimum we’re going to keep up the current pace that we’re on.

All right. Sounds great. I would just throw my $0.02 [ph] in there just to make sure it’s newsworthy. There is a lot of companies out there that, you know they put stuff out there and you could tell it’s just a kind of fluff and plump and not a whole lot of substance to it. So, I think you guys are using the right approach and make sure that it’s got some material impact before putting anything out there?

Thank you for saying that. And we’re strong, we are strongly, yes, we’re not, if we say it we truly believe it’s important.

Yes, we’ve had a few investors in the past few years who’ve encouraged us to do more of the form that you described. We didn’t do it and they’ve left and probably good for the overall investor community.

Yes. I mean you make get some short-term benefit out of it, but in the long run it is going to hurt you more than it helps you. So, you put the news out there when it is there and if it is material then definitely put it out. I mean it is great to see, but just you have to be careful with it.

We agree.

Thanks, guys. Good job.

Thank you.

[Operator Instructions] Presenters we have your question. Comes from the line of Michael Stone, Homeland Security. Your line is open. You may ask your question.

Guys, congratulations on the increased sales for the quarter. A lot of the questions I'd thought of have been asked, I was wondering what happened with the year of patent litigation, are we seeing any benefit of that, as far as sales or customer increase?

Yes. So, this patent issue was in Japan where our competitors started that we were infringing one of their Japanese patents and it took several years to get a definitive ruling from the Japanese patent office that we were not infringing, but that ruling has been made and that issue is completely behind us. I want to be brief here, but really there are two very, very positive developments as a result of that ruling. One is that in Japan, the Japanese customers can now buy from us without the threat of being sued by our competitor and we’re absolutely making progress at all of the major players in Japan, primarily in the baseplate area. So that’s very positive. And then the – our competitor had used the fact that they had excluded us from Japan. Frankly they then kept prices relatively high there and reduced them significantly in Europe. And now we have the opportunity to enter the Japanese market prices worldwide we think are returning to a more rational basis, and so, we're just very glad that whole issue is behind us. I guess to say it in another way, it was a distortion in kind of free and open competition and we’re very delighted to be back into a mode where that competition is free and open and we are quite confident that we are the low-cost provider and let me just leave it at that.

Is there any ways of such a thing as a backlog of orders that we can use to project the next quarters revenues?

No. We don't really have the backlog per se, Michael, because if you take our big customers they respond to the demands that their customers require. And so, we have a good forecast from the major people that goes out probably as much as eight weeks, but it’s not a committed backlog and we’ve described that in our filings that we just don't think that’s a helpful situation.

Tom give us a few words about his sales approach and how we can accelerate that?

Say that again?

Could Tom give us an overview of some of his sales approach and how we can accelerate new customers and new products into our product line?

Sure. Thank you, Michael. I think what has been a theme over the last couple of conference calls and including in this one is Grant refers to our growth strategy, and it’s more than just a pricing strategy. We’ve been able to leverage our reputation and track record for quality product and on-time delivery, and customer service. And demonstrate to our customers in conjunction with pricing that’s market driven that is in their best interest to lock up multiple or multi-year sourcing and price agreements, which has a number of benefits for us. Certainly, a large percentage of the increase that you see right now that will continue is a result of that increase in market share we’ve been able to walk-up, but once we’re in that competitive advantages position, our ability to actually now execute and be responsive to customer demands opens up more doors for us. So that, as we look at the next round of product development within our customers, as well as follow-on orders for the existing products we have a significant advantage and are able to better control our own destiny and lock out the competition, all of which will contribute to increased sales revenue going forward.

At one time we were talking about for the Chinese rail plates, has anything happened in that area?

Yes. So, as I think you have a good appreciation for, we operate in market segments that have very long sales cycles on the automotive side. Typically, we are dealing with customers today for a product that doesn't go to market for 3, 5 to 7 years down the road and then has a 5 year to 9-year product supply cycle. Traction is not significantly different than that, but we are doing a considerable amount of work to essentially try and replicate our success in Europe over the past six months, but replicate that in China over this next 6 months to 12 months. And that starts with existing qualification – prototype and qualification contracts that we’ve received. It continues with a great deal of technical interchange and direct customer contract contacts. I will personally be have spent at least four trips to China this year along with Grant and Mark Occhionero, our Senior Vice President of Technical Sales. So, all of that both in China and in other countries in the Asia-Pacific region is trending very positively to have material benefits to us in 2019.

A little more direct, which is where – yes, we're going through the formal qualification cycle with the state-owned Chinese railway company with hundreds and hundreds of baseplates going through accelerated life testing et cetera. And everything is positive.

Thank you, gentlemen.

Your next question comes from the line of Lenny Dunn from Mutual Trust Company of America Securities. You may ask your questions.

Hi. This may be obvious, since you already put out your releases that are real and [indiscernible] and you're going to be putting out more and you have been putting out more of them, it sounds to me like your real business is getting much better, would you have any criticism with that statement?

This is just getting better.

I would agree entirely.

Okay. And the, so I mean I look forward to some more press releases because we're going to have real ones, which you have always done, and I agree completely that it should only be the – you just stay with the conservative way you’ve been doing it because anything else doesn't help long-term shareholders. The other – the peer like you have got the cross of employment under control now, so you are not saying it, if fact it sounds like we’re going to move in or a profitable third quarter and that is just, what I can include from everything you said. You've got most of the transition cost behind you. You built up inventory that’s going to flow through at much higher margins, so we should be looking forward to third quarter. Would you agree with that statement?

This is the conservative CFO speaking here, I’ll say that we expect the last half sales would be noticeably higher than the first half, and it’s pretty clear that once we clear 6 million a quarter, we will be in a profitable basis and I think that’s the position we will take. Hope that’s helpful?

Well, it’s helpful. It looks like it’s going to happen, but again you have to – you have always been conservative and I appreciate that. Thank you.

Speakers your last question comes from the line of [indiscernible] a Private Investor. You may ask your questions.

At this point, it would something terribly wrong if you came back with something that was negative in regards to sales and earnings, but I doubt that very much, but in any event, over the years we’ve been involved in something that had some promise in regard to electric cars, to space, whatever, it seems to me that you're missing out on that and yet it’s so potentially a rather big area or big areas. Any comments about it? Anything going on that we have hope for?

This is Grant speaking. So, we have had revenues of several millions of dollars each year for the last six or seven years from hybrid vehicle applications and we, as we look forward, we definitely, we will definitely continue to have and let me comment that most of those revenues are related to a generation of products, which is now coming later this year to end of life, but nonetheless, we have several programs with Tier 1 OEMs and we’re confident that some of them will proceed into volume production. So, we still view this as a real growth area. I guess my real comment that I want to make though is that I’ve used the words once or twice in the past that it is the Wild West that Tesla is doing something very different from Ford, it’s doing something very different from BMW, and Mercedes, and Toyota. And even within Toyota, if you look at all of the hybrid cars they are producing, almost each model has a different architecture in the power module. And so, we are one of many solutions and our solution we’re gaining a better understanding of where it generates real value and when it doesn't. So, we’re confident that we have some smaller volume production parts in production today. We happen to be in a couple of real high-end applications today, but we’re also being evaluated and considered and we’re in – our product is, we’re shipping prototypes frankly around the world for some high-volume next-generation applications. It’s just we don't have it until we have it. So, we're little cautious about talking about it. Still you want to comment on that Tom?

Yes, the reality is a lot of the work we are doing today in the EV space is at the front end of the development activity. We’ve had some very attractive long-term production relationships that will continue, but we see growth within that particular market segment in new designs that are being driven by a number of the key players in the market coming up with creative ways to manage their thermal challenges and it may not look exactly the same to us different form factors, different configuration, but we’re bullish about the long-term potential to maintain and hopefully grow our position within the commercial automotive EV space.

Okay. Glad to hear all this. Thank you very much.

Your next question comes from the line of Mike Hyde from Jefferies. You may ask your question.

Thanks. Hi all. Just one question to backtrack to China, and the question of volume production seems significant annual revenues in China, which we might see something you are indicating or hinting in 2019, my question is of course you have no partner as such right now if China, correct? It is not Siemens, Infineon or anyone else, it’s just you and the people you're talking to?

Yes. That’s correct. We do have – we have a company, which if you like is working with us as a sales agent, but we don't – we aren't partnered with any other industrial companies there. This would be, we would sell our product to our end customer who would incorporate it in a module.

And, of course I'm recalling a few years ago, when I believe it was you Grant who attended a Trade Show and then there was a missing box that didn't get shipped back, and then you suddenly discover on the Internet that, I forget the name of the Chinese outfit that said that they were selling your AlSiC and reporting they have some relationship with you or whatever, have you seen anything since then that you would call monkey business?

You’ve got a great memory and yes, we went to a Trade Show years ago in Shanghai and packaged up our samples ourselves, they never arrived in Boston, and pictures of them showed up on a start-up Chinese company. Who claimed they run the outfit business. The short answer is, although there has been a little bit of pictures and data sheets, we find some – in various Chinese forms we find that they don't have any qualms about using a data they get of our website, but we’ve made the decision that we’re simply not under any circumstances going to disclose key intellectual property. We’re simply shipping a product and we feel that that’s the way to go in China.

And then my last China question is, to get from hundreds of prototypes whether it’s baseplates or auto hybrid or whatever, switches or something related, is anybody else shipping hundreds of prototypes as we speak [indiscernible] of a Chinese manufacturer or anybody else? Are you the only outfit supplying hundreds of prototypes for this potential new business?

Every customer that’s in volume production use this component as strategic component where they want two sources of supply and around the world that’s typically us and Denka. And, that same situation exists in China, but let me just say there are a variety of reasons why China rail would prefer to deal with us and that’s a nice situation, but among those reasons are that as we’re very aware here in Boston, the Chinese state-owned railway company has a strategic objective to be the dominant player worldwide in high-speed rail, and the Boston subway system has bought $0.5 billion worth of new Red Line cars from them. Well, anyway their competition is, the Japanese railway producers, and so they would prefer to buy the components in this area from American and European companies rather than Japanese suppliers because they view buying from the Japanese suppliers is essentially strengthening their competition. So, it’s not determinative, but it is a piece of information that works to our favor.

It sounds like you think you might get a first crack at China rail and Denka would be second source?

Yes. And these are important details, but in China historically – China rail historically has bought the motor control modules from European and Japanese vendor's and as they themselves are, they have made their decision to get into this business and make them for themselves, and so they are just scaling up, and where they are – as they start to scale up. So, the demand that we see is not just a function of what share do we have, but it’s a function of how faster they are scaling up.

Thanks.

Thank you.

[Operator Instructions] Speakers, you have no questions at the moment. Please continue.

Thank you. We thank all of you for joining the call, and we extend our usual invitation to come visit us in Northern Massachusetts. It’s just by way of conclusion, we are very optimistic about the future. We see overall market conditions to be very positive. We see this underlying trend towards electrification in vehicles and industrial equipment, rebuilding the grid, all of those things to be positive developments that are increasing the demand for power modules. We also, where a year ago after Tom brings a rival, we took a Greenfield deep dive into our strategy and we’re now doing an update one year later, and our growth strategy is clear than it’s ever been. And it’s clear to us that in the market segments in which we’re participating, there are significant growth opportunities and we’re moving forward aggressively to realize those opportunities. So, we look forward to engaging with you in the future and believe that we’re on a trajectory that there will be quarter-to-quarter fluctuation. Of course, these programs begin to end, but fundamentally on a very positive trajectory. Thanks very much, and we look forward to speaking with you in three-months’ time.

Thank you. Goodbye.

We appreciate your participation. This completes today's conference call. Have a wonderful day everyone.