SYPRIS SOLUTIONS INC (Form: 10-Q, Received: 05/18/2016 10:33:08)

Item 1. Financial Statements

Sypris Solutions, Inc.

Consolidated Statements of Operations

(in thousands, except for per share data)

	Three Months Ended
	April 3,			April 5,
	2016			2015
	(Unaudited)
Net revenue:
Outsourced services	$	19,757		$	31,872
Products		7,181			5,137
Total net revenue		26,938			37,009
Cost of sales:
Outsourced services		20,977			35,786
Products		5,234			4,380
Total cost of sales		26,211			40,166
Gross profit (loss)		727			(3,157	)
Selling, general and administrative		6,503			9,118
Research and development		124			333
Severance		484			285
Operating loss		(6,384	)		(12,893	)
Interest expense, net		876			334
Other (income), net		(2,162	)		(179	)
Loss before taxes		(5,098	)		(13,048	)
Income tax expense (benefit), net		1			(15	)
Net loss	$	(5,099	)	$	(13,033	)
Loss per share:
Basic	$	(0.26	)	$	(0.66	)
Diluted	$	(0.26	)	$	(0.66	)

Weighted average shares outstanding:
Basic		19,702			19,650
Diluted		19,702			19,650
Dividends declared per common share	$	0.00		$	0.00

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

Sypris Solutions, Inc.

Consolidated Statements of Comprehensive (Loss) Income

(in thousands)

	Three Months Ended
	April 3,			April 5,
	2016			2015
	(Unaudited)
Net loss	$	(5,099	)	$	(13,033	)
Other comprehensive income:
Foreign currency translation adjustments, net of tax		(30	)		(658	)
Comprehensive loss	$	(5,129	)	$	(13,691	)

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

Sypris Solutions, Inc.

Consolidated Balance Sheets

(in thousands, except for share data)

	April 3,			December 31,
	2016			2015
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	2,306		$	1,349
Restricted cash – current		6,000			0
Accounts receivable, net		13,470			12,394
Inventory, net		20,795			20,192
Other current assets		3,410			4,459
Assets held for sale		0			3,230
Total current assets		45,981			41,624
Property, plant and equipment, net		24,158			22,178
Other assets		3,242			3,090
Total assets	$	73,381		$	66,892
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	10,276		$	11,311
Accrued liabilities		14,750			11,661
Revolving credit facility		2,581			2,132
Current portion of long-term debt and capital lease obligations		1,906			1,714
Total current liabilities		29,513			26,818
Long-term debt and capital lease obligations		11,208			8,780
Note payable – related party		6,500			5,500
Other liabilities		11,214			6,082
Total liabilities		58,435			47,180
Stockholders’ equity:
Preferred stock, par value $0.01 per share, 975,150 shares authorized; no shares issued		0			0
Series A preferred stock, par value $0.01 per share, 24,850 shares authorized; no shares issued		0			0
Common stock, non-voting, par value $0.01 per share, 10,000,000 shares authorized; no shares issued		0			0
Common stock, par value $0.01 per share, 30,000,000 shares authorized; 21,311,736 shares issued and 21,265,044 outstanding in 2016 and 20,826,236 shares issued and 20,776,544 outstanding in 2015		213			208
Additional paid-in capital		152,435			152,077
Retained deficit		(111,911	)		(106,812	)
Accumulated other comprehensive loss		(25,790	)		(25,760	)
Treasury stock, 46,692 and 49,692 shares in 2016 and 2015, respectively		(1	)		(1	)
Total stockholders’ equity		14,946			19,712
Total liabilities and stockholders’ equity	$	73,381		$	66,892

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

Sypris Solutions, Inc.

Consolidated Cash Flow Statements

(in thousands)

	Three Months Ended
	April 3,			April 5,
	2016			2015
	(Unaudited)
Cash flows from operating activities:
Net loss	$	(5,099	)	$	(13,033	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,953			2,180
Stock-based compensation expense		363			206
Deferred revenue recognized		0			(2,170	)
Deferred loan costs recognized		205			77
Gain on the sale of assets		(2,370	)		0
Provision for excess and obsolete inventory		25			82
Other noncash items		137			(183	)
Contributions to pension plans		0			(77	)
Changes in operating assets and liabilities:
Accounts receivable		(1,066	)		17,303
Inventory		(630	)		(1,047	)
Other current assets		423			(691	)
Accounts payable		(1,048	)		(7,046	)
Accrued and other liabilities		2,397			(916	)

Net cash used in operating activities		(4,710	)		(5,315	)

Cash flows from investing activities:
Capital expenditures, net		(40	)		(295	)
Proceeds from sale of assets		11,066			0
Change in restricted cash		(6,000	)		0

Net cash provided by (used in) investing activities		5,026			(295	)

Cash flows from financing activities:
Principal payments on Term Loan		(429	)		0
Proceeds from related party note payable		1,000			4,000
Net change in debt under New Revolving Credit Agreement		449			0
Net change in debt under Credit Facility		0			(1,051	)
Debt issuance and modification costs		(379	)		(440	)
Indirect repurchase of shares of minimum statutory tax withholdings		0			(77	)
Cash dividends paid		0			(410	)

Net cash provided by financing activities		641			2,022

Net increase (decrease) in cash and cash equivalents		957			(3,588	)

Cash and cash equivalents at beginning of period		1,349			7,003

Cash and cash equivalents at end of period	$	2,306		$	3,415

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

Sypris Solutions, Inc.

Notes to Consolidated Financial Statements

(1) Nature of Business

All references to “Sypris,” the “Company,” “we” or “our” include Sypris Solutions, Inc. and its wholly-owned subsidiaries. Sypris is a diversified provider of outsourced services and specialty products. The Company performs a wide range of manufacturing, engineering, design, and other technical services, often under multi-year, sole-source contracts with corporations and government agencies in the markets for truck components and assemblies and aerospace and defense electronics. The Company provides such services through its two segments, Sypris Technologies, Inc. (Sypris Technologies) and Sypris Electronics, LLC (Sypris Electronics). See Note 11, “Segment Data,” to the consolidated financial statements.

(2) Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Sypris Solutions, Inc. and its wholly-owned subsidiaries, and have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission. The Company’s operations are domiciled in the United States (U.S.), Mexico and the United Kingdom (U.K.) and serve a wide variety of domestic and international customers. All intercompany transactions and accounts have been eliminated. These unaudited consolidated financial statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to fairly state the results of operations, financial position and cash flows for the periods presented, and the disclosures herein are adequate to make the information presented not misleading. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Actual results for the three months ended April 3, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, and notes thereto, for the year ended December 31, 2015 as presented in the Company’s Annual Report on Form 10-K.

Certain prior period amounts have been reclassified to conform to the current period presentation.

(3) Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” This ASU supersedes the revenue recognition requirements in “Accounting Standard Codification 605 - Revenue Recognition” and most industry-specific guidance. The standard requires that entities recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. The new guidance will also require new disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 was originally effective for us on January 1, 2017; however, in July 2015 the FASB decided to defer the effective date by one year. Early application is not permitted, but reporting entities may choose to adopt the standard as of the original effective date. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently assessing the impact of the adoption of ASU 2014-09 on its results of operations, financial position and cash flows. The Company does not intend to early adopt this standard.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU 2015-03. In August 2015 the FASB issued ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. ASU 2015-15 was issued to address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements that were not found in ASU 2015-03. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. These standards are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, and should be applied retrospectively. Early adoption is permitted. The Company adopted this guidance January 1, 2016. As a result of adoption, debt issuance costs of $1,220,000 were reclassified from assets to reduce long-term-debt as of December 31, 2015 .

In July 2015, the FASB issued ASU No. 2015-11, which simplifies the subsequent measurement of inventory. It replaces the current lower of cost or market test with a lower of cost or net realizable value test. The standard is effective for public entities for annual reporting periods beginning after December 15, 2016, and interim periods therein. Early adoption is permitted. The new guidance must be applied prospectively. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This standard affects any entity that enters into a lease, with some specified scope exemptions. The guidance in this update supersedes FASB ASC 840, Leases. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently assessing the impact of adopting this ASU on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09) requiring an entity to record all excess tax benefits and tax deficiencies as an income tax benefit or expense in the income statement. ASU 2016-09 will also require an entity to elect an accounting policy to either estimate the number of forfeitures or account for forfeitures when they occur. ASU 2016-09 becomes effective for the Company during the first quarter 2017. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

(4) Management’s Recovery Plans

Given the Company’s loss of market share in commercial vehicle manufacturing in early 2015 due to the nonrenewal of a supply agreement with Dana Holding Corporation (“Dana”), and the recent unfavorable growth trends and softness in commercial vehicle manufacturing and the oil and gas markets served by the Company, management has developed various profit recovery and protection plans and is evaluating strategic alternatives to optimize asset values in each of the Company’s segments. Management has engaged advisors during various periods to provide recommendations for cost reductions and other actions that can be taken to improve profitability. Management prepared a revised forecast during March 2016 with plans to further reduce costs, optimize cash flow and remain in compliance with its debt covenant requirements throughout 2016. The Company completed a number of its profit recovery and protection actions during 2015 and the first quarter of 2016, including: (i) the sale of certain assets used in the Company’s manufacturing facility in Morganton, North Carolina within the Sypris Technologies segment, (ii) reductions in workforce at all locations, and (iii) other reductions in employment costs through reduced work schedules, senior management pay reductions, deferral of merit increases and certain benefit payments. The Company restructured its debt and has received the benefit of cash infusions from Gill Family Capital Management, Inc. (“GFCM’) in the form of subordinated promissory note obligations totaling $6,500,000 in principal through the first quarter of 2016.

Demand in the commercial vehicle industry has softened beginning in the fourth quarter of 2015 along with other durable and non-durable goods sectors in the North America economy. Management has identified additional cost reduction actions in the Sypris Technologies segment. Reductions in selling, general and administrative expense and labor expense were implemented during the first quarter of 2016, and additional cost reductions are planned during the second and third quarters. Although the expected benefits of the cost reductions will be partially offset by the impact of minor investments and severance required to enable the cost reductions, the actions are expected to contribute to improved liquidity during 2016.

Management has identified a number of new customer opportunities that are expected to provide higher gross margin opportunities, even at lower volumes. Management is implementing operational efficiencies that are expected to enable reductions in the machinery set-up time for new commercial vehicle orders which should enable the Company to quote on customer requirements that are higher margin but with somewhat shorter run lengths. These new business activities are anticipated to enable the Company to diversify its revenue sources over a larger and more profitable customer base.

One of the additional actions implemented by management during the first quarter of 2016 was to consummate the sale and partial lease back of its facility located in Toluca Mexico, which generated gross proceeds of approximately $12,182,000. Of these proceeds, $6,000,000 was deposited into a cash collateral account, to be held for up to one year as additional collateral for the Term Loan (see Note 10 “Debt”). Management will continue to operate in Toluca, but given the reduction in Sypris Technologies’ revenues in 2015 and the overall downturn in the commercial vehicle markets beginning in the fourth quarter of 2015, management determined that the underutilized Toluca real estate value could be better optimized with a sale and lease back arrangement where some but not all of the facility would continue to be occupied and managed by Sypris Technologies.

The oil and gas industry has experienced significant price erosion, and as a result the Company’s customers are delaying capital expenditures that support their growth and maintenance projects. The Company has identified some capacity reallocation opportunities between plants in the United States and Mexico. The Company has initiated the process of qualifying production for certain components in Mexico that are currently produced in the United States and completed the qualification for the first group of these components. The Company expects this capacity reallocation will accelerate during 2016 as the capital necessary to fund the reallocation becomes available and the qualification process for the production is complete.

Sypris Electronics has continued to invest in a number of product development projects. The Company was awarded a significant engineering services contract in the defense sector in March 2016. Nevertheless, the Company has identified certain cost reduction and cash flow enhancements in the Sypris Electronics segment that are targeted to be implemented during the second and third quarters of 2016, which are not expected to adversely impact the future growth in the Sypris Electronics segment.

Sypris Electronics has filed a number of patent applications for technology related to its new SiOMetrics ^TM hardware authentication solutions, which may enable the Company to address commercial markets for infrastructure and the Internet of Things (IoT). New commercial opportunities in automotive, industrial controls, communications, infrastructure, utilities, automation, aviation, retail, and personal communication devices could benefit from the technology that Sypris Electronics has patented or for which it has patents pending. Sypris Electronics now provides a platform of layered security protocols that will enable customers in a number of industries to tailor the security solutions to their individual requirements. Management has taken steps to diversify its product and service offerings in the Sypris Electronics segment. The Company intends to be less dependent upon the Defense markets and better positioned to take advantage of the rapidly growing commercial security and encryption markets going forward.

Management has identified certain cost reductions at the corporate headquarters that are expected to improve profitability and cash flow throughout 2016. Salary reductions and other SG&A cost reductions were implemented during the first quarter of 2016 that management believes will continue to benefit the Company throughout future periods. Additional cost reductions have been identified in the area of professional services, administration and lease expenses.

(5) Morganton Sale

On July 9, 2015, the Company entered into an asset purchase agreement (the “Agreement”) to sell certain assets used in the Company’s manufacturing facility in Morganton, North Carolina, to its largest customer, Meritor, Inc. (“Meritor”). The Company retained the Morganton plant’s axle shaft manufacturing lines and certain related assets, intellectual property and inventories, which were transitioned to the Company’s Louisville, Kentucky plant in October 2015. All other Morganton equipment, related assets and intellectual property were sold to Meritor (the “Morganton Sale”) for $10,500,000 in cash paid at the closing and other consideration. Meritor purchased related inventories and accounts receivable and assumed or released certain accounts payable and other accrued liabilities, for $2,000,000 (subject to customary post-closing adjustments to actual). Meritor also purchased the Morganton building and real estate for $3,200,000. The total proceeds received of $15,700,000, primarily in consideration for the Morganton sale, were used to pay down the Company’s prior senior secured debt. As a result of the Morganton sale, the Company recognized a gain of $7,744,000.

At closing, the parties also entered into an amendment to a secured promissory note with Meritor in an original principal amount of $3,047,000 (the “Meritor Note”) to increase the principal balance by $412,000, effective July 9, 2015. The parties also agreed to increase the Meritor Note by an additional $321,000 in September 2015 to reflect certain roof repairs required at the Morganton facility. The Company repaid the Meritor Note on October 30, 2015.

(6) Toluca Sale-Leaseback

On October 30, 2015, the Company entered into a non-binding letter of intent to sell and lease-back its property and buildings in Toluca, Mexico, which is part of the Sypris Technologies Group. As such, the Company concluded that the assets qualified for Assets Held for Sale accounting in accordance with ASC 205 as of December 31, 2015. The assets had a net book value of $3,230,000 as of December 31, 2015.

On March 9, 2016, Sypris Technologies Mexico, S. de R.L. de C.V. (“Seller”), a subsidiary of the Company, concluded its sale of the 24-acre Toluca property pursuant to an agreement with Promotora y Desarrolladora Pulso Inmobiliario, S.C. (together with its affiliates and assignees, “Buyer”) for 215,000,000 Mexican Pesos, or approximately $12,182,000 in U.S. currency. Simultaneously, the Seller and the Buyer entered a long-term lease of the 9 acres and buildings currently occupied by Seller and needed for its ongoing business in Toluca (collectively, the “Toluca Sale-Leaseback”). The Company incurred transaction related expenses of $1,116,000. The Company deposited $6,000,000 of the proceeds from the sale-leaseback into a Cash Collateral Account, to be held for up to one year as additional collateral for the Term Loan (see Note 10 “Debt” for further discussion on the Term Loan). This amount has been classified as restricted cash on the consolidated balance sheets as of April 3, 2016.

As a result of the Toluca Sale-Leaseback, the Company initially recorded a capital lease of $3,315,000, which is included in property plant and equipment. The Company recorded a gain on the sale of $2,370,000 during the three months ended April 3, 2016, which is included in other income, net in the consolidated income statement, and recorded a deferred gain of $5,537,000, which will be recognized over the ten year lease term. The Company’s base rent, which is denominated in U.S. currency, is $936,000 annually, adjusted based on U.S. CPI with certain cap conditions.

The following assets have been segregated and included in assets held for sale in the consolidated balance sheet as of December 31, 2015 (in thousands):

	December 31,
	2015
Land and land improvements	$	1,568
Buildings and building improvements		3,658
Accumulated depreciation		(1,996	)
Property, plant and equipment, net	$	3,230

(7) Loss Per Common Share

The Company computes earnings per share using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and participating securities. Restricted stock granted by the Company is considered a participating security since it contains a non-forfeitable right to dividends.

Our potentially dilutive securities include potential common shares related to our stock options and restricted stock. Diluted earnings per share considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. Diluted earnings per share excludes the impact of common shares related to our stock options in periods in which the option exercise price is greater than the average market price of our common stock for the period. For the three months ended April 3, 2016 and April 5, 2015, diluted weighted average common shares do not include the impact of any outstanding stock options and unvested compensation-related shares because the effect of these items on diluted net loss would be anti-dilutive.

A reconciliation of the weighted average shares outstanding used in the calculation of basic and diluted loss per common share is as follows (in thousands):

	Three Months Ended
	April 3,			April 5,
	2016			2015
	(Unaudited)
Loss attributable to stockholders:
Net loss as reported	$	(5,099	)	$	(13,033	)
Less distributed and undistributed earnings allocable to restricted awarded holders		0			0
Less dividends declared attributed to restricted awarded holders		0			0
Net loss allocable to common stockholders	$	(5,099	)	$	(13,033	)
Loss per common share attributable to stockholders:
Basic	$	(0.26	)	$	(0.66	)
Diluted	$	(0.26	)	$	(0.66	)
Weighted average shares outstanding – basic		19,702			19,650
Weighted average additional shares assuming conversion of potential common shares		0			0
Weighted average shares outstanding – diluted		19,702			19,650

(8) Inventory

Inventory consists of the following (in thousands):

	April 3,			December 31,
	2016			2015
	(Unaudited)
Raw materials	$	12,638		$	12,388
Work in process		10,718			10,366
Finished goods		3,060			3,167
Reserve for excess and obsolete inventory		(5,621	)		(5,729	)
	$	20,795		$	20,192

(9) Property, Plant and Equipment

Property, plant and equipment consists of the following (in thousands):

	April 3,			December 31,
	2016			2015
	(Unaudited)
Land and land improvements	$	219		$	219
Buildings and building improvements		18,305			18,305
Machinery, equipment, furniture and fixtures		127,135			123,935
Construction in progress		717			759
		146,376			143,218
Accumulated depreciation		(122,218	)		(121,040	)
	$	24,158		$	22,178

(10) Debt

Debt outstanding consists of the following (in thousands):

	April 3,			December 31,
	2016			2015
	(Unaudited)
Current:
Revolving Credit facility	$	2,581		$	2,132
Current portion of long term debt		1,714			1,714
Current portion of capital lease obligation		192			0
Current debt	$	4,487		$	3,846
Long Term:
Term loan	$	9,571		$	10,000
Note payable – related party		6,500			5,500
Capital lease obligation		3,123			0
Less unamortized debt issuance and modification costs		(1,486	)		(1,220	)
Long term debt net of unamortized debt costs	$	17,708		$	14,280

The Company adopted new accounting guidance effective January 1, 2016 which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct reduction of the carrying amount of the related debt. Upon adoption, the Company reclassified $1,220,000 from other assets to long-term debt to reflect this guidance in the comparable balance as of December 31, 2015.

Note Payable – Related Party

During 2015, the Company received the proceeds of subordinated indebtedness from GFCM in an amount of $5,500,000. On February 26, 2016, the Company further amended the GFCM note to increase the amount by $1,000,000 to $6,500,000. GFCM is an entity controlled by the Company’s 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. The promissory note bears interest at a rate of 8.00% per year. All principal and interest on the promissory note, as amended, will be due and payable on January 30, 2019.

Revolving Credit Facility and Term Loan

On October 30, 2015, the Company secured debt financing consisting of a $12,000,000 term loan (“Term Loan”) and a $15,000,000 revolving credit facility (“Revolving Credit Facility”). Proceeds from the two new financing arrangements (collectively the “Loan Agreements”) were used in part to repay the senior secured debt with a prior lender and the Meritor Note. Borrowing availability under the Revolving Credit Facility is determined by a weekly borrowing base collateral calculation that includes specified percentages of the value of eligible accounts receivable and inventory, less certain reserves and subject to certain other adjustments. Borrowing availability under the Term Loan is also evaluated using a separate borrowing base collateral calculation that includes designated percentages of real estate, machinery and equipment appraisals, in each case less certain reserves and subject to certain other adjustments. If the appraised value of such collateral causes the Term Loan borrowing base to fall below the then current Term Loan balance, the Company is required to make a partial prepayment of such difference and related fees.

On February 25, 2016, the Company entered into an amendment (the “Term Loan Amendment”) to the Term Loan and an amendment (the “Revolving Credit Amendment”) to the Revolving Credit Facility (together, the “Amendments”). The Amendments increased the Company’s borrowing capability under its Revolving Credit Facility and provided for an agreement on use of proceeds from the sale of its Toluca, Mexico property and buildings, as described below.

As a result of the Term Loan Amendment, the Company deposited $6,000,000 of the proceeds of the sale-leaseback of its Toluca, Mexico property and buildings (the “Toluca Sale-Leaseback”) into a Cash Collateral Account, to be held for up to one year as additional collateral for the Term Loan. Amounts deposited in the Cash Collateral Account that are subsequently used to pay down the principal of the Term Loan must be accompanied by an additional amount equal to the present value of the avoided interest associated with that principal payment. If the Company meets certain milestones as determined by the lender after its review of the Company’s revised business plan, up to $1,000,000 may be released from the Cash Collateral Account to the Company. The Term Loan Amendment also permitted the Company to retain the remaining balance of the proceeds from Toluca Sale-Leaseback, and increased the interest rate of the Term Loan by 1.0%.

In addition, under the Amendments, the Company’s minimum excess availability provision was reduced from $4,000,000 to $3,000,000. The lender further agreed to remove certain reserves which had been established against the Company’s “borrowing base.” These changes are estimated to provide the Company with $1,655,000 in additional borrowing capacity under the Revolving Credit Facility.

Based on the above mentioned calculation, at April 3, 2016, the Company had actual total borrowing base availability under the Revolving Credit Facility of $5,897,000 of which it had drawn $2,581,000, leaving $3,316,000 still available for borrowing, $3,000,000 of which was reserved for compliance with the minimum excess availability provisions of the Revolving Credit Facility. Along with an unrestricted cash balance of $2,306,000, the Company had total cash and available borrowing capacity of $2,622,000 as of April 3, 2016. Approximately $2,192,000 of this unrestricted cash balance related to the Company’s Mexican subsidiaries.

The Company’s obligations under each of the Revolving Credit Facility and the Term Loan, as amended, continue to be guaranteed by the Company’s U.S. subsidiaries and are secured by a first priority lien on substantially all assets of the Company and the guarantors.

The Loan Agreements, as amended, contain a number of customary representations and warranties, affirmative, negative and financial maintenance covenants, events of default and remedies upon default, including acceleration and rights to foreclose on the collateral securing each lender. If the Company’s borrowing availability under the Revolving Credit Facility falls below $3,000,000, the Company must maintain a fixed charge coverage ratio of at least 1 to 1, as measured on a trailing twelve months’ basis.

Non-compliance with the Company’s debt covenants would provide the debt holders with certain contractual rights, including the right to demand immediate repayment of all outstanding borrowings. Since the nonrenewal of Sypris Technologies’ supply agreement with Dana (see Note 4 “Management’s Recovery Plans”), the Company has also experienced negative cash flows from consolidated operations, which could hamper or materially increase the costs of the Company’s ability to comply with such covenants. The Company’s consolidated financial statements have been prepared assuming the ongoing realization of assets, satisfaction of liabilities and continuity of operations as a going concern in the ordinary course of business, but there can be no assurances that the Company’s current initiatives, forecasts and plans will ultimately succeed, which could materially and adversely impair the Company’s ability to operate, its cash flows, financial condition and ongoing results.

The classification of debt as of April 3, 2016 and December 31, 2015 considers debt outstanding under the Loan Agreements on a long-term basis. However, the Revolving Credit Facility allows the lender to establish certain reserves against the borrowing base which could, under certain circumstances, cause a potential event of default. Because such an event is not objectively measureable in advance and because the Company is required to maintain a lock-box arrangement, ASC 470-10-45 requires the otherwise long-term revolving advances to be classified as a current liability. As a result, all borrowings under the Revolving Credit Facility have been classified in the accompanying consolidated balance sheets as a current liability.

Capital Lease Obligation

On March 9, 2016, the Company completed the sale of its 24-acre Toluca property pursuant to an agreement with Promotora y Desarrolladora Pulso Inmobiliario, S.C. (together with its affiliates and assignees, “Buyer”) for 215,000,000 Mexican Pesos, or approximately $12,182,000 in U.S. currency. Simultaneously, the Company entered a long-term lease of the 9 acres and buildings currently occupied by the Company and needed for its ongoing business in Toluca (see Note 6 “Toluca Sale-Leaseback”). The Company incurred transaction related expenses of $1,116,000.

The Company recorded a gain on the sale of $2,370,000 during the three months ended April 3, 2016, which is included in other income, net in the consolidated income statement, and recorded a deferred gain of $5,537,000, which will be recognized over the ten year lease term. The Company’s base rent, which is denominated in U.S. currency, is $936,000 annually, adjusted based on U.S. CPI with certain cap conditions. As a result of the Toluca Sale-Leaseback, the Company initially recorded a capital lease obligation of $3,315,000 for the building.

The future minimum payments for capital leases as of April 3, 2016 are as follows (in thousands):

	Capital Lease
2016 (remaining 9 months)	$	396
2017		503
2018		549
2019		549
2020		503
Thereafter		2,834
Total future payments		5,334
Less: Amount representing interest		(2,019	)
Present value of future minimum payments		3,315
Less: Current portion		(192	)
Long term portion	$	3,123

(11) Segment Data

The Company is organized into two business groups, Sypris Technologies and Sypris Electronics. These segments are each managed separately because of the distinctions between the products, services, markets, customers, technologies and workforce skills of the segments. Sypris Technologies provides manufacturing services for a variety of customers that outsource forged and finished steel components and subassemblies. Sypris Technologies also manufactures high-pressure closures and other fabricated products. Sypris Electronics provides manufacturing and technical services as an outsourced service provider and manufactures complex data storage systems, trusted solutions for identity management, cryptographic key distribution and cyber analytics. There was no intersegment net revenue recognized in any of the periods presented.

The following table presents financial information for the reportable segments of the Company (in thousands):

	Three Months Ended
	April 3,			April 5,
	2016			2015
	(Unaudited)
Net revenue from unaffiliated customers:
Sypris Technologies	$	17,827		$	28,070
Sypris Electronics		9,111			8,939
	$	26,938		$	37,009
Gross profit (loss):
Sypris Technologies	$	(656	)	$	(4,104	)
Sypris Electronics		1,383			947
	$	727		$	(3,157	)
Operating loss:
Sypris Technologies	$	(2,974	)	$	(9,368	)
Sypris Electronics		(1,060	)		(1,590	)
General, corporate and other		(2,350	)		(1,935	)
	$	(6,384	)	$	(12,893	)

	April 3,		December 31,
	2016		2015
	(Unaudited)
Total assets:
Sypris Technologies	$	39,098	$	38,968
Sypris Electronics		24,547		23,845
General, corporate and other		9,736		4,079
	$	73,381	$	66,892

(12) Commitments and Contingencies

The provision for estimated warranty costs is recorded at the time of sale and periodically adjusted to reflect actual experience. The Company’s warranty liability, which is included in accrued liabilities in the accompanying balance sheets as of April 3 , 2016 and December 31, 2015 was $867,000 and $830,000, respectively. The Company’s warranty expense for the three months ended April 3, 2016 and April 5, 2015 was $37,000 and $64,000, respectively.

Additionally, the Company sells three and five-year extended warranties for certain link encryption products. The revenue from the extended warranties is deferred and recognized ratably over the contractual term. As of April 3, 2016 and December 31, 2015, the Company had deferred revenue of $413,000 and $495,000, respectively, related to extended warranties.

The Company bears insurance risk as a member of a group captive insurance entity for certain general liability, automobile and workers’ compensation insurance programs and a self-insured employee health program. The Company records estimated liabilities for its insurance programs based on information provided by the third-party plan administrators, historical claims experience, expected costs of claims incurred but not paid, and expected costs to settle unpaid claims. The Company monitors its estimated insurance-related liabilities on a quarterly basis. As facts change, it may become necessary to make adjustments that could be material to the Company’s consolidated results of operations and financial condition. The Company believes that its present insurance coverage and level of accrued liabilities are adequate.

The Company is involved in certain litigation and contract issues arising in the normal course of business. While the outcome of these matters cannot, at this time, be predicted in light of the uncertainties inherent therein, management does not expect that these matters will have a material adverse effect on the consolidated financial position or results of operations of the Company.

The Company has various current and previously-owned facilities subject to a variety of environmental regulations. The Company has received certain indemnifications either from companies previously owning these facilities or from purchasers of those facilities. As of April 3, 2016 and December 31, 2015, no amounts were accrued for any environmental matters.

As of April 3, 2016, the Company had outstanding purchase commitments of approximately $8,236,000, primarily for the acquisition of inventory and manufacturing equipment.

The Company accounts for loss contingencies in accordance with U.S. generally accepted accounting principles (GAAP). Estimated loss contingencies are accrued only if the loss is probable and the amount of the loss can be reasonably estimated. With respect to a particular loss contingency, it may be probable that a loss has occurred but the estimate of the loss is within a wide range or undeterminable. If the Company deems an amount within the range to be a better estimate than any other amount within the range, that amount will be accrued. However, if no amount within the range is a better estimate than any other amount, the minimum amount of the range is accrued.

During the fourth quarter of 2015, the Company gave notification regarding its intention to not renew the lease for its Tampa, FL facility, which will expire on December 31, 2016. During the first quarter of 2016, the Company entered into lease negotiations to extend the current lease for a smaller portion of the facility, but was unable to reach an agreement on the economics of a lease renewal with its current landlord. On May 3, 2016, the Company entered a lease for an alternative facility, which it expects to occupy upon the expiration of the current lease (see Note 17, “Subsequent Events”). The Company, Sypris Electronics and the landlord of the Tampa facility are currently involved in litigation over certain terms of the lease (see Item 1, “Legal Proceedings”). As such, it is reasonably possible that the Company may be required to make certain repairs to the current facility upon exit. The current estimate of the Company’s reasonably possible loss contingency is from no liability to $4,000,000. While the Company intends to vigorously dispute these claims, the Company accrued $500,000 during the three months ended April 3, 2016 related to its estimated potential obligation under the lease. This accrual is included in accrued liabilities in the Company’s consolidated balance sheet as of April 3, 2016.

(13) Income Taxes

The provision for income taxes includes federal, state, local and foreign taxes. The Company’s effective tax rate varies from period to period due to the proportion of foreign and domestic pre-tax income expected to be generated by the Company. The Company provides for income taxes for its domestic operations at a statutory rate of 35% and for its foreign operations at a statutory rate of 30% in 2016 and 2015. Reconciling items between the federal statutory rate and the effective tax rate also include the expected usage of federal net operating loss carryforwards, state income taxes, valuation allowances and certain other permanent differences.

The Company recognizes liabilities or assets for the deferred tax consequences of temporary differences between the tax bases of assets or liabilities and their reported amounts in the financial statements in accordance with ASC 740, Income Taxes . These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of assets or liabilities are recovered or settled. ASC 740 requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company evaluates its deferred tax position on a quarterly basis and valuation allowances are provided as necessary. During this evaluation, the Company reviews its forecast of income in conjunction with other positive and negative evidence surrounding the realizability of its deferred tax assets to determine if a valuation allowance is needed. Based on its current forecast, the Company has established a valuation allowance against the domestic net deferred tax asset. Until an appropriate level and characterization of profitability is attained, the Company expects to continue to maintain a valuation allowance on its net deferred tax assets related to future U.S. and non-U.S. tax benefits.

As of April 3, 2016 and December 31, 2015, the Company has no undistributed earnings of foreign subsidiaries that are classified as permanently reinvested. The Company did not repatriate any funds to the U.S. during 2015 and expects the repatriation of any available non-U.S. cash holdings during 2016 will be limited to the amount of undistributed earnings as of December 31, 2015. The loss recognized by the Company’s Mexican operations during 2015 and the first quarter of 2016 reduced the undistributed earnings of that entity and the Company has therefore recognized a deferred income tax benefit equal to the reduction in the U.S deferred tax liability and a corresponding increase in the deferred tax asset valuation allowance. Should the U.S. valuation allowance be released at some future date, the U.S. tax on foreign earnings not permanently reinvested might have a material effect on our effective tax rate.

(14) Employee Benefit Plans

Pension expense (benefit) consisted of the following (in thousands):

	Three Months Ended
	April 3,			April 5,
	2016			2015
	(Unaudited)
Service cost	$	3		$	4
Interest cost on projected benefit obligation		426			434
Net amortizations of actuarial loss		174			170
Expected return on plan assets		(496	)		(564	)
	$	107		$	44

(15) Accumulated Other Comprehensive Loss

The Company’s accumulated other comprehensive loss consists of employee benefit related adjustments and foreign currency translation adjustments.

Accumulated other comprehensive loss consisted of the following (in thousands):

	April 3,			December 31,
	2016			2015
	(Unaudited)
Foreign currency translation adjustments	$	(9,584	)	$	(9,554	)
Employee benefit related adjustments – U.S.		(16,177	)		(16,177	)
Employee benefit related adjustments – Mexico		(29	)		(29	)
Accumulated other comprehensive loss	$	(25,790	)	$	(25,760	)

(16) Fair Value of Financial Instruments

Cash, accounts receivable, accounts payable and accrued liabilities are reflected in the consolidated financial statements at their carrying amount which approximates fair value because of the short-term maturity of those instruments. The carrying amount of debt outstanding at April 3, 2016 under the Revolving Credit Facility and Term Loan approximates fair value, and is based upon a market approach (Level 2).

(17) Subsequent Events

On May 3, 2016, Sypris Electronics entered into an office and light manufacturing facility lease agreement (the “Lease”) to lease approximately 49,386 rentable square feet (the “Premises”) of a building beginning in January 2017. The base rent payments associated with the Lease will be approximately $7,131,000 over the 11 year term of the Lease, and the Company estimates that operating expenses owed to the landlord over the term of the Lease will be approximately $1,980,000. So long as Sypris Electronics is not in default of the Lease beyond any applicable notice and cure period, the base rent for months 1-24 will be abated by 50% and operating expenses will be abated 100% for months 1-6, and 50% for months 7-24. Additionally, Sypris Electronics’ obligations under the Lease have been guaranteed by the Company.

The Company has the right to extend the term of the Lease for five years, then the successive right to extend the term for an additional five years. Subject to certain terms and conditions, the Company also has the right to sublease, assign or transfer the Premises.

Delaware	61-1321992
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)

101 Bullitt Lane, Suite 450
Louisville, Kentucky 40222	(502) 329-2000
(Address of principal executive	(Registrant’s telephone number,
offices) (Zip code)	including area code)

Part I. Financial Information

	Item 1.	Financial Statements

		Consolidated Statements of Operations for the Three Months Ended April 3, 2016 and April 5, 2015	2

		Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended April 3, 2016 and April 5, 2015	3

		Consolidated Balance Sheets at April 3, 2016 and December 31, 2015	4

		Consolidated Cash Flow Statements for the Three Months Ended April 3, 2016 and April 5, 2015	5

		Notes to Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24

	Item 4.	Controls and Procedures	24

Part II. Other Information

	Item 1.	Legal Proceedings	25

	Item 1A.	Risk Factors	25

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25

	Item 3.	Defaults Upon Senior Securities	25

	Item 4.	Mine Safety Disclosures	25

	Item 5.	Other Information	25

	Item 6.	Exhibits	26

Signatures			27

										Year Over
							Year Over			Year			Results as Percentage of
							Year			Percentage			Net Revenue for the Three
	Three Months Ended,						Change			Change			Months Ended
	April 3,			April 5,			Favorable			Favorable			April 3,			April 5,
	2016			2015			(Unfavorable)			(Unfavorable)			2016			2015
	(in thousands, except percentage data)
Net revenue:
Sypris Technologies	$	17,827		$	28,070		$	(10,243	)		(36.5	)%		66.2	%		75.8	%
Sypris Electronics		9,111			8,939			172			1.9			33.8			24.2
Total		26,938			37,009			(10,071	)		(27.2	)		100.0			100.0

Cost of sales:
Sypris Technologies		18,483			32,174			13,691			42.6			103.7			114.6
Sypris Electronics		7,728			7,992			264			3.3			84.8			89.4
Total		26,211			40,166			13,955			34.7			97.3			108.5

Gross profit (loss):
Sypris Technologies		(656	)		(4,104	)		3,448			84.0			(3.7	)		(14.6	)
Sypris Electronics		1,383			947			436			46.0			15.2			10.6
Total		727			(3,157	)		3,884			NM			2.7			(8.5	)

Selling, general and administrative		6,503			9,118			2,615			28.7			24.1			24.6
Research and development		124			333			209			62.8			0.5			0.9
Severance		484			285			(199	)		(69.8	)		1.8			0.8
Operating loss		(6,384	)		(12,893	)		6,509			50.5			(23.7	)		(34.8	)

Interest expense, net		876			334			(542	)		(162.3	)		3.2			0.9
Other (income), net		(2,162	)		(179	)		1,983			NM			(8.0	)		(0.5	)

Loss before taxes		(5,098	)		(13,048	)		7,950			60.9			(18.9	)		(35.2	)
Income tax expense (benefit), net		1			(15	)		(16	)		NM			—			—

Net loss	$	(5,099	)	$	(13,033	)	$	7,934			60.9			(18.9	)%		(35.2	)%

Exhibit
Number	Description

10.1	First Amendment to Amended and Restated Loan and Security Agreement between Sypris Solutions, Inc. and Siena Lending Group LLC, dated February 25, 2016.

10.2	First Amendment to Loan and Security Agreement between Sypris Solutions, Inc. and Great Rock Capital Partners Management, LLC, dated February 25, 2016.

10.3	Amended and Restated Promissory Note, issued by Sypris Solutions, Inc. in favor of Gill Family Capital Management, dated February 25, 2016.

10.4	Lease agreement between Promotora y Desarrolladora Pulso Inmobiliario, S.C. and Sypris Technologies Mexico, S. de R.L. de C.V dated January 29, 2016.

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


		SYPRIS SOLUTIONS, INC.
		(Registrant)

Date: May 18, 2016	By:	/s/ Anthony C. Allen
		(Anthony C. Allen)
		Vice President & Chief Financial Officer




Date: May 18, 2016	By:	/s/ Rebecca R. Eckert
		Rebecca R. Eckert)
		Con troller (Principal Accounting Officer)


	Lender:

	SIENA LENDING GROUP LLC ,
	as servicer for affiliated assignee Siena Funding LLC


	By:	/s/ Jorge Chiluisa
		Jorge Chiluisa
		Authorized Signatory

	Borrowers :


	SYPRIS SOLUTIONS, INC.


	By:	/s/ Jeffrey T. Gill
		Name: Jeffrey T. Gill
		Its: President & CEO

	S YPRIS DATA SYSTEMS, INC.


	By:	/s/ Jeffrey T. Gill
		Name: Jeffrey T. Gill
		Its: Chairman of the Board

	SYPRIS DATA SYSTEMS, INC.


	By:	/s/ Jeffrey T. Gill
		Name: Jeffrey T. Gill
		Its: Chairman of the Board

	SYPRIS TECHNOLOGIES, INC.


	By:	/s/ Jeffrey T. Gill
		Name: Jeffrey T. Gill
		Its: Chairman of the Board and President

	SYPRIS TECHNOLOGIES NORTHERN, INC.


	By:	/s/ Jeffrey T. Gill
		Name: Jeffrey T. Gill
		Its: Chairman of the Board and President

	SYPRIS TECHNOLOGIES SOUTHERN, INC.


	By:	/s/ Jeffrey T. Gill
		Name: Jeffrey T. Gill
		Its: Chairman of the Board and President

	SYPRIS TECHNOLOGIES INTERNATIONAL, INC.


	By:	/s/ Jeffrey T. Gill
		Name: Jeffrey T. Gill
		Its: Chairman of the Board and President

	SYPRIS TECHNOLOGIES KENTON, INC.


	By:	/s/ Jeffrey T. Gill
		Name: Jeffrey T. Gill
		Its: Chairman of the Board and President


	By:	/s/ Steve Sanicola
		Steve Sanicola
		Authorized Signatory

	Agent:

	GREAT ROCK CAPITAL PARTNERS MANAGEMENT, LLC ,


	By:	/s/ Stuart Armstrong
		Stuart Armstrong
		Authorized Signatory

	SYPRIS TECHNOLOGIES MARION, LLC


	By:	/s/ Jeffrey T. Gill
		Name: Jeffrey T. Gill
		Its: Chairman of the Board and President

	SYPRIS TECHNOLOGIES MEXICAN HOLDINGS, LLC


	By:	/s/ Jeffrey T. Gill
		Name: Jeffrey T. Gill
		Its: Chairman of the Board and President

	Guarantors:

	SYPRIS TECHNOLOGIES TOLUCA, S.A. DE C.V.


	By:	/s/ Jeffrey T. Gill
		Name: Jeffrey T. Gill
		Its: President

	SYPRIS TECHNOLOGIES MÉXICO, S. DE R.L. DE C.V


	By:	/s/ Jeffrey T. Gill
		Name: Jeffrey T. Gill
		Its: President

	SYPRIS SOLUTIONS, INC.


	By:	/s/ Jeffrey T. Gill
		Name: Jeffrey T. Gill Its: President & CEO

	SYPRIS ELECTRONICS, LLC


	By:	/s/ Jeffrey T. Gill
		Name: Jeffrey T. Gill
		Its: Chairman of the Board

	S YPRIS TECHNOLOGIES KENTON, INC


	By:	/s/ Jeffrey T. Gill
		Name: Jeffrey T. Gill
		Its: Chairman of the Board & President

	Sypris Solutions, Inc. ,
	a Delaware corporation


	By:	/s/ Jeffrey T. Gill

	Title:	President &CEO

	Sypris Technologies, Inc. ,
	a Delaware corporation


	By:	/s/ Jeffrey T. Gill

	Title:	Chairman of the Board & President


	Sypris Electronics, LLC ,
	a Delaware limited liability company

	By:	/s/ Jeffrey T. Gill

	Title:	Chairman of the Board

	SYPRIS DATA SYSTEMS, INC. ,
	a Delaware corporation


	By:	/s/ Jeffrey T. Gill

	Title:	Chairman of the Board

	SYPRIS TECHNOLOGIES MARION, LLC ,
	a Delaware limited liability company


	By:	/s/ Jeffrey T. Gill

	Title:	Chairman of the Board & President

	SYPRIS TECHNOLOGIES KENTON, INC. ,
	a Delaware corporation


	By:	/s/ Jeffrey T. Gill

	Title:	Chairman of the Board & President

	SYPRIS TECHNOLOGIES MEXICAN
	HOLDINGS, LLC , a Delaware limited liability company


	By:	/s/ Jeffrey T. Gill

	Title:	Chairman of the Board & President

	SYPRIS TECHNOLOGIES NORTHERN, INC. ,
	a Delaware corporation


	By:	/s/ Jeffrey T. Gill

	Title:	Chairman of the Board & President

	SYPRIS TECHNOLOGIES SOUTHERN, INC. ,
	a Delaware corporation


	By:	/s/ Jeffrey T. Gill

	Title:	Chairman of the Board & President

	SYPRIS TECHNOLOGIES INTERNATIONAL,
	INC. , a Delaware corporation


	By:	/s/ Jeffrey T. Gill

	Title:	Chairman of the Board & President

		(the “Makers”)

Español	English
CONTRATO DE ARRENDAMIENTO	LEASE AGREEMENT
QUE CELEBRAN	ENTERED INTO BY AND BETWEEN
PROMOTORA Y DESARROLLADORA PULSO INMOBILIARIO, S.C.	PROMOTORA Y DESARROLLADORA PULSO INMOBILIARIO, S.C.
Y	AND
SYPRIS TECHNOLOGIES MÉXICO, S. DE R.L. DE C.V.	SYPRIS TECHNOLOGIES MÉXICO, S. DE R.L. DE C.V.
CONTRATO DE ARRENDAMIENTO (EL “ CONTRATO ”), QUE CELEBRAN POR UNA PARTE PROMOTORA Y DESARROLLADORA PULSO INMOBILIARIO, S.C., REPRESENTADA LEGALMENTE POR EL SEÑOR DAVID KAMKHAJI AMBE , (EL “ ARRENDADOR ”), Y POR LA OTRA PARTE SYPRIS TECHNOLOGIES MÉXICO, S. DE R.L. DE C.V., REPRESENTADA LEGALMENTE EN ÉSTE ACTO POR EL SEÑOR JOSÉ ANTONIO RODRÍGUEZ ESCOBAR (EL “ ARRENDATARIO ” ) Y SYPRIS TECHNOLOGIES INC, REPRESENTADA POR EL SEÑOR JOHN R. MCGEENEY (OBLIGADO SOLIDARIO Y CONJUNTAMENTE CON EL ARRENDADOR, Y EL ARRENDATARIO “ LAS PARTES ”), QUIENES SE SUJETAN AL TENOR DE LOS SIGUIENTES ANTECEDENTES, DECLARACIONES Y CLÁUSULAS:	LEASE AGREEMENT ( HEREINAFTER CALLED THE AGREEMENT ), ENTERED INTO BY AND BETWEEN PROMOTORA Y DESARROLLADORA PULSO INMOBILIARIO, S.C., LEGALLY REPRESENTED BY MR. MARTIN OLALDE GONZÁLEZ ( HEREINAFTER CALLED THE LANDLORD ) AND SYPRIS TECHNOLOGIES MÉXICO, S. DE R.L. DE C.V. LEGALLY REPRESENTED IN THIS ACT BY MR. JOSÉ ANTONIO RODRÍGUEZ ESCOBAR ( HEREINAFTER CALLED THE TENANT , AND SYPRIS TECHNOLOGIES IN C, REPRESENTED IN THIS ACT BY MR JOHN R. MCGEENEY (GUARANTOR AND, COLLECTIVELY WITH THE LANDLORD, AND TENANT THE PARTIES ), UNDER THE FOLLOWING BACKGROUND STATEMENT, RECITALS, AND CLAUSES:
ANTECEDENTES	BACKGROUND STATEMENT
Ú NICO . Con fecha 29 de enero de 2016, Promotora y Desarrolladora Pulso Inmobiliario, S.C. con el carácter de “Comprador” y Sypris Technologies México, S. de R.L. de C.V., con el carácter de “Vendedor”, celebraron un contrato de compraventa privado respecto del Inmueble ubicado en Av. Industrias Químicas número 200, Zona Industrial 50071, Toluca, Estado de México con una superficie aproximada de 98,681 m2 (noventa y ocho mil ciento cuarenta y nueve metros cuadrados).	SINGLE . On January 29, 2016, Promotora y Desarrolladora Pulso Inmobiliario, S.C. as the “Buyer” and Sypris Technologies México, S. de R.L. de C.V., as the “Seller”, signed a private purchase and sale agreement for the property located at Av. Industrias Químicas number 200, Zona Industrial 50071 Toluca, Estado de México with an area measuring approximately 98,681 m2 (ninety-eight thousand one hundred forty-nine square meters).
DECLARACIONES	REPRESENTATIONS
I. Declara el “ARRENDADOR”, de manera expresa y bajo protesta de decir verdad, que:	I. The LANDLORD expressly affirms that:

a. Es una sociedad legalmente constituida conforme a las leyes mexicanas mediante escritura pública número 46,148 de fecha 17 de marzo de 2005, pasada ante la fe del Notario Público número 11 del Distrito Federal, Licenciado Carlos Alejandro Durán Loera, debidamente inscrita ante el Registro Público de la Propiedad y del Comercio en el Distrito Federal bajo el folio mercantil número 76,217 de fecha 11 de octubre de 2006.	a. It is a business corporation duly incorporated under Mexican law according to public instrument number 46,148 granted as witnessed by Carlos Alejandro Durán Loera, Attorney at Law and Notary Public number 11 of the Federal District on March 17, 2005, and recorded in the Public Registry of Property and Commerce (Registro Público de la Propiedad y del Comercio) of the Federal District under commercial folio number 76,217 on October 11, 2006.
b. Está legalmente facultada para obligarse en los términos del presente Contrato, por así estar previsto en sus estatutos sociales.	b. It is legally authorized to bind itself to the terms of this Agreement, as established in the company's corporate bylaws.
c. Tiene facultades suficientes para celebrar el presente Contrato, según consta en la escritura pública número 17,380, de fecha 5 de febrero de 2009 otorgado ante la fe del Notario Público número 235, del Distrito Federal, el Licenciado Fernando Dávila Rebollar, facultades que al día de hoy no le han sido revocadas, ni limitadas de manera alguna.	c. It has sufficient power and authority to enter into this Agreement, as confirmed in public instrument number 17,380 granted as witnessed by Fernando Dávila Rebollar, Notary Public number 235 of the Federal District, on February 5, 2009, and that the powers it exercises have not been revoked, suspended or limited in any way.
d. Tiene su domicilio ubicado en la Av. Paseo de las Palmas número 239 piso 6, en la colonia Lomas de Chapultepec, delegación Miguel Hidalgo, código postal 11,000 en México, Distrito Federal	d. Its business address is Av. Paseo de las Palmas number 239 floor 6 in Colonia Lomas de Chapultepec, Delegación Miguel Hidalgo, 11000 in the Federal District.
e. Está inscrito ante la Secretaría de Hacienda y Crédito Público, con el Registro Federal de Contribuyentes número PDP050317728.	e. It is registered with the Ministry of Finance and Public Credit under Federal Taxpayer number PDP050317728.
f. Es su interés otorgar en arrendamiento al “ARRENDATARIO" en forma exclusiva, de conformidad con los lineamientos y términos establecidos en el presente Contrato, 36,783 m2 (treinta y seis mil setecientos ochenta y tres metros cuadrados) de la superficie total del inmueble descrito en el Antecedente Primero del presente documento, de los cuales, aproximadamente 20,000 m2 (veinte mil metros cuadrados) corresponden a la planta de manufactura y bodega y aproximadamente 16,000 m2 (dieciséis mil metros cuadrados) de terreno (en lo sucesivo el “Inmueble”).	f. It wants to lease to the TENANT exclusively, and in accordance with the guidelines and terms set forth in this Agreement, 36,783 m2 (thirty-six thousand seven hundred and eighty three square meters) of the total area of the property described in the Single Recital of this Agreement, of which approximately 20,000 m2 (twenty thousand square meters) correspond to the manufacturing plant and warehouse and approximately 16,000 m2 (sixteen thousand square meters) are vacant land (hereinafter called the “Property”).

g. (i) cuenta con las autorizaciones, facultades e instrucciones necesarias para la celebración del presente Contrato, ya sea corporativas, fiduciarias, contractuales, así como de cualquier autoridad o de cualquier otro tipo; (ii) la celebración de este Contrato no constituye ni genera incumplimiento alguno respecto a cualquier obligación con algún tercero; (iii) no se ha iniciado y no tiene conocimiento de que se pretenda iniciar procedimiento de cualquier índole que pueda afectar el cumplimiento del presente Contrato; (iv) no existe alguna acción, demanda, investigación o procedimiento administrativo, ya sea que se encuentre pendiente y no tiene conocimiento de que se pretenda iniciar uno de estos que pueda afectar al cumplimiento de las obligaciones asumidas en este Contrato; (v) no ha celebrado ni prometido celebrar contrato alguno por el cual pueda afectar las obligaciones asumidas en este Contrato; y (vi) no existe convenio, acción, litigio o procedimiento alguno en el que sea parte o que lo afecte o que pueda tener como consecuencias que no cumpla con sus obligaciones contraídas en los términos y condiciones establecidas en el presente Contrato.	g. (i) It has the authorizations, powers, and instructions required to sign this Agreement, including corporate, fiduciary, and contractual powers of attorney, and all authority of any other type; (ii) signing this Agreement does not constitute or generate breach of any third party obligation; (iii) no proceedings have been filed and it has no knowledge of any proceedings of any type that anyone might be planning to file that could affect compliance with this Agreement; (iv) there are no claims, complaints, investigations or administrative proceedings pending or knowledge of any procedure that may be filed in the future, that may affect the obligations assumed under this Agreement; (v) it has not entered into or promised to enter into any agreement which could affect the obligations stemming from this Agreement and (vi) there are no agreements, actions, lawsuits or proceedings involving or that could result in consequences that would lead to breach of his obligations assumed under the terms and conditions set forth in this Agreement.
II. Declara el “ARRENDATARIO”, de manera expresa y bajo protesta de decir verdad, que:	II. The TENANT expressly affirms that:
a. Es una sociedad legalmente constituida conforme a las leyes mexicanas mediante escritura pública número 18,114 de fecha 20 de Mayo de 2004 , pasada ante la fe del Lic. Ángel Gilberto Adame López , Notario Público número 233 del Distrito Federal, debidamente inscrita ante el Registro Público de la Propiedad y del Comercio del Estado de México bajo el folio mercantil: Libro Primero, Volumen 45, Partida 554 el 7 de Septiembre de 2004 .	a. It is a business corporation duly incorporated under Mexican law according to public instrument number 18,114 granted on May 20, 2004, as witnessed by Mr. Ángel Gilberto Adame López , Attorney at Law and Notary Public number 233 of Mexico City, and recorded in the Public Registry of Property and Commerce of the Federal District under commercial folio Book First, Volume 45, Issue 554 on September 7, 2004.
b. Está legalmente facultada para obligarse en los términos del presente Contrato, por así estar previsto sus estatutos sociales.	b. It is legally authorized to bind itself to the terms of this Agreement, as established in the company's corporate bylaws.
c. El representante legal tiene facultades suficientes para celebrar el presente Contrato, según consta en la escritura pública número 70,795, de fecha 3 de diciembre de 2015, otorgado ante la fe del Lic. Erik Namur Campesino número 94 del Distrito Federal.	c. Its legal representative has sufficient power and authority to enter into this Agreement, as confirmed in public instrument number 70,795 granted on December 3, 2015, as witnessed by Mr. Erik Namur Campesino, Attorney at Law and Notary Public number 94 of Mexico City.