UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark
One)
[X]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For
the period ended March 28, 2020
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 CORP.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
|
04-2832509
(I.R.S. Employer
Identification No.)
|
111 South Worcester Street
Norton MA
(Address of principal executive offices)
|
02766-2102
(Zip Code)
|
(508) 222-0614
Registrant’s Telephone Number, including Area Code:
CPS TECHNOLOGIES CORP.
111 South Worcester Street
Norton, MA 02766-2102
Former Name, Former Address and Former Fiscal Year if Changed since
Last Report
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period than the registrant was required to file
such reports), and (2) has been subject to the filing requirements
for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit
and post such files). [X ] Yes [ ] No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer or a non-accelerated filer
or a smaller reporting company, or an emerging growth company. See
definition of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company”” in Rule
12b-2 of the Exchange Act.
Large
accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [X] Smaller reporting company
[X]
Emerging growth company[ ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act):
[ ]
Yes [X] No
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable date.
Number of shares of common stock outstanding as of May 8, 2020:
13,207,436.
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS (Unaudited)
CPS TECHNOLOGIES CORP.
Balance Sheets (Unaudited)
|
|
|
March 28, |
|
|
|
December 28, |
|
|
|
|
2020 |
|
|
|
2019 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
122,255 |
|
|
$ |
133,965 |
|
Accounts
receivable-trade, net |
|
|
5,959,224 |
|
|
|
4,086,945 |
|
Inventories,
net |
|
|
3,595,338 |
|
|
|
3,099,824 |
|
Prepaid
expenses and other current assets |
|
|
227,459 |
|
|
|
147,786 |
|
Total
current assets |
|
|
9,904,276 |
|
|
|
7,468,520 |
|
Property and
equipment: |
|
|
|
|
|
|
|
|
Production
equipment |
|
|
9,919,484 |
|
|
|
9,649,169 |
|
Furniture and
office equipment |
|
|
508,423 |
|
|
|
508,423 |
|
Leasehold improvements |
|
|
934,195 |
|
|
|
934,195 |
|
Total cost |
|
|
11,362,102 |
|
|
|
11,091,787 |
|
|
|
|
|
|
|
|
|
|
Accumulated
depreciation and amortization |
|
|
(10,224,691) |
|
|
|
(10,110,663) |
|
Construction in progress |
|
|
286,891 |
|
|
|
255,754 |
|
Net property and equipment |
|
|
1,424,302 |
|
|
|
1,236,878 |
|
Right-of-use
lease asset |
|
|
136,000 |
|
|
|
171,000 |
|
Deferred taxes, net |
|
|
147,873 |
|
|
|
147,873 |
|
Total Assets |
|
$ |
11,612,451 |
|
|
$ |
9,024,271 |
|
See
accompanying notes to financial statements.
(continued)
CPS TECHNOLOGIES CORP.
Balance Sheets (Unaudited)
(concluded)
|
|
|
March 28, |
|
|
|
December 28, |
|
|
|
|
2020 |
|
|
|
2019 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
Borrowings against line of credit |
|
|
1,577,506 |
|
|
|
1,249,588 |
|
Note payable,
current portion |
|
|
45,980 |
|
|
|
— |
|
Accounts
payable |
|
|
2,621,862 |
|
|
|
1,436,417 |
|
Accrued
expenses |
|
|
691,921 |
|
|
|
815,166 |
|
Deferred
revenue |
|
|
381,216 |
|
|
|
21,110 |
|
Lease
liability, current portion |
|
|
136,000 |
|
|
|
148,000 |
|
|
|
|
|
|
|
|
|
|
Total
current liabilities |
|
|
5,454,485 |
|
|
|
3,670,281 |
|
|
|
|
|
|
|
|
|
|
Note payable less
current portion |
|
|
159,649 |
|
|
|
— |
|
Long
term lease liability |
|
|
— |
|
|
|
23,000 |
|
|
|
Total
liabilities |
|
|
5,614,134 |
|
|
|
3,693,281 |
|
Commitments (note
4) |
|
|
|
|
|
|
|
|
Stockholders’
equity: |
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, |
|
|
|
|
|
|
|
|
authorized 20,000,000 shares; |
|
|
|
|
|
|
|
|
issued 13,427,492 shares; |
|
|
|
|
|
|
|
|
outstanding 13,207,436 shares; |
|
|
|
|
|
|
|
|
at March 28, 2020 and December 28,
2019, respectively |
|
|
134,275 |
|
|
|
134,275 |
|
Additional paid-in
capital |
|
|
36,159,874 |
|
|
|
36,094,201 |
|
Accumulated
deficit |
|
|
(29,778,779) |
|
|
|
(30,380,433) |
|
Less cost of
220,056 common shares repurchased |
|
|
|
|
|
|
|
|
at March 28,
2020 and December 28, 2019, |
|
|
(517,053) |
|
|
|
(517,053) |
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity |
|
|
5,998,317 |
|
|
|
5,330,990 |
|
|
|
Total liabilities
and stockholders’ |
|
|
|
|
|
|
|
|
equity |
|
$ |
11,612,451 |
|
|
$ |
9,024,271 |
|
|
|
See
accompanying notes to financial statements.
CPS TECHNOLOGIES CORP.
Statements of Operations (Unaudited)
|
|
|
Fiscal Quarters Ended |
|
|
|
|
March 28, |
|
|
|
March
30, |
|
|
|
|
2020 |
|
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Product sales |
|
$ |
6,511,571 |
|
|
$ |
5,269,538 |
|
|
|
|
|
|
|
|
|
|
Total
revenues |
|
|
6,511,571 |
|
|
|
5,269,538 |
|
Cost
of product sales |
|
|
4,961,361 |
|
|
|
5,110,114 |
|
|
|
|
|
|
|
|
|
|
Gross Margin |
|
|
1,550,210 |
|
|
|
159,424 |
|
Selling, general,
and |
|
|
|
|
|
|
|
|
administrative expense |
|
|
928,590 |
|
|
|
903,686 |
|
|
|
Income (loss) from
operations |
|
|
621,620 |
|
|
|
(744,262) |
|
Other
income (expense), net |
|
|
(19,966) |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
Income (loss)
before taxes |
|
|
601,654 |
|
|
|
(744,214) |
|
Income
tax provision (benefit) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Net
income (loss) |
|
$ |
601,654 |
|
|
$ |
(744,214) |
|
|
|
Net income (loss)
per |
|
|
|
|
|
|
|
|
basic common
share |
|
$ |
0.05 |
|
|
$ |
(0.06) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of |
|
|
|
|
|
|
|
|
basic common shares |
|
|
|
|
|
|
|
|
outstanding |
|
|
13,207,436 |
|
|
|
13,206,069 |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
per |
|
|
|
|
|
|
|
|
diluted common
share |
|
$ |
0.05 |
|
|
$ |
(0.06) |
|
|
|
Weighted average number of |
|
|
|
|
|
|
|
|
diluted common shares |
|
|
|
|
|
|
|
|
outstanding |
|
|
13,247,131 |
|
|
|
13,206,069 |
|
|
|
See
accompanying notes to financial statements.
CPS TECHNOLOGIES CORPORATION
STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 28, 2020 AND MARCH 30,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
shares |
|
|
|
Par |
|
|
|
paid-in |
|
|
|
Accumulated |
|
|
|
Stock |
|
|
|
stockholders’ |
|
|
|
|
issued |
|
|
|
Value |
|
|
|
capital |
|
|
|
deficit |
|
|
|
repurchased |
|
|
|
equity |
|
Balance
at December 28, 2019 |
|
|
13,427,492 |
|
|
$ |
134,275 |
|
|
$ |
36,094,201 |
|
|
|
(30,380,433) |
|
|
|
(517,053) |
|
|
|
5,330,990 |
|
Share-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
65,673 |
|
|
|
— |
|
|
|
— |
|
|
|
65,673 |
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
601,654 |
|
|
|
— |
|
|
|
601,654 |
|
Balance at March 28, 2020 |
|
|
13,427,492 |
|
|
|
134,275 |
|
|
|
36,159,874 |
|
|
|
(29,778,779) |
|
|
|
(517,053) |
|
|
|
5,998,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
— |
|
|
|
— |
|
|
|
58,986 |
|
|
|
— |
|
|
|
— |
|
|
|
58,986 |
|
Issuance of common stock |
|
|
1,500 |
|
|
|
15 |
|
|
|
2,235 |
|
|
|
— |
|
|
|
— |
|
|
|
2,250 |
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(744,214) |
|
|
|
— |
|
|
|
(744,214) |
|
Balance at March 30, 2019 |
|
|
13,427,492 |
|
|
|
134,275 |
|
|
|
36,021,766 |
|
|
|
(30,486,445) |
|
|
|
(517,053) |
|
|
|
5,152,543 |
|
See
accompanying notes to financial statements.
CPS TECHNOLOGIES CORP.
Statements of Cash Flows (Unaudited)
|
|
|
Fiscal
Quarters Ended |
|
|
|
|
March 28, |
|
|
|
March 30, |
|
|
|
|
2020 |
|
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
Cash flows from
operating activities: |
|
|
|
|
|
|
|
|
Net
income (loss) |
|
$ |
601,654 |
|
|
$ |
(744,214) |
|
Adjustments to
reconcile net income (loss) |
|
|
|
|
|
|
|
|
to cash used in
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and
amortization |
|
|
128,759 |
|
|
|
139,465 |
|
Share-based
compensation |
|
|
65,673 |
|
|
|
61,236 |
|
Gain on sale of
property and equipment |
|
|
(5,000) |
|
|
|
— |
|
Changes in: |
|
|
|
|
|
|
|
|
Accounts
receivable-trade |
|
|
(1,872,279) |
|
|
|
(138,667) |
|
Inventories |
|
|
(495,514) |
|
|
|
115,342 |
|
Prepaid expenses
and other current assets |
|
|
(79,673) |
|
|
|
(47,209) |
|
Accounts
payable |
|
|
1,185,445 |
|
|
|
388,619 |
|
Accrued
expenses |
|
|
(123,245) |
|
|
|
(255,980) |
|
Deferred revenue |
|
|
360,106 |
|
|
|
— |
|
Net cash used in
operating activities |
|
|
(234,074) |
|
|
|
(481,408) |
|
|
|
|
|
|
|
|
|
|
Cash flows from
investing activities: |
|
|
|
|
|
|
|
|
Purchases of
property and equipment |
|
|
(107,600) |
|
|
|
(116,327) |
|
Proceeds from sale of property and equipment |
|
|
5,000 |
|
|
|
— |
|
Net cash used in
investing |
|
|
|
|
|
|
|
|
activities |
|
|
(102,600) |
|
|
|
(116,327) |
|
Cash flows from
financing activities: |
|
|
|
|
|
|
|
|
Net borrowings on
line of credit |
|
|
327,918 |
|
|
|
200,000 |
|
Payments on note payable |
|
|
(2,954) |
|
|
|
— |
|
Net cash provided
by |
|
|
|
|
|
|
|
|
financing activities |
|
|
324,964 |
|
|
|
200,000 |
|
|
|
|
|
|
|
|
|
|
Net decrease in
cash and cash equivalents |
|
|
(11,710) |
|
|
|
(397,735) |
|
Cash
and cash equivalents at beginning of period |
|
|
133,965 |
|
|
|
628,804 |
|
Cash
and cash equivalents at end of period |
|
$ |
122,255 |
|
|
$ |
231,069 |
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flows information: |
|
|
|
|
|
|
|
|
Cash paid for
interest |
|
$ |
33,216 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of non-cash activity: |
|
|
|
|
|
|
|
|
Issuance of note
payable to finance equipment purchase |
|
$ |
208,583 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
CPS TECHNOLOGIES CORP.
Notes to Financial Statement
(Unaudited)
(1) Nature of
Business
CPS Technologies Corporation (the “Company” or “CPS”) provides
advanced material solutions to the electronics, power generation,
automotive and other industries. The Company’s primary
advanced material solution is metal-matrix composites which are a
combination of metal and ceramic.
CPS also assembles housings and packages for hybrid circuits. These
housings and packages may include components made of metal-matrix
composites or they may include components made of more traditional
materials such as aluminum, copper-tungsten, etc.
The Company sells into several end markets including the wireless
communications infrastructure market, high-performance
microprocessor market, motor controller market, and other
microelectronic and structural markets.
(2) Summary of
Significant Accounting Policies
As permitted by the rules of the Securities and Exchange Commission
applicable to quarterly reports on Form 10-Q, these notes are
condensed and do not contain all disclosures required by generally
accepted accounting principles.
The accompanying financial statements are unaudited. In the opinion
of management, the unaudited financial statements of CPS reflect
all normal recurring adjustments which are necessary to present
fairly the financial position and results of operations for such
periods.
The Company’s balance sheet at December 28, 2019 has been derived
from the audited financial statements at that date, but does not
include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for
complete financial statements.
For further information, refer to the financial statements and
footnotes thereto included in the Registrant’s Annual Report on
Form 10-K for the year ended December 28, 2019 and in CPS’s other
SEC reports, which are accessible on the SEC’s website at
www.sec.gov and the Company’s website at www.alsic.com.
The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year.
(3) Net Income (Loss)
Per Common and Common Equivalent Share
Basic net income (loss) per common share is calculated by dividing
net income (loss) by the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per common
share is calculated by dividing net income (loss) by the sum of the
weighted average number of common shares plus additional common
shares that would have been outstanding if potential dilutive
common shares had been issued for granted stock options and stock
purchase rights. Common stock equivalents are excluded from the
diluted calculations when a net loss is incurred as they would be
anti-dilutive.
The following table presents the calculation of both basic and
diluted EPS:
|
|
|
Three Months
Ended |
|
|
|
|
March 28, |
|
|
|
March 30, |
|
|
|
|
2020 |
|
|
|
2019 |
|
Basic EPS Computation: |
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
Net
income (loss) |
|
$ |
601,654 |
|
|
$ |
(744,214) |
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted average |
|
|
|
|
|
|
|
|
Common shares |
|
|
|
|
|
|
|
|
Outstanding |
|
|
13,207,436 |
|
|
|
13,206,069 |
|
|
|
|
|
|
|
|
|
|
Basic EPS |
|
$ |
0.05 |
|
|
$ |
(0.06) |
|
|
|
|
|
|
|
|
|
|
Diluted EPS
Computation: |
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
Net income
(loss) |
|
$ |
601,654 |
|
|
$ |
(744,214) |
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted average |
|
|
|
|
|
|
|
|
Common shares |
|
|
|
|
|
|
|
|
Outstanding |
|
|
13,207,436 |
|
|
|
13,206,069 |
|
Dilutive effect of
stock options |
|
|
39,695 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Total Shares |
|
|
13,247,131 |
|
|
|
13,206,069 |
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
$ |
0.05 |
|
|
$ |
(0.06) |
|
|
|
|
|
|
|
|
|
|
(4) Commitments &
Contingencies
Commitments
Leases
The Company has two real estate leases—one expiring in February
2021 and one with an 11 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. 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 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
commencement dates. The Company’s lease agreements do not contain
any material residual value guarantees or material restrictive
covenants.
Operating Leases
Lease expense for operating leases is recognized on a straight-line
basis over the lease term. Lease expense is included in rents on
the statements of operations and is reported net of lease income.
Lease income is not material to the results of operations for the
quarter ended March 28, 2020.
The following table presents information about the amount, timing
and uncertainty of cash flows arising from the Company’s
capitalized operating leases as of March 28, 2020
(Dollars in
Thousands) |
|
|
March
28, 2020 |
|
Maturity of capitalized lease
liabilities |
|
|
Lease payments |
|
2020 |
|
|
117 |
|
2021 |
|
|
26 |
|
Total
undiscounted operating lease payments |
|
$ |
143 |
|
Less:
Imputed interest |
|
|
(7) |
|
Present value of operating lease liability |
|
$ |
136 |
|
Balance
Sheet Classification |
|
|
|
|
Current lease liability |
|
$ |
136 |
|
Long-term lease liability |
|
|
0 |
|
Total
operating lease liability |
|
$ |
136 |
|
Other
Information |
|
|
|
|
Weighted-average
remaining lease term for capitalized operating leases |
|
|
11 months |
|
Weighted-average
discount rate for capitalized operating leases |
|
|
6.5% |
|
Operating Lease Costs and Cash Flows
Operating lease cost and cash paid was $38 thousand during the
first quarter of 2020. 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
Payments
The Company
measures the cost of employee services received in exchange for an
award of equity instruments based on the grant date fair value of
the award. That cost is recognized over the period during which an
employee is required to provide services in exchange for the award,
the requisite service period (usually the vesting period). The
Company provides an estimate of forfeitures at initial grant date.
Reductions in compensation expense associated with the forfeited
options are estimated at the date of grant, and this estimated
forfeiture rate is adjusted periodically based on actual forfeiture
experience. The company uses the Black-Scholes option pricing model
to determine the fair value of the stock options granted.
During the quarters ended March 28, 2020 and March 30, 2019 a total
of 59,000 and 79,000 stock options, respectively, were granted to
employees under the Company’s 2020 Equity Incentive Plan and 2009
Stock Incentive Plan, respectively (collectively the “Plan”) and a
total of 60,000 and 45,000 stock options, respectively, were
granted to outside directors during the quarters ended March 28,
2020 and March 30, 2019
During the quarter ended March 28, 2020 there were no shares issued
and during the quarter ended March 30, 2019 there were 1,500 shares
issued.
As of March 28, 2020, there was $198 thousand of total unrecognized
compensation cost related to nonvested share-based compensation
arrangements granted under the Plan; that cost is expected to be
recognized over a weighted average period of 1.47 years.
During the quarters ended March 28, 2020 and March 30, 2019, the
Company recognized approximately $66 thousand and $59 thousand,
respectively, as shared-based compensation expense related to
previously granted shares under the Plan.
(6)
Inventories
Inventories consist of the following:
|
|
|
March 28, |
|
|
|
December 28, |
|
|
|
|
2020 |
|
|
|
2019 |
|
Raw
materials |
|
$ |
818,501 |
|
|
$ |
778,409 |
|
Work in
process |
|
|
2,005,211 |
|
|
|
1,898,916 |
|
Finished goods |
|
|
1,220,988 |
|
|
|
871,861 |
|
Gross
inventory |
|
|
4,044,700 |
|
|
|
3,549,186 |
|
|
|
|
|
|
|
|
|
|
Reserve
for obsolescence |
|
|
(449,362) |
|
|
|
(449,362) |
|
Inventories, net |
|
$ |
3,595,338 |
|
|
$ |
3,099,824 |
|
(7) Accrued
Expenses
Accrued expenses consist of the following:
|
|
|
March 28, |
|
|
|
December
28, |
|
|
|
|
2020 |
|
|
|
2019 |
|
Accrued legal and accounting |
|
$ |
28,755 |
|
|
$ |
62,725 |
|
Accrued payroll
and related expenses |
|
|
508,327 |
|
|
|
518,015 |
|
Accrued other |
|
|
154,839 |
|
|
|
234,426 |
|
Total
Accrued Expenses |
|
$ |
691,921 |
|
|
$ |
815,166 |
|
(8) Line of
Credit
In September 2019, the Company entered into revolving line of
credit with The Massachusetts Business Development Corporation
(BDC) in the amount of $2.5 million. The agreement includes a
demand note allowing the Lender to call the loan at any time.
CPS may terminate the agreement without a termination fee after 3
years. The LOC is secured by the accounts receivable and
other assets of the Company and has an interest rate of LIBOR plus
650 basis points. At March 28, 2020 the Company had $1.578 million
of borrowings under this LOC and its borrowing base at the time
would have permitted an additional $922 thousand to have been
borrowed.
The line of credit is subject to certain financial covenants, all
of which have been met.
(9)
Note
Payable
In March 2020, the company acquired a Sonoscan ultrasound
microscope for a price of $208. The full amount was financed
through a 5 year note payable with Crest Capital Corporation.
The note is collateralized by the microscope and is being paid in
monthly installments of $4, consisting of principal plus interest
at a rate of 6.47%.
(10) Income Taxes
A valuation allowance against deferred tax assets is required to be
established or maintained when it is "more likely than not" that
all or a portion of deferred tax assets will not be realized. In
December 2018, the Company established a valuation allowance
reserve, as it is judged more likely than not that all or a portion
of its deferred tax assets will not be utilized before they expire.
This decision was reached after giving greater weight to the
Company’s losses in recent years as compared to its forecasts.
The Coronavirus Aid, Relief and Economic Security Act (“Act”)
became law on March 27, 2020. The Act contains two provisions that
provide a tax benefit to the Company. The Act suspends the current
80% limitation on the utilization of net operating losses for
taxable years beginning in 2018, 2019 and 2020. The Act also allows
net operating losses arising in 2018, 2019 and 2020 to be carried
back five years. The Act also accelerates the ability of the
Company to recover Federal alternative minimum tax credits.
The Company recorded a reduction of the valuation allowance reserve
of $216 thousand during the quarter ended March 28, 2020 to account
for the utilization of deferred tax assets to reduce the current
tax liability for the quarter ended March 28, 2020. As a result of
the utilization of deferred tax assets, the Company did not record
a provision for income taxes for the quarter ended March 28,
2020.
ITEM 2 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of financial condition and
results of operations is based upon and should be read in
conjunction with the financial statements of the Company and notes
thereto included in this report and the Company’s Annual Report on
Form 10-K for the year ended December 28, 2019 and in CPS’s other
SEC reports, which are accessible on the SEC’s website at
www.sec.gov and the Company’s website at www.alsic.com.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking
statements that involve a number of risks and uncertainties. There
are a number of factors that could cause the Company’s actual
results to differ materially from those forecasted or projected in
such forward-looking statements. This includes the impact of
the COVID-19 pandemic, which is discussed in Item 3 of this report.
Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date
hereof. The Company undertakes no obligation to publicly
release the results of any revisions to these forward-looking
statements which may be made to reflect events or changed
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Critical Accounting Policies
The critical accounting policies utilized by the Company in
preparation of the accompanying financial statements are set forth
in Part II, Item 7 of the Company’s Annual Report on Form 10-K for
the year ended December 28, 2019, under the heading “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations”. There have been no material changes to these policies
since December 28, 2019.
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 heat spreaders 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 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.
Our products are manufactured by proprietary processes we
have developed including the QuicksetTM Injection Molding Process
(‘Quickset Process’) and the QuickCastTM Pressure Infiltration
Process (‘QuickCast Process’).
CPS was incorporated in Massachusetts in 1984 as Ceramics Process
Systems Corporation and reincorporated in Delaware in April 1987
through a merger into a wholly-owned Delaware subsidiary organized
for purposes of the reincorporation. In July 1987, CPS completed
our initial public offering of 1.5 million shares of our Common
Stock. In March 2007, we changed our name from Ceramics Process
Systems Corporation to CPS Technologies Corporation.
Results of Operations for the First Fiscal Quarter of 2020 (Q1
2020) Compared to the First Fiscal Quarter of 2019 (Q1 2019); (all
$ in 000’s)
Revenues totaled $6,512 in Q1 2020 compared with $5,270 generated
in Q1 2019, an increase of 24%. About one third of this increase
was due to increased unit volume with the balance due to price
changes in Q1 2020 compared with Q1 2019.
Gross margin in Q1 2020 totaled $1,550 or 24% of sales. This
compares with gross margin in Q1 2019 of $159 or 3% of sales.
Increases in sales volume as well as a reduction in manufacturing
expenses of $202 predominantly account for this change. As
stated above, the sales increase was the result of increases in
both unit sales volume and price. The increase of unit sales
volume was more than offset by increased efficiencies in
manufacturing resulting in the reduction in manufacturing
expenses.
Selling, general and administrative (SG&A) expenses totaled
$929 in Q1 2020 compared with SG&A expenses of $904 in Q1
2019. Although the Company has been able to reduce sales
commission rates where appropriate, this increase was due almost
entirely to increased sales commissions as a result of increased
sales.
The Company experienced an operating profit of $622 in Q1 2020
compared with an operating loss of $744 in Q1 2019 as a result of
the improved gross margin.
The Company is part of the Defense Industrial Base and thus has
been open and operating throughout the COVID-19 pandemic. The
COVID-19 pandemic did not affect financial results for the quarter
ended March 28, 2020. The Company believes the pandemic will
negatively affect financial results, at least modestly, in upcoming
quarters.
Since the outbreak of the pandemic, the Company has aggressively
implemented CDC guidelines in the workplace to prevent the spread
of COVID-19. For example, the Company has staggered shifts to
eliminate overlap at shift changes, reorganized workstations to
ensure social distancing, implemented daily screening of all
employees by taking employees’ temperatures, etc.
Where possible, employees are working from home.
Demand from customers remains strong as of today, but this demand
may be reduced due to COVID-19 related factors such as
government-mandated business closings, inability of our customers
to obtain components from other suppliers, etc.
We are now seeing certain operating costs increasing such as
freight costs. Employee absenteeism has increased due
to school closings, employees caring for sick family members, etc.
Increased absenteeism is causing labor inefficiencies and increased
use of overtime.
Because demand has remained strong, no employees have been
furloughed and employee hours have not been reduced.
The Company does not currently need and is not participating in the
Payroll Protection Program of the CARES Act. The
Families First Coronavirus Response Act requires the Company to pay
employees who are absent due to specific COVID-19 reasons, but
allows the Company to recover this cost via a reduction in the
Company’s portion of payroll taxes.
All of these factors combine to create a higher degree of
uncertainty regarding future financial performance, however, as of
today the Company believes the effect of the COVID-19 pandemic on
future financial performance will be negative, but modest.
Liquidity and Capital Resources (all $ in 000’s unless
noted)
The Company’s net cash and cash equivalents at March 28, 2020
totaled ($1,455). (Net cash is defined as cash and cash equivalents
less bank borrowings.) This compares to cash and cash
equivalents at December 28, 2019 of ($1,116). Payment terms for
customers range from payment in advance to 90 days from shipment
and are based on factors such as credit worthiness, volume of
business, etc. The decrease in net cash was due primarily to
longer terms for our large customers, including the elimination of
the prompt pay discount, resulting in an increase in working
capital (i.e. receivables and inventory less payables and
accruals).
Accounts receivable at March 28, 2020 totaled $5,959 compared with
$4,087 at December 28, 2019. Days Sales Outstanding (DSO) increased
from 67 days at the end of 2019 to 77 days at the end of Q1 2020.
The increase in DSO was due to higher sales at the end of the
quarter compared to the beginning of the quarter, as well as higher
sales to one customer with longer payment terms. The accounts
receivable balances at December 28, 2019, and March 28, 2020 were
both net of an allowance for doubtful accounts of $10.
Inventories totaled $3,595 at March 28, 2020 compared with
inventory totaling $3,100 at December 28, 2019. The inventory
turnover in the most recent four quarters ending Q1 2020 was 6.0
times (based on a 5 point average) compared with 6.2 times averaged
during the four quarters of 2019.
The Company financed its increase in working capital in Q1 2020
from its profit and increased borrowings of $328 from its line of
credit with BDC Capital. The Company expects it will continue
to be able to fund its operations for the remainder of 2020 from
existing cash balances and bank borrowings.
The Company continues to sell to a limited number of customers and
the loss of any one of these customers could cause the Company to
require additional external financing. Failure to generate
sufficient revenues, raise additional capital or reduce certain
discretionary spending could have a material adverse effect on the
Company’s ability to achieve its business objectives.
Contractual Obligations (all $ in 000’s unless otherwise
noted)
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. At March 28,
2020 the Company had $1.58 million of borrowings under this LOC and
its borrowing base at the time would have permitted an additional
$922 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.
In March 2020, the company acquired a Sonoscan ultrasound
microscope for a price of $208. The full amount was financed
through a 5 year note payable with Crest Capital Corporation.
The note is collateralized by the microscope and is being paid in
monthly installments of $4, consisting of principal plus interest
at a rate of 6.47%
As of March, 28 2020 the Company had $287 of construction in
progress and no outstanding commitments to purchase production
equipment.
The Company has two real estate leases—one expiring in February
2021 and one with an 11 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. 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. (Note 4, Leases)
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not significantly exposed to the impact of interest
rate changes or foreign currency fluctuations. The Company
has not used derivative financial instruments.
The COVID-19 pandemic presents several risks for the Company.
The Company is part of the Defense Industrial Base and thus has
remained open and operating throughout the pandemic. The
primary risks resulting from the pandemic are potential declines in
customer demand due to government-mandated business closures and
increased operating costs resulting from pandemic-related factors
such as increased freight costs and increased employee absenteeism
causing labor inefficiencies and increased use of overtime.
The COVID-19 pandemic did not materially affect financial
results for the quarter ended March 28, 2020. The Company
believes it will negatively affect financial results, at least
modestly, in upcoming quarters, due to the risks described
above.
ITEM
4
CONTROLS AND PROCEDURES
(a) The Company’s Chief
Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Company’s disclosure controls and procedures
(as such term is defined in Rules 13a-14(c) and 15d - 14(c) under
the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) as of the end of the period covered by this Form 10-Q (the
“Evaluation Date”). Based on such evaluation, such officers
have concluded that, as of the Evaluation Date, 1) the
Company’s disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in
reports the Company files under the Securities Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC and 2) the
Company’s disclosure controls and procedures are effective to
ensure that information required to be disclosed in the reports
that the Company files or submits under the Exchange Act is
accumulated and communicated to our management, including our chief
executive officer and chief financial officer, to allow timely
decisions regarding required disclosure.
(b) Changes in Internal
Controls. There has been no change in our internal control over
financial reporting that occurred during our most recent fiscal
quarter that has materially affected or is reasonably likely to
materially affect our internal control over financial
reporting.
PART II OTHER INFORMATION
ITEM
1
LEGAL PROCEEDINGS
None.
ITEM
1A RISK
FACTORS
There have been no material changes to the risk factors as
discussed in our 2019 Form 10-K.
ITEM
2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS. None.
ITEM
3
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4
MINE SAFETY DISCLOSURES
Not applicable.
ITEM
5
OTHER INFORMATION
Not applicable.
ITEM
6
EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
Exhibit 31.1 Certification Of Chief Executive Officer Pursuant To
18 U.S.C. Section 1350, As Adopted Pursuant To Section 302 Of The
Sarbanes-Oxley Act Of 2002
Exhibit 31.2 Certification Of Chief Financial Officer Pursuant To
18 U.S.C. Section 1350, As Adopted Pursuant To Section 302 Of The
Sarbanes-Oxley Act Of 2002
Exhibit 32.1 Certification Pursuant To 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of
2002
(b)
Reports on
Form 8-K:
On
March 5, 2020 the Company filed a report on Form 8-K relating to
the announcement of its financial results for the year ended
December 28, 2019 as presented in a press release dated March 4,
2020.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CPS TECHNOLOGIES CORPORATION
(Registrant)
Date: May 12, 2020
/s/ Grant C. Bennett
Grant
C. Bennett
Chief
Executive Officer
Date: May 12, 2020
/s/
Charles K. Griffith Jr.
Charles K. Griffith Jr.
Chief
Financial Officer