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 27, 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 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

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 July 31, 2020: 13,296,168.

 

PART I  FINANCIAL INFORMATION

 

ITEM 1  FINANCIAL STATEMENTS (Unaudited)

 

CPS TECHNOLOGIES CORPORATION

Balance Sheets (Unaudited)

 

 

			June 27,				December 28,
			2020				2019
ASSETS
Current assets:
Cash and cash equivalents		$	116,612			$	133,965
Accounts receivable-trade, net			4,975,842				4,086,945
Inventories, net			3,872,868				3,099,824
Prepaid expenses and other current assets			173,237				147,786
Total current assets			9,138,559				7,468,520
Property and equipment:
Production equipment			10,008,886				9,649,169
Furniture and office equipment			508,423				508,423
Leasehold improvements			934,195				934,195
Total cost			11,451,504				11,091,787
Accumulated depreciation and amortization			(10,357,620)				(10,110,663)
Construction in progress			320,209				255,754
Net property and equipment			1,414,093				1,236,878
Right-of-use lease asset			100,000				171,000
Deferred taxes, net			147,873				147,873
Total assets		$	10,800,525			$	9,024,271

See accompanying notes to financial statements.

 

(continued)

 

CPS TECHNOLOGIES CORPORATION

Balance Sheets (Unaudited)

(concluded)

 

			June 27,				December 28,
			2020				2019
LIABILITIES AND STOCKHOLDERS` EQUITY
Current liabilities:
Borrowings against line of credit			1,026,765				1,249,588
Note payable, current portion			37,311				—
Accounts payable			1,770,160				1,436,417
Accrued expenses			908,994				815,166
Deferred revenue			482,997				21,110
Lease liability, current portion			100,000				148,000
Total current liabilities			4,326,227				3,670,281
Note payable less current portion			159,360				—
Long term lease liability			—				23,000
Total liabilities			4,485,587				3,693,281
Commitments (note 4)
Stockholders` equity:
Common stock, $0.01 par value,
authorized 20,000,000 shares;
issued 13,427,492;
outstanding 13,207,436;
at June 27, 2020 and December 28, 2019;			134,275				134,275
Additional paid-in capital			36,177,264				36,094,201
Accumulated deficit			(29,479,548)				(30,380,433)
Less cost of 220,056 common shares repurchased
at June 27, 2020 and December 28, 2019			(517,053)				(517,053)
Total stockholders` equity			6,314,938				5,330,990
Total liabilities and stockholders`
equity		$	10,800,525			$	9,024,271

See accompanying notes to financial statements.

 

 

 

CPS TECHNOLOGIES CORPORATION

Statements of Operations (Unaudited)

 

			Three Months Ended								Six Months Ended
			June 27,				June 29,				June 27,				June 29,
			2020				2019				2020				2019
Revenues:
Product sales		$	5,758,015			$	6,366,951			$	12,269,586			$	11,636,489
Total revenues			5,758,015				6,366,951				12,269,586				11,636,489
Cost of product sales			4,574,686				5,191,964				9,536,047				10,302,078
Gross Margin			1,183,329				1,174,987				2,733,539				1,334,411
Selling, general, and
administrative expense			852,773				917,079				1,781,362				1,820,765
Income (loss) from operations			330,556				257,908				952,176				(486,354)
Interest income (expense), net			(31,325)				(7,310)				(51,291)				(7,261)
Net income (loss) before
income tax			299,231				250,598				900,885				(493,615)
Income tax provision (benefit)			—				—				—				—
Net income (loss)		$	299,231			$	250,598			$	900,885			$	(493,615)
Net income (loss) per
basic common share		$	0.02			$	0.02			$	0.07			$	(0.04)
Weighted average number of
basic common shares
outstanding			13,207,436				13,206,069				13,207,436				13,206,756
Net income (loss) per
diluted common share		$	0.02			$	0.02			$	0.07			$	(0.04)
Weighted average number of
diluted common shares
outstanding			13,259,783				13,260,261				13,253,457				13,206,756

 

See accompanying notes to financial statements.

 

 

CPS TECHNOLOGIES CORPORATION
STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 27, 2020 AND JUNE 29, 2019

		Common Stock									Additional												Total
		Number of									paid-in				Accumulated				Stock				stockholders'
		shares issued					Par Value				capital				deficit				repurchased				equity
Balance at March 28, 2020				13,427,492			$	134,275			$	36,159,874				(29,778,779)				(517,053)				5,998,317
Share-based compensation expense			—					—				17,390				—				—				17,390
Issuance of common stock			—					—				—				—				—				—
Net income																299,231				—				299,231
Balance at June 27, 2020			13,427,492					134,275				36,177,264				(29,479,548)				(517,053)				6,314,938

 

		Common Stock								Additional												Total
		Number of								paid-in				Accumulated				Stock				stockholders'
		shares issued				Par 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			—				—				83,063				—				—				83,063
Issuance of common stock			—				—				—				—				—				—
Net income															900,885				—				900,885
Balance at June 27, 2020			13,427,492				134,275				36,177,264				(29,479,548)				(517,053)				6,314,938

 

		Common Stock								Additional												Total
		Number of								paid-in				Accumulated				Stock				stockholders'
		shares issued				Par 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								Additional												Total
		Number of								paid-in				Accumulated				Stock				stockholders'
		shares issued				Par 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

 See accompanying notes to financial statements.

 

 

CPS TECHNOLOGIES CORPORATION

Statements of Cash Flows (Unaudited)

 

			Six Months Ended
				June 27,				June 29,
				2020				2019
Cash flows from operating activities:
Net income (loss)				900,885			$	(493,615)
Adjustments to reconcile net income (loss)
to cash provided by (used in) operating activities:
Depreciation and amortization				261,688				278,369
Share-based compensation				83,063				87,647
Gain on sale of property and equipment				(5,000)				—
Changes in:
Accounts receivable-trade				(888,897)				(1,057,298)
Inventories				(773,044)				292,034
Prepaid expenses and other current assets				(25,451)				(64,304)
Accounts payable				333,743				4,819
Accrued expenses				93,828				(148,844)
Deferred revenue				461,887				—
Net cash provided by (used in) operating
activities				442,702				(1,101,192)
Cash flows from investing activities:
Purchases of property and equipment				(233,270)				(166,011)
Proceeds from sale of property and equipment				5,000				—
Net cash used in investing
activities				(228,270)				(166,011)
Cash flows from financing activities:
Net borrowings on line of credit				(222,823)				800,000
Payments on note payable				(8,962)
Net cash provided by (used in)
financing activities				(231,785)				800,000
Net decrease in cash and cash equivalents				(17,353)				(467,203)
Cash and cash equivalents at beginning of period				133,965				628,804
Cash and cash equivalents at end of period			$	116,612			$	161,601
Supplemental disclosures of cash flows information:
Cash paid for interest				65,741				—
Supplemental disclosures of non-cash activity:
Issuance of note payable to finance equipment purchase				208,583				—

 

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 (MMC’s) 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:

 

			June 27,				June 29,				June 27,				June 29,
			2020				2019				2020				2019
Basic EPS Computation:
Numerator:
Net income (loss)		$	299,231			$	250,598			$	900,885			$	(493,615)
Denominator:
Weighted average
Common shares
Outstanding			13,207,436				13,206,069				13,207,436				13,206,756
Basic EPS		$	0.02			$	0.02			$	0.07			$	(0.04)
Diluted EPS Computation:
Numerator:
Net income (loss)		$	299,231			$	250,598			$	900,885			$	(493,615)
Denominator:
Weighted average
Common shares
Outstanding			13,207,436				13,206,069				13,207,436				13,206,756
Dilutive effect of stock options			52,347				54,192				46,021				—
Total Shares			13,259,783				13,260,261				13,253,457				13,206,756
Diluted EPS		$	0.02			$	0.02			$	0.07			$	(0.04)

 

 

 

(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.

 

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 27, 2020

 

 

(Dollars in Thousands)			June 27, 2020
Maturity of capitalized lease liabilities			Lease payments
2020		$	76
2021			26
Total undiscounted operating lease payments		$	102
Less: Imputed interest			(2)
Present value of operating lease liability		$	100

 

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)		$	100
Total operating lease liability		$	100
Other Information
Weighted-average remaining lease term for capitalized operating leases			8 months
Weighted-average discount rate for capitalized operating leases			6.5%

 

 

Operating Lease Costs and Cash Flows

Operating lease cost and cash paid was $76 thousand during the first half year 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 June 27, 2020 and June 29, 2019 a total of 0 and 75,000 stock options, respectively, were granted to employees under the Company’s 2020 Equity Incentive Plan and 2009 Stock Incentive Plan, respectively (collectively the “Plan”)

 

During the quarters ended June 27, 2020 and June 29, 2019 there were no shares issued.  

 

During the three and six months ended June 27, 2020, the Company recognized $17,390 and $83,063, respectively, as shared-based compensation expense related to previously granted shares under the Plan.

 

During the three and six months ended June 29, 2019, the Company recognized $26,411 and $85,397, respectively, as shared-based compensation expense related to previously granted shares under the Plan.

 

(6)  Inventories

Inventories consist of the following:

			June 27,				December 28,
			2020				2019
Raw materials		$	941,757			$	778,409
Work in process			1,997,260				1,898,916
Finished goods			1,383,213				871,861
Total inventory			4,322,230				3,549,186
Reserve for obsolescence			(449,362)				(449,362)
Inventories, net		$	3,872,868			$	3,099,824

 

(7)  Accrued Expenses

Accrued expenses consist of the following:

			June 27,				December 28,
			2020				2019
Accrued legal and accounting		$	42,255			$	62,725
Accrued payroll and related expenses			755,148				518,015
Accrued other			111,591				234,426
		$	908,994			$	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.  In May of 2020 this credit line was increased to $3.0 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 June 27, 2020 the Company had $1.027 million of borrowings under this LOC and its borrowing base at the time would have permitted an additional $1.973 million to have been borrowed. 

 

The line of credit is subject to certain financial covenants, all of which have been met or waived.

 

(9)        Note Payable 

In March 2020, the company acquired a Sonoscan ultrasound microscope for a price of $208 thousand.  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 thousand, 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.

 

No provision for income taxes was provided during the quarter and six months ended June 27, 2020, as the Company continues to maintain a full valuation allowance against the majority of its deferred tax assets and no current tax is forecasted for the year.

 

 

 

 

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.

 

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 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. 

The manufacturing process for MMCs (infusing ceramic materials with molten metals) is complicated and results in varying yields, which poses challenges to profitability for less developed manufacturers.

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 Second Fiscal Quarter of 2020 (Q2 2020) Compared to the Second Fiscal Quarter of 2019 (Q2 2019); (all $ in 000s)

 

Total revenue was $5,758 in Q2 2020, a 10% decrease compared with total revenue of $6,367 in Q2 2019. This decrease was due primarily to a decrease in the sale of baseplates and the shipment of a large infrequent order in Q2 2019. Price increases of 10% offset the overall revenue decrease in Q2 2020 revenue compared with Q2 2019.

 

Gross margin in Q2 2020 totaled $1,183 or 21% of sales.  In Q2 2019, gross margin was $1,175 or 18% of sales.   This increase in margin was primarily due to increased pricing and product mix.

 

Selling, general and administrative expenses (SG&A) were $853 in Q2 2020, down 7% when compared with SG&A expenses of $917 in Q2 2019.  This reduction in SG&A expense was due, almost equally, to reduced sales commissions on reduced revenue, and reduced travel expenses, as virtually all company travel was shut down due to the Covid-19 pandemic.

 

In Q2, 2020, the Company incurred interest expense of $32 due to bank borrowings.  This compares with interest expense of $7 in Q2 of 2019.  The increase in interest is due to increased borrowings to finance the growth of accounts receivable and inventory

 

The Company experienced operating income of $331 compared with an operating income of $258 in the same quarter last year. This increase in operating income is due primarily to the decrease in SG&A expense, discussed above. The net income for Q2 2020 totaled $299 versus $251 in Q2 2019.

 

 

Results of Operations for the First Six Months of 2020 Compared to the First Six Months of 2019 (all $ in 000s)

 

Total revenue was $12,270 in the first half of 2020, a 5% increase compared with total revenue of $11,636 in the first six months of 2019. This increase was due primarily to a 12% increase in pricing during the first half of 2020 compared with the first half of 2019.

 

Gross margin in the first six months of 2020 totaled $2,734 or 22% of sales.  In the first six months of 2019 gross margin totaled $1,334 or 11% of sales.  This increase was due to the increase in revenues, pricing, and product mix.

 

Selling, general and administrative (SG&A) expenses were $1,781 during the first six months of 2020, down 2% compared with SG&A expenses of $1,821 in the first six months of 2019  This reduction is due primarily to reductions in travel due to the Covid-19 pandemic.

 

During the first half of 2020, the Company incurred interest expense of $66 due to bank borrowings.  This compares with interest expense of $7 incurred during the first half of 2019.  The increase in interest is due to increased borrowings to finance the growth of accounts receivable and inventory

 

In the first six months of 2020 the Company had operating income of $952 compared with an operating loss of $486 in the same period last year.  The net income for the first six months of 2020 totaled $901 versus a net loss of $494 in the first six months of 2019. 

 

 

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

 

The Company’s cash and cash equivalents at June 27, 2020 totaled $117.  The Company’s net cash, which considers the $1,027 of bank borrowings, totaled a negative $910 at the end of the second quarter. This compares to cash and cash equivalents at December 28, 2019 of $134 and net cash of negative $1,116. The improvement in net cash was due to the gains from operations.

 

Accounts receivable at June 27, 2020 totaled $4,976 compared with $4,087 at December 28, 2019.

Days Sales Outstanding (DSO) increased from 67 days at the end of 2019 to 78 days at the end of Q2 2020.  The increase in DSO was due to higher sales to one large customer with longer payment terms. The accounts receivable balances at December 29, 2019, and June 27, 2020 were both net of an allowance for doubtful accounts of $10.

 

Inventories totaled $3,873 at June 27, 2020 compared with inventory totaling $3,100 at December 28, 2019. This increase was due to increased finished goods awaiting outside plating services for our two largest customers.  The inventory turnover in the most recent four quarters ending Q2 2020 was 5.5 times, down from 6.2 times averaged during the four quarters of 2019 (based on a 5 point average).

 

 

The Company financed its increase in working capital in Q2 2020 from its profit.  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

 

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 was amended in May 2020 to increase the line to $3.0 million.  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 June 27, 2020 the Company had $1.03 million of borrowings under this LOC and its borrowing base at the time would have permitted an additional $1.97 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 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 June 27, 2020 the Company had $320 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)

 

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.

 

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 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 affect financial results for the quarter ended June 27, 2020.  One of our major customers increased inventory above normal levels in Q1 to protect against the risk that their  suppliers, including CPS, would be unable to meet their demands due to the pandemic.  In addition, demand from their customers has declined.   This has resulted in this customer reducing Q2 purchases, and most likely will result in reduced Q3 and Q4 purchases.  The Company believes there will continue to be negative effects on 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 April 28, 2020 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 April 24, 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:    August 7, 2020
/s/        Grant C. Bennett
Grant C. Bennett
Chief Executive Officer

 

Date:    August 7, 2020

/s/        Charles K. Griffith Jr.

Charles K. Griffith Jr.

Chief Financial Officer