[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Former Name, Former Address and Former Fiscal
Year if Changed since Last Report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period than the registrant was required to file such reports), and (2) has been subject to the filing requirements for
the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). [X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition
of “large accelerated filer,” “accelerated filer,” smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [X] Smaller reporting company [X] Emerging growth company[ ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act):
[ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable date. Number of shares of common stock outstanding as of October 29,
2019: 13,207,436.
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS (Unaudited)
CPS TECHNOLOGIES CORPORATION
Balance Sheets (Unaudited)
(continued on next page)
|
|
|
September 28,
|
|
|
|
December 29,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
470,284
|
|
|
$
|
628,804
|
|
Accounts receivable- trade, net of allowance for doubtful
|
|
|
|
|
|
|
|
|
accounts of $10,000
|
|
|
2,795,743
|
|
|
|
3,053,091
|
|
Inventories, net
|
|
|
2,791,111
|
|
|
|
3,192,933
|
|
Prepaid expenses and other current assets
|
|
|
173,320
|
|
|
|
156,338
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
6,230,458
|
|
|
|
7,031,166
|
|
|
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Production equipment
|
|
|
9,587,303
|
|
|
|
9,550,043
|
|
Furniture and office equipment
|
|
|
525,055
|
|
|
|
519,779
|
|
Leasehold improvements
|
|
|
891,817
|
|
|
|
891,817
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
11,004,175
|
|
|
|
10,961,639
|
|
Accumulated depreciation and amortization
|
|
|
(10,113,918)
|
|
|
|
(9,722,767)
|
|
Construction in progress
|
|
|
241,901
|
|
|
|
34,314
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
1,132,158
|
|
|
|
1,273,186
|
|
|
|
|
|
|
|
|
|
|
Right-of-use lease asset (note 4, leases)
|
|
|
207,000
|
|
|
|
—
|
|
Deferred taxes
|
|
|
186,747
|
|
|
|
186,747
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,756,363
|
|
|
$
|
8,491,099
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORPORATION
Balance Sheets (Unaudited)
(concluded)
LIABILITIES AND STOCKHOLDERS’
|
|
|
September 28,
|
|
|
|
December 29,
|
|
EQUITY
|
|
|
2019
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
|
412,732
|
|
|
|
—
|
|
Accounts payable
|
|
|
1,474,059
|
|
|
|
1,680,263
|
|
Accrued expenses
|
|
|
700,990
|
|
|
|
975,315
|
|
Current portion lease liability
|
|
|
148,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,735,781
|
|
|
|
2,655,578
|
|
|
|
|
|
|
|
|
|
|
Long term lease liability
|
|
|
59,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,794,781
|
|
|
|
2,655,578
|
|
Commitments (note 4)
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value,
|
|
|
|
|
|
|
|
|
authorized 20,000,000 shares;
|
|
|
|
|
|
|
|
|
issued 13,427,492 and 13,425,992;
|
|
|
|
|
|
|
|
|
outstanding 13,207,436 and 13,205,936;
|
|
|
|
|
|
|
|
|
at September 28, 2019 and December 29, 2018
|
|
|
134,275
|
|
|
|
134,260
|
|
Additional paid-in capital
|
|
|
36,076,177
|
|
|
|
35,960,545
|
|
Accumulated deficit
|
|
|
(30,731,817)
|
|
|
|
(29,742,231)
|
|
Less cost of 220,056 common shares repurchased
|
|
|
|
|
|
|
|
|
at September 28, 2019 and December 29, 2018
|
|
|
(517,053)
|
|
|
|
(517,053)
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
4,961,582
|
|
|
|
5,835,521
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’
|
|
|
|
|
|
|
|
|
equity
|
|
$
|
7,756,363
|
|
|
$
|
8,491,099
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORPORATION
Statements of Operations (Unaudited)
|
|
|
Fiscal Quarters Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 28,
|
|
|
|
September 29,
|
|
|
|
September 28,
|
|
|
|
September 29,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
2019
|
|
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
4,387,125
|
|
|
$
|
6,116,448
|
|
|
$
|
16,023,615
|
|
|
$
|
15,500,173
|
|
Total Revenues
|
|
|
4,387,125
|
|
|
|
6,116,448
|
|
|
|
16,023,615
|
|
|
|
15,500,173
|
|
Cost of product sales
|
|
|
4,164,187
|
|
|
|
5,152,598
|
|
|
|
14,466,266
|
|
|
|
13,786,762
|
|
Gross Margin
|
|
|
222,938
|
|
|
|
963,850
|
|
|
|
1,557,349
|
|
|
|
1,713,411
|
|
Selling, general and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative expense
|
|
|
702,413
|
|
|
|
982,765
|
|
|
|
2,523,178
|
|
|
|
2,822,240
|
|
Operating loss
|
|
|
(479,475)
|
|
|
|
(18,915)
|
|
|
|
(965,829)
|
|
|
|
(1,108,829)
|
|
Interest income (expense), net
|
|
|
(16,495)
|
|
|
|
(13,679)
|
|
|
|
(23,757)
|
|
|
|
(25,313)
|
|
Other income
|
|
|
—
|
|
|
|
13,645
|
|
|
|
—
|
|
|
|
13,645
|
|
Net loss before income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax expense
|
|
|
(495,970)
|
|
|
|
(18,949)
|
|
|
|
(989,586)
|
|
|
|
(1,120,497)
|
|
Income tax (benefit)
|
|
|
—
|
|
|
|
(5,000)
|
|
|
|
—
|
|
|
|
(275,000)
|
|
Net (loss)
|
|
$
|
(495,970)
|
|
|
$
|
(13,949)
|
|
|
$
|
(989,586)
|
|
|
$
|
(845,497)
|
|
Net (loss) per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic common share
|
|
$
|
(0.04)
|
|
|
$
|
(0.00)
|
|
|
$
|
(0.07)
|
|
|
$
|
(0.06)
|
|
Weighted average number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
13,206,069
|
|
|
|
13,203,436
|
|
|
|
13,206,984
|
|
|
|
13,203,436
|
|
Net (loss) per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted common share
|
|
$
|
(0.04)
|
|
|
$
|
(0.00)
|
|
|
$
|
(0.07)
|
|
|
$
|
(0.06)
|
|
Weighted average number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
13,206,069
|
|
|
|
13,203,436
|
|
|
|
13,206,984
|
|
|
|
13,203,436
|
|
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORPORATION
STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 28, 2019 AND SEPTEMBER 29, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
shares
|
|
|
|
Par
|
|
|
|
paid-in
|
|
|
|
Accumulated
|
|
|
|
Stock
|
|
|
stockholders'
|
|
|
|
|
issued
|
|
|
|
Value
|
|
|
|
capital
|
|
|
|
deficit
|
|
|
|
repurchased
|
|
|
equity
|
|
Balance at June 29, 2019
|
|
|
13,427,492
|
|
|
$
|
134,275
|
|
|
$
|
36,048,177
|
|
|
|
(30,235,846)
|
|
|
|
(517,053)
|
|
|
5,429,553
|
|
Share-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
28,000
|
|
|
|
—
|
|
|
|
—
|
|
|
28,000
|
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(495,971)
|
|
|
|
—
|
|
|
(495,971)
|
|
Balance at September 28, 2019
|
|
|
13,427,492
|
|
|
|
134,275
|
|
|
|
36,076,177
|
|
|
|
(30,731,817)
|
|
|
|
(517,053)
|
|
|
4,961,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
shares
|
|
|
|
Par
|
|
|
|
paid-in
|
|
|
|
Accumulated
|
|
|
|
Stock
|
|
|
|
stockholders'
|
|
|
|
|
issued
|
|
|
|
Value
|
|
|
|
capital
|
|
|
|
deficit
|
|
|
|
repurchased
|
|
|
|
equity
|
|
Balance at December 29, 2018
|
|
|
13,425,992
|
|
|
$
|
134,260
|
|
|
$
|
35,960,545
|
|
|
|
(29,742,231)
|
|
|
|
(517,053)
|
|
|
|
5,835,521
|
|
Share-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
113,397
|
|
|
|
—
|
|
|
|
—
|
|
|
|
113,397
|
|
Issuance of common stock
|
|
|
1,500
|
|
|
|
15
|
|
|
|
2,235
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,250
|
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(989,586)
|
|
|
|
—
|
|
|
|
(989,586)
|
|
Balance at September 28, 2019
|
|
|
13,427,492
|
|
|
|
134,275
|
|
|
|
36,076,177
|
|
|
|
(30,731,817)
|
|
|
|
(517,053)
|
|
|
|
4,961,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
shares
|
|
|
|
Par
|
|
|
|
paid-in
|
|
|
|
Accumulated
|
|
|
|
Stock
|
|
|
|
stockholders'
|
|
|
|
|
issued
|
|
|
|
Value
|
|
|
|
capital
|
|
|
|
deficit
|
|
|
|
repurchased
|
|
|
|
equity
|
|
Balance at June 30, 2018
|
|
|
13,423,492
|
|
|
$
|
134,235
|
|
|
$
|
35,842,945
|
|
|
|
(26,867,812)
|
|
|
|
(517,053)
|
|
|
|
8,592,315
|
|
Share-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
32,669
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,669
|
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,949)
|
|
|
|
—
|
|
|
|
(13,949)
|
|
Balance at September 29, 2018
|
|
|
13,423,492
|
|
|
|
134,235
|
|
|
|
35,875,614
|
|
|
|
(26,881,761)
|
|
|
|
(517,053)
|
|
|
|
8,611,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
shares
|
|
|
|
Par
|
|
|
|
paid-in
|
|
|
|
Accumulated
|
|
|
|
Stock
|
|
|
|
stockholders'
|
|
|
|
|
issued
|
|
|
|
Value
|
|
|
|
capital
|
|
|
|
deficit
|
|
|
|
repurchased
|
|
|
|
equity
|
|
Balance at December 30, 2017
|
|
|
13,423,492
|
|
|
$
|
134,235
|
|
|
$
|
35,739,916
|
|
|
|
(26,036,264)
|
|
|
|
(517,053)
|
|
|
|
9,320,834
|
|
Share-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
135,698
|
|
|
|
—
|
|
|
|
—
|
|
|
|
135,698
|
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(845,497)
|
|
|
|
—
|
|
|
|
(845,497)
|
|
Balance at September 29, 2018
|
|
|
13,423,492
|
|
|
|
134,235
|
|
|
|
35,875,614
|
|
|
|
(26,881,761)
|
|
|
|
(517,053)
|
|
|
|
8,611,035
|
|
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORPORATION
Statements of Cash Flows (Unaudited)
|
|
Nine
Month Periods Ended
|
|
|
|
|
September 28,
|
|
|
|
September 29,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(989,586)
|
|
|
$
|
(845,497)
|
|
Adjustments to reconcile net loss
|
|
|
|
|
|
|
|
|
to cash provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
Depreciation & amortization
|
|
|
391,156
|
|
|
|
411,499
|
|
Share-based compensation
|
|
|
115,647
|
|
|
|
135,698
|
|
Deferred taxes
|
|
|
—
|
|
|
|
(275,000)
|
|
Gain on sale of property and equipment
|
|
|
—
|
|
|
|
(13,645)
|
|
|
|
|
|
|
|
|
|
|
Changes in:
|
|
|
|
|
|
|
|
|
Accounts receivable-trade
|
|
|
257,348
|
|
|
|
(958,744)
|
|
Inventories
|
|
|
401,822
|
|
|
|
(1,461,763)
|
|
Prepaid expenses
|
|
|
(16,982)
|
|
|
|
(7,907)
|
|
Accounts payable
|
|
|
(206,204)
|
|
|
|
1,046,607
|
|
Deferred revenue
|
|
|
—
|
|
|
|
(100,000)
|
|
Accrued expenses
|
|
|
(274,325)
|
|
|
|
247,087
|
|
Net cash provided by (used in) operating
|
|
|
|
|
|
|
|
|
activities
|
|
|
(321,124)
|
|
|
|
(1,821,665)
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(250,128)
|
|
|
|
(343,576)
|
|
Proceeds from sale of property and equipment
|
|
|
—
|
|
|
|
13,645
|
|
Net cash provided by (used in) investing
|
|
|
|
|
|
|
|
|
activities
|
|
|
(250,128)
|
|
|
|
(329,931)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net borrowings on line of credit
|
|
|
412,732
|
|
|
|
900,000
|
|
Net cash provided by (used in)
|
|
|
|
|
|
|
|
|
financing activities
|
|
|
412,732
|
|
|
|
900,000
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(158,520)
|
|
|
|
(1,251,596)
|
|
Cash and cash equivalents at beginning of period
|
|
|
628,804
|
|
|
|
1,339,572
|
|
Cash and cash equivalents at end of period
|
|
$
|
470,284
|
|
|
$
|
87,976
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for taxes, net of refunds
|
|
$
|
485
|
|
|
$
|
486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORPORATION
Notes to Financial Statements
(Unaudited)
(1) Nature of Business
CPS Technologies Corporation (the “Company”
or “CPS”) provides advanced material solutions to the electronics, power generation, automotive and other industries.
The Company’s primary advanced material solution is metal-matrix composites which are a combination of metal and ceramic.
CPS also assembles housings
and packages for hybrid circuits. These housings and packages may include components made of metal-matrix composites or they may
include components made of more traditional materials such as aluminum, copper-tungsten, etc.
The Company sells into
several end markets including the wireless communications infrastructure market, high-performance microprocessor market, motor
controller market, and other microelectronic and structural markets.
(2) Interim Financial Statements
As permitted by the rules of the Securities and
Exchange Commission applicable to quarterly reports on Form 10-Q, these notes are condensed and do not contain all disclosures
required by generally accepted accounting principles.
The accompanying financial statements are unaudited.
In the opinion of management, the unaudited financial statements of CPS reflect all normal recurring adjustments which are necessary
to present fairly the financial position and results of operations for such periods.
The Company’s balance
sheet at December 29, 2018 has been derived from the audited financial statements at that date, but does not include all of the
information and footnotes required by accounting principles generally accepted in the United States of America for complete financial
statements.
For further information,
refer to the financial statements and footnotes thereto included in the Registrant’s Annual Report on Form 10-K for the year
ended December 29, 2018 and in CPS’s other SEC reports, which are accessible on the SEC’s website at www.sec.gov and
the Company’s website at www.alsic.com.
The results of operations
for interim periods are not necessarily indicative of the results to be expected for the full year.
New Accounting Pronouncements
Pronouncements adopted in 2019
The Company adopted Accounting Standards Codification
(ASC) 842 for leases effective at the beginning of the fiscal year, December 30, 2018, using the cumulative-effect adjustment transition
method, which applies the provisions of the standard at the effective date without adjusting the comparative periods presented.
The Company elected an accounting policy for short-term leases, which allows lessees to avoid recognizing right-of-use assets and
liabilities for leases with terms of 12 months or fewer.
We have lease agreements with lease and non-lease
components, which are generally accounted for separately. We have not elected the practical expedient to account for lease and
non-lease components as one lease component. The Company has elected certain practical expedients upon adoption and therefore has
not reassessed whether any expired or existing contracts contain leases, has not reassessed the lease classification for any expired
or existing leases and has not reassessed initial direct costs for any existing leases.
Adoption of the standard resulted in the recognition
of operating lease right-of-use assets and corresponding lease liabilities of $310 thousand on the consolidated balance sheet as
of December 30, 2018. The standard did not materially impact operating results or liquidity. Disclosures related to the amount,
timing and uncertainty of cash flows arising from leases are included in Note 4, Leases.
(3) Net Income (loss) Per Common and Common Equivalent Share
Basic net income (loss) per common share is calculated
by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net
income (loss) per common share is calculated by dividing net income (loss) by the sum of the weighted average number of common
shares plus additional common shares that would have been outstanding if potential dilutive common shares had been issued for granted
stock options and stock purchase rights. Common stock equivalents are excluded from the diluted calculations when a net loss
is incurred as they would be anti-dilutive.
(4) Commitments & Contingencies
Commitments
Leases
The Company has two real estate leases—one
expiring in February 2021 and one with a 12 month duration with options to extend additional years. Since the latter is not reasonably
certain that any options will be exercised, it has not been recorded on the balance sheet in accordance with the accounting policy
elected in Note 2. CPS also has a few other leases for equipment which are minor in nature and are generally short-term in duration.
None of these have been capitalized.
The lease expiring in 2021 (the “Norton
facility lease’) is included as a right-of-use lease asset and corresponding lease liability on the balance sheet. This asset
and liability was recognized on December 30, 2018 based on the present value of remaining lease payments over the remaining lease
term using the Company’s incremental borrowing rate at date of adoption. The Company’s lease agreements do not contain
any material residual value guarantees or material restrictive covenants.
Operating Leases
Lease expense for operating leases is recognized
on a straight-line basis over the lease term. Lease expense is allocated between Cost of Product Sales and Selling, General and
Administrative Expense in the income statement
The following table presents information about
the amount, timing and uncertainty of cash flows arising from the Company’s capitalized operating leases as of September
28, 2019
(Dollars in Thousands)
|
|
|
Sept 28, 2019
|
|
Maturity of capitalized lease liabilities
|
|
|
Lease payments
|
|
2019 (remaining)
|
|
$
|
38
|
|
2020
|
|
|
152
|
|
2021
|
|
|
26
|
|
Total undiscounted operating lease payments
|
|
$
|
216
|
|
Less: Imputed interest
|
|
|
(9)
|
|
Present value of operating lease liability
|
|
$
|
207
|
|
Balance Sheet Classification
|
|
|
|
|
Current lease liability
|
|
$
|
148
|
|
Long-term lease liability
|
|
|
59
|
|
Total operating lease liability
|
|
$
|
207
|
|
Other Information
|
|
|
|
|
Weighted-average remaining lease term for capitalized operating leases
|
|
|
17 months
|
|
Weighted-average discount rate for capitalized operating leases
|
|
|
6.5%
|
|
Cash Flows
An initial right-of-use asset of $310 thousand
was recognized as a non-cash asset addition with the adoption of the new lease accounting standard on December 30, 2018. Cash paid
for the amounts included in the present value of operating lease liabilities was $114 thousand during the first nine months of
2019 and is included in operating cash flows.
Operating Lease Costs
Operating lease cost was $114 thousand during
the first nine months of 2019. This cost is related to its long-term operating lease. All other short-term leases were immaterial.
Finance Leases
The company does not have any finance leases.
Loss contingency
The Company manufactures baseplates for power
module manufacturers. Most baseplates manufactured by CPS require a nickel coating be applied to the baseplate (“Ni plating”).
CPS warranties its baseplates meet the Ni plating specifications required by our customers, and flows this requirement to its Ni
plating vendors.
On January 24, 2018 the Company received a “Claim
and Non-Conformance Notification” from one of its European customers relating to the Ni plating on our baseplates. Upon investigation,
it was determined that one employee of the Ni plating vendor used by CPS had deviated from the prescribed work instruction for
Ni plating from mid-September 2017 until mid-January 2018. The Company's Ni plating vendor acknowledged this violation and worked
with the customer to resolve the problem.
On April 11, 2018 the Company received a “Follow-up
Claim and Non-Conformance Notification” from the European customer. The customer estimated the total value of the claim
to be $1.0 million “as of today”, and reserves the right to claim additional damages in the future.
The Company informed its insurer of this claim
and the Ni plating vendor did the same with its insurer. No amounts for damages had been recorded in the financial statements as
management believed that it was not possible at the time to quantify the potential impact, if any, to the Company.
On July 9, 2019, the Company received confirmation
from its customer accepting the settlement offer of the Company’s insurer. The settlement is covered by the Company’s
insurance policy and the Company does not expect to incur any losses as part of the settlement.
(5) Share-Based Payments
The Company measures the cost of employee services
received in exchange for an award of equity instruments based on the grant date fair value of the award. That cost is recognized
over the period during which an employee is required to provide services in exchange for the award, the requisite service period
(usually the vesting period). The Company provides an estimate of forfeitures at initial grant date. Reductions in compensation
expense associated with the forfeited options are estimated at the date of grant, and this estimated forfeiture rate is adjusted
periodically based on actual forfeiture experience. The company uses the Black-Scholes option pricing model to determine the fair
value of the stock options granted.
There were no stock options granted or issued
under the Plan during the quarters ended September 28, 2019 and September 29, 2018.
During the quarter ended September 28, 2019,
24,000 options were forfeited and 16,000 expired. During the quarter ended September 29, 2018, 18,600 options were forfeited and
8,000 options expired.
During the quarters ended September 28, 2019
and September 29, 2018 there were no shares repurchased.
During the three and nine months ended September
28, 2019 the Company recognized approximately $28 thousand and $113 thousand, respectively as share-based compensation expense
related to previously granted shares under the Plan. These amounts are included as a component of selling, general and administrative
expenses in the statement of operations.
During the three and nine months ended September
29, 2018 the Company recognized approximately $33 thousand and $136 thousand, respectively as share-based compensation expense
related to previously granted shares under the Plan. These amounts are included as a component of selling, general and administrative
expenses in the statement of operations.
(6) Inventories
Inventories consist of the following:
|
|
|
September 28,
|
|
|
|
December 29,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
668,141
|
|
|
$
|
706,982
|
|
Work in process
|
|
|
1,973,122
|
|
|
|
2,248,370
|
|
Finished goods
|
|
|
614,210
|
|
|
|
693,943
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
|
3,255,473
|
|
|
|
3,649,295
|
|
Reserve for obsolescence
|
|
|
(464,362)
|
|
|
|
(456,362)
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
2,791,111
|
|
|
$
|
3,192,933
|
|
|
|
|
|
|
|
|
|
|
(7) Accrued Expenses
Accrued expenses consist of the following:
|
|
|
September 28,
|
|
|
|
December 29,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Accrued legal and accounting
|
|
$
|
68,433
|
|
|
$
|
67,000
|
|
Accrued payroll
|
|
|
498,633
|
|
|
|
594,641
|
|
Accrued other
|
|
|
133,924
|
|
|
|
313,674
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
700,990
|
|
|
$
|
975,315
|
|
|
|
|
|
|
|
|
|
|
(8) Line of Credit
In September 2019, the Company entered into revolving
line of credit with The Massachusetts Business Development Corporation in the amount of $2.5 million. This agreement replaces
the $1.25 million line of credit with Santander Bank, set to expire September 30, 2019. The agreement includes a demand note
allowing the Lender to call the loan at any time. CPS may terminate the agreement without a termination fee after 3 years.
The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of LIBOR plus 650 basis
points. The Company has provided BDC with an earnings projection for the year ended December 28, 2019 and the covenant states that
until the projection is met, $500 thousand of the line will be locked. At September 29, 2019 the Company had $413 thousand
of borrowings under this LOC and its borrowing base at the time would have permitted an additional $1.335 million to have been
borrowed.
The line of credit is subject to certain financial
covenants.
(9) Income Taxes
A valuation allowance against deferred tax assets
is required to be established or maintained when it is "more likely than not" that all or a portion of deferred tax assets
will not be realized. In December 2018, the Company established a partial valuation allowance reserve, as it is judged more likely
than not that a majority of its deferred tax assets will not be used before they expire. This decision was reached after giving
greater weight to its losses over the previous three years compared with its forecast of the future. Consistent with this conclusion,
no income tax provision/(benefit) has been recorded for the quarter and nine months ending September 28, 2019.
The Company recorded a tax benefit of $4 thousand
and tax benefit of $231 thousand for federal income taxes during the three and nine months ended September 29, 2018, respectively.
The Company recorded a tax benefit of $1 thousand and a tax benefit of $44 thousand for state income taxes during the three and
nine months ended September 29, 2018, respectively.
ITEM 2 MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial
condition and results of operations is based upon and should be read in conjunction with the financial statements of the Company
and notes thereto included in this report and the Company’s Annual Report on Form 10-K for the year ended December 29, 2018.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking
statements that involve a number of risks and uncertainties. There are a number of factors that could cause the Company’s
actual results to differ materially from those forecasted or projected in such forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes
no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect
events or changed circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Critical Accounting Policies
The critical accounting policies utilized by
the Company in preparation of the accompanying financial statements are set forth in Part II, Item 7 of the Company’s Annual
Report on Form 10-K for the year ended December 29, 2018, under the heading “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”. There have been no material changes to these policies since December
29, 2018, other than the adoption of ASU No. 2016-02, Leases.
Overview
CPS Technologies Corporation (the ‘Company’
or ‘CPS’) provides advanced material solutions to the electronics, power generation, automotive and other industries.
The Company’s products are generally used
in high-power, high-reliability applications. These applications always involve energy use or energy generation and the Company’s
products allow higher performance and improved energy efficiency. The Company is an important participant in the growing movement
towards alternative energy and "green" lifestyles. For example, the Company’s products are used in mass transit,
hybrid and electric cars, wind-turbines for electricity generation as well as routers and switches for the internet which in turn
allows telecommuting.
The Company’s primary advanced material
solution is metal matrix composites (MMCs), a new class of materials which are a combination of metal and ceramic. CPS has a leading,
proprietary position in metal matrix composites. Metal matrix composites have several superior properties compared to conventional
materials including improved thermal conductivity, thermal expansion matching, stiffness and light weight which enable higher performance
and higher reliability in our customers’ products.
Like plastics several decades ago, we believe
metal-matrix composites will penetrate many end markets over many years. CPS management believes our business model of providing
advanced material solutions to a portfolio of high growth end markets which are, at any point in time, in various stages of the
technology adoption lifecycle, provides CPS with the opportunity for sustained growth and a diversified customer base. We believe
we have validated this model as we are now supplying customers at all stages of the technology adoption lifecycle.
CPS is the leader in supplying metal matrix composites
to certain high growth electronics end markets which are well along in the adoption lifecycle and therefore generating significant
demand. These end markets include high-performance integrated circuits and circuit boards used in internet switches and routers,
as well as motor controllers used in high-speed electric trains, subway cars and wind turbines. CPS supplies heat spreaders,
lids and baseplates to customers in these end markets. CPS is a fully qualified manufacturer for many of the world’s largest
electronics OEMs.
CPS also assembles housings and packages for
hybrid circuits. These housings and packages may include components made of metal-matrix composites; they may include components
made of more traditional materials such as aluminum, copper-tungsten, etc.
A market at an earlier stage of the adoption
lifecycle is the market for hybrid and electric automobiles. In 2012 the Company announced a multi-year supply agreement
with a major tier one automotive supplier for the supply of AlSiC pin fin baseplates for use in motor controllers for hybrid and
electric automobiles.
We are also actively working with customers in
end markets at the beginning stages of the adoption lifecycle.
The Company believes that its hybrid hard face
armor tiles will find application in many military vehicles as well as armored commercial vehicles.
Our products are manufactured by proprietary
processes we have developed including the QuicksetTM Injection Molding Process (‘Quickset Process’) and
the QuickCastTM Pressure Infiltration Process (‘QuickCast Process’).
CPS was incorporated in Massachusetts in 1984
as Ceramics Process Systems Corporation and reincorporated in Delaware in April 1987 through a merger into a wholly-owned Delaware
subsidiary organized for purposes of the reincorporation. In July 1987, CPS completed our initial public offering of 1.5 million
shares of our Common Stock. In March 2007, we changed our name from Ceramics Process Systems Corporation to CPS Technologies Corporation.
Results of Operations for the Third Fiscal Quarter of 2019 (Q3
2019) Compared to the Third Fiscal Quarter of 2018 (Q3 2018); (all $ in 000s)
Total revenue was $4,387 in Q3 2019, a 28% decrease
compared with total revenue of $6,116 in Q3 2018. This decrease was due primarily to a decrease in the sale of baseplates partially
offset by an increase in the sale of hermetic packages. There were no significant price changes in Q3 2019 compared with Q3 2018.
Gross margin in Q3 2019 totaled $223 or 5% of
sales. In Q3 2018, gross margin was $964 or 16% of sales. This decrease in margin was primarily due to lower sales
volume.[VMC2] A significant portion of CPS’ manufacturing costs are fixed.
As such lower sales volume will have an unfavorable impact on gross margin in terms of both actual dollars and percentage.
Selling, general and administrative expenses
(SG&A) were $702 in Q3 2019, down 29% when compared with SG&A expenses of $983 in Q3 2018. This decrease was
primarily due to lower sales commission expense of $150 as a result of both, lower sales volumes and lower commission rates, and
a reduction in outside professional services of $53.
In Q3, 2019, the Company incurred interest expense
of $17 due to bank borrowings. This compares with interest expense of $14 in Q3 of 2018.
The Company incurred an operating loss of $479
compared with an operating loss of $19 in the same quarter last year. This increase in operating loss is due primarily to the decrease
in revenue, discussed above. The net loss for Q3 2019 totaled $496 versus a net loss of $14 in Q3 2018.
Results of Operations for the First Nine Months of 2019 Compared
to the First Nine Months of 2018 (all $ in 000s)
Total revenue was $16,024 in the first nine months
of 2019, a 3% increase compared with total revenue of $15,500 in the first nine months of 2018. This increase was due primarily
to an increase in the sale of housings and packages for hybrid circuits. There were no significant price changes during the first
nine months of 2019 compared with the first nine months of 2018.
Gross margin in the first nine months of 2019
totaled $1,557 or 10% of sales. In the first nine months of 2018 gross margin totaled $1,713 or 11% of sales. This
decrease was almost entirely due to a change in product mix. More higher margin parts were sold in 2018 compared to 2019.
Selling, general and administrative (SG&A)
expenses were $2,523 during the first nine months of 2019, down 11% compared with SG&A expenses of $2,822 in the first nine
months of 2018 Most of this decrease occurred in Q3 due to lower sales commission expense of $150 as a result of lower sales
volumes and lower commission rates, and a reduction in outside professional services of $53.
During the first nine months of 2019, the Company
incurred interest expense of $24 due to bank borrowings. This compares with interest expense of $25 incurred during the first
nine months of 2018.
In the first nine months of 2019 the Company
incurred an operating loss of $966 compared with an operating loss of $1,109 in the same period last year. The net loss for
the first nine months of 2019 totaled $990 versus a net loss of $845 in the first nine months of 2018.
Liquidity and Capital Resources (all $ in 000s unless noted)
The Company’s cash and cash equivalents
at September 28, 2019 totaled $470. The Company’s net cash, which considers the $413 of bank borrowings, totaled $57
at the end of the third quarter. This compares to cash and cash equivalents at December 29, 2018 of $629. The decrease in net cash
was due to the loss from operations.
Accounts receivable at September 28, 2019 totaled
$2,796 compared with $3,053 at December 29, 2018.
Days Sales Outstanding (DSO) increased from 45
days at the end of 2018 to 57 days at the end of Q3 2019. DSO’s at the end of 2018 were unusually low due to the fact
that sales during Q4 2018 were more heavily loaded toward the front end of the quarter. The accounts receivable balances at December
29, 2018, and September 28, 2019 were both net of an allowance for doubtful accounts of $10. The Company entered into a new line
in September 2019. The terms of new line of credit are expected to provide increased liquidity and, as a result, we have
ended our policy of allowing a discount on prompt payments from certain of our customers. Due to the Company’s change
in its discount policy, we expect an increase in DSO going forward. Had this change been in effect during Q3 and customers
paid based on their undiscounted terms, the DSO would have been 71 days.
Inventories totaled $2,791 at September 28, 2019
compared with inventory totaling $3,193 at December 29, 2018. This decrease was due primarily to the decision to reduce production
due to reduced customer sales projections for the summer. The inventory turnover in the most recent four quarters ending
Q3 2019 was 6.2 times, up from 6.0 times averaged during the four quarters of 2018 (based on a 5 point average).
Pursuant to customer agreements, CPS maintains
unplated product offsite, at outside plating vendors. These plating vendors are located near the end customer locations
allowing for same day or overnight delivery of finished, plated product. CPS directs these vendors as to which specific products
to plate and when to plate them, based on customer requirements. The Company feels that doing this gives CPS a competitive
advantage. At September 28, 2019 and December 29, 2018, $835 and $1,556, respectively, was located at vendor locations pursuant
to these agreements.
The Company financed its working capital during
the first nine months of 2019 from a combination of its cash at the beginning of the year and bank borrowings. The Company
expects it will continue to be able to fund its working capital requirements for the remainder of 2019 from existing cash balances
and bank borrowings.
The Company continues to sell to a limited number
of customers and the loss of any one of these customers could cause the Company to require additional external financing. Failure
to generate sufficient revenues, raise additional capital or reduce certain discretionary spending could have a material adverse
effect on the Company’s ability to achieve its business objectives.
Contractual Obligations
In September 2019, the Company entered into revolving
line of credit with Massachusetts Business Development Corporation in the amount of $2.5 million. This agreement replaces
the $1.25 million line of credit with Santander Bank, set to expire September 30, 2019. The agreement includes a demand note
allowing the Lender to call the loan at any time. CPS may terminate the agreement without a termination fee after 3 years.
The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of LIBOR plus 650 basis
points. The Company has provided BDC with an earnings projection for the year ended December 28, 2019 and the agreement states
that until the projection is met, $500 thousand of the line will be locked. Also, at September 28, 2019 the Company had $413
thousand of borrowings under this LOC and its borrowing base at the time would have permitted an additional $1.335 million to have
been borrowed. The increased availability has allowed the Company to end its policy of allowing prompt pay discounts to certain
customers. This should have a positive effect on the Company’s earnings going forward.
As of September 28, 2019, the Company had $242
of construction in progress and no outstanding commitments to purchase production equipment.
As of September 28, 2019, all our manufacturing,
engineering, sales and administrative operations were and continue to be located in leased facilities in Norton, Massachusetts
and Attleboro, Massachusetts.
In February 2018, the Company signed a lease
for the Norton facilities through February 2021. The leased facilities comprise approximately 38 thousand square feet. The lease
is a triple net lease wherein the Company is responsible for payment of all real estate taxes, operating costs and utilities.
The Company also has an option to buy the property and a right of first refusal during the term of the lease. Annual rental
payments continue at $152 thousand.
In February 2011, the Company entered into a
lease for an additional 13.8 thousand square feet in Attleboro, MA. The Attleboro facility lease expires in February 2020 and the
Company has two, one-year options at the current annual rental payments of $79, with minor escalation for real estate tax increases.
(Note 4, Leases).
Management believes that a combination of existing
cash balances and borrowings, if necessary, will be sufficient to fund our cash requirements for the foreseeable future. However,
there is no assurance that we will be able to generate sufficient revenues or reduce certain discretionary spending in the event
that planned operational goals are not met such that we will be able to meet our obligations as they become due.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not significantly exposed to the
impact of interest rate changes or foreign currency fluctuations. The Company has not used derivative financial instruments.
ITEM 4
CONTROLS AND PROCEDURES
(a) The Company’s
Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls
and procedures (as such term is defined in Rules 13a-14(c) and 15d - 14(c) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) as of the end of the period covered by this Form 10-Q (the “Evaluation Date”).
Based on such evaluation, such officers have concluded that, as of the Evaluation Date, 1) the Company’s disclosure
controls and procedures are effective to ensure that information required to be disclosed by the Company in reports the Company
files under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
rules and forms of the SEC and 2) the Company’s disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated
to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required
disclosure.
(b) Changes in Internal
Controls. There has been no change in our internal control over financial reporting that occurred during our most recent fiscal
quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.