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