Company Quick10K Filing
Quick10K
CPS Technologies
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$1.51 13 $20
10-Q 2019-09-28 Quarter: 2019-09-28
10-Q 2019-06-29 Quarter: 2019-06-29
10-Q 2019-03-30 Quarter: 2019-03-30
10-K 2018-12-29 Annual: 2018-12-29
10-Q 2018-09-29 Quarter: 2018-09-29
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-30 Annual: 2017-12-30
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-04-01 Quarter: 2017-04-01
10-Q 2017-01-07 Quarter: 2017-01-07
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-10-01 Quarter: 2016-10-01
10-Q 2016-07-02 Quarter: 2016-07-02
10-Q 2016-04-02 Quarter: 2016-04-02
10-K 2015-12-26 Annual: 2015-12-26
10-Q 2015-09-26 Quarter: 2015-09-26
10-Q 2015-06-27 Quarter: 2015-06-27
10-Q 2015-03-28 Quarter: 2015-03-28
10-K 2014-12-27 Annual: 2014-12-27
10-Q 2014-09-27 Quarter: 2014-09-27
10-Q 2014-06-28 Quarter: 2014-06-28
10-Q 2014-03-29 Quarter: 2014-03-29
10-K 2013-12-28 Annual: 2013-12-28
8-K 2019-10-11 Officers
8-K 2019-09-25 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-08-21 Officers
8-K 2019-06-29 Earnings, Exhibits
8-K 2019-05-13 Shareholder Vote
8-K 2019-05-06 Officers, Exhibits
8-K 2019-04-08 Officers
8-K 2019-03-30 Earnings, Exhibits
8-K 2018-12-29 Earnings, Exhibits
8-K 2018-12-29 Earnings, Exhibits
8-K 2018-12-03 Officers
8-K 2018-09-29 Earnings, Exhibits
8-K 2018-06-30 Earnings, Exhibits
8-K 2018-06-21 Officers, Exhibits
8-K 2018-05-07 Shareholder Vote
8-K 2018-03-31 Earnings, Exhibits
8-K 2017-12-30 Earnings, Exhibits
CRH CRH Public 27,570
EXP Eagle Materials 3,611
CPAC Cementos Pacasmayo Saa 3,569
LOMA Loma Negra Compania Industrial Argentina Sociedad Anonima 3,028
CBPX Continental Building Products 825
USCR US Concrete 647
CSTE Caesarstone 497
FRTA Forterra 385
CUO Continental Materials 28
CCCL China Ceramics 4
CPSH 2019-09-28
Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risk
Item 4 Controls and Procedures
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 2018 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 (A) Exhibits:
EX-31.1 ex311q32019.htm
EX-31.2 ex312q32019.htm
EX-32.1 ex321q32019.htm

CPS Technologies Earnings 2019-09-28

CPSH 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 q109282019q3.htm Q3 2019 10Q DOCUMENT

 

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  September 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
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
Registrants Telephone Number, including Area Code:

 

 

CPS Technologies Corporation

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, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]   Accelerated filer [ ]   Non-accelerated filer [X]   Smaller reporting company [X] Emerging growth company[ ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):
[ ] Yes       [X] No

 

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 October 29, 2019: 13,207,436.

 

 

PART I  FINANCIAL INFORMATION

ITEM 1  FINANCIAL STATEMENTS (Unaudited)

CPS TECHNOLOGIES CORPORATION
Balance Sheets (Unaudited)
(continued on next page)

 

    September 28,      December 29,  
     2019      2018  
ASSETS          
Current assets:          
Cash and cash equivalents  $470,284   $628,804 
Accounts receivable- trade, net of allowance for doubtful          
accounts of $10,000   2,795,743    3,053,091 
Inventories, net   2,791,111    3,192,933 
Prepaid expenses and other current assets   173,320    156,338 
                
Total current assets   6,230,458    7,031,166 
                
Property and equipment:          
Production equipment   9,587,303    9,550,043 
Furniture and office equipment   525,055    519,779 
Leasehold improvements   891,817    891,817 
                
Total cost   11,004,175    10,961,639 
Accumulated depreciation and amortization   (10,113,918)   (9,722,767)
Construction in progress   241,901    34,314 
                
 Net property and equipment   1,132,158    1,273,186 
                
Right-of-use lease asset (note 4, leases)   207,000    —   
Deferred taxes   186,747    186,747 
                
 Total assets  $7,756,363   $8,491,099 
                

 

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORPORATION
Balance Sheets (Unaudited)
(concluded)

LIABILITIES AND STOCKHOLDERS’    September 28,      December 29,  
EQUITY    2019      2018  
           
Current liabilities:          
Line of credit   412,732    —   
Accounts payable   1,474,059    1,680,263 
Accrued expenses   700,990    975,315 
Current portion lease liability   148,000    —   
                
Total current liabilities   2,735,781    2,655,578 
                
Long term lease liability   59,000    —   
                
Total liabilities   2,794,781    2,655,578 
Commitments (note 4)          
Stockholders’ equity:          
Common stock, $0.01 par value,          
authorized 20,000,000 shares;          
issued 13,427,492 and 13,425,992;          
outstanding 13,207,436 and 13,205,936;          
at September 28, 2019 and December 29, 2018   134,275    134,260 
Additional paid-in capital   36,076,177    35,960,545 
Accumulated deficit   (30,731,817)   (29,742,231)
Less cost of 220,056 common shares repurchased          
at September 28, 2019 and December 29, 2018   (517,053)   (517,053)
                
Total stockholders’ equity   4,961,582    5,835,521 
                
Total liabilities and stockholders’          
 equity  $7,756,363   $8,491,099 
                

 

See accompanying notes to financial statements.

 

CPS TECHNOLOGIES CORPORATION
Statements of Operations (Unaudited)

  Fiscal Quarters Ended      Nine Months Ended  
    September 28,      September 29,      September 28,      September 29,  
     2019      2018      2019      2018  
Revenues:                            
Product sales  $4,387,125   $6,116,448   $16,023,615   $15,500,173 
Total Revenues   4,387,125    6,116,448    16,023,615    15,500,173 
Cost of product sales   4,164,187    5,152,598    14,466,266    13,786,762 
Gross Margin   222,938    963,850    1,557,349    1,713,411 
Selling, general and                    
administrative expense   702,413    982,765    2,523,178    2,822,240 
Operating loss   (479,475)   (18,915)   (965,829)   (1,108,829)
Interest income (expense), net   (16,495)   (13,679)   (23,757)   (25,313)
Other income   —      13,645    —      13,645 
Net loss before income                    
tax expense   (495,970)   (18,949)   (989,586)   (1,120,497)
Income tax (benefit)   —      (5,000)   —      (275,000)
Net (loss)  $(495,970)  $(13,949)  $(989,586)  $(845,497)
Net (loss) per                    
basic common share  $(0.04)  $(0.00)  $(0.07)  $(0.06)
Weighted average number of                    
basic common shares                    
outstanding   13,206,069    13,203,436    13,206,984    13,203,436 
Net (loss) per                    
diluted common share  $(0.04)  $(0.00)  $(0.07)  $(0.06)
Weighted average number of                    
diluted common shares                    
outstanding   13,206,069    13,203,436    13,206,984    13,203,436 

 

See accompanying notes to financial statements.

 

 

 

 

 

CPS TECHNOLOGIES CORPORATION
STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 28, 2019 AND SEPTEMBER 29, 2018

                                   
   Common Stock                          
     Number of             Additional                   Total  
     shares    Par      paid-in       Accumulated      Stock    stockholders'  
     issued      Value      capital     deficit      repurchased    equity  
Balance at June 29, 2019   13,427,492   $134,275   $36,048,177    (30,235,846)   (517,053)  5,429,553  
Share-based compensation expense   —      —      28,000    —      —     28,000  
Net (loss)                  (495,971)   —     (495,971)  
Balance at September 28, 2019   13,427,492    134,275    36,076,177    (30,731,817)   (517,053)  4,961,582  

 

 

                                
   Common Stock                       
     Number of             Additional                 Total
     shares      Par      paid-in      Accumulated      Stock      stockholders'  
     issued      Value      capital      deficit      repurchased      equity  
Balance at December 29, 2018   13,425,992   $134,260   $35,960,545    (29,742,231)   (517,053)   5,835,521 
Share-based compensation expense   —      —      113,397    —      —      113,397 
Issuance of common stock   1,500    15    2,235    —      —      2,250 
Net (loss)                  (989,586)   —      (989,586)
Balance at September 28, 2019   13,427,492    134,275    36,076,177    (30,731,817)   (517,053)   4,961,582 

 

                                   
   Common Stock                          
     Number of             Additional                Total  
     shares      Par      paid-in      Accumulated      Stock      stockholders'  
     issued      Value      capital      deficit      repurchased      equity  
Balance at June 30, 2018   13,423,492   $134,235   $35,842,945    (26,867,812)   (517,053)   8,592,315 
Share-based compensation expense   —      —      32,669    —      —      32,669 
Net (loss)                  (13,949)   —      (13,949)
Balance at September 29, 2018   13,423,492    134,235    35,875,614    (26,881,761)   (517,053)   8,611,035 

 

                                   
   Common Stock                            
     Number of           Additional                    Total  
     shares      Par      paid-in      Accumulated      Stock      stockholders'  
     issued      Value      capital      deficit      repurchased      equity  
Balance at December 30, 2017   13,423,492   $134,235   $35,739,916    (26,036,264)   (517,053)   9,320,834 
Share-based compensation expense   —      —      135,698    —      —      135,698 
Net (loss)                  (845,497)   —      (845,497)
Balance at September 29, 2018   13,423,492    134,235    35,875,614    (26,881,761)   (517,053)   8,611,035 

 

See accompanying notes to financial statements.

 

CPS TECHNOLOGIES CORPORATION
Statements of Cash Flows (Unaudited)

    Nine Month Periods Ended  
     September 28,       September 29,  
     2019       2018  
               
Cash flows from operating activities:          
Net loss  $(989,586)  $(845,497)
Adjustments to reconcile net loss          
to cash provided by (used in) operating activities          
Depreciation & amortization   391,156    411,499 
Share-based compensation   115,647    135,698 
Deferred taxes   —      (275,000)
Gain on sale of property and equipment   —      (13,645)
           
Changes in:          
Accounts receivable-trade   257,348    (958,744)
Inventories   401,822    (1,461,763)
Prepaid expenses   (16,982)   (7,907)
Accounts payable   (206,204)   1,046,607 
Deferred revenue   —      (100,000)
Accrued expenses   (274,325)   247,087 
Net cash provided by (used in) operating          
activities   (321,124)   (1,821,665)
Cash flows from investing activities:          
Purchases of property and equipment   (250,128)   (343,576)
Proceeds from sale of property and equipment   —      13,645 
Net cash provided by (used in) investing          
activities   (250,128)   (329,931)
Cash flows from financing activities:          
Net borrowings on line of credit   412,732    900,000 
Net cash provided by (used in)          
financing activities   412,732    900,000 
Net increase (decrease) in cash and cash equivalents   (158,520)   (1,251,596)
Cash and cash equivalents at beginning of period   628,804    1,339,572 
Cash and cash equivalents at end of period  $470,284   $87,976 
Supplemental cash flow information:          
Cash paid for taxes, net of refunds  $485   $486 
           
           

See accompanying notes to financial statements.

 

 

CPS TECHNOLOGIES CORPORATION
Notes to Financial Statements
(Unaudited)

(1)  Nature of Business

CPS Technologies Corporation (the “Company” or “CPS”) provides advanced material solutions to the electronics, power generation, automotive and other industries.   The Company’s primary advanced material solution is metal-matrix composites which are a combination of metal and ceramic.

CPS also assembles housings and packages for hybrid circuits. These housings and packages may include components made of metal-matrix composites or they may include components made of more traditional materials such as aluminum, copper-tungsten, etc.

The Company sells into several end markets including the wireless communications infrastructure market, high-performance microprocessor market, motor controller market, and other microelectronic and structural markets.

 

(2)  Interim Financial Statements

As permitted by the rules of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, these notes are condensed and do not contain all disclosures required by generally accepted accounting principles.

 

The accompanying financial statements are unaudited. In the opinion of management, the unaudited financial statements of CPS reflect all normal recurring adjustments which are necessary to present fairly the financial position and results of operations for such periods.

 

The Company’s balance sheet at December 29, 2018 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

 

For further information, refer to the financial statements and footnotes thereto included in the Registrant’s Annual Report on Form 10-K for the year ended December 29, 2018 and in CPS’s other SEC reports, which are accessible on the SEC’s website at www.sec.gov and the Company’s website at www.alsic.com.

 

The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

 

New Accounting Pronouncements

Pronouncements adopted in 2019

The Company adopted Accounting Standards Codification (ASC) 842 for leases effective at the beginning of the fiscal year, December 30, 2018, using the cumulative-effect adjustment transition method, which applies the provisions of the standard at the effective date without adjusting the comparative periods presented. The Company elected an accounting policy for short-term leases, which allows lessees to avoid recognizing right-of-use assets and liabilities for leases with terms of 12 months or fewer.

 

We have lease agreements with lease and non-lease components, which are generally accounted for separately. We have not elected the practical expedient to account for lease and non-lease components as one lease component. The Company has elected certain practical expedients upon adoption and therefore has not reassessed whether any expired or existing contracts contain leases, has not reassessed the lease classification for any expired or existing leases and has not reassessed initial direct costs for any existing leases.

 

Adoption of the standard resulted in the recognition of operating lease right-of-use assets and corresponding lease liabilities of $310 thousand on the consolidated balance sheet as of December 30, 2018. The standard did not materially impact operating results or liquidity. Disclosures related to the amount, timing and uncertainty of cash flows arising from leases are included in Note 4, Leases.

 

 

(3)  Net Income (loss) Per Common and Common Equivalent Share

Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period.  Diluted net income (loss)  per common share is calculated by dividing net income (loss) by the sum of the weighted average number of common shares plus additional common shares that would have been outstanding if potential dilutive common shares had been issued for granted stock options and stock purchase rights.  Common stock equivalents are excluded from the diluted calculations when a net loss is incurred as they would be anti-dilutive.

 

 

(4)  Commitments & Contingencies

 

Commitments

 

Leases

The Company has two real estate leases—one expiring in February 2021 and one with a 12 month duration with options to extend additional years. Since the latter is not reasonably certain that any options will be exercised, it has not been recorded on the balance sheet in accordance with the accounting policy elected in Note 2. CPS also has a few other leases for equipment which are minor in nature and are generally short-term in duration. None of these have been capitalized.

 

The lease expiring in 2021 (the “Norton facility lease’) is included as a right-of-use lease asset and corresponding lease liability on the balance sheet. This asset and liability was recognized on December 30, 2018 based on the present value of remaining lease payments over the remaining lease term using the Company’s incremental borrowing rate at date of adoption. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

Operating Leases

Lease expense for operating leases is recognized on a straight-line basis over the lease term. Lease expense is allocated between Cost of Product Sales and Selling, General and Administrative Expense in the income statement

 

The following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s capitalized operating leases as of September 28, 2019

 

 

(Dollars in Thousands)    Sept 28, 2019  
Maturity of capitalized lease liabilities    Lease payments  
2019 (remaining)  $38 
2020   152 
2021   26 
Total undiscounted operating lease payments  $216 
Less: Imputed interest   (9)
Present value of operating lease liability  $207 

 

 

Balance Sheet Classification     
Current lease liability  $148 
Long-term lease liability   59 
Total operating lease liability  $207 
Other Information     
Weighted-average remaining lease term for capitalized operating leases   17 months 
Weighted-average discount rate for capitalized operating leases   6.5%

 

 

Cash Flows

An initial right-of-use asset of $310 thousand was recognized as a non-cash asset addition with the adoption of the new lease accounting standard on December 30, 2018. Cash paid for the amounts included in the present value of operating lease liabilities was $114 thousand during the first nine months of 2019 and is included in operating cash flows.

 

Operating Lease Costs

Operating lease cost was $114 thousand during the first nine months of 2019. This cost is related to its long-term operating lease. All other short-term leases were immaterial.

 

Finance Leases

The company does not have any finance leases.

 

Loss contingency

The Company manufactures baseplates for power module manufacturers. Most baseplates manufactured by CPS require a nickel coating be applied to the baseplate (“Ni plating”). CPS warranties its baseplates meet the Ni plating specifications required by our customers, and flows this requirement to its Ni plating vendors.

 

On January 24, 2018 the Company received a “Claim and Non-Conformance Notification” from one of its European customers relating to the Ni plating on our baseplates. Upon investigation, it was determined that one employee of the Ni plating vendor used by CPS had deviated from the prescribed work instruction for Ni plating from mid-September 2017 until mid-January 2018. The Company's Ni plating vendor acknowledged this violation and worked with the customer to resolve the problem.

 

On April 11, 2018 the Company received a “Follow-up Claim and Non-Conformance Notification” from the European customer.  The customer estimated the total value of the claim to be $1.0 million “as of today”, and reserves the right to claim additional damages in the future.

 

The Company informed its insurer of this claim and the Ni plating vendor did the same with its insurer. No amounts for damages had been recorded in the financial statements as management believed that it was not possible at the time to quantify the potential impact, if any, to the Company.

 

On July 9, 2019, the Company received confirmation from its customer accepting the settlement offer of the Company’s insurer.  The settlement is covered by the Company’s insurance policy and the Company does not expect to incur any losses as part of the settlement.

 

(5)  Share-Based Payments

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. That cost is recognized over the period during which an employee is required to provide services in exchange for the award, the requisite service period (usually the vesting period). The Company provides an estimate of forfeitures at initial grant date. Reductions in compensation expense associated with the forfeited options are estimated at the date of grant, and this estimated forfeiture rate is adjusted periodically based on actual forfeiture experience. The company uses the Black-Scholes option pricing model to determine the fair value of the stock options granted.

 

There were no stock options granted or issued under the Plan during the quarters ended September 28, 2019 and September 29, 2018.

 

During the quarter ended September 28, 2019, 24,000 options were forfeited and 16,000 expired. During the quarter ended September 29, 2018, 18,600 options were forfeited and 8,000 options expired.   

 

During the quarters ended September 28, 2019 and September 29, 2018 there were no shares repurchased.  

During the three and nine months ended September 28, 2019 the Company recognized approximately $28 thousand and $113 thousand, respectively as share-based compensation expense related to previously granted shares under the Plan. These amounts are included as a component of selling, general and administrative expenses in the statement of operations.

 

During the three and nine months ended September 29, 2018 the Company recognized approximately $33 thousand and $136 thousand, respectively as share-based compensation expense related to previously granted shares under the Plan. These amounts are included as a component of selling, general and administrative expenses in the statement of operations.

 

(6)  Inventories

Inventories consist of the following:

    September 28,      December 29,  
     2019      2018  
               
Raw materials  $668,141   $706,982 
Work in process   1,973,122    2,248,370 
Finished goods   614,210    693,943 
                
Total inventory   3,255,473    3,649,295 
Reserve for obsolescence   (464,362)   (456,362)
                
Inventories, net  $2,791,111   $3,192,933 
                

 

(7)  Accrued Expenses

Accrued expenses consist of the following:

     September 28,      December 29,  
     2019      2018  
               
Accrued legal and accounting  $68,433   $67,000 
Accrued payroll   498,633    594,641 
Accrued other   133,924    313,674 
           
   $700,990   $975,315 
           

 

 

(8)  Line of Credit 

In September 2019, the Company entered into revolving line of credit with The Massachusetts Business Development Corporation in the amount of $2.5 million.  This agreement replaces the $1.25 million line of credit with Santander Bank, set to expire September 30, 2019.  The agreement includes a demand note allowing the Lender to call the loan at any time.  CPS may terminate the agreement without a termination fee after 3 years.  The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of LIBOR plus 650 basis points. The Company has provided BDC with an earnings projection for the year ended December 28, 2019 and the covenant states that until the projection is met, $500 thousand of the line will be locked.  At September 29, 2019 the Company had $413 thousand of borrowings under this LOC and its borrowing base at the time would have permitted an additional $1.335 million to have been borrowed. 

 

The line of credit is subject to certain financial covenants.

 

(9)  Income Taxes

A valuation allowance against deferred tax assets is required to be established or maintained when it is "more likely than not" that all or a portion of deferred tax assets will not be realized. In December 2018, the Company established a partial valuation allowance reserve, as it is judged more likely than not that a majority of its deferred tax assets will not be used before they expire. This decision was reached after giving greater weight to its losses over the previous three years compared with its forecast of the future. Consistent with this conclusion, no income tax provision/(benefit) has been recorded for the quarter and nine months ending September 28, 2019.

 

The Company recorded a tax benefit of $4 thousand and tax benefit of $231 thousand for federal income taxes during the three and nine months ended September 29, 2018, respectively. The Company recorded a tax benefit of $1 thousand and a tax benefit of $44 thousand for state income taxes during the three and nine months ended September 29, 2018, respectively.

 

 

 

 

ITEM 2       MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of financial condition and results of operations is based upon and should be read in conjunction with the financial statements of the Company and notes thereto included in this report and the Company’s Annual Report on Form 10-K for the year ended December 29, 2018.

 

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. There are a number of factors that could cause the Company’s actual results to differ materially from those forecasted or projected in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof.  The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or changed circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

Critical Accounting Policies

The critical accounting policies utilized by the Company in preparation of the accompanying financial statements are set forth in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 29, 2018, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.  There have been no material changes to these policies since December 29, 2018, other than the adoption of ASU No. 2016-02, Leases.

 

 

Overview

CPS Technologies Corporation (the ‘Company’ or ‘CPS’) provides advanced material solutions to the electronics, power generation, automotive and other industries.

 

The Company’s products are generally used in high-power, high-reliability applications. These applications always involve energy use or energy generation and the Company’s products allow higher performance and improved energy efficiency. The Company is an important participant in the growing movement towards alternative energy and "green" lifestyles. For example, the Company’s products are used in mass transit, hybrid and electric cars, wind-turbines for electricity generation as well as routers and switches for the internet which in turn allows telecommuting.

 

The Company’s primary advanced material solution is metal matrix composites (MMCs), a new class of materials which are a combination of metal and ceramic. CPS has a leading, proprietary position in metal matrix composites. Metal matrix composites have several superior properties compared to conventional materials including improved thermal conductivity, thermal expansion matching, stiffness and light weight which enable higher performance and higher reliability in our customers’ products.

 

Like plastics several decades ago, we believe metal-matrix composites will penetrate many end markets over many years. CPS management believes our business model of providing advanced material solutions to a portfolio of high growth end markets which are, at any point in time, in various stages of the technology adoption lifecycle, provides CPS with the opportunity for sustained growth and a diversified customer base. We believe we have validated this model as we are now supplying customers at all stages of the technology adoption lifecycle.

 

CPS is the leader in supplying metal matrix composites to certain high growth electronics end markets which are well along in the adoption lifecycle and therefore generating significant demand. These end markets include high-performance integrated circuits and circuit boards used in internet switches and routers, as well as motor controllers used in high-speed electric trains, subway cars and wind turbines.   CPS supplies heat spreaders, lids and baseplates to customers in these end markets. CPS is a fully qualified manufacturer for many of the world’s largest electronics OEMs.

 

CPS also assembles housings and packages for hybrid circuits. These housings and packages may include components made of metal-matrix composites; they may include components made of more traditional materials such as aluminum, copper-tungsten, etc.

 

A market at an earlier stage of the adoption lifecycle is the market for hybrid and electric automobiles.  In 2012 the Company announced a multi-year supply agreement with a major tier one automotive supplier for the supply of AlSiC pin fin baseplates for use in motor controllers for hybrid and electric automobiles.

 

We are also actively working with customers in end markets at the beginning stages of the adoption lifecycle.

 

The Company believes that its hybrid hard face armor tiles will find application in many military vehicles as well as armored commercial vehicles.

 

Our products are manufactured by proprietary processes we have developed including the QuicksetTM Injection Molding Process (‘Quickset Process’) and the QuickCastTM Pressure Infiltration Process (‘QuickCast Process’).

 

CPS was incorporated in Massachusetts in 1984 as Ceramics Process Systems Corporation and reincorporated in Delaware in April 1987 through a merger into a wholly-owned Delaware subsidiary organized for purposes of the reincorporation. In July 1987, CPS completed our initial public offering of 1.5 million shares of our Common Stock. In March 2007, we changed our name from Ceramics Process Systems Corporation to CPS Technologies Corporation.

 

 

Results of Operations for the Third Fiscal Quarter of 2019 (Q3 2019) Compared to the Third Fiscal Quarter of 2018 (Q3 2018); (all $ in 000s)

 

Total revenue was $4,387 in Q3 2019, a 28% decrease compared with total revenue of $6,116 in Q3 2018. This decrease was due primarily to a decrease in the sale of baseplates partially offset by an increase in the sale of hermetic packages. There were no significant price changes in Q3 2019 compared with Q3 2018.

 

Gross margin in Q3 2019 totaled $223 or 5% of sales.  In Q3 2018, gross margin was $964 or 16% of sales.   This decrease in margin was primarily due to lower sales volume.[VMC2]   A significant portion of CPS’ manufacturing costs are fixed.  As such lower sales volume will have an unfavorable impact on gross margin in terms of both actual dollars and percentage.

 

Selling, general and administrative expenses (SG&A) were $702 in Q3 2019, down 29% when compared with SG&A expenses of $983 in Q3 2018.  This decrease was primarily due to lower sales commission expense of $150 as a result of both, lower sales volumes and lower commission rates, and a reduction in outside professional services of $53.

 

In Q3, 2019, the Company incurred interest expense of $17 due to bank borrowings.  This compares with interest expense of $14 in Q3 of 2018.

 

The Company incurred an operating loss of $479 compared with an operating loss of $19 in the same quarter last year. This increase in operating loss is due primarily to the decrease in revenue, discussed above. The net loss for Q3 2019 totaled $496 versus a net loss of $14 in Q3 2018.

 

 

Results of Operations for the First Nine Months of 2019 Compared to the First Nine Months of 2018 (all $ in 000s)

 

Total revenue was $16,024 in the first nine months of 2019, a 3% increase compared with total revenue of $15,500 in the first nine months of 2018. This increase was due primarily to an increase in the sale of housings and packages for hybrid circuits. There were no significant price changes during the first nine months of 2019 compared with the first nine months of 2018.

 

Gross margin in the first nine months of 2019 totaled $1,557 or 10% of sales.  In the first nine months of 2018 gross margin totaled $1,713 or 11% of sales.  This decrease was almost entirely due to a change in product mix.  More higher margin parts were sold in 2018 compared to 2019.

 

Selling, general and administrative (SG&A) expenses were $2,523 during the first nine months of 2019, down 11% compared with SG&A expenses of $2,822 in the first nine months of 2018  Most of this decrease occurred in Q3 due to lower sales commission expense of $150 as a result of lower sales volumes and lower commission rates, and a reduction in outside professional services of $53.

 

During the first nine months of 2019, the Company incurred interest expense of $24 due to bank borrowings.  This compares with interest expense of $25 incurred during the first nine months of 2018.

 

In the first nine months of 2019 the Company incurred an operating loss of $966 compared with an operating loss of $1,109 in the same period last year.  The net loss for the first nine months of 2019 totaled $990 versus a net loss of $845 in the first nine months of 2018. 

 

 

Liquidity and Capital Resources (all $ in 000s unless noted)

 

The Company’s cash and cash equivalents at September 28, 2019 totaled $470.  The Company’s net cash, which considers the $413 of bank borrowings, totaled $57 at the end of the third quarter. This compares to cash and cash equivalents at December 29, 2018 of $629. The decrease in net cash was due to the loss from operations.

 

Accounts receivable at September 28, 2019 totaled $2,796 compared with $3,053 at December 29, 2018.

Days Sales Outstanding (DSO) increased from 45 days at the end of 2018 to 57 days at the end of Q3 2019.  DSO’s at the end of 2018 were unusually low due to the fact that sales during Q4 2018 were more heavily loaded toward the front end of the quarter. The accounts receivable balances at December 29, 2018, and September 28, 2019 were both net of an allowance for doubtful accounts of $10. The Company entered into a new line in September 2019.  The terms of new line of credit are expected to provide increased liquidity and, as a result, we have ended our policy of allowing a discount on prompt payments from certain of our customers.  Due to the Company’s change in its discount policy, we expect an increase in DSO going forward.  Had this change been in effect during Q3 and customers paid based on their undiscounted terms, the DSO would have been 71 days.

 

Inventories totaled $2,791 at September 28, 2019 compared with inventory totaling $3,193 at December 29, 2018. This decrease was due primarily to the decision to reduce production due to reduced customer sales projections for the summer.  The inventory turnover in the most recent four quarters ending Q3 2019 was 6.2 times, up from 6.0 times averaged during the four quarters of 2018 (based on a 5 point average).

 

Pursuant to customer agreements, CPS maintains unplated product offsite, at outside plating vendors.   These plating vendors are located near the end customer locations allowing for same day or overnight delivery of finished, plated product.  CPS directs these vendors as to which specific products to plate and when to plate them, based on customer requirements.  The Company feels that doing this gives CPS a competitive advantage.  At September 28, 2019 and December 29, 2018, $835 and $1,556, respectively, was located at vendor locations pursuant to these agreements.

 

The Company financed its working capital during the first nine months of 2019 from a combination of its cash at the beginning of the year and bank borrowings.  The Company expects it will continue to be able to fund its working capital requirements for the remainder of 2019 from existing cash balances and bank borrowings.

 

The Company continues to sell to a limited number of customers and the loss of any one of these customers could cause the Company to require additional external financing. Failure to generate sufficient revenues, raise additional capital or reduce certain discretionary spending could have a material adverse effect on the Company’s ability to achieve its business objectives.

 

 

Contractual Obligations

 

In September 2019, the Company entered into revolving line of credit with Massachusetts Business Development Corporation in the amount of $2.5 million.  This agreement replaces the $1.25 million line of credit with Santander Bank, set to expire September 30, 2019.  The agreement includes a demand note allowing the Lender to call the loan at any time.  CPS may terminate the agreement without a termination fee after 3 years.  The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of LIBOR plus 650 basis points. The Company has provided BDC with an earnings projection for the year ended December 28, 2019 and the agreement states that until the projection is met, $500 thousand of the line will be locked.  Also, at September 28, 2019 the Company had $413 thousand of borrowings under this LOC and its borrowing base at the time would have permitted an additional $1.335 million to have been borrowed.  The increased availability has allowed the Company to end its policy of allowing prompt pay discounts to certain customers. This should have a positive effect on the Company’s earnings going forward.

 

As of September 28, 2019, the Company had $242 of construction in progress and no outstanding commitments to purchase production equipment.

 

As of September 28, 2019, all our manufacturing, engineering, sales and administrative operations were and continue to be located in leased facilities in Norton, Massachusetts and Attleboro, Massachusetts.

 

In February 2018, the Company signed a lease for the Norton facilities through February 2021. The leased facilities comprise approximately 38 thousand square feet. The lease is a triple net lease wherein the Company is responsible for payment of all real estate taxes, operating costs and utilities.  The Company also has an option to buy the property and a right of first refusal during the term of the lease.  Annual rental payments continue at $152 thousand.

 

In February 2011, the Company entered into a lease for an additional 13.8 thousand square feet in Attleboro, MA. The Attleboro facility lease expires in February 2020 and the Company has two, one-year options at the current annual rental payments of $79, with minor escalation for real estate tax increases. (Note 4, Leases).

 

Management believes that a combination of existing cash balances and borrowings, if necessary, will be sufficient to fund our cash requirements for the foreseeable future. However, there is no assurance that we will be able to generate sufficient revenues or reduce certain discretionary spending in the event that planned operational goals are not met such that we will be able to meet our obligations as they become due.

 

 

 

ITEM 3             QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is not significantly exposed to the impact of interest rate changes or foreign currency fluctuations.  The Company has not used derivative financial instruments.

 

ITEM 4             CONTROLS AND PROCEDURES

 

(a)        The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d - 14(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Form 10-Q (the “Evaluation Date”).  Based on such evaluation, such officers have concluded that, as of the Evaluation Date,  1) the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports the Company files under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and 2) the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

 

(b)        Changes in Internal Controls. There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

 

 

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 2018 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
(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 August 16, 2019, the Company’s Board of Directors elected Ralph M. Norwood, retired Chief Financial Officer of CPS Technologies, to the Company’s Board of Directors.

 

On September 25, 2019, CPS Technologies Corporation (“Company”) entered into a three year Credit and Security Agreement (“Agreement”) with The Massachusetts Business Development Corporation (“Lender”) providing for a $2.5 million line of credit (“Credit Line”). The Agreement replaces the $1.25 million credit facility with Santander Bank, due to expire on September 30, 2019.

 

On October 11, 2019 the Company filed a report on form 8-K announcing the elimination of the position of Senior Vice President Sales and Marketing. As a result, effective October 11, 2019, Thomas Breen is no longer an executive officer of the Company

 

 

 

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:    November 6, 2019
/s/        Grant C. Bennett
Grant C. Bennett
Chief Executive Officer

 

Date:    November 6, 2019

/s/        Charles K. Griffith Jr.

Charles K. Griffith Jr.

Chief Financial Officer