Cps Technologies Corp 10-Q for FY2021 Q2
Cps Technologies Corp (CPSH)
About this 10-Q
Cps Technologies Corp filed this 10-Q on August 13, 2021, covering the quarter ended June 26, 2021 (FY2021 Q2).
Headline figures
Quarter ended June 26, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $5.86M
- up 1.8% from $5.76M a year earlier
- Net income
- $239.2K
- down 20.1% from net income of $299.23K a year earlier
- Diluted EPS
- $0.02
- unchanged from $0.02 a year earlier
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 26, 2021
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
|
02766-2102
|
(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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15U.S.C. 7262(b)) by the registered public firm that prepared or issued its audit report.
[ ] Yes [X] No
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 register
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 6, 2021: 14,322,617.
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS (Unaudited)
CPS TECHNOLOGIES CORP.
Balance Sheets (Unaudited)
| June 26, | December 26, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 3,015,760 | $ | 195,203 | ||||
| Accounts receivable-trade, net | 4,432,310 | 2,914,800 | ||||||
| Inventories, net | 3,989,435 | 3,709,471 | ||||||
| Prepaid expenses and other current assets | 273,523 | 71,506 | ||||||
| Total current assets | 11,711,028 | 6,890,980 | ||||||
| Property and equipment: | ||||||||
| Production equipment | 10,343,553 | 10,265,471 | ||||||
| Furniture and office equipment | 568,846 | 568,846 | ||||||
| Leasehold improvements | 951,384 | 951,384 | ||||||
| Total cost | 11,863,783 | 11,785,701 | ||||||
| Accumulated depreciation and amortization | (10,831,191) | (10,558,816) | ||||||
| Construction in progress | 140,270 | 61,062 | ||||||
| Net property and equipment | 1,172,862 | 1,287,947 | ||||||
| Right-of-use lease asset | 638,000 | 25,000 | ||||||
| Deferred taxes, net | 117,000 | 117,000 | ||||||
| Total assets | $ | 13,638,890 | $ | 8,320,927 |
See accompanying notes to financial statements.
(continued)
CPS TECHNOLOGIES CORP.
Balance Sheets (Unaudited)
(concluded)
| June 26, | December 26, | |||||||
| 2021 | 2020 | |||||||
| LIABILITIES AND STOCKHOLDERS` EQUITY | ||||||||
| Current liabilities: | ||||||||
| Note payable, current portion | $ | 59,438 | $ | 58,134 | ||||
| Accounts payable | 1,522,336 | 909,291 | ||||||
| Accrued expenses | 997,755 | 804,091 | ||||||
| Deferred revenue | 400,874 | 12,177 | ||||||
| Lease liability, current portion | 151,000 | 25,000 | ||||||
| Total current liabilities | 3,131,403 | 1,808,693 | ||||||
| Note payable less current portion | 124,566 | 154,570 | ||||||
| Long term lease liability | 487,000 | — | ||||||
| Total liabilities | 3,742,969 | 1,963,263 | ||||||
| Commitments and contingencies (note 4) | ||||||||
| Stockholders` equity: | ||||||||
| Common stock, $0.01 par value, | ||||||||
| authorized 20,000,000 shares; | ||||||||
| issued 14,300,771 and 13,746,242; | ||||||||
| outstanding 14,300,548 and 13,313,790; | ||||||||
| at June 26, 2021 and December 26, 2020; | 143,007 | 137,462 | ||||||
| Additional paid-in capital | 38,956,952 | 36,688,894 | ||||||
| Accumulated deficit | (29,202,268) | (29,472,369) | ||||||
| Less cost of 223 and 432,452 common shares repurchased | ||||||||
| at June 26, 2021 and December 26, 2020 | (1,770) | (996,323) | ||||||
| Total stockholders` equity | 9,895,921 | 6,357,664 | ||||||
| Total liabilities and stockholders` | ||||||||
| equity | $ | 13,638,890 | $ | 8,320,927 | ||||
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORP.
Statements of Operations (Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||
| June 26, | June 27, | June 26, | June 27, | ||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||
| Revenues: | |||||||||||||||||
| Product sales | $ | 5,862,183 | $ | 5,758,015 | $ | 10,727,890 | $ | 12,269,586 | |||||||||
| Total revenues | 5,862,183 | 5,758,015 | 10,727,890 | 12,269,586 | |||||||||||||
| Cost of product sales | 4,510,600 | 4,574,686 | 8,432,168 | 9,536,047 | |||||||||||||
| Gross Margin | 1,351,583 | 1,183,329 | 2,295,722 | 2,733,539 | |||||||||||||
| Selling, general, and | |||||||||||||||||
| administrative expense | 1,098,616 | 852,773 | 2,007,087 | 1,781,362 | |||||||||||||
| Income from operations | 252,967 | 330,556 | 288,635 | 952,176 | |||||||||||||
| Interest income (expense), net | (13,769) | (31,325) | (18,079) | (51,291) | |||||||||||||
| Net income before | |||||||||||||||||
| income tax | 239,198 | 299,231 | 270,556 | 900,885 | |||||||||||||
| Income tax provision | — | — | 456 | — | |||||||||||||
| Net income | $ | 239,198 | $ | 299,231 | $ | 270,101 | $ | 900,885 | |||||||||
| Net income per | |||||||||||||||||
| basic common share | $ | 0.02 | $ | 0.02 | $ | 0.02 | $ | 0.07 | |||||||||
| Weighted average number of | |||||||||||||||||
| basic common shares | |||||||||||||||||
| outstanding | 13,982,177 | 13,207,436 | 13,783,276 | 13,207,436 | |||||||||||||
| Net income per | |||||||||||||||||
| diluted common share | $ | 0.02 | $ | 0.02 | $ | 0.02 | $ | 0.07 | |||||||||
| Weighted average number of | |||||||||||||||||
| diluted common shares | |||||||||||||||||
| outstanding | 14,550,918 | 13,259,783 | 14,407,904 | 13,253,457 | |||||||||||||
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORP.
STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 26, 2021 AND JUNE 27, 2020
| Common Stock | Additional | Total | ||||||||||||||||||||||
| Number of | paid-in | Accumulated | Stock | stockholders' | ||||||||||||||||||||
| shares issued | Par Value | capital | deficit | repurchased | equity | |||||||||||||||||||
| Balance at March 27, 2021 | 14,360,042 | $ | 143,600 | $ | 37,925,674 | (29,441,466) | (2,201,509) | 6,426,299 | ||||||||||||||||
| Share-based compensation expense | — | — | 92,113 | — | — | 92,113 | ||||||||||||||||||
| Issuance of common stock | 479,289 | 4,793 | 3,132,599 | — | — | 3,137,392 | ||||||||||||||||||
| Employee option exercises | 16,100 | 161 | 25,272 | — | (24,514) | 919 | ||||||||||||||||||
| Treasury shares retired | (554,660 | ) | (5,547 | ) | (2,218,706 | ) | — | 2,224,253 | — | |||||||||||||||
| Net income | — | — | — | 239,198 | — | 239,198 | ||||||||||||||||||
| Balance at June 26, 2021 | 14,300,771 | 143,007 | 38,956,952 | (29,202,268) | (1,770) | 9,895,921 | ||||||||||||||||||
| Common Stock | Additional | Total | ||||||||||||||||||||||
| Number of | paid-in | Accumulated | Stock | stockholders' | ||||||||||||||||||||
| shares issued | Par Value | capital | deficit | repurchased | equity | |||||||||||||||||||
| Balance at December 26, 2020 | 13,746,242 | $ | 137,462 | $ | 36,688,894 | (29,472,369) | (996,323) | 6,357,664 | ||||||||||||||||
| Share-based compensation expense | — | — | 119,535 | — | — | 119,535 | ||||||||||||||||||
| Issuance of common stock | 479,900 | 4,793 | 3,132,599 | — | — | 3,137,392 | ||||||||||||||||||
| Employee options Exercised | 629,900 | 6,299 | 1,234,630 | — | (1,229,700) | 11,229 | ||||||||||||||||||
| Treasury shares retired | (554,660) | (5,547) | (2,218,706) | — | 2,224,253 | |||||||||||||||||||
| Net income | 270,101 | — | 270,101 | |||||||||||||||||||||
| Balance at June 26, 2021 | 14,300,771 | 143,007 | 38,956,952 | (29,202,268 | ) | (1,770) | 9,895,921 | |||||||||||||||||
| 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 | ||||||||||||||||
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORP.
Statements of Cash Flows (Unaudited)
| Six Months Ended | ||||||||
| June 26, | June 27, | |||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 270,101 | $ | 900,885 | ||||
| Adjustments to reconcile net income | ||||||||
| to cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 284,408 | 261,688 | ||||||
| Share-based compensation | 119,535 | 83,063 | ||||||
| Gain on sale of property and equipment | — | (5,000) | ||||||
| Changes in: | ||||||||
| Accounts receivable-trade | (1,517,511) | (888,897) | ||||||
| Inventories | (279,963) | (773,044) | ||||||
| Prepaid expenses and other current assets | (202,018) | (25,451) | ||||||
| Accounts payable | 613,046 | 333,743 | ||||||
| Accrued expenses | 193,665 | 93,828 | ||||||
| Deferred revenue | 388,697 | 461,887 | ||||||
| Net cash provided by (used in) operating | ||||||||
| activities | (130,040) | 442,702 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (163,524) | (233,270 | ) | |||||
| Proceeds from sale of property and equipment | — | 5,000 | ||||||
| Net cash used in investing | ||||||||
| activities | (163,524) | (228,270) | ||||||
| Cash flows from financing activities: | ||||||||
| Net borrowings on line of credit | — | (222,823) | ||||||
| Proceeds from exercise of employee stock options, net of repurchases | 11,229 | — | ||||||
| Proceeds from issuance of common stock | 3,137,392 | — | ||||||
| Payments on note payable | (34,500) | (8,962) | ||||||
| Net cash provided by (used in) | ||||||||
| financing activities | 3,114,121 | (231,785) | ||||||
| Net increase (decrease) in cash and cash equivalents | 2,820,557 | (17,353) | ||||||
| Cash and cash equivalents at beginning of period | 195,203 | 133,965 | ||||||
| Cash and cash equivalents at end of period | $ | 3,015,760 | $ | 116,612 | ||||
| Supplemental disclosures of cash flows information: | ||||||||
| Cash paid for interest | 18,079 | 65,741 | ||||||
| Supplemental disclosures of non-cash activity: | ||||||||
| Issuance of note payable to finance equipment purchase | — | 208,583 | ||||||
| Net exercise of stock options | 24,514 | — | ||||||
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORP.
Notes to Financial Statements
(Unaudited)
(1) Nature of Business
CPS Technologies Corp. (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.
Using its proprietary MMC technology, the Company also produces light-weight armor, particularly for extreme environments and heavy threat levels.
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 26, 2020 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 26, 2020 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 Per Common and Common Equivalent Share
Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share is calculated by dividing net income 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 | Six Months Ended | |||||||||||||||
| June 26, | June 27, | June 26, | June 27, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Basic EPS Computation: | ||||||||||||||||
| Numerator: | ||||||||||||||||
| Net income (loss) | $ | 239,198 | $ | 299,231 | $ | 270,101 | $ | 900,885 | ||||||||
| Denominator: | ||||||||||||||||
| Weighted average | ||||||||||||||||
| Common shares | ||||||||||||||||
| Outstanding | 13,982,177 | 13,207,436 | 13,783,276 | 13,207,436 | ||||||||||||
| Basic EPS | $ | 0.02 | $ | 0.02 | $ | 0.02 | $ | 0.07 | ||||||||
| Diluted EPS Computation: | ||||||||||||||||
| Numerator: | ||||||||||||||||
| Net income (loss) | $ | 239,198 | $ | 299,231 | $ | 270,101 | $ | 900,885 | ||||||||
| Denominator: | ||||||||||||||||
| Weighted average | ||||||||||||||||
| Common shares | ||||||||||||||||
| Outstanding | 13,982,177 | 13,207,436 | 13,783,276 | 13,207,436 | ||||||||||||
| Dilutive effect of stock options | 568,741 | 52,347 | 624,628 | 46,021 | ||||||||||||
| Total Shares | 14,550,918 | 13,259,783 | 14,407,904 | 13,253,457 | ||||||||||||
| Diluted EPS | $ | 0.02 | $ | 0.02 | $ | 0.02 | $ | 0.07 | ||||||||
(4) Commitments & Contingencies
Commitments
Leases
The Company has one real estate lease expiring in February 2026. CPS also has a few other leases for equipment which are minor in nature and are generally short-term in duration. None of these equipment leases have been capitalized as 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.
The real estate lease expiring in 2026 (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 March 1, 2021 based on the present value of lease payments over the lease term using the Company’s incremental borrowing rate at commencement date. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating Leases
The Norton facility lease comprises approximately 38 thousand square feet. The lease is 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 renew the lease starting in March 2026 through February 2032. Annual rental payments range from $152 thousand to $165 thousand through maturity.
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 26, 2021
| (Dollars in Thousands) | June 26, 2021 | |||
| Maturity of capitalized lease liabilities | Lease payments | |||
| 2021 | 76 | |||
| 2022 2023 2024 2025 2026 | 160 162 165 165 28 | |||
| Total undiscounted operating lease payments | $ | 756 | ||
| Less: Imputed interest | (118) | |||
| Present value of operating lease liability | $ | 638 |
| Balance Sheet Classification | ||||
| Current lease liability | $ | 151 | ||
| Long-term lease liability | 487 | |||
| Total operating lease liability | $ | 638 | ||
| Other Information | ||||
| Weighted-average remaining lease term for capitalized operating leases | 56 months | |||
| Weighted-average discount rate for capitalized operating leases | 6.6% |
Operating Lease Costs and Cash Flows
Operating lease cost and cash paid was $38 thousand during the second quarter of 2021 and $76 thousand for the six months ended June 26, 2021. These costs are 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 quarter ended June 26, 2021 a total of 26,000 stock options were granted to employees under the Company’s 2020 Equity Incentive Plan Stock Incentive Plan (the “Plan”) and a total of 22,000 were granted to outside directors during the quarter ended June 26, 2021 issued at a weighted average price of $5.81 per share. There were no stock options granted for the quarter ended June 27, 2020.
During the three and six months ended June 26, 2021 there were 16,100 and 629,900 options exercised and corresponding shares issued at a weighted average price of $1.58 and $1.97, respectively. During the three and six months ended June 27, 2020 there were no shares exercised or issued.
During the three and six months ended June 26, 2021, the Company repurchased 2,235 and 122,431 shares, respectively, for employees to facilitate their exercise of stock options. During the three and six months ended June 27, 2020 there were no shares repurchased.
There were also 869,600 shares outstanding at a weighted average price of $2.14 with a weighted average remaining term of 6.67 years as of June 26, 2021, and there were 472,200 shares exercisable at a weighted average price of $2.14 with a weighted average remaining term of 4.95 years as of June 27, 2020. The Plan, as amended, is authorized to issue 1,500,000 shares of common stock. As of June 26, 2021, there were 1,138,000 shares available for future grants.
As of June 26, 2021, there was $445 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 2.02 years.
During the three and six months ended June 26, 2021, the Company recognized $92,113 and $119,535, respectively, as shared-based compensation expense related to previously granted shares under the Plan.
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.
(6) 2021 At-the-Market Offering
On April 26, 2021, the Company entered into a sales agreement (the “Sales Agreement”) with Craig-Hallum Capital Group LLC (“C-H”) pursuant to which the Company may issue and sell, from time to time, shares of the Company’s common stock having an aggregate offering price of up to $25.0 million in at-the-market offerings (“ATM”) sales. On the same day, the Company filed a prospectus supplement under a shelf registration relating to the Sales Agreement. C-H will act as sales agent and will be paid a 3% commission on each sale under the Sales Agreement. The Company’s common stock will be sold at prevailing market prices at the time of the sale, and, as a result, prices will vary. From date of inception until June 26, 2021, the Company sold 479,289 shares of common stock under the Sales Agreement, for gross proceeds of $3,356,342, fees to C-H of $100,690, other fees of $118,140 for net proceeds of $3,137,512. Subsequent to June 26, 2021, and as of August 6, 2021, the Company has sold 25,267 additional shares for gross proceeds of $153,659.
(7) Inventories
Inventories consist of the following:
| June 26, | December , 26 | |||||||
| 2021 | 2020 | |||||||
| Raw materials | $ | 1,363,413 | $ | 752,760 | ||||
| Work in process | 2,203,222 | 2,800,226 | ||||||
| Finished goods | 858,955 | 592,640 | ||||||
| Total inventory | 4,425,590 | 4,145,626 | ||||||
| Reserve for obsolescence | (436,155) | (436,155) | ||||||
| Inventories, net | $ | 3,989,435 | $ | 3,709,471 | ||||
(8) Accrued Expenses
Accrued expenses consist of the following:
| June 26, | December 26, | |||||||
| 2021 | 2020 | |||||||
| Accrued legal and accounting | $ | 56,219 | $ | 71,671 | ||||
| Accrued payroll and related expenses | 762,740 | 626,063 | ||||||
| Accrued other | 178,796 | 106,357 | ||||||
| $ | 997,755 | $ | 804,091 | |||||
(9) Line of Credit
In September 2019, the Company entered into a revolving line of credit (LOC) with 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. The Company may terminate the agreement without a termination fee after 3 years. In May of 2020 this credit line was increased to $3.0 million. The LOC is secured by the accounts receivable and other assets of the Company and had an interest rate of LIBOR plus 650 basis points. In May of 2021 the interest rate was reduced to LIBOR plus 550 basis points. On June 26, 2021 the Company had $0 of borrowings under this LOC and its borrowing base at the time would have permitted an additional $3.0 million to have been borrowed.
The line of credit is subject to certain financial covenants, all of which have been met.
(10) 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 third party equipment finance company. 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%.
In July 2020 CPS placed into service a piece of manufacturing equipment which it financed with the machine’s vendor. The equipment cost of $40 thousand will be paid at the rate of $2 thousand per month over 2 years, resulting in an implied interest rate of 1.90%.
The aggregate maturities of the notes payable based on the payment terms of the agreement are as follows:
| Remaining in: | Payments due by period | |||
| FY 2021 | $ | 29,414 | ||
| FY 2022 | $ | 55,906 | ||
| FY 2023 | $ | 43,837 | ||
| FY 2024 | $ | 46,757 | ||
| FY 2025 | $ | 8,090 | ||
| Total | 184,004 | |||
Total interest expense on notes payable during 2021 was $5,800.
(11) 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 $8 thousand and $69, respectively during the three and six months ended June 26, 2021 to account for the utilization of deferred tax assets to reduce the current tax liability for the three and six months ended June 26, 2021. As a result of the utilization of deferred tax assets, the Company did not record a provision for income taxes for the three months ended June 26, 2021, and less than $1 thousand for the six months so ended.
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 26, 2020, and in CPS’ 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. 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 26, 2020, 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 26, 2020.
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. Using its proprietary MMC technology, the Company also produces light-weight vehicle armor, particularly for extreme environments and heavy threat levels.
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 Corp.
Results of Operations for the Second Fiscal Quarter of 2021 (Q2 2021) Compared to the Second Fiscal Quarter of 2020 (Q2 2020); (all $ in 000s)
Total revenue was $5,862 in Q2 2021, a 2% increase compared with total revenue of $5,758 in Q2 2020. This increase was due primarily to the initial shipments of armor panels and increased sales of hermetic packages, offset by a decrease in the sale of baseplates to a major customer.
Gross margin in Q2 2021 totaled $1,352 or 23% of sales. In Q2 2020, gross margin was $1,183 or 21% of sales. This increase in margin was primarily due to moderate price increases and product mix.
Selling, general and administrative expenses (SG&A) were $1,099 in Q2 2021, up 28% when compared with SG&A expenses of $853 in Q2 2020. This increase in SG&A expense was due to increased compensation expense as a result of the addition of our new COO and the delay in certain Director’s compensation from Q1 to Q2.
In Q2, 2021, the Company incurred interest expense of $14 due to bank borrowings. This compares with interest expense of $32 in Q2 of 2020. The decrease in interest is due to decreased borrowings as a result of the At-the-Market offering
The Company experienced operating income of $253 compared with an operating income of $331 in the same quarter last year. This decrease in operating income is due primarily to the increase in SG&A expense, discussed above. The net income for Q2 2021 totaled $239 versus $299 in Q2 2020.
Results of Operations for the First Six Months of 2021 Compared to the First Six Months of 2020 (all $ in 000s)
Total revenue was $10,728 in the first half of 2021, a 13% decrease compared with total revenue of $12,270 in the first six months of 2020. This decrease was due primarily to the impact on the Covid-19 pandemic on Q1 2021 compared to the lack of impact of the pandemic on Q1 2020.
Gross margin in the first six months of 2021 totaled $2,296 or 21% of sales. In the first six months of 2020 gross margin totaled $2,734 or 22% of sales. This decrease was due to the decrease in revenue and the reduced coverage of our fixed costs.
Selling, general and administrative (SG&A) expenses were $2,007 during the first six months of 2021, up 13% compared with SG&A expenses of $1,781 in the first six months of 2020. The hiring of our new Chief Operating Officer and increased costs associated with printing and distributing our proxy statement were the primary reasons for this increase.
During the first half of 2021, the Company incurred interest expense of $18 due to bank borrowings. This compares with interest expense of $66 incurred during the first half of 2020. The decrease in interest is due to decreased borrowings as the result of our move to profitability from 2019 to 2020 and the At-the-Market offering in Q2 2021.
In the first six months of 2021 the Company had operating income of $289 compared with $952 in the same period last year. The net income for the first six months of 2021 totaled $270 versus $901 in the first six months of 2020. This decrease was due primarily to the impact on the Covid-19 pandemic on Q1 2021 compared to the lack of impact of the pandemic on Q1 2020.
Liquidity and Capital Resources (all $ in 000s unless noted)
The Company’s cash and cash equivalents at June 26, 2021 totaled $3,016 . This compares to cash and cash equivalents at December 26, 2020 of $195 . The improvement in cash and net cash was primarily due to equity raised through the At the Market offering (“ATM”) discussed below.
Accounts receivable at June 26, 2021 totaled $4,432 compared with $2,915 at December 26, 2020.
Days Sales Outstanding (DSO) increased from 62 days at the end of 2020 to 69 days at the end of Q2 2021. The increase in DSO was due to higher sales to two large customers with longer payment terms. The accounts receivable balances at December 26, 2020, and June 26, 2021 were both net of an allowance for doubtful accounts of $10.
Inventories totaled $3,989 at June 26, 2021 compared with inventory totaling $3,709 at December 26, 2020. This increase was due to the buildup of inventory for our armor order. The inventory turnover in the most recent four quarters ending Q2 2021 was 4.0 times, down from 4.5 times averaged during the four quarters of 2020 (based on a 5 point average).
On April 26, 2021, we entered into a sales agreement (the “Sales Agreement”) with Craig-Hallum Capital Group LLC (“C-H”) pursuant to which the Company may issue and sell, from time to time, shares of the Company’s common stock having an aggregate offering price of up to $25.0 million in at-the-market offerings (“ATM”). On the same day, the Company filed a prospectus supplement under a shelf registration relating to the Sales Agreement. C-H will act as sales agent and will be paid a 3% commission on each sale under the Sales Agreement. The Company’s common stock will be sold at prevailing market prices at the time of the sale, and, as a result, prices will vary. From date of inception until June 26, 2021, the Company sold approximately 479 thousand shares of common stock under the Sales Agreement, for gross proceeds of approximately $3.4 million. Subsequent to June 26, 2021, the Company has not sold any additional shares.
The Company financed its increase in working capital in Q2 2021 from its profit and the ATM offering. The Company expects it will continue to be able to fund its operations for the remainder of 2021 from existing cash balances.
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.
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.
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 had an interest rate of LIBOR plus 650 basis points. In May of 2021 the interest rate was reduced to LIBOR plus 550 basis points. On June 26, 2021 the Company had $0 of borrowings under this LOC and its borrowing base at the time would have permitted an additional $3.0 million to have been borrowed.
In March 2020, the company acquired a scanning acoustic microscope for a price of $208 thousand. The full amount was financed through a 5 year note payable with a financing company. 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%
In July 2020 CPS placed into service a piece of manufacturing equipment which it financed with the machine’s vendor. The equipment cost of $40 thousand will be paid at the rate of $2 thousand per month over 2 years with an interest rate of 1.9%.
The Company has one real estate lease expiring in February 2026. 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 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 has affected financial results for the quarter ended June 26, 2021. One of our major customers uses a significant portion of our product in the manufacture of products used in high-speed rail trains. As a result of decreased ridership due to the pandemic, demand from their customers has declined. This has resulted in this customer reducing Q2 purchases. The Company believes the worst is behind us, but COVID-19 variants, lack of vaccinations on a world-wide scale and other factors could continue to negatively affect our financial results moving forward.
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 2020 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 23, 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 23, 2020.
On April 26, 2020 the Company filed a report on Form 8-K which included the entry into an At-the-Market Issuance Sales Agreement.
On April 30, 2021 the Company filed a report on Form 8-K which included a press release announcing the Q1 2021 financial results.
On May 13, 2021 the Company filed a report on Form 8-K which included a press release announcing the retirement of Grant Bennett as Chief Executive Officer and the appointment of Michael Bennett in his stead.
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 CORP.
(Registrant)
Date: August 13, 2021
/s/ Michael E. McCormack
Michael E. McCormack
Chief Executive Officer
Date: August 13, 2021
/s/ Charles K. Griffith Jr.
Charles K. Griffith Jr.
Chief Financial Officer
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
I, Michael E. McCormack, certify that:
I have reviewed this quarterly report on Form 10-Q;
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
The registrant`s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant`s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this quarterly report based on such evaluation (the "Evaluation Date"); and
d) Disclosed in this quarterly report any change in the registrant`s internal control over financial reporting that occurred during the registrant`s most recent fiscal quarter that has materially affected or is reasonably like to materially affect, the registrant`s internal control over financial reporting.
The registrant`s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant`s auditors and the audit committee of the registrant`s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant`s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant`s internal control over financial reporting.
Date: August 13, 2021
/s/ Michael E. McCormack
Michael E. McCormack
President and Chief Executive Officer
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
I, Charles K. Griffith Jr., certify that:
I have reviewed this quarterly report on Form 10-Q;
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
The registrant`s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant`s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this quarterly report based on such evaluation (the "Evaluation Date"); and
d) Disclosed in this quarterly report any change in the registrant`s internal control over financial reporting that occurred during the registrant`s most recent fiscal quarter that has materially affected or is reasonably like to materially affect, the registrant`s internal control over financial reporting.
The registrant`s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant`s auditors and the audit committee of the registrant`s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant`s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant`s internal control over financial reporting.
Date: August 13, 2021
/s/ Charles K. Griffith Jr.
Charles K. Griffith Jr.
Chief Financial Officer
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
In connection with the Quarterly Report of CPS Technologies Corporation (the "Company") on Form 10-Q for the three month period ended June 26, 2021 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael E. McCormack, President and Chief Executive Officer of the Company, and I, Charles K. Griffith Jr., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 13, 2021
/s/ Michael E. McCormack
Michael E. McCormack
President and Chief Executive Officer
Date: August 13, 2021
/s/ Chales K. Griffith Jr.
Charles K. Griffith Jr.
Chief Financial Officer