CPS TECHNOLOGIES CORP/DE/ - Quarter Report: 2022 July (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the period ended July 2, 2022
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 | 04-2832509 |
| 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. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☒ 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 ☒ Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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 ☒ No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):
☐ Yes ☒ 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 29,2022: 14,433,509.
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS (Unaudited)
CPS TECHNOLOGIES CORP.
Balance Sheets (Unaudited)
| July 2, | December 25, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 5,076,282 | $ | 5,050,312 | ||||
| Accounts receivable-trade, net | 4,536,973 | 4,870,021 | ||||||
| Inventories, net | 4,665,719 | 3,911,602 | ||||||
| Prepaid expenses and other current assets | 313,501 | 225,873 | ||||||
| Total current assets | 14,592,475 | 14,057,808 | ||||||
| Property and equipment: | ||||||||
| Production equipment | 10,545,236 | 10,489,729 | ||||||
| Furniture and office equipment | 738,205 | 673,305 | ||||||
| Leasehold improvements | 968,509 | 951,384 | ||||||
| Total cost | 12,251,950 | 12,114,418 | ||||||
| Accumulated depreciation and amortization | (11,212,803 | ) | (11,028,154 | ) | ||||
| Construction in progress | 373,776 | 246,669 | ||||||
| Net property and equipment | 1,412,923 | 1,332,933 | ||||||
| Right-of-use lease asset | 528,000 | 586,000 | ||||||
| Deferred taxes, net | 2,482,720 | 2,823,978 | ||||||
| Total assets | $ | 19,016,118 | $ | 18,800,719 | ||||
See accompanying notes to financial statements.
(continued)
CPS TECHNOLOGIES CORP.
Balance Sheets (Unaudited)
(concluded)
|
| July 2, | December 25, | ||||||
|
| 2022 | 2021 | ||||||
| LIABILITIES AND STOCKHOLDERS` EQUITY | ||||||||
| Current liabilities: | ||||||||
| Note payable, current portion | $ | 47,321 | $ | 55,906 | ||||
| Accounts payable | 1,621,278 | 2,100,251 | ||||||
| Accrued expenses | 648,180 | 1,086,429 | ||||||
| Deferred revenue | 1,752,543 | 1,707,138 | ||||||
| Lease liability, current portion | 157,000 | 155,000 | ||||||
| Total current liabilities | 4,226,322 | 5,104,724 | ||||||
| Note payable less current portion | 77,120 | 98,684 | ||||||
| Long term lease liability | 371,000 | 431,000 | ||||||
| Total liabilities | 4,674,442 | 5,634,408 | ||||||
| Commitments and contingencies (note 4) | ||||||||
| Stockholders` equity: | ||||||||
| Common stock, $ par value, authorized shares; issued and ; outstanding and ; at July 2, 2022 and December 25, 2021, respectively; | 144,388 | 143,508 | ||||||
| Additional paid-in capital | 39,600,085 | 39,281,810 | ||||||
| Accumulated deficit | (25,381,948 | ) | (26,256,492 | ) | ||||
| Less cost of and common shares repurchased at July 2, 2022 and December 25, 2021, respectively; | (20,849 | ) | (2,515 | ) | ||||
| Total stockholders` equity | 14,341,676 | 13,166,311 | ||||||
| Total liabilities and stockholders` equity | $ | 19,016,118 | $ | 18,800,719 | ||||
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORP.
Statements of Operations (Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| July 2, | June 26, | July 2, | June 26, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues: | ||||||||||||||||
| Product sales | $ | 7,070,743 | $ | 5,862,183 | $ | 13,723,457 | $ | 10,727,890 | ||||||||
| Total revenues | 7,070,743 | 5,862,183 | 13,723,457 | 10,727,890 | ||||||||||||
| Cost of product sales | 5,242,106 | 4,510,600 | 9,931,330 | 8,432,168 | ||||||||||||
| Gross Margin | 1,828,637 | 1,351,583 | 3,792,127 | 2,295,722 | ||||||||||||
| Selling, general, and administrative expense | 1,159,157 | 1,098,616 | 2,575,550 | 2,007,086 | ||||||||||||
| Income from operations | 669,480 | 252,967 | 1,216,577 | 288,636 | ||||||||||||
| Interest income (expense), net | 1,594 | (13,769 | ) | (18,079 | ) | |||||||||||
| Net income before income tax | 671,074 | 239,198 | 1,216,258 | 270,557 | ||||||||||||
| Income tax provision | 215,966 | -- | 341,714 | 456 | ||||||||||||
| Net income | $ | 455,108 | $ | 239,198 | $ | 874,544 | $ | 270,101 | ||||||||
| Net income per basic common share | $ | 0.03 | $ | 0.02 | $ | 0.06 | $ | 0.02 | ||||||||
| Weighted average number of basic common shares outstanding | 14,431,825 | 13,982,177 | 14,410,064 | 13,783,276 | ||||||||||||
| Net income per diluted common share | $ | 0.03 | $ | 0.02 | $ | 0.06 | $ | 0.02 | ||||||||
| Weighted average number of diluted common shares outstanding | 14,708,646 | 14,550,918 | 14,682,516 | 14,407,904 | ||||||||||||
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORP.
STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JULY 2, 2022 AND JUNE 26, 2021
| Common Stock |
Additional | Total |
||||||||||||||||||||||
| Number of |
paid-in |
Accumulated |
Stock |
stockholders' |
||||||||||||||||||||
| shares issued |
Par Value |
capital |
deficit |
repurchased |
equity |
|||||||||||||||||||
| Balance at April 2, 2022 |
14,423,486 | $ | 144,235 | $ | 39,546,975 | (25,837,056 | ) | (5,623 | ) | 13,848,531 | ||||||||||||||
| Share-based compensation expense |
-- | -- | 39,384 | -- | -- | 39,384 | ||||||||||||||||||
| Issuance of common stock |
-- | -- | (8,144 | ) | -- | -- | (8,144 | ) | ||||||||||||||||
| Employee option exercises |
15,300 | 153 | 21,870 | -- | (15,226 | ) | 6,797 | |||||||||||||||||
| Net income |
-- | -- | -- | 455,108 | -- | 455,108 | ||||||||||||||||||
| Balance at July 2, 2022 |
14,438,786 | 144,388 | 39,600,085 | (25,381,948 | ) | (20,849 | ) | 14,341,676 | ||||||||||||||||
| Common Stock |
Additional |
Total |
||||||||||||||||||||||
| Number of |
paid-in |
Accumulated |
Stock |
stockholders' |
||||||||||||||||||||
| shares issued |
Par Value |
capital |
deficit |
repurchased |
equity |
|||||||||||||||||||
| Balance at December 25, 2021 |
14,350,786 | $ | 143,508 | $ | 39,281,810 | (26,256,492 | ) | (2,515 | ) | 13,166,311 | ||||||||||||||
| Share-based compensation expense |
-- | -- | 163,855 | -- | -- | 163,855 | ||||||||||||||||||
| Issuance of common stock |
-- | -- | (17,758 | ) | -- | -- | (17,758 | ) | ||||||||||||||||
| Employee options Exercised |
88,000 | 880 | 172,178 | -- | (18,334 | ) | 154,724 | |||||||||||||||||
| Net income |
-- | -- | -- | 874,544 | -- | 874,544 | ||||||||||||||||||
| Balance at July 2, 2022 |
14,438,786 | 144,388 | 39,600,085 | (25,381,948 | ) | (20,849 | ) | 14,341,676 | ||||||||||||||||
| 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 option exercises |
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 | ||||||||||||||||
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORP.
Statements of Cash Flows (Unaudited)
| Six Months Ended | ||||||||
| July 2, | June 26, | |||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 874,544 | $ | 270,101 | ||||
| Adjustments to reconcile net income to cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 211,641 | 284,408 | ||||||
| Share-based compensation | 163,855 | 119,535 | ||||||
| Changes in: | ||||||||
| Accounts receivable-trade | 333,048 | (1,517,511 | ) | |||||
| Inventories | (754,117 | ) | (279,963 | ) | ||||
| Prepaid expenses and other current assets | (87,628 | ) | (202,018 | ) | ||||
| Accounts payable | (478,973 | ) | 613,046 | |||||
| Accrued expenses | (438,249 | ) | 193,665 | |||||
| Deferred taxes | 341,258 | -- | ||||||
| Deferred revenue | 45,405 | 388,697 | ||||||
| Net cash provided by (used in) operating activities | 210,784 | (130,040 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (291,631 | ) | (163,524 | ) | ||||
| Proceeds from sale of property and equipment | -- | -- | ||||||
| Net cash used in investing activities | (291,631 | ) | (163,524 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from exercise of employee stock options, net of repurchases | 154,724 | 11,229 | ||||||
| Proceeds from issuance of common stock, net of expenses | (17,758 | ) | 3,137,392 | |||||
| Payments on note payable | (30,149 | ) | (34,500 | ) | ||||
| Net cash provided by (used in) financing activities | 106,817 | 3,114,121 | ||||||
| Net increase (decrease) in cash and cash equivalents | 25,970 | 2,820,557 | ||||||
| Cash and cash equivalents at beginning of period | 5,050,312 | 195,203 | ||||||
| Cash and cash equivalents at end of period | $ | 5,076,282 | $ | 3,015,760 | ||||
| Supplemental disclosures of cash flows information: | ||||||||
| Cash paid for interest | 4,353 | 18,079 | ||||||
| Supplemental disclosures of non-cash activity: | ||||||||
| Issuance of note payable to finance equipment purchase | -- | -- | ||||||
| Net exercise of stock options | 18,334 | 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 ballistic threat levels.
The Company sells into several end markets including the aerospace & defense markets, wireless communications infrastructure market, high-performance microprocessor market, motor controller market, and other microelectronic 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 25, 2021 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 25, 2021 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.cpstechnologysolutions.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 | |||||||||||||||
| July 2, | June 26, | July 2, | June 26, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Basic EPS Computation: | ||||||||||||||||
| Numerator: | ||||||||||||||||
| Net income (loss) | $ | 455,108 | $ | 239,198 | $ | 874,544 | $ | 270,101 | ||||||||
| Denominator: | ||||||||||||||||
| Weighted average | ||||||||||||||||
| Common shares | ||||||||||||||||
| Outstanding | 14,431,825 | 13,982,177 | 14,410,064 | 13,783,276 | ||||||||||||
| Basic EPS | $ | 0.03 | $ | 0.02 | $ | 0.06 | $ | 0.02 | ||||||||
| Diluted EPS Computation: | ||||||||||||||||
| Numerator: | ||||||||||||||||
| Net income (loss) | $ | 455,108 | $ | 239,198 | $ | 874,544 | $ | 270,101 | ||||||||
| Denominator: | ||||||||||||||||
| Weighted average | ||||||||||||||||
| Common shares | ||||||||||||||||
| Outstanding | 14,431,825 | 13,982,177 | 14,410,064 | 13,783,276 | ||||||||||||
| Dilutive effect of stock options | 276,821 | 568,741 | 272,452 | 624,628 | ||||||||||||
| Total Shares | 14,708,646 | 14,550,918 | 14,682,516 | 14,407,904 | ||||||||||||
| Diluted EPS | $ | 0.03 | $ | 0.02 | $ | 0.06 | $ | 0.02 | ||||||||
(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 $160 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 July 2, 2022
| (Dollars in Thousands) | July 2, 2022 | |||
| Maturity of capitalized lease liabilities | Lease payments | |||
| 2022 | 81 | |||
| 2023 | 162 | |||
| 2024 | 165 | |||
| 2025 | 165 | |||
| 2026 | 28 | |||
| Total undiscounted operating lease payments | $ | 601 | ||
| Less: Imputed interest | (73 | ) | ||
| Present value of operating lease liability | $ | 528 | ||
| Balance Sheet Classification | ||||
| Current lease liability | $ | 157 | ||
| Long-term lease liability | 371 | |||
| Total operating lease liability | $ | 528 | ||
| Other Information | ||||
| Weighted-average remaining lease term for capitalized operating leases (months) | 44 | |||
| Weighted-average discount rate for capitalized operating leases | 6.6 | % |
Operating Lease Costs and Cash Flows
Operating lease cost and cash paid was $41 thousand during the second quarter of 2022 and $79 thousand for the six months ended July 2, 2022. 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 July 2, 2022, a total of 15,000 stock options were granted to employees under the Company’s 2020 Equity Incentive Plan Stock Incentive Plan (the “Plan”) and no stock options were granted to outside directors during the quarter ended July 2, 2022, issued at a weighted average price of $4.41 per share. 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.
During the three and six months ended July 2, 2022, there were 15,300 and 88,000 options exercised and corresponding shares issued at a weighted average price of $1.44 and $1.97, respectively. 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 July 2, 2022, the Company repurchased 3,143 and 3,983 shares, respectively, for employees to facilitate their exercise of stock options. During the three and six months ended June 26,2021 the Company repurchased 2,235 and 122,431 shares, respectively.
There were also 968,100 shares outstanding at a weighted average price of $2.41 with a weighted average remaining term of 6.46 years as of July 2, 2022, and there were 517,800 shares exercisable at a weighted average price of $2.02 with a weighted average remaining term of 4.52 years as of July 2, 2022. The Plan, as amended, is authorized to issue 1,500,000 shares of common stock. As of July 2, 2022, there were 930,800 shares available for future grants.
As of July 2, 2022, there was $616 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 1.95 years.
During the three and six months ended July 2, 2022, the Company recognized $39,384 and $163,855, respectively, as shared-based compensation expense related to previously granted shares under the Plan.
During the three and six months ended June 26,2021, the Company recognized $91,113 and $119,535, respectively, as shared-based compensation expense related to previously granted shares under the Plan.
(6) Inventories
Inventories consist of the following:
| July 2, | December 25, | |||||||
| 2022 | 2021 | |||||||
| Raw materials | $ | 2,691,395 | $ | 2,080,778 | ||||
| Work in process | 1,447,528 | 1,309,572 | ||||||
| Finished goods | 704,638 | 805,159 | ||||||
| Total inventory | 4,843,561 | 4,195,509 | ||||||
| Reserve for obsolescence | (177,842 | ) | (283,907 | ) | ||||
| Inventories, net | $ | 4,665,719 | $ | 3,911,602 | ||||
(7) Accrued Expenses
Accrued expenses consist of the following:
| July 2, | December 25, | |||||||
| 2022 | 2021 | |||||||
| Accrued legal and accounting | $ | 62,474 | $ | 79,917 | ||||
| Accrued payroll and related expenses | 460,293 | 905,698 | ||||||
| Accrued other | 125,413 | 100,814 | ||||||
| $ | 648,180 | $ | 1,086,429 | |||||
(8) 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 has an interest rate of LIBOR plus 550 basis points. On July 2, 2022, 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.
(9) Note Payable
In March 2020, the Company acquired inspection equipment for a price of $208 thousand. The full amount was financed through a 5 year note payable with a third-party equipment finance company. The note is collateralized by the equipment 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 2022 | $ | 25,882 | ||
| FY 2023 | $ | 43,837 | ||
| FY 2024 | $ | 46,757 | ||
| FY 2025 | $ | 8,090 | ||
| Total | 124,566 | |||
Total interest expense on notes payable during 2022 was $4,353.
(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.
In September 2021, this decision was reevaluated in light of the Company’s recent profitability and its forecasts for future profitability. The Company concluded that it is “more likely than not” that the Company will be able to fully utilize the deferred tax asset. This reversal of the valuation allowance was made net of the expected tax liability for 2021. For the second quarter of 2022 a charge against the tax asset of $215,966 for the estimated tax liability on Q2 income was made. For the 6 months ended July 2, 2022, a charge against the tax asset of $341,258 was made for the estimated tax liability on year-to-date income.
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 25, 2021, 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.cpstechnologysolutions.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 25, 2021, 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 25, 2021.
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 Silicon Carbide (“SiC”) and Gallium Nitride (“GaN”), collectively Metal Matrix Composites (“MMC”). 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, cold rolled steel and Kovar. Using its proprietary MMC technology, the Company also produces lightweight 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 such as engineering, tooling design and fabrication, process engineering, and others. 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 MMC, housings for hybrid circuits and our proprietary armor solution 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.
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 2022 (Q2 2022) Compared to the Second Fiscal Quarter of 2021 (Q2 2021); (all $ in 000s)
Total revenue was $7,071 in Q2 2022, a 21% increase compared with total revenue of $5,862 in Q2 2021. This increase was due primarily to increased shipments of armor panels and hermetic packages, but in particular baseplates which last year bore the biggest negative impact of the Covid-19 pandemic.
Gross margin in Q2 2022 totaled $1,829 or 26% of sales. In Q2 2021, gross margin was $1,352 or 23% of sales. This increase in margin was primarily due to the impact of higher sales on certain factory costs which are fixed relative to increased sales.
Selling, general and administrative expenses (SG&A) were $1,159 in Q2 2022, up 5% when compared with SG&A expenses of $1,099 in Q2 2021. This increase in SG&A expense was due to increased compensation expense as a result of the addition of our new Corporate Development Officer (CDO) and other salary increases.
In Q2, 2022, the Company incurred interest expense of $2 due to notes payable. This compares with interest expense of $14 in Q2 of 2021. The decrease in interest is due to the elimination of line of credit borrowings based on the Company’s current cash position.
The Company experienced operating income of $669 compared with an operating income of $253 in the same quarter last year. This increase in operating income is due primarily to the increase in revenue and gross margin, discussed above. The net income for Q2 2022 totaled $455 versus $239 in Q2 2021.
Results of Operations for the First Six Months of 2022 Compared to the First Six Months of 2021 (all $ in 000s)
Total revenue was $13,723 in the first half of 2022, a 28% increase compared with total revenue of $10,728 in the first six months of 2021. This increase was due primarily to the impact of the Covid-19 pandemic on Q1 2021 compared to the lessening impact of the pandemic on Q2 2022 and a full six months of armor sales in 2022 compared to about 2 months of sales in the first half of 2021.
Gross margin in the first six months of 2022 totaled $3,792 or 28% of sales. In the first six months of 2021 gross margin totaled $2,296 or 21% of sales. This increase was due to the increase in revenue and the increased coverage of our fixed costs.
Selling, general and administrative (SG&A) expenses were $2,576 during the first six months of 2022, up 28% compared with SG&A expenses of $2,007 in the first six months of 2021. The hiring of our new CDO, increased variable compensation accruals due to higher 2022 profitability and increased costs associated commissions on armor product shipments were the primary reasons for this increase.
During the first half of 2022, the Company incurred interest expense of $4 due to notes payable. This compares with interest expense of $18 incurred during the first half of 2021. The decrease in interest is due to decreased borrowings as the result of our cash position.
In the first six months of 2022 the Company had operating income of $1,217 compared with $289 in the same period last year. The net income for the first six months of 2022 totaled $875 versus $270 in the first six months of 2021. This increase 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 2022 as well as increased sales of armor in 2022.
Liquidity and Capital Resources (all $ in 000s unless noted)
The Company’s cash and cash equivalents at July 2, 2022 totaled $5,076 . This compares to cash and cash equivalents at December 25, 2021, of $5,050. The neutrality of cash was primarily due to our net profit and reduction in accounts receivable, offset by increased inventory to support higher sales and reductions in accounts payable and accrued expenses.
Accounts receivable at July 2, 2022, totaled $4,537 compared with $4,870 at December 25, 2021. Days Sales Outstanding (DSO) decreased from 69 days at the end of 2021 to 58 days at the end of Q2 2022. The decrease in DSO was due to higher sales to large customers with shorter payment terms in 2022 as compared to 2021. The accounts receivable balances at December 25, 2021, and July 2, 2022, were both net of an allowance for doubtful accounts of $10.
Inventories totaled $4,666 at July 2, 2022, compared with inventory totaling $3,912 at December 25, 2021. This increase was due to the buildup of inventory for our armor order. The inventory turnover in the most recent four quarters ending Q2 2022 was 4.6 times, slightly down from 4.7 times averaged during the four quarters of 2021 (based on a 5-point average) .
The Company financed its increase in working capital in Q2 2021 from its profit and usage of cash on hand. The Company expects it will continue to be able to fund its operations for the remainder of 2022 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.
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 550 basis points. The Company was in compliance with all debt covenants as of July 2, 2022, had $0 borrowings under this LOC and its borrowing base at the time would have permitted $3.0 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 had a minimal impact on financial results for the quarter ended July 2, 2022. There were several COVID related absences during the quarter which required the use of overtime in order to meet production needs. The Company expects these mild disruptions to continue as COVID becomes more endemic. Nevertheless, the possibility of a more dangerous variant could result in a negative impact on the Company’s business in the future.
Although CPS has not been directly impacted by the war in Ukraine, potential supply chain disruptions and its impact on energy costs are areas where we could be impacted in the future.
Inflation is an area where we have seen some impact on our business. We have seen significant price increases in commodity raw materials, such as aluminum, as well as increases in other costs of doing business. As we receive new orders, we have been able to pass on most of these costs to our customers. In the case of longer-term pricing agreements, we have been able to pass on some of these costs through surcharges and in other ways to mitigate the impact on our profit. As inflation continues, our ability to continue to absorb higher costs by raising customer prices cannot be guaranteed.
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: |
101.INS Inline XBRL Instance Document
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)
| (b) |
Reports on Form 8-K: |
On May 3, 2022, 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 28, 2022.
On May 5, 2022, the Company filed a report on Form 8-K which included a press release announcing the Q1 2022 financial results.
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 5, 2022
/s/ Michael E. McCormack
Michael E. McCormack
Chief Executive Officer
Date: August 5, 2022
/s/ Charles K. Griffith Jr.
Charles K. Griffith Jr.
Chief Financial Officer