Company Quick10K Filing
Quick10K
CPS Technologies
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$1.30 13 $17
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 2019-06-29 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
DHI Horton D R 16,280
TFSL TFS Financial 4,810
KELYA Kelly Services 967
AGS PlayAGS 746
FNHC Fednat Holding 193
RADA Rada Electronic Industries 137
AUTO Autoweb 44
JASN Jason Industries 40
OFFLP Ceres Orion 0
SIRE Southwest Iowa Renewable Energy 0
CPSH 2019-06-29
Part I Financial Information
Item 1 Financial Statements (Unaudited)
Item 2 Management's 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
Item 1A Risk Factors
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Mine Safety Disclosures
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K:
EX-31.1 ex311q22019.htm
EX-31.2 ex312q22019.htm
EX-32.1 ex321q22019.htm

CPS Technologies Earnings 2019-06-29

CPSH 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 q2201910q.htm Q2 2019 10Q

 

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 June 29, 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
Registrant’s Telephone Number, including Area Code:

 

CPS Technologies Corporation

111 South Worcester Street

Norton, MA 02766-2102

 

None

(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 August 2, 2019: 13,207,436.

 

PART I  FINANCIAL INFORMATION

 

ITEM 1  FINANCIAL STATEMENTS (Unaudited)

 

CPS TECHNOLOGIES CORPORATION

Balance Sheets (Unaudited)

 

 

     June 29,      December 29,  
     2019      2018  
ASSETS              
               
Current assets:          
Cash and cash equivalents  $161,601   $628,804 
Accounts receivable-trade, net   4,110,388    3,053,091 
Inventories, net   2,900,900    3,192,933 
Prepaid expenses and other current assets   220,642    156,338 
Total current assets   7,393,531    7,031,166 
Property and equipment:          
Production equipment   9,587,309    9,550,043 
Furniture and office equipment   525,054    519,779 
Leasehold improvements   891,813    891,817 
Total cost   11,004,176    10,961,639 
           
Accumulated depreciation and amortization   (10,001,133)   (9,722,767)
Construction in progress   157,785    34,314 
 Net property and equipment   1,160,828    1,273,186 
Right-of-use lease asset (note 4, leases)   241,000    —   
Deferred taxes, net   186,747    186,747 
 Total assets  $8,982,106   $8,491,099 

 

See accompanying notes to financial statements.

 

(continued)

 

CPS TECHNOLOGIES CORPORATION

Balance Sheets (Unaudited)

(concluded)

 

    June 29,      December 29,  
    2019      2018  
LIABILITIES AND STOCKHOLDERS` EQUITY              
               
Current liabilities:          
Line of credit   800,000    —   
Accounts payable   1,685,082    1,680,263 
Accrued expenses   826,471    975,315 
Current portion lease liability   148,000    —   
           
Total current liabilities   3,459,553    2,655,578 
           
Long term lease liability   93,000    —   
           
Total liabilities   3,552,553    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 June 29, 2019 and December 29, 2018;   134,275    134,260 
Additional paid-in capital   36,048,177    35,960,545 
Accumulated deficit   (30,235,846)   (29,742,231)
Less cost of 220,056 common shares repurchased          
at June 29, 2019 and December 29, 2018   (517,053)   (517,053)
  
Total stockholders` equity   5,429,553    5,835,521 
  
Total liabilities and stockholders`          
 equity  $8,982,106   $8,491,099 

 

See accompanying notes to financial statements.

 

CPS TECHNOLOGIES CORPORATION

Statements of Operations (Unaudited)

 

    Three Months Ended      Six Months Ended  
    June 29,      June 30,      June 29,      June 30,  
     2019      2018      2019      2018  
                             
Revenues:                            
Product sales  $6,366,951   $5,228,721   $11,636,489   $9,383,725 
                              
Total revenues   6,366,951    5,228,721    11,636,489    9,383,725 
Cost of product sales   5,191,964    4,623,033    10,302,078    8,634,164 
                              
Gross Margin   1,174,987    605,688    1,334,411    749,561 
Selling, general, and                    
administrative expense   917,079    931,358    1,820,765    1,839,474 
                              
Income (loss) from operations   257,908    (325,669)   (486,353)   (1,089,913)
Interest income (expense), net   (7,310)   (11,692)   (7,262)   (11,634)
                              
Net income (loss) before                    
income tax   250,598    (337,361)   (493,615)   (1,101,547)
Income tax provision (benefit)   —      (80,000)   —      (270,000)
                              
Net income (loss)  $250,598   $(257,361)  $(493,615)  $(831,547)
                              
Net income (loss) per                    
basic common share  $0.02   $(0.02)  $(0.04)  $(0.06)
                              
Weighted average number of                    
basic common shares                    
outstanding   13,206,069    13,203,436    13,206,756    13,203,436 
                              
Net income (loss) per                    
diluted common share  $0.02   $(0.02)  $(0.04)  $(0.06)
                              
Weighted average number of                    
diluted common shares                    
outstanding   13,260,261    13,203,436    13,206,756    13,203,436 
                              

 

See accompanying notes to financial statements.

 

 

CPS TECHNOLOGIES CORPORATION
STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 29, 2019 AND JUNE 30, 2018

                                           
     Common Stock                          
     Number of             Additional                Total  
     shares      Par      paid-in      Accumulated      Stock      stockholders'  
     issued      Value      capital      deficit      repurchased      equity  
Balance at March 30, 2019   13,427,492   $134,275   $36,021,766    (30,486,445)   (517,053)   5,152,543 
Share-based compensation expense   —      —      26,411    —      —      26,411 
Issuance of common stock   —      —      —      —      —      —   
Net income                  250,599    —      250,599 
Balance at June 29, 2019   13,427,492    134,275    36,048,177    (30,235,846)   (517,053)   5,429,553 

 

     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   —      —      85,397    —      —      85,397 
Issuance of common stock   1,500    15    2,235    —      —      2,250 
Net (loss)                  (493,615)   —      (493,615)
Balance at June 29, 2019   13,427,492    134,275    36,048,177    (30,235,846)   (517,053)   5,429,553 

 

                                           
     Common Stock                          
     Number of             Additional                  Total  
     shares      Par      paid-in      Accumulated      Stock      stockholders'  
     issued      Value      capital      deficit      repurchased      equity  
Balance at March 31, 2018   13,423,492   $134,235   $35,811,943    (26,610,450)   (517,053)   8,818,675 
Share-based compensation expense   —      —      31,002    —      —      31,002 
Issuance of common stock   —      —      —      —      —      —   
Net (loss)                  (257,361)   —      (257,361)
Balance at June 30, 2018   13,423,492    134,235    35,842,945    (26,867,811)   (517,053)   8,592,316 

 

     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   —      —      103,029    —      —      103,029 
Issuance of common stock   —      —      —      —      —        
Net (loss)                  (831,547)    —      (831,547)
Balance at June 30, 2018   13,423,492    134,235    35,842,945    (26,867,811)   (517,053)   8,592,316 

 

See accompanying notes to financial statements.

 

CPS TECHNOLOGIES CORPORATION

Statements of Cash Flows (Unaudited)

 

    Six Months Ended  
    June 29,     June 30,  
     2019      2018  
                 
Cash flows from operating activities:          
Net loss  $(493,615)  $(831,547)
Adjustments to reconcile net loss          
to cash provided by (used in) operating activities:          
Depreciation and amortization   278,369    284,209 
Share-based compensation   87,647    103,029 
Deferred taxes   —      (270,000)
Changes in:          
Accounts receivable-trade   (1,057,298)   (497,231)
Inventories   292,034    (1,652,830)
Prepaid expenses and other current assets   (64,304)   (1,338)
Accounts payable   4,819    1,064,654 
Deferred revenue   —      (100,000)
Accrued expenses   (148,844)   331,799 
  
Net cash provided by (used in) operating          
activities   (1,101,192)   (1,569,255)
  
Cash flows from investing activities:          
Purchases of property and equipment   (166,011)   (252,250)
  
Net cash provided by (used in) investing          
activities   (166,011)   (252,250)
  
Cash flows from financing activities:          
Net borrowings on line of credit   800,000    900,000 
  
Net cash provided by (used in)          
financing activities   800,000    900,000 
  
Net increase (decrease) in cash and cash equivalents   (467,203)   (921,505)
Cash and cash equivalents at beginning of period   628,804    1,339,572 
  
Cash and cash equivalents at end of period  $161,601   $418,067 
  

 

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)   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 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 June 29, 2019

 

(Dollars in Thousands)    June 29, 2019  
Maturity of capitalized lease liabilities    Lease payments  
2019 (remaining)  $76 
2020   152 
2021   26 
Total undiscounted operating lease payments  $254 
Less: Imputed interest   (13)
Present value of operating lease liability  $241 

 

Additionally, the Company has short-term lease commitments not reflected in the schedule above and not recorded as a right-of-use asset in accordance with the Company’s accounting policy.

 

Balance Sheet Classification     
Current lease liability (recorded in other current liabilities)  $148 
Long-term lease liability   93 
Total operating lease liability  $241 
Other Information     
Weighted-average remaining lease term for capitalized operating leases   11.5 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. Cash paid for the amounts included in the present value of operating lease liabilities was $76 thousand during the first half year of 2019 and is included in operating cash flows.

 

Operating Lease Costs

Operating lease cost was $76 thousand during the first half year 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 75,000 stock options granted during the quarter ended June 29, 2019 and 5,000 stock options granted during the quarter ended June 30, 2018

 

There were no options exercised during the quarters ended June 29, 2019 or June 30, 2018.

 

During the three and six months ended June 29, 2019, the Company recognized $26,412 and $85,397, respectively, as shared-based compensation expense related to previously granted shares under the Plan.

 

During the three and six months ended June 30, 2018, the Company recognized $31,000 and $103,029, respectively, as shared-based compensation expense related to previously granted shares under the Plan.

 

 

(6)  Inventories

Inventories consist of the following:

    June 29,      December 29,  
     2019      2018  
               
Raw materials  $687,105   $706,982 
Work in process   1,838,555    2,248,370 
Finished goods   887,912    693,943 
                
Total inventory   3,413,572    3,649,295 
Reserve for obsolescence   (512,672)   (456,362)
                
Inventories, net  $2,900,900   $3,192,933 
                

 

(7)  Accrued Expenses

Accrued expenses consist of the following:

    June 29,      December 29,  
     2019      2018  
               
Accrued legal and accounting  $46,222   $67,000 
Accrued payroll   567,058    594,641 
Accrued other   213,191    313,674 
                
   $826,471   $975,315 
                

 

(8)  Line of Credit

In May 2019, the Company amended its revolving line of credit line with Santander Bank to $1.25 million.  The agreement matures at the end of September 2019.  The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of prime plus 100 basis points. Under the terms of the agreement, the Company is required to maintain its operating accounts with Santander Bank. The Company is also subject to certain financial covenants.  These include specific EBITDA levels, a targeted current ratio and a targeted debt to tangible net worth ratio at the end of subsequent quarters.  The covenants exclude the requirements of Accounting Standards Codification (ASC) 842 for leases.  At June 29, 2019, the Company was in compliance with all existing covenants.  Also, at June 29, 2019 the Company had $800 thousand of borrowings under this LOC and its borrowing base at the time would have permitted an additional $450 thousand to have been borrowed.

 

 

(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 tax 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 six month ending June 29, 2019.

 

The Company recorded a tax benefit of $67 thousand and $227 thousand for federal income taxes during the three and six months ended June 30, 2018, respectively. The Company recorded a tax benefit of $13 and $43 thousand for state income taxes during the three and six months ended June 30, 2018, respectively.

 

 

 

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 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.

 

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 Second Fiscal Quarter of 2019 (Q2 2019) Compared to the Second Fiscal Quarter of 2018 (Q2 2018); (all $ in 000s)

 

Total revenue was $6,367 in Q2 2019, a 22% increase compared with total revenue of $5,229 in Q2 2018. This increase was due primarily to an increase in the sale of baseplates and, to a lesser degree, to an increase in the sale of hermetic packages and armor revenue. There were no significant price changes in Q2 2019 compared with Q2 2018.

 

Gross margin in Q2 2019 totaled $1,175 or 18% of sales.  In Q2 2018, gross margin was $606 or 12% of sales.   This increase in margin was primarily due to higher sales volume and product mix.

 

Selling, general and administrative expenses (SG&A) were $917 in Q2 2019, down slightly when compared with SG&A expenses of $931 in Q2 2018.  During 8 weeks of Q2 2019 the company incurred the salaries of both the incoming CFO and the retiring CFO resulting in an extra $25k of SG&A salaries.  Without this duplication SG&A spend would have been down by 4%.

 

In Q2, 2019, the Company incurred interest expense of $7 due to bank borrowings.  This compares with interest expense of $12 in Q2 of 2018.

 

The Company experienced operating income of $258 compared with an operating loss of $326 in the same quarter last year. This increase in operating income is due primarily to the increase in revenue, discussed above. Increased revenue resulted in higher gross margin due to more coverage of fixed factory overhead. The net income for Q2 2019 totaled $251 versus a net loss of $257 in Q2 2018.

 

 

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

 

Total revenue was $11,636 in the first half of 2019, a 24% increase compared with total revenue of $9,384 in the first six months of 2018. This increase was due primarily to an increase in the sale of baseplates as well as housings and packages for hybrid circuits. There were no significant price changes during the first half of 2019 compared with the first half of 2018.

 

Gross margin in the first six months of 2019 totaled $1,334 or 11% of sales.  In the first six months of 2018 gross margin totaled $750 or 8% of sales.  This increase was almost entirely due to the increase in revenues, as well as a change in product mix.

 

Selling, general and administrative (SG&A) expenses were $1,821 during the first six months of 2019, down 1% compared with SG&A expenses of $1,839 in the first six months of 2018  During 8 weeks of 2019 the company incurred the salaries of both the incoming CFO and the retiring CFO resulting in an extra $25k of SG&A salaries.  Without this duplication SG&A spend would have been down by 2%.

 

During the first half of 2019, the Company incurred interest expense of $7 due to bank borrowings.  This compares with interest expense of $12 incurred during the first half of 2018.

 

In the first six months of 2019 the Company incurred an operating loss of $486 compared with an operating loss of $1,090 in the same period last year.  The net loss for the first six months of 2019 totaled $494 versus a net loss of $832 in the first six months of 2018. 

 

 

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

 

The Company’s cash and cash equivalents at June 29, 2019 totaled $162.  The Company’s net cash, which considers the $800 of bank borrowings, totaled a negative $638 at the end of the second quarter. This compares to cash and cash equivalents at December 29, 2018 of $629. The decrease in net cash was due to the increase in working capital i.e. receivables and inventory less payables and accruals, coupled with the loss from operations.

 

Accounts receivable at June 29, 2019 totaled $4,110 compared with $3,053 at December 29, 2018.

Days Sales Outstanding (DSO) increased from 45 days at the end of 2018 to 58 days at the end of Q2 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. Whereas DSOs at the end of Q2 2019 were higher due to higher sales at the end of the quarter. The accounts receivable balances at December 29, 2018, and June 29, 2019 were both net of an allowance for doubtful accounts of $10.

 

Inventories totaled $2,901 at June 29, 2019 compared with inventory totaling $3,193 at December 29, 2018. This decrease was due primarily to the decision to begin the summer manufacturing vacation period the final week of Q2 instead of the first week of Q3.  The inventory turnover in the most recent four quarters ending Q2 2019 was 6.2 times, up from 6.0 times averaged during the four quarters of 2018 (based on a 5 point average).

 

All consigned inventory is shipped under existing purchase orders and per customers’ requests. At June 29, 2019 and December 29, 2018, $1,288 and $1,556, respectively, was located at customer locations pursuant to consigned inventory agreements.

 

The Company financed its increase in working capital during the first half 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 May 2019, the Company amended its revolving line of credit line with Santander Bank to $1.25 million.  The agreement matures at the end of September 2019.  The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of prime plus 100 basis points. Under the terms of the agreement, the Company is required to maintain its operating accounts with Santander Bank. The Company is also subject to certain financial covenants.  These include specific EBITDA levels, a targeted current ratio and a targeted debt to tangible net worth ratio at the end of subsequent quarters.  The covenants exclude the requirements of Accounting Standards Codification (ASC) 842 for leases.  At June 29, 2019, the Company was in compliance with all existing covenants.  Also, at June 29, 2019 the Company had $800 thousand of borrowings under this LOC and its borrowing base at the time would have permitted an additional $450 thousand to have been borrowed.

The financial covenant requirement at the end of Q2, 2019 are shown below, together with the actual ratios achieved:

 

Covenant    Requirement      Actual  
Current Ratio   Minimum of 2.0X    2.2X
Liabilities to Tangible Net Worth   Maximum of 0.7X    0.6X
Borrowings under the line of credit   Maximum of $1,250   $800 
EBITDA   Minimum of $130   $397 

 

As of June 29, 2019, the Company had $158 of construction in progress and no outstanding commitments to purchase production equipment.

 

As of June 29, 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 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 Attleboro facility lease expires in February 2020 and the Company has two, one-year options at the current annual rental payments of $83, 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 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 April 8, 2019 the Company filed a report on form 8-K announcing the selection of Charles Griffith as its new CFO, to assume those responsibilities on May 6, 2019.

 

On May 2, 2019 the Company filed a report on Form 8-K of its earnings report for the fiscal first quarter ended March 30, 2019.

 

On May 7 2019 the Company filed a report on form 8-K announcing the retirement of Ralph Norwood as CFO and the appointment of Charles Griffith as the new CFO.

 

On May 14, 2019 the Company filed a report on Form 8-K which included final tabulation of votes from the Company’s Annual Meeting of Shareholders held on May 13, 2019.

 

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:    August 8, 2019
/s/        Grant C. Bennett
Grant C. Bennett
Chief Executive Officer

 

Date:    August 8, 2019

/s/        Charles K. Griffith Jr.

Charles K. Griffith Jr.

Chief Financial Officer