UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December
28, 2019
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, for the transition period
from to
Commission file number: 0-16088
CPS TECHNOLOGIES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
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04-2832509
(I.R.S. Employer
Identification No.)
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111 South Worcester Street
Norton, MA
(Address of principal executive offices)
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02766-2102
(Zip Code)
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508-222-0614
(Registrant’s telephone number, including
area code)
Securities registered pursuant
to Section 12(b) of the Act:
Title
of each class
Trading
Symbol(s) Name
of each exchange on which registered
Common Stock, $0.01 par value CPSH NASDAQ
Capital Markets
Securities registered pursuant to Section 12(g)
of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] Yes
[X] No
Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or Section 15(d) of the Act.[ ] Yes [X] No
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 Website, 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 if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to the Form 10-K. [ ]
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of
"accelerated filer" and "smaller reporting 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
The aggregate market value of the voting Common
Stock held by non-affiliates of the Registrant was $10 million based on the average of the reported closing bid and asked prices
for the Common Stock as of the last business day of the registrant’s most recently completed second fiscal quarter as reported
on the NASDAQ Capital Market.
Number
of shares of Common Stock outstanding as of March 6, 2020: 13,207,436 shares .
Documents incorporated by reference.
Part I
Item 1. Business.
CPS Technologies Corporation (the ‘Company’
or ‘CPS’) provides advanced material solutions to the transportation, automotive, energy, computing/internet, telecommunications,
aerospace, defense and oil and gas end markets.
Our primary material solution is metal matrix composites.
We design, manufacture and sell custom metal matrix composite components which improve the performance and reliability of systems
in these end markets.
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 high-speed trains,
mass transit, hybrid and electric cars, wind-turbines for electricity generation as well as routers and switches for the internet
which enable telecommuting. These applications involve energy use or energy generation; the Company’s products allow higher
performance and improved energy efficiency.
Metal matrix composites (MMCs) are a class of materials
consisting of a combination of metals and ceramics. Compared to conventional materials, MMCs provide superior thermal conductivity,
improved thermal expansion matching, greater stiffness and lighter weight.
For 30 years CPS has been the leader in manufacturing MMC
components. Products we provide include baseplates for motor controllers used in high-speed electric trains, subway cars, wind
turbines, and hybrid and electric vehicles. We provide baseplates and housings used in radar, satellite and avionics applications.
We provide lids and heatspreaders used with high performance integrated circuits for use in internet switches and routers. We provide
baseplates and housings used in modules built with Wide Band Gap Semiconductors like SiC and GaN. CPS also assembles housings and
packages for hybrid circuits. These housings and packages may include MMC components; they may also include components made of
more traditional materials such as aluminum, copper-tungsten, etc.
CPS is a fully qualified manufacturer for many of the world’s
largest electronics OEMs.
CPS management believes our business model of providing
advanced material solutions to a portfolio of high growth end markets 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.
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, the Company changed its name from Ceramics Process Systems Corporation to CPS Technologies Corporation.
CPS website is http://www.alsic.com.
Overview of Markets and Products
Electronics Markets Overview
End-user demand continues to motivate the electronics industry
to produce products which:
- operate at higher speeds;
- are smaller in size; and
- operate with higher reliability.
While these three requirements result in products of ever-increasing
performance, these requirements also create a fundamental challenge for the designer to manage the heat generated by the system
operating at higher speeds and/or higher power. Smaller assemblies further concentrate the heat and increase the difficulty of
removing it.
This challenge is found at each level in an electronic assembly:
at the integrated circuit level speeds are increasing and line widths are decreasing; at the circuit board level higher density
devices are placed closer together on circuit boards; and at the system level higher density circuit boards are being assembled
closer together.
The designer must resolve the thermal management issues
or the system will fail. For every 10 degree Celsius rise in temperature above a threshold level, the reliability of a circuit
is decreased by approximately half. In addition, heat usually causes changes in parameters which degrade the performance of both
active and passive electronic components.
To resolve thermal management issues the designer is primarily
concerned with two properties of the materials which comprise the system: 1) thermal conductivity, which is the rate at which heat
moves through materials, and 2) thermal expansion rate (Coefficient of Thermal Expansion or CTE) which is the rate at which materials
expand or contract as temperature changes. The designer must ensure that the temperature of an electronic assembly stays within
a range in which the differences in the expansion rates of the materials in the assembly do not cause a failure from breaking,
delaminating, etc.
CPS combines at the microstructural level a ceramic with
a metal to produce a metal matrix composite which has the thermal conductivity needed to remove heat, and a thermal expansion rate
which is sufficiently close to other components in the assembly to ensure the assembly is reliable. The ceramic is silicon carbide
(SiC), the metal is aluminum (Al), and the composite is aluminum silicon carbide (AlSiC), a metal-matrix composite. CPS can adjust
the thermal expansion rate of AlSiC components to match the specific application by modifying the amount of SiC compared to the
amount of Al in the component. The Company also has the capability of encapsulating Pyrolytic Graphite inserts to enhance the thermal
conductivity of the AlSiC composite.
CPS produces products made of AlSiC in the shapes and configurations
required for each application, for example, in the form of lids, substrates, housings, etc. Every product is made to a customer’s
blueprint. The CPS process technology allows most products to be made to net shape, requiring no or little final machining.
Although the Company’s focus today is on AlSiC components,
it believes its proprietary Quickset- Quickcast process technology can be used to produce other metal-matrix composites which may
meet future market needs.
Today, the problem of thermal management is most acute in
high-performance, high-density applications such as high-performance microprocessors, application-specific integrated circuits
for internet routers and switches, motor controllers for trains, subway cars and wind turbines, and components for satellite communications.
However, as the trends towards faster speeds, reduced size and increased reliability continue, and as high-density circuitry is
used in a larger number of applications, we believe our products will be used in an increasing number of applications across many
end markets.
Structural Markets Overview
Structural applications perform primarily a mechanical rather
than electrical function. In any mechanical assembly with moving parts the stiffness and weight of moving parts can have a significant
impact on the performance and energy efficiency of the assembly. In particular, in equipment with reciprocating components increasing
the stiffness and reducing the weight of reciprocating components improves the performance and energy efficiency of the equipment.
Today many mechanical components are made of steel because
steel has the stiffness required for the particular application. AlSiC has approximately the same stiffness as steel, but is only
one-third the weight of steel. AlSiC is higher cost than steel. However, we believe there are many mechanical applications where
the customer will pay the higher cost for AlSiC because of significant improvements in performance resulting from the superior
stiffness-to-weight ratio of AlSiC.
Examples of structural applications for which we have developed
and supplied components include robotic arms for semiconductor manufacturing equipment and components. The Company continues to
identify opportunities for using advanced materials in such diverse areas as non-skid coatings, fire/heat barriers, consumer electronics
and working with nuclear waste.
Specific Markets and Products
Motor Controller Applications (Insulated Gate Bipolar
Transistor ("IGBT") Applications)
The use of power modules to control electric motors of all
sizes is growing. This growth is the result of several factors including emerging high-power applications which demand power controllers
such as trains, subways and certain industrial equipment, and cost declines in power modules which increasingly make variable speed
drives cost effective. Power semiconductors are a very significant portion of the cost of variable speed drives, and the cost of
the module housing and thermal management system are also significant; declines in the costs of all these components is driving
increased use of variable speed drives.
We provide baseplates and heat spreaders on which power
semiconductors are mounted to produce modules for motor control. The power semiconductors are typically IGBTs and these applications
are often referred to as IGBT applications. Our AlSiC baseplates have sufficient thermal conductivity to allow for removal of heat
through the baseplate, and have a thermal expansion rate sufficiently similar to the other components in the assembly to ensure
reliability over time as the assembly thermally cycles. We believe this market will continue to grow as the use of power modules
penetrates additional motor applications, and as electric motors themselves penetrate new applications such as the hybrid electric
vehicle.
Today our primary products for IGBT applications are used
in electric trains, subway cars, wind turbines and hybrid and electric vehicles.
Major automobile companies around the world are introducing
hybrid electric vehicles (HEVs) and electric vehicle (EVs) at an increasing rate. This focus on more energy efficient vehicles
is being driven by increases in energy costs and concerns about climate change. There are many varieties of HEVs and EVs, but all
HEVs and EVs contain an electric motor and contain one or more motor controller modules. The Company provides baseplates on which
motor controller modules are assembled; these baseplates are lighter weight and provide greater reliability than baseplates made
from more conventional materials.
The Company is working with multiple tier one and tier two
suppliers to the automobile industry on several new designs for future introduction. The Company believes the HEV and EV markets
will be the source of significant and long-term growth for the Company.
Lids and Heat Spreaders for High-Performance Microprocessors,
Application-Specific Integrated Circuits and Other Integrated Circuits ("Flip-chip Applications")
Increases in speed, circuit density, and the number of connections
in microprocessor chips (CPUs) and application-specific integrated circuits (ASICs) are accelerating a transition in the way in
which these circuits are packaged. Packages provide mechanical protection to the integrated circuit (IC), enable the IC to be connected
to other circuits via pins, solder bumps or other connectors, and allow attachment of a heat sink or fan to ensure the IC does
not overheat. In the past most high-performance ICs were electrically connected to the package by fine wires in a process known
as wire bonding. Today, most high-performance semiconductors are connected to the package by placing metal bumps on the connection
points of the die, turning the die upside down in the package, and directly connecting the bumps on the die with corresponding
bumps on the package base by reflowing the bumps. This is referred to as a "flip-chip package". Flip chip packages allow
for connection of a larger number of leads in a smaller space, and can provide other electrical performance advantages compared
to wire bonded packages.
In many flip chip configurations a lid or heat spreader
is placed over the die to protect the die from mechanical damage and to facilitate the removal of heat from the die. Often a heat
sink or fan is then attached to the lid. For a high-density die the package designer must ensure that the lid has sufficient thermal
conductivity to remove heat from the die and that all components of the package assembly - the die itself, the package base, and
the package lid - are made from materials with sufficiently similar thermal expansion rates to ensure the assembly will not break
apart over time as it thermally cycles.
Our composite material, AlSiC, has been developed to meet
these two needs: it is engineered to have sufficient thermal conductivity to allow the heat generated by the die to be removed
through the lid, and it is engineered to expand upon heating at a rate similar to other materials used in the package assembly
in order to ensure reliability of the package over time as it thermally cycles. We produce lids made of AlSiC for high performance
microprocessors and application-specific integrated circuits used in servers, internet switches and other applications.
Most participants in the semiconductor industry believe
the densities of ICs will continue to increase following the well-known "Moore’s Law". As IC densities increase,
generally so does the IC size, and the amount of heat generated by the IC. We believe the need for thermal management will continue
to grow rapidly.
Customers
We sell primarily to major microelectronics
systems houses in the United States, Europe and Asia. Our customers typically purchase prototype and evaluation quantities of our
products over a one to three year period before purchasing production volumes.
In 2019, our three largest customers accounted
for 43%, 14%, and 13% of revenues, respectively. In 2019, approximately 75% of our revenues were derived from commercial applications
and 10% from defense-related applications.
Availability of Raw Materials
We use a variety of raw materials from numerous
domestic and foreign suppliers. These materials are primarily aluminum ingots, ceramic powders and chemicals. The raw materials
we use are available from domestic and foreign sources and none is believed to be scarce or restricted for national security reasons.
We use no conflict metals.
Patents and Trade Secrets
As of December 28, 2019, the Company had 11 United States patents.
In addition the Company had several international patents covering the same subject matter as the U.S. patents. Licensees of these
patents have rights to use certain patents as defined in their respective license agreements.
We intend to continue to apply for domestic
and foreign patent protection in appropriate cases. In other cases, we believe we are better served by reliance on trade secret
protection. In all cases, we seek protection for our technological developments to preserve our competitive position.
Backlog and Contracts
Over 90% of the Company's product sales are
custom in that they are based on customers’ drawings and the large majority of these sales are "designed in" and
are sold over multiple years. Major customers typically give the Company a non-binding forecast of demand for a one-year period
and then negotiate a pricing agreement with the Company valid for that one-year period. Each week customers then issue releases
or authorizations to ship under the pricing agreements. At any point in time the contractually binding backlog represented by the
releases in hand does not necessarily reflect underlying demand. Given this situation, the Company does not believe backlog data
are meaningful.
Competition
We have developed and expect to continue to
develop products for a number of different end markets and we will encounter competition from different producers of metal-matrix
composites and other competing materials.
We believe that the principal competitive factors
in our end markets today include technical competence, product performance, quality, reliability, price, delivery performance,
corporate reputation, and strength of sales and marketing resources. We believe our proprietary processes, reputation, and the
price at which we can offer products for sale will enable us to compete successfully in the many electronics end markets.
Our primary direct competitor in metal matrix composites is Denka, a large chemical company based in Japan. We have also seen attempts
by manufacturers in China to penetrate our markets. We believe they offer their products at lower prices, but have yet to be able
to provide the delivery, performance, quality and reliability required by the market.
Government Regulation
We produce non-nuclear, non-medical hazardous
waste in our development and manufacturing operations. The disposal of such waste is governed by state and federal regulations.
Various customers, vendors, and collaborative development agreement partners of CPS may reside abroad, thereby possibly requiring
export and import of raw materials, intermediate products, and finished products, as well as potential technology transfer abroad
under collaborative development agreements. These types of activities are regulated by bureaus within the Departments of Commerce,
State and Treasury.
Employees
As of December 28, 2019, we had 152 permanent
full-time employees. 142 were engaged in manufacturing and engineering and 10 in sales and administration, including finance, HR
and general management.
None of our employees are covered by a collective
bargaining agreement. We consider our relations with our employees to be excellent.
Item 1A. Risk Factors.
Smaller reporting companies are not required
to provide the information required by this item.
Item 1B. Unresolved Staff Comments.
Smaller reporting companies are not required
to provide the information required by this item.
Item 2. Properties
As of December 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 December 2020. 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 first right of 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 lease terms have been for one year and have been renewed
annually. The current lease expires in February 2020 and the Company has entered into an amended lease expiring December
2020 reducing the leased space to 2.0 thousand square feet to be used primarily for storage. Annual rental payments
will now be $24 thousand.
Item 3. Legal Proceedings
We are not a party to any litigation which
could have a material adverse effect on us or on our business.
The “Claim of Non-Conformance Notification” received
by the Company in January 2018 has been resolved with no expense to the Company. The Company received a release from its Customer
dated October 9, 2019 acknowledging that it had received $180,000 from the Company’s insurer in full settlement of the Company’s
obligations.
Item 4. Mine Safety Disclosures
Not applicable
Part II
Item 5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities.
CPS Technologies Corp. shares have traded on
The Nasdaq Stock Market, LLC under the symbol “CPSH”. On December 28, 2019, we had approximately 700 shareholders.
We have never paid cash dividends on our Common Stock. We currently plan to reinvest our earnings, if any, for use in the business
and do not intend to pay cash dividends in the foreseeable future. Future dividend policy will depend, among other factors, upon
our earnings and financial condition.
Item 6. Selected Financial Data
Smaller reporting companies are not required
to provide the information required by this item.
Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
This document contains forward-looking statements,
based on numerous assumptions, subject to risks and uncertainties. Although we believe that the forward-looking statements are
reasonable, we do not and cannot give any assurance that our beliefs and expectations will prove to be correct. Many factors could
significantly affect our operations and cause our actual results to be substantially different from our expectations. Those factors
include, but are not limited to: (i) general economic and business conditions; (ii) customer acceptance of our products; (iii)
materials and manufacturing costs; (iv) the financial condition of customers, competitors and suppliers; (v) technological developments;
(vi) increased competition; (vii) changes in capital market conditions; (viii) governmental and business conditions in countries
where our products are manufactured and sold; (ix) changes in trade regulations; (x) the effect of acquisition activity; (xi) changes
in our plans, strategies, objectives, expectations or intentions; and (xii) other risks and uncertainties indicated from time to
time in our filings with the Securities and Exchange Commission. Actual results might differ materially from results suggested
by any forward-looking statements in this report. We do not have an obligation to publicly update any forward-looking statements,
whether as a result of the receipt of new information, the occurrence of future events or otherwise.
Overview
Products we provide include baseplates for motor controllers
used in high-speed electric trains, subway cars, wind turbines, and hybrid and electric vehicles. We provide baseplates and housings
used in radar, satellite and avionics applications. We provide lids and heatspreaders used with high performance integrated circuits
for in internet switches and routers. We provide baseplates and housings used in modules built with Wide Band Gap Semiconductors
like SiC and GaN. CPS also assembles housings and packages for hybrid circuits. These housings and packages may include MMC components;
they may include components made of more traditional materials such as aluminum, copper-tungsten, etc.
CPS’s products are custom rather than
catalog items. They are made to customers’ designs and are used as components in systems built and sold by our customers.
At any point in time our product mix will consist of some products with on-going production demand, and some products which are
in the prototyping or evaluation stages at our customers. The Company seeks to have a portfolio of products which include products
in every stage of the technology adoption lifecycle at our customers. CPS’ growth is dependent upon the level of demand for
those products already in production, as well as its success in achieving new "design wins" for future products.
As a manufacturer of highly technical and custom
products, the Company incurs fixed costs needed to support the business, but which do not vary significantly with changes in sales
volume. These costs include the fixed costs of applications engineering, tooling design and fabrication, process engineering, etc.
Accordingly, particularly given our current size, changes in sales volume generally result in even greater changes in financial
performance on a percentage basis as fixed costs are spread over a larger or smaller base. Sales volume is therefore a key financial
metric used by management.
The Company believes the underlying demand
for metal matrix composites is growing as the electronics and other industries seek higher performance, higher reliability, and
reduced costs. CPS believes that the Company is well positioned to offer our solutions to current and new customers as these demands
grow. In 2019 the Company’s top three customers accounted for 70% of revenue and the remaining 30% of revenue was derived
from 60 other customers. In 2018 the top three customers accounted for 65% of revenue and the remaining 35% of revenue was derived
from approximately 77 customers.
Application of Critical Accounting Policies
Financial statements are prepared in conformity
with accounting principles generally accepted in the United States of America. As such, the Company is required to make certain
estimates, judgments and assumptions that it believes are reasonable based upon the information available. These estimates and
assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the periods presented. CPS’s significant accounting policies are presented within Note 2
to the financial statements; the significant accounting policies which management believes are most critical to aid in fully understanding
and evaluating its reported financial results include the following:
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a)
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Allowance for doubtful accounts
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The Company performs ongoing monitoring of the status of
its receivables based on the payment history and the credit worthiness of our customers, as determined by a review of their current
credit information. Management continuously monitors collections and payments from customers and maintains a provision for estimated
credit losses based upon historical experience and any specific customer collection issues that have been identified. While such
credit losses have historically been low and within expectations, there is no guarantee that we will continue to experience the
same credit loss rates as in the past. Although the Company’s major customers are large and have a favorable payment history,
a significant change in the liquidity or financial position of one of them could have a material adverse impact on the collectability
of accounts receivable and future operating results. To further mitigate the potential for credit losses the Company has acquired
a credit insurance policy covering most of our sales to non-US accounts.
The Company has a build-to-order business model and manufactures
product to ship against specific purchase orders; occasionally CPS manufactures product in advance of anticipated purchase orders
to level load production or prepare for a ramp-up in demand. In addition, 100% of the Company’s products are custom, meaning
they are produced to a customer’s design and generally cannot be used for any other purpose. Purchase orders generally have
cancellation provisions which vary from customer to customer, but which can result occasionally in CPS producing product which
the customer is not obligated to purchase. However, once a product has gone into production, most customer orders are recurring
and order cancellations are rare. The Company’s general obsolescence policy is to write off obsolete inventory when there
has been no activity on a particular part for a twelve month period and there are no pending customer orders.
In some cases, customers place blanket purchase orders
and request the Company to maintain inventory sufficient to respond quickly upon receiving a shipment request. The Company manufactures
to specifications and the products typically have a life which extends over several years and does not deteriorate over time. Therefore,
the risk of obsolescence due to the passage of time, per se, is minimal. However, in order to more efficiently schedule production
or to meet agreements with customers to have inventory in the pipeline, the Company occasionally manufactures products in advance
of purchase orders. In these instances, the Company bears the risk that it will be left with product manufactured to specification
for which there are no customer purchase orders. The Company scrutinizes its inventory and, in the absence of pending orders or
strong evidence of future sales, establishes an obsolescence reserve when there has been no activity on a particular part for a
twelve month period.
In determining inventory cost, the Company uses the first-in,
first-out method and states inventory at the lower of cost or net realizable value. Virtually, all of the Company’s inventory
is customer specific; as a result, if a customer’s order is cancelled, it is unlikely that CPS would be able to sell that
inventory to another customer. Likewise, if the Company chooses to manufacture product in advance of anticipated purchase orders
and those orders do not materialize, it is unlikely that it would be able to sell that inventory to another customer. The value
of CPS’s work in process and finished goods is based on the assumption that specific customers will take delivery of specific
items of inventory. The Company has not experienced losses to date as a result of customer cancellations and has not established
a reserve for such cancellations.
The Company typically buys ‘lots’ of components
for its hermetic packaging products. Often all the components in a lot are not necessary to complete the order. Annually the company
reviews this unused material and establishes an obsolescence reserve for the amount it does not expect to use over the next three
years.
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c)
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Valuation of deferred tax assets
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Deferred tax assets and liabilities are based on the net
tax effects of tax credits, operating loss carryforwards and temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. The Company considers many factors in assessing
whether or not a valuation allowance for its Deferred Tax Asset is warranted and has concluded that it is more likely than not
that a portion or all of the Deferred Tax Asset will not be used before they expire. As a result a valuation reserve has been established
as of December 29, 2018 and December 28, 2019.
At December 28, 2019 the Company’s Deferred Tax Asset
and other temporary differences will require taxable income of approximately $16 million and reversals of existing temporary differences
to fully utilize the Deferred Tax Asset, assuming a statutory corporate tax rate of 21% based on the recently enacted Tax Cuts
and Jobs Act.
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d)
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Initial adoption of ASU No. 2016-02 (Leases)
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In February 2016 the FASB issued ASU No. 2016-02, Leases,
which requires a lessee
to
recognize lease liabilities for the lessee’s obligation to make lease payments arising from a lease, measured on a discounted
basis, and right-of-use assets, representing the lessee’s right to use, or control the use of, specified assets for the lease
term. The ASU became effective and the Company adopted it on December 30, 2018 (Q1 of 2019). The assets and liabilities increased
by approximately $310 thousand based upon the present value of remaining lease payments for leases in place at the adoption date.
Results of Operations (all $ in millions unless noted)
Results of Operations for the year 2019 (“2019”) compared
with the year 2018 (“2018”):
Total revenue was $21.4 million in 2019, a 1% decrease compared with
total revenue of $21.6 million in 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 in the third and fourth quarters.The Company negotiated new contracts with its
three largest customers which resulted in significant price increases of $0.7 million, mitigating the decrease in sales. Two of
these contracts took effect in the fourth quarter of 2019 with the third taking effect in the first and second quarters of 2020 .
Gross margin in 2019 totaled $2.5 million or 12% of sales.
This compares with $2.9 million, or 13% of sales, generated during 2018. This change in margin was due to a change in product mix
resulting in an increase in material costs, partially offset by reductions in direct labor and factory overhead.
Selling, general and administrative (SG&A) expenses were $3.1
million during 2019, a decrease of 18% compared with SG&A expenses of $3.8 million incurred during 2018. The predominant
reason for this change was a renegotiation of commission rates with our outside sales representatives.
The Company incurred an operating loss of $0.6 in 2019, compared
with an operating loss of $0.9 in 2018. This improvement was due to the decrease in SG&A expenses, as discussed above. The
net loss in 2019 totaled $0.6 versus a net loss of $3.7 in 2018. In the 2018 the Company established a valuation reserve against
its deferred tax asset, which accounted for $2.8 of the net loss.
Significant Fourth Quarter Activity in 2019:
Revenues
totaled $5.4 million versus $6.1 million in the last quarter of 2018, representing a decrease of 11%. This decrease was due primarily
to a decrease in the sale of baseplates partially offset by an increase in the sale of hermetic packages The impact of price changes
was significant in the quarter, increasing sales by $0.7 million, compared to third quarter pricing, partially mitigating the
sales decline.
Gross margin decreased in the fourth quarter of 2019 compared with
the fourth quarter of 2018 from $1.2 million to $1.0 million. This decrease was directly associated with the decrease in sales.
SG&A expenses totaled $0.6 million during the quarter a reduction
of 36% compared to $1.0 million in the same quarter of 2018. The predominant reason for this change was a renegotiation of commission
rates with our outside sales representatives, along with the elimination of the position of Senior Vice President Sales and Marketing.
Primarily as a result of the reduction of SG&A expenses, the
Company generated an operating profit of $0.4 million compared to $0.2 million in the fourth quarter of 2018.
The Company generated net income of $0.4 million in the last quarter
of 2019. In the last quarter of 2018 the Company established a valuation reserve against its deferred tax asset. Due in large part
to this reserve, the Company recorded a net loss for the quarter of $2.9 million.
Liquidity and Capital Resources (all $ in millions unless noted)
The Company’s cash and cash equivalents at December 28, 2019
totaled $0.1 compared with cash and cash equivalents at December 29, 2018 of $0.6. The decrease in net cash was due to the combination
of losses from operations, coupled with an increase in working capital associated with the increase in receivables, less payables
and accruals. The Company elected to end its 2% 30 day payment discount with its largest customer in the fourth quarter of 2019,
accounting for much of the increase in receivables and reduction in cash.
Accounts receivable at December 28, 2019 totaled $4.1 compared with
$3.1 at December 29, 2018. Days Sales Outstanding (DSO) increased to 67 days at the end of 2019 compared to 45 days at the end
of Q4 2018. This change was due in large part to the fact that sales were more front-end loaded in the quarter in 2018 and, as
a result, a higher percentage of sales were collected during the quarter and due to the elimination of the 2% net 30 day discount
with the Company’s largest customer which terms reverted to net 60 days. The accounts receivable balances at December 28,
2019, and December 29, 2018 were both net of an allowance for doubtful accounts of $10 thousand.
Inventories were essentially flat and totaled $3.1 and $3.2 at December
28, 2019 and December 29, 2018 , respectively. The inventory turnover in the most recent four quarters ending was 6.2 times, up
from 6.0 times averaged during the four quarters of 2018 (each based on a 5 point average).
The Company had no inventory on consignment at any customers at the
end of 2019. At December 28, 2019 and December 29, 2018 inventory of, $1.2 and $1.5, respectively, was located at vendor locations
pursuant to inventory agreements.
The Company financed its losses from operations and an increase in
working capital during 2019 from a combination of its cash at the beginning of the year and bank/lender borrowings during the year.
The Company expects it will continue to be able to fund its operations during 2020 from existing cash balances and the existing
credit facility.
The Company continues to sell to a limited number of customers and
the loss of any one of these customers or vendors 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
(LOC) with Massachusetts Business Development Corporation (BDC) in the amount of $2.5 million. This agreement replaces the $1.25
million line of credit with Santander Bank. The agreement includes a demand note allowing the Lender to call the loan at any time.
The Company 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. BDC requires that the total loss for
2019 be at most $640 thousand before the Company will be able to access the final $500 thousand of the line. At December 28, 2019
the Company had $1.25 million of borrowings under this LOC and its borrowing base at the time would have permitted an additional
$750 thousand to have been borrowed. The increased availability has allowed the Company to end its policy of allowing prompt pay
discounts to certain customers. This has and should continue to have a positive effect on the Company’s earnings going forward.
As of December 28, 2019 the Company had $256 thousand of
construction in progress and no outstanding commitments to purchase production equipment.
Our
leasing arrangements consist of the Norton, MA and Attleboro, MA facility leases. The Norton facility lease expires in February
2021 and 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 first right of refusal during the term of the lease. Annual rental payments
continue at $152 thousand. The Attleboro lease, initially set to expire in February 2020, has been amended. The amended lease expires
in December 2020 and reduces the leased space to 2.0 thousand square feet to be used primarily for storage. Annual rental payments
will now be $24 thousand with no additional charges.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Inflation
Inflation had no material effect on the results
of operations or financial condition during the last few years. There can be no assurance however, that inflation will not affect
our operations or business in the future.
Item 7A. Quantitative and Qualitative Disclosure
about Market Risk
Smaller reporting companies are not required
to provide the information required by this item.
Item 8. Financial Statements and Supplementary
Data
See Index to the Company’s Financial
Statements and the accompanying notes which are filed as part of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and
Procedures
The Company maintains disclosure controls and
procedures that are designed to ensure that information required to be disclosed in Securities and Exchange Commission reports
is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s
rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the direction of our Chief Executive
Officer and Chief Financial Officer, management has carried out an evaluation of the effectiveness of the Company’s disclosure
controls and procedures as such item is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that
these disclosure controls and procedures were effective as of December 28, 2019.
Changes in Internal Control over Financial
Reporting
There were no material changes in the Company’s
internal control over financial reporting during fiscal 2019.
Management’s Report on Internal
Control over Financial Reporting
Management is responsible for establishing
and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Rule 13a-15(f)
of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States and includes those policies and procedures that (i) pertain to the maintenance
of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Under the direction of our Chief Executive
Officer and Chief Financial Officer, management has assessed the effectiveness of the Company’s internal control over financial
reporting as of December 28, 2019. In making this assessment, management used the criteria set forth in the "Internal
Control Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2013).
Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective
as of December 28, 2019.
This annual report does not include an attestation
report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s
report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities
and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Item 9B. Other Information
The Company had no information required to
be disclosed in a report on Form 8-K during the fourth quarter of the year covered by this Form 10-K that has not been so reported.
Part III
|
|
Item 10.
|
Directors, Executive Officer and Corporate Governance
|
The information required by this Item 10 is incorporated herein by
reference to our Definitive Proxy Statement, under the captions “Members of the Board of Directors, Nominees and Executive
Officers,” “Certain Relationships and Related Person Transactions; Legal Proceedings,” “Section 16(a) Beneficial
Ownership Reporting Compliance,” “Code of Conduct” and “Corporate Governance” and with respect to
our 2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the
end of the Company’s 2019 fiscal year.
The Company has adopted the CPS Code of Conduct, which applies to
all directors, officers (including the principal executive officer, principal financial officer and treasurer) and employees. A
copy of this code can be found on the Company’s website at www.alsic.com/investor-relations.
|
|
Item 11.
|
Executive Compensation
|
The information required by this Item 11 is incorporated herein by
reference to our Definitive Proxy Statement, under the captions “Compensation” and “Compensation Discussion and
Analysis” with respect to our 2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission
not later than 120 days after the end of the Company’s 2019 fiscal year.
|
|
Item 12.
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
The information required by this Item 12 is incorporated herein by
reference to our Definitive Proxy Statement, under the caption “Equity Compensation Plan Information” and “Security
Ownership of Certain Beneficial Owners and Management” with respect to our 2020 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission not later than 120 days after the end of the Company’s 2019 fiscal year.
|
|
Item 13.
|
Certain Relationships and Related Transactions, and Director Independence
|
The information required by this Item 13 is incorporated herein by
reference to our Definitive Proxy Statement, under the captions “Certain Relationships and Related Person Transactions;
Legal Proceedings” and “Corporate Governance” with respect to our 2020 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission not later than 120 days after the end of the Company’s 2019 fiscal year.
|
|
Item 14.
|
Principal Accountant Fees and Services
|
The information required by this Item 14 is incorporated herein by
reference to our Definitive Proxy Statement, under the caption “Accounting Matters” with respect to our 2020 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company’s
2019 fiscal year.
Part IV
|
|
Item 15.
|
Exhibits, Financial Statement Schedules.
(a) Documents filed as part of this Form 10-K.
|
1. Financial Statements
The financial statements filed as part of this Form 10-K are listed on the Index to Financial Statements of this Form 10-K.
2. Exhibits
The exhibits to this Form 10-K are listed on the Exhibit Index of this Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
CPS TECHNOLOGIES CORPORATION
|
|
By:
|
/s/
Grant C. Bennett
President and Chief Executive Officer
March 13, 2020
|
Pursuant to the Requirements of the Securities
Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
Signature
|
Title
|
Date
|
|
/s/ Grant C. Bennett
|
President and Chief Executive Officer
|
March
13, 2020
|
|
Grant C. Bennett
|
|
|
|
|
|
|
|
/s/ Charles K. Griffith Jr.
|
Chief Financial Officer
|
March
13, 2020
|
|
Charles K. Griffith Jr.
|
|
|
|
|
|
|
|
/s/ Francis J. Hughes,
Jr.
|
Director
|
March 13, 2020
|
|
Francis J. Hughes
|
|
|
|
|
|
|
|
/s/ Daniel C. Snow
|
Director
|
March 13, 2020
|
|
Daniel C. Snow
|
|
|
|
|
|
|
|
/s/ Thomas M. Culligan
|
Director
|
March 13,
2020
|
|
Thomas M. Culligan
|
|
|
|
|
|
|
|
/s/ Ralph M. Norwood
|
Director
|
March 13,
2020
|
|
Ralph M. Norwood
|
|
|
|
|
|
|
CPS TECHNOLOGIES CORPORATION
EXHIBIT INDEX
|
Exhibit
No.
|
Description
|
|
3.1*
|
Restated Certificate of Incorporation of the Company, as amended, is incorporated herein by reference to Exhibit 3 to the Company’s Registration Statement on Form 8-A (File No. 0-16088)
|
|
3.2*
|
By-laws of the Company, as amended, are incorporated herein by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (File No. 33-14616)(the ‘1987 S-1Registration Statement’)
|
|
4.1*
|
Specimen certificate for shares of Common Stock of the Company is incorporated herein by reference to Exhibit 4 to the 1987 S-1 Registration Statement
|
|
4.2*
|
Description of Capital Stock contained in the Restated Certificate of Incorporation of the Company, as amended, filed as Exhibit 3.1
|
|
10.5*(1)
|
Retirement Savings Plan, effective September 1, 1987 is incorporated by reference to Exhibit 10.35 to the Company’s 1989 S-1 Registration Statement
|
|
10.21*
|
1999 Stock Incentive Plan adopted by the Company’s Board of Directors on January 22, 1999
|
|
10.22*
|
2009 Stock Incentive Plan ("2009 Plan") on December 10, 2009.
|
|
23.1
|
Consent of Wolf & Company, P.C.
|
|
31.1
|
Certification Pursuant to Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
* Incorporated herein by reference.
(1) Management Contract or compensatory plan
or arrangement filed as an exhibit to this Form pursuant to Items 14(a) and 14(c) of Form 10-K.
INDEX TO FINANCIAL STATEMENTS
OF
CPS TECHNOLOGIES CORPORATION
Report of Independent Registered Public Accounting Firm
|
|
Balance Sheets as of December 28, 2019 and December 29, 2018
|
|
Statements of Operations for the years ended December 28, 2019 and December 29, 2018
|
|
Statements of Stockholders’ Equity for the years ended December 28, 2019 and December 29, 2018
|
|
Statements of Cash Flows for the years ended December 28, 2019 and December 29, 2018
|
|
Notes to Financial Statements
|
|
Report of Independent Registered
Public Accounting Firm
To the Board of Directors and Stockholders of CPS Technologies
Corporation
Opinion on the Financial Statements
We have audited the accompanying balance sheets of CPS
Technologies Corporation (the "Company") as of December 28, 2019 and December 29, 2018, the related statements of operations,
stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of
the Company as of December 28, 2019 and December 29, 2018, and the results of its operations and its cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We
are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards
of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness
of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the
risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ Wolf & Company, P.C.
We have served as the Company's auditor since 2005.
Boston, Massachusetts
March 13, 2020
CPS TECHNOLOGIES CORPORATION
BALANCE SHEETS
|
|
|
|
December 28,
|
|
|
|
December 29,
|
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
133,965
|
|
|
$
|
628,804
|
|
|
Accounts receivable-trade, net
|
|
|
4,086,945
|
|
|
|
3,053,091
|
|
|
Inventories
|
|
|
3,099,824
|
|
|
|
3,192,933
|
|
|
Prepaid expenses and other current assets
|
|
|
147,786
|
|
|
|
156,338
|
|
|
Total current assets
|
|
|
7,468,520
|
|
|
|
7,031,166
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
|
Production equipment
|
|
|
9,649,169
|
|
|
|
9,550,043
|
|
|
Furniture and office equipment
|
|
|
508,423
|
|
|
|
519,779
|
|
|
Leasehold improvements
|
|
|
934,195
|
|
|
|
891,817
|
|
|
Total cost
|
|
|
11,091,787
|
|
|
|
10,961,639
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
and amortization
|
|
|
(10,110,663)
|
|
|
|
(9,722,767)
|
|
|
Construction in progress
|
|
|
255,754
|
|
|
|
34,314
|
|
|
Net property and equipment
|
|
|
1,236,878
|
|
|
|
1,273,186
|
|
|
Right-of-use lease asset (note 4, leases)
|
|
|
171,000
|
|
|
|
—
|
|
|
Deferred taxes, net
|
|
|
147,873
|
|
|
|
186,747
|
|
|
Total assets
|
|
$
|
9,024,271
|
|
|
$
|
8,491,099
|
|
(continued)
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORPORATION
BALANCE SHEETS
|
|
|
|
December 28,
|
|
|
|
December 29,
|
|
|
LIABILITIES AND STOCKHOLDERS’
|
|
|
2019
|
|
|
|
2018
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Borrowings against line of credit
|
|
$
|
1,249,588
|
|
|
$
|
—
|
|
|
Accounts payable
|
|
|
1,436,417
|
|
|
|
1,680,263
|
|
|
Accrued expenses
|
|
|
815,166
|
|
|
|
975,315
|
|
|
Deferred revenue
|
|
|
21,110
|
|
|
|
—
|
|
|
Current portion lease liability
|
|
|
148,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,670,281
|
|
|
|
2,655,578
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term lease liability
|
|
|
23,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,693,281
|
|
|
|
2,655,578
|
|
|
Commitments & Contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value,
|
|
|
|
|
|
|
|
|
|
authorized 20,000,000 shares;
|
|
|
|
|
|
|
|
|
|
issued 13,427,492 and 13,425,992 shares;
|
|
|
|
|
|
|
|
|
|
outstanding 13,207,436 and 13,205,936;
|
|
|
|
|
|
|
|
|
|
at December 28, 2019 and December 29, 2018, respectively
|
|
|
134,275
|
|
|
|
134,260
|
|
|
Additional paid-in capital
|
|
|
36,094,201
|
|
|
|
35,960,545
|
|
|
Accumulated deficit
|
|
|
(30,380,433)
|
|
|
|
(29,742,231)
|
|
|
Less cost of 220,056 common shares repurchased
|
|
|
|
|
|
|
|
|
|
at December 28, 2019 and December 29, 2018
|
|
|
(517,053)
|
|
|
|
(517,053)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
5,365,990
|
|
|
|
5,835,521
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
9,024,271
|
|
|
$
|
8,491,099
|
|
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 28, 2019 AND DECEMBER 29, 2018
|
|
|
|
2019
|
|
|
|
2018
|
|
|
Product sales
|
|
$
|
21,468,414
|
|
|
$
|
21,580,904
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
18,928,173
|
|
|
|
18,668,052
|
|
|
Gross margin
|
|
|
2,540,241
|
|
|
|
2,912,852
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and
|
|
|
|
|
|
|
|
|
|
Administrative expenses
|
|
|
3,137,440
|
|
|
|
3,813,415
|
|
|
Income (loss) from operations
|
|
|
(597,199)
|
|
|
|
(900,563)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
(35,547)
|
|
|
|
(20,985)
|
|
|
Income (loss) before income tax
|
|
|
(632,746)
|
|
|
|
(921,548)
|
|
|
Income tax provision (benefit)
|
|
|
5,456
|
|
|
|
2,784,419
|
|
|
Net income (loss)
|
|
$
|
(638,202)
|
|
|
$
|
(3,705,967)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
|
|
|
|
|
|
|
|
|
|
basic common share
|
|
$
|
(0.05)
|
|
|
$
|
(0.28)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
|
|
|
|
|
|
|
|
|
|
basic common shares
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
13,207,097
|
|
|
|
13,205,936
|
|
|
Net income (loss) per
|
|
|
|
|
|
|
|
|
|
diluted common share
|
|
$
|
(0.05)
|
|
|
$
|
(0.28)
|
|
|
Weighted average number of
|
|
|
|
|
|
|
|
|
|
diluted common shares
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
13,207,097
|
|
|
|
13,205,396
|
|
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORPORATION
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 28, 2019 AND DECEMBER 29, 2018
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Stock-
|
|
|
|
|
|
Number
of
|
|
|
|
Par
|
|
|
|
Paid-in
|
|
|
|
Accumulated
|
|
|
|
Stock
|
|
|
|
holders’
|
|
|
|
|
|
shares issued
|
|
|
|
Value
|
|
|
|
capital
|
|
|
|
deficit
|
|
|
|
repurchased
|
|
|
|
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
|
13,423,492
|
|
|
$
|
134,235
|
|
|
$
|
35,739,915
|
|
|
$
|
(26,036,264)
|
|
|
$
|
(517,053)
|
|
|
$
|
9,320,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
217,430
|
|
|
|
—
|
|
|
|
—
|
|
|
|
217,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock
|
|
|
2,500
|
|
|
|
25
|
|
|
|
3,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,705,967)
|
|
|
|
—
|
|
|
|
(3,705,967)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
—
|
|
|
|
—
|
|
|
|
131,421
|
|
|
|
—
|
|
|
|
—
|
|
|
|
131,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common stock
|
|
|
1,500
|
|
|
|
15
|
|
|
|
2,235
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(638,202)
|
|
|
|
—
|
|
|
|
(638,202)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
|
13,427,492
|
|
|
$
|
134,275
|
|
|
|
36,094,201
|
|
|
$
|
(30,380,433)
|
|
|
$
|
(517,053)
|
|
|
$
|
5,330,990
|
|
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 28, 2019 AND DECEMBER 29, 2018
|
|
|
|
2019
|
|
|
|
2018
|
|
|
Cash flows
from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(638,202)
|
|
|
$
|
(3,705,967)
|
|
|
Adjustments
to reconcile net income (loss)
|
|
|
|
|
|
|
|
|
|
to
cash provided (used) by operating
|
|
|
|
|
|
|
|
|
|
activities:
|
|
|
|
|
|
|
|
|
|
Share-based
compensation
|
|
|
133,671
|
|
|
|
220,654
|
|
|
Depreciation
and amortization
|
|
|
525,783
|
|
|
|
568,164
|
|
|
Deferred
taxes
|
|
|
38,874
|
|
|
|
2,851,919
|
|
|
Gain
on sale of property and equipment
|
|
|
(6,946)
|
|
|
|
(13,645)
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable – trade
|
|
|
(1,033,854)
|
|
|
|
(109,718)
|
|
|
Inventories
|
|
|
93,109
|
|
|
|
(1,083,420)
|
|
|
Prepaid
expenses and other current assets
|
|
|
8,552
|
|
|
|
(55,252)
|
|
|
Accounts
payable
|
|
|
(243,846)
|
|
|
|
733,878
|
|
|
Accrued
expenses
|
|
|
(160,149)
|
|
|
|
319,826
|
|
|
Deferred
revenue
|
|
|
21,110
|
|
|
|
(100,000)
|
|
|
Net
cash provided (used) by operating activities
|
|
|
(1,261,898)
|
|
|
|
(373,561)
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(489,475)
|
|
|
|
(350,852)
|
|
|
Proceeds
from sale of property and equipment
|
|
|
6,946
|
|
|
|
13,645
|
|
|
Net
cash used by
|
|
|
|
|
|
|
|
|
|
investing
activities
|
|
|
(482,529)
|
|
|
|
(337,207)
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Net
borrowings on lines of credit
|
|
|
1,249,588
|
|
|
|
—
|
|
|
Net
cash provided by financing activities
|
|
|
1,249,588
|
|
|
|
—
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(494,839)
|
|
|
|
(710,768)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
628,804
|
|
|
|
1,339,572
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
133,965
|
|
|
$
|
628,804
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
|
Income
taxes paid (refunded), net
|
|
$
|
(67,311)
|
|
|
$
|
436
|
|
|
Interest
paid
|
|
$
|
44,113
|
|
|
$
|
34,791
|
|
See
accompanying notes to financial statements.
CPS Technologies Corporation
Years Ended December 28, 2019 and December 29, 2018
Notes to Financial Statements
(1) Nature of Business
CPS Technologies Corporation (the ‘Company’
or ‘CPS’) provides advanced material solutions to the transportation, automotive, energy, computing/internet, telecommunications,
aerospace, defense and oil and gas end markets.
Our primary material solution is metal matrix composites.
We design, manufacture and sell custom metal matrix composite components which improve the performance and reliability of systems
in these end markets.
(2) Summary of Significant Accounting Policies
(2)(a) Cash and Cash Equivalents
The Company considers all highly liquid investments
with a maturity of three months or less at the date of purchase to be cash equivalents.
(2)(b) Accounts Receivable
The Company reports its accounts receivable
at the invoiced amount less an allowance for doubtful accounts. The Company’s management provides appropriate provisions
for uncollectible accounts based upon factors surrounding the credit risk and activity of specific customers, historical trends,
economic conditions and other information. Adjustments to the allowance are charged to operations in the period in which information
becomes available that may affect the allowance.
(2)(c) Inventories
Inventories are stated at the lower of cost,
as determined under the first-in, first-out method (FIFO), or net realizable value. A reserve for obsolete inventories is based
on factors regarding the sales and usage of such inventories, including inventories manufactured for specific customers. The Company’s
general obsolescence policy is to write off obsolete inventory when there has been no activity on a particular part for a twelve
month period and there are no pending customer orders.
(2)(d) Property and Equipment
Property and equipment are stated at cost.
Depreciation of equipment is calculated on a straight-line basis over the estimated useful life, generally five years for production
equipment and three to five years for furniture and office equipment. Leasehold improvements are depreciated over the shorter of
the lease term or their useful life. Maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost
and related accumulated depreciation or amortization are removed from their respective accounts. Any gains or losses on the disposition
of property and equipment are included in the results of operations in the period in which they occur.
(2)(e) Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment
whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered. Recoverability
is assessed based on estimated undiscounted future cash flows. As of December 28, 2019 and December 29, 2018, the Company believes
that there has been no impairment of its long-lived assets.
(2)(f) Revenue Recognition
The Company adopted Accounting Standards Codification
(ASC) 606, “Revenue from Contracts with Customers” in fiscal 2018. The adoption of FASB ASC Topic 606 did not have
a material impact on the Company’s financial statements and no cumulative adjustment was required.
Identifying the Contract with the
Customer
The Company identifies contracts with customers
as agreements that create enforceable rights and obligations. In the case of a few large customers the Company has executed long-term
Master Sales Agreements (“MSA”). These are umbrella agreements which typically define the terms and conditions under
which a customer can order goods from CPS. These in themselves do not constitute a contract as no products are committed to be
transferred and the customer has no obligation to make payments.
The Company contract is only enforceable once
both parties have approved it, and is usually in the form of a written purchase order from a customer combined with acknowledgement
from the Company.
In cases without an MSA, the customer submits
a blueprint for a product, the Company provides a quote and the customer responds with a purchase order. In these cases the Company’s
acceptance of the purchase order constitutes an enforceable contract.
Identifying the Performance Obligations in the Contract
For each contract, the Company considers the
promise to transfer products, each of which are distinct, to be the identified performance obligations.
Shipping and handling activities for which the
Company is responsible are not a separate promised service but instead are activities to fulfill the entity’s promise to
transfer goods. Shipping and handling fees will be recognized at the same time as the related performance obligations are satisfied.
The Company provides an assurance-type warranty.
This guarantees that the product functions as promised and meets specifications. Under its terms and conditions the Company offers
a 30 day warranty and replaces defective or non-conforming products. The expense of replacement is recorded at the time the Company
agrees to replace a defective or non-conforming product. This assurance type warranty is not considered to be a distinct performance
obligation.
Determining the Transaction Price
The Company determines the transaction price
as the amount of consideration specified in the contract that it expects to receive in exchange for transferring promised goods
to the customer. Amounts collected from customers for sales value added and other taxes are excluded from the transaction prices.
Product sales are recorded net of trade discounts and sales returns.
If a contract includes a variable amount, such
as a rebate, then the Company estimates the transaction price using either the expected value or the most likely amount of consideration
to be received, depending upon the specific facts and circumstances. The Company includes estimated variable consideration in the
transaction price only to the extent it is probable that a significant reversal of revenue will not occur when the uncertainty
is resolved. The Company updates its estimate of variable consideration at the end of each reporting period to reflect changes
in facts and circumstances. As of December 28, 2019 there are no contracts with variable consideration.
When credit is granted to customers, payment is typically due 30
to 90 days from billing and accordingly our contracts with customers do not include a significant financing component.
Allocating the Transaction Price
to the Performance Obligations
In virtually all cases the transaction price
is tied to a specific product in the contract obviating the need for any allocation.
Recognizing Revenue When (or as)
the Performance Obligations are Satisfied
The Company recognizes revenue at the point
in time when it transfers control of the promised goods or services to the customer, which typically occurs once the product has
shipped or has been delivered to the customer. Occasionally, for the purpose of ensuring a steady flow of product, the Company
ships products on consignment. In these instances, delivery is deemed to have occurred when the customer pulls inventory out of
the warehouse for use in their production, or upon a specified period of time as agreed upon by both parties. As of December 28,
2019 there are no products on consignment.
The Company generally expenses sales commissions
when incurred because the amortization period would have been one year or less. The costs are recorded within, selling, general
and administrative expenses.
The Company does not disclose the value of unsatisfied
performance obligations for contracts with an original expected length of one year or less
(2)(g) Income Taxes
The Company uses the liability method of accounting
for income taxes. Under this method, deferred tax assets and liabilities are recorded for the expected future tax consequences
of temporary differences between the financial reporting and income tax bases of assets and liabilities and are measured using
the enacted tax rates and laws that are expected to be in affect when the differences reverse. A valuation allowance is established
to reduce net deferred tax assets to the amount expected to be realized.
The Company’s policy is to recognize
interest and penalties related to income tax matters in income tax expense. As of December 28, 2019 and December 29, 2018, the
Company has no accruals for interest or penalties related to income tax matters. The Company does not have any uncertain tax positions
at December 28, 2019 or December 29, 2018 which required accrual or disclosure.
(2)(h) Net Income (Loss) Per Common 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 option 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.
(2)(i) Reclassification
Certain amounts in prior year’s financial
statements have been reclassified to conform to the current year’s presentation.
(2)(j) Recent Accounting Pronouncements
In the normal course of business, management evaluates all the new
accounting pronouncements issued by the Financial Accounting Standard Board (“FASB”). Based upon this review, except
as noted below, management does not expect any of the recently issued accounting pronouncements, which have not already been adopted,
to have a material impact on the Company’s consolidated financial statements.
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 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.
(2)(k) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the amounts of revenues and expenses recorded during the reporting period. Such estimates
are adjusted by management periodically as a result of existing or anticipated economic changes which effect, or may effect, the
Company’s financial statements. Actual results could differ from these estimates.
(2)(l) Fiscal Year-End
The Company’s fiscal year end is the
last Saturday in December which could result in a 52 or 53 week year. Fiscal years 2019 and 2018 each consisted of 52 weeks.
(2)(m) 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, 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 stock options granted.
(2)(n) Segment Reporting
The Company views its operations and manages
its business as one segment. The Company produces and sells advanced material solutions, primarily metal matrix composites, to
assemblers of high density electronics and other specialty components and subassemblies. The Company also assembles housings and
packages for hybrid circuits, selling to the same customers mentioned above. These customers represent a single market or segment
with similar stringent and well-defined requirements. The Company’s customers, in turn, sell the components and subassemblies
which incorporate the products into many different end markets, however, these end markets are two to three levels removed from
the Company. The Company makes operating decisions and assesses financial performance only for the Company as a whole and does
not make operating decisions or assess financial performance by the end markets which ultimately use the products.
(3) Inventories
As of December 28, 2019 and December 29, 2018
inventories consisted of the following:
|
|
|
|
2019
|
|
|
|
2018
|
|
|
Raw
materials
|
|
$
|
778,409
|
|
|
$
|
706,982
|
|
|
Work
in process
|
|
|
1,898,916
|
|
|
|
2,248,370
|
|
|
Finished
goods
|
|
|
871,861
|
|
|
|
693,943
|
|
|
Gross
Inventory
|
|
|
3,549,186
|
|
|
|
3,649,295
|
|
|
Reserve
for obsolescence
|
|
|
(449,362)
|
|
|
|
(456,362)
|
|
|
Total
|
|
$
|
3,099,824
|
|
|
$
|
3,192,933
|
|
(4) 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.
The
Norton facility lease comprises 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 first right of refusal during the term of the lease. Annual rental payments are $152 thousand through maturity.
The
following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s capitalized
operating leases as of December 28, 2019
|
(Dollars in Thousands)
|
|
|
December 28, 2019
|
|
|
Maturity of capitalized lease liabilities
|
|
|
Lease payments
|
|
|
2020
|
|
|
152
|
|
|
2021
|
|
|
26
|
|
|
Total undiscounted operating lease payments
|
|
$
|
178
|
|
|
Less: Imputed interest
|
|
|
(7)
|
|
|
Present value of operating lease liability
|
|
$
|
171
|
|
|
Balance Sheet Classification
|
|
|
|
|
|
Current lease liability
|
|
$
|
148
|
|
|
Long-term lease liability
|
|
|
23
|
|
|
Total operating lease liability
|
|
$
|
171
|
|
|
Other Information
|
|
|
|
|
|
Weighted-average remaining lease term for capitalized operating leases
|
|
|
14 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 $152 thousand during 2019
and is included in operating cash flows.
Operating Lease Costs
Operating lease
cost was $152 thousand during 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.
(5) Share-Based Compensation
Plans
The Company
adopted the 2009 Stock Incentive Plan ("2009 Plan") on December 10, 2009. Under the terms of the 2009 Plan all of the
Company’s employees, officers, directors, consultants and advisors are eligible to be granted options, restricted stock
awards, or other stock-based awards. Some outstanding options are nonstatutory stock options; some are incentive stock options.
All options granted are exercisable at the fair market value of the stock on the date of grant, and expire ten years from the
date of grant. The options granted to employees generally vest in equal annual installments over a five-year period. The options
granted to directors generally vest immediately on date of grant.
Under the 2009
Plan a total of 2,848,100 shares of common stock are available for issuance, of which 1,053,995 shares remain available for grant
as of December 28, 2019.
A summary of
stock option activity as of December 28, 2019 and changes during the year then ended is presented below:
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
|
Shares
|
|
Price
|
|
Life (years)
|
|
Value
|
|
Outstanding at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
beginning of year
|
|
|
1,753,605
|
|
|
$
|
1.75
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
199,500
|
|
|
$
|
1.44
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(127,000)
|
|
|
$
|
1.61
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(32,000)
|
|
|
$
|
1.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
1,794,105
|
|
|
$
|
1.72
|
|
|
|
3.8
|
|
|
$
|
11,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at year-end
|
|
|
1,471,905
|
|
|
$
|
1.74
|
|
|
|
3.1
|
|
|
$
|
10,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No
options were exercised during
fiscal 2019 or 2018.
The fair value
of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following table presents
the annualized weighted average values of the significant assumptions used to estimate the fair values of the options granted
during 2019 and 2018:
|
|
|
|
2019
|
|
|
|
2018
|
|
|
Risk-free interest rate
|
|
|
2.48%
|
|
|
|
2.76%
|
|
|
Expected life in years
|
|
|
6.1
|
|
|
|
6.1
|
|
|
Expected volatility
|
|
|
54%
|
|
|
|
54%
|
|
|
Expected dividend yield
|
|
|
0
|
|
|
|
0
|
|
|
Weighted average fair value of grants
|
|
$
|
.79
|
|
|
$
|
.84
|
|
All options
are granted with an exercise price equal to the fair market value of the underlying common stock on the date of grant.
The Company
recognized $133,671 and $220,654 as stock based compensation expense in 2019 and 2018, respectively including $131,421 related
to stock options outstanding and $2,250 related to the issue of common stock in 2019. As of December 28, 2019, there was $171,332
of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plan; that
cost is expected to be recognized over a weighted average period of 2.2 years.
(6) Accrued
Expenses
Accrued expenses
at December 28, 2019 and December 29, 2018 consist of the following:
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Accrued legal and accounting
|
|
$
|
62,725
|
|
|
$
|
67,000
|
|
|
Accrued payroll and related costs
|
|
|
518,015
|
|
|
|
594,641
|
|
|
Accrued other
|
|
|
234,426
|
|
|
|
313,674
|
|
|
|
|
$
|
815,166
|
|
|
$
|
975,315
|
|
(7) Revolving
Line of Credit
In
September 2019, the Company entered into revolving line of credit (“LOC”) with Massachusetts Business Development
Corporation(“BDC”) in the amount of $2.5 million. This agreement replaces the $1.25 million line of credit with Santander
Bank. The agreement includes a demand note allowing the Lender to call the loan at any time. The Company 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 LOC was initially limited to a maximum of $2.0 million and included a requirement
that the total loss for 2019 be $640 thousand or better before the company will be able to access the full $2.5 million. At December
28, 2019 the Company had $1.25 million of borrowings under this LOC and its borrowing base at the time would have permitted an
additional $750 thousand to have been borrowed .
Total Interest Expense for 2019 was $44 thousand.
(8)
Income Taxes
Components of
income tax expense (benefit) for each year are as follows:
|
|
|
|
2019
|
|
|
|
2018
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(33,874)
|
|
|
$
|
(67,956)
|
|
|
State
|
|
|
456
|
|
|
|
456
|
|
|
|
|
|
Current income tax provision (benefit):
|
|
|
(33,418)
|
|
|
|
(67,500)
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(6,387)
|
|
|
|
2,285,758
|
|
|
State
|
|
|
45,261
|
|
|
|
566,161
|
|
|
|
|
|
Deferred income tax provision (benefit), net
|
|
|
38,874
|
|
|
|
2,851,919
|
|
|
|
|
|
Total
|
|
$
|
5,456
|
|
|
$
|
2,784,419
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax
assets as of December 28, 2019 and December 29, 2018 are as follows:
|
|
|
|
December 28, 2019
|
|
|
|
December 29, 2018
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
884,508
|
|
|
$
|
738,213
|
|
|
Stock compensation
|
|
|
543,614
|
|
|
|
524,893
|
|
|
Credit carryforwards
|
|
|
1,317,445
|
|
|
|
1,365,068
|
|
|
Inventory
|
|
|
316,943
|
|
|
|
281,192
|
|
|
Accrued liabilities
|
|
|
18,920
|
|
|
|
21,615
|
|
|
Depreciation
|
|
|
237,449
|
|
|
|
215,936
|
|
|
Other
|
|
|
2,732
|
|
|
|
2,985
|
|
|
Gross deferred tax assets
|
|
|
3,321,611
|
|
|
|
3,149,902
|
|
|
Valuation allowance
|
|
|
3,173,738
|
|
|
|
2,963,155
|
|
|
Net deferred tax assets
|
|
$
|
147,873
|
|
|
$
|
186,747
|
|
At December 28, 2019 and December
29, 2018 the Company had net operating loss carryforwards of approximately $3,278,463 and $2,742,700, respectively, available
to offset future income for U.S. Federal income tax purposes.
The Company
established a valuation reserve as it is judged more likely than not that all or a portion of the tax credits will not be used
before they expire. This decision was initially reached in 2018 after giving greater weight to its losses over the last three
years compared with its forecast of the future.
A summary of
the change in the deferred tax asset is as follows:
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
3,150,155
|
|
|
$
|
3,038,666
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax benefit (provision)
|
|
|
171,456
|
|
|
|
111,236
|
|
|
Valuation allowance
|
|
|
(3,173,738)
|
|
|
|
(2,963,155)
|
|
|
Balance at end of year
|
|
$
|
147,873
|
|
|
$
|
186,747
|
|
Income tax expense
is different from the amounts computed by applying the U.S. federal statutory income tax rate of 21 percent to pretax income as
a result of the following:
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax at statutory rate
|
|
$
|
(125,527)
|
|
|
$
|
(193,000)
|
|
|
State tax, net
|
|
|
|
|
|
|
|
|
|
of federal benefit
|
|
|
360
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss and
|
|
|
|
|
|
|
|
|
|
credit carryforwards
|
|
|
153,204
|
|
|
|
(68,857)
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
210,836
|
|
|
|
2,962,902
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(233,417)
|
|
|
|
82,924
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,456
|
|
|
$
|
2,784,419
|
|
The Company’s
income tax filings are subject to review and examination by federal and state taxing authorities. The Company is currently open
to audit under the applicable statutes of limitations for the years 2016 through 2019.
(9) Retirement
Savings Plan
The Company
sponsors a Retirement Savings Plan (the ‘Plan’) under the provisions of Section 401 of the Internal Revenue Code.
Employees, as defined in the Plan, are eligible to participate in the Plan after 30 days of employment. Under the terms of the
Plan, the Company may match employee contributions under such method as described in the Plan and as determined each year by the
Board of Directors. During 2019 and 2018 the Company did not offer a 401k match.
(10) Concentrations
of Credit Risk, Significant Customers and Geographic Information
Financial instruments
which subject the Company to concentrations of credit risk consist principally of cash, cash equivalents and trade accounts receivable.
The Company maintains such cash deposits in a high credit quality financial institution.
The Company
extends credit to customers who consist principally of microelectronics systems companies in the United States, Europe and Asia.
The Company generally does not require collateral or other security as a condition of sale rather relying on credit approval,
balance limitation and monitoring procedures to control credit risk of trade accounts receivable. Management conducts on-going
credit evaluations of its customers, and historically the Company has not experienced any significant credit-related losses with
respect to its trade accounts receivable.
Revenues from
significant customers as a percentage of total revenues in 2019 and 2018 were as follows:
|
|
|
Percent of Total Revenues
|
|
Significant Customer
|
|
2019
|
|
2018
|
|
A
|
|
|
43
|
%
|
|
|
36
|
%
|
|
B
|
|
|
14
|
%
|
|
|
17
|
%
|
|
C
|
|
|
13
|
%
|
|
|
12
|
%
|
As of December 28, 2019, the Company
had trade accounts receivable due from these three customers that accounted for 85% of total trade accounts receivable as of that
date. No other customer balances constitute 10% or more of accounts receivable at December 28, 2019. To further mitigate the potential
for credit losses the Company has acquired a credit insurance policy covering most of our sales to non-US accounts. Management
believes that any credit risks have been properly provided for in the accompanying financial statements.
The Company’s
revenue was derived from the following countries in 2018 and 2017:
|
|
|
Percent of Total Revenues
|
|
Country
|
|
2019
|
|
2018
|
|
United States of America
|
|
|
25
|
%
|
|
|
33
|
%
|
|
Germany
|
|
|
44
|
%
|
|
|
53
|
%
|
|
Other
|
|
|
31
|
%
|
|
|
14
|
%
|
Many of the
Company’s customers based in the United States conduct design, purchasing and payable functions in the United States, but
manufacture overseas. Revenue generated from shipments made to customers’ locations outside the United States accounted
for 75% and 67% of total revenue in 2019 and 2018, respectively.
All of the Company’s
long-lived assets and operations are located in the United States.
(11)
Commitments and Contingencies
On January 24,
2018 the Company received a “Claim and Non-Conformance Notification” from one of its European customers related to
plating performed by a third party vendor of the Company. On April 11, 2018 the Company received a “Follow-up Claim and
Non-Conformance Notification” from the customer. 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 and on October
9, 2019 the Company entered into a Settlement and Release Agreement resulting in no loss to the Company.
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