CPS TECHNOLOGIES CORP/DE/ - Quarter Report: 2023 September (Form 10-Q)

PART I FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS (Unaudited)

CPS TECHNOLOGIES CORP.
Balance Sheets (Unaudited)
(continued on next page)

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORP.
Balance Sheets (Unaudited)
(concluded)

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORP.
Statements of Operations (Unaudited)

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORP.
STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND OCTOBER 1, 2022

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORP.
Statements of Cash Flows (Unaudited)

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 31, 2022 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 31, 2022 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:

(4)   Commitments & Contingencies

Commitments

Operating Leases

The Company has one real estate lease expiring in February 2026. CPS also has a few operating leases for equipment which are minor in nature and are generally short-term in duration. None of these equipment leases has 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 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.

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 facility lease as of September 30, 2023.

Operating Lease Costs and Cash Flows

Operating lease cost and cash paid was $41 thousand during the third quarter of 2023 and $122 thousand for the nine months ended September 30, 2023. 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 September 30, 2023 there were 229,500 stock options granted under the Plan. There were 25,000 stock options granted under the Plan during the quarter ended October 1 2022.

During the quarter ended September 30, 2023, 55,000 options were exercised at a weighted average cost of $2.65 per share. During the quarter ended September 30, 2023, 27,400 options were forfeited and none expired. During the quarter ended October 1, 2022, no options were exercised, 10,000 options were forfeited and none expired.

During the quarter ended September 30, 2023, the Company repurchased 138,200 shares for employees to facilitate their exercise of stock options. During the quarter ended October 1, 2022, the Company did not repurchase any shares for employees to facilitate their exercise of stock options.

There were also 901,900 shares outstanding at a weighted average price of $2.67 with a weighted average remaining term of 6.7 years as of September 30, 2023, and there were 497,000 shares exercisable at a weighted average price of $2.43 with a weighted average remaining term of 4.8 years as of September 30, 2023. The Plan, as amended, is authorized to issue 1,500,000 shares of common stock. As of September 30, 2023, there were 834,300 shares available for future grants.

During the three and nine months ended September 30, 2023, the Company recognized approximately $28 thousand and $176 thousand, respectively, as share-based compensation expense related to share and option grants. These amounts are included as a component of selling, general and administrative expenses in the statement of operations.

During the three and nine months ended October 1, 2022, the Company recognized approximately $43 thousand and $207 thousand, respectively, as share-based compensation expense related to share and option grants. These amounts are included as a component of selling, general and administrative expenses in the statement of operations.

(6)   Inventories

Inventories consist of the following:

(7)   Accrued Expenses

Accrued expenses consist of the following:

(8)   Line of Credit

In May 2023, the Company terminated its $3.0 million revolving line of credit (LOC) with Massachusetts Business Development Corporation (BDC). A new LOC in the amount of $3.0 million was entered into with Rockland Trust Company. The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of the National Prime Rate as published by the Wall Street Journal. On September 30, 2023, 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 LOC remains in effect until terminated per mutual agreement by both parties.

(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 fixed rate of 6.47%.

The aggregate maturities of the notes payable based on the payment terms of the agreement are as follows: 

Total interest expense on notes payable during 2023 was $4,130.

(10)   Income Taxes

The Company’s current income tax expense and deferred income tax expense are $73 and $424, respectively, for the nine months ended September 30, 2023. The Company’s current income tax expense and deferred income tax expense are $18 and $19, respectively, for the three months ended September 30, 2023.

ITEM 2        MANAGEMENTS 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 31, 2022 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.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. There are a number of factors that could cause the Company’s actual results to differ materially from those forecasted or projected in such forward-looking statements. This includes the Russian invasion of Ukraine, the war in Israel/Gaza and other geopolitical events. 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 estimates 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 31, 2022, 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 31, 2022.

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 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 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 Third Fiscal Quarter of 2023 (Q3 2023) Compared to the Third Fiscal Quarter of 2022 (Q3 2022); (all $ in 000s)

Total revenue was $6,285 in Q3 2023, a 7% decrease compared with total revenue of $6,748 in Q3 2022. This decrease was due primarily to customers moving expected Q3 shipments into Q4. The bulk of the deferrals of these shipments was in armor which did not affect production as we built up our finished goods armor inventory for the Q4 shipments.

Gross profit in Q3 2023 totaled $1,236 or 20% of sales. In Q3 2022, gross profit was $1,883 or 28% of sales. This decrease in profit directly correlates to the decreased revenue and the impact increased revenue has on fixed manufacturing costs. In addition, we are replacing a piece of testing equipment and in the interim are outsourcing the testing, resulting in higher costs.

Selling, general and administrative expenses (SG&A) were $1,105 in Q3 2023, down 6% when compared with SG&A expenses of $1,175 in Q3 2022. This decrease was primarily due to decreased variable compensation in Q3 as a result of the Company’s decreased revenue.

In Q3 2023, the Company incurred interest expense of $1 due to equipment financing. This compares with interest expense of $2 in Q3 of 2022.

The Company generated operating income of $131 compared with operating income of $709 in the same quarter last year. This decrease in operating income is due to the reduction in gross profit, discussed above. The net income for Q3 2023 totaled $171 versus net income of $988 in Q3 2022. This differential in net income is due to the decrease in operating income, discussed above, as well as the Employee Retention Tax Credit ("ERTC") in 2022 which was claimed and recognized in 2022. 

Results of Operations for the First Nine Months of 2023 Compared to the First Nine Months of 2022 (all $ in 000s)

Total revenue was $20,803 in the first nine months of 2023, a 2% increase compared with total revenue of $20,472 in the first nine months of 2022. A reduction in shipments of hermetic packages was more than offset by an increase in MMC shipments.

Gross margin in the first nine months of 2023 totaled $5,677 or 27% of sales. In the first nine months of 2022 gross margin totaled $5,675 or 28% of sales.

Selling, general and administrative (SG&A) expenses were $4,121 during the first nine months of 2023, up 10% compared with SG&A expenses of $3,750 in the first nine months of 2022. There were three major reasons for this increase. First there was a significant increase in travel expenses. In 2022 we were just beginning to come out of the Covid-19 pandemic. Many conferences continued to be virtual and many customers continued to prohibit outside visitors. In 2023 this has changed, thus our business development team, in particular, have been doing significantly more travel than a year ago. Secondly, the Company increased its 401k matching formula in 2023 resulting in increased payroll costs. Lastly, the Company accrued severance to a long-time employee whose service with the Company was terminated.

During the first nine months of 2023, the Company incurred interest expense of $4 on its notes payable. This compares with interest expense of $6 incurred during the first nine months of 2022.

In the first nine months of 2023, the Company generated operating income of $1,556 compared with operating income of $1,925 in the same period last year. This difference is primarily due to the increased SG&A discussed above. The net income for the first nine months of 2023 totaled $1,231 versus net income of $1,862 in the first nine months of 2022. As mentioned above, the ERTC which was recognized in 2022, accounted for this difference.

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

The Company’s cash and cash equivalents at September 30, 2023 totaled $8,779. This compares to cash and cash equivalents at December 31, 2022 of $8,267. The increase in cash was primarily due to our net profit, offset by increased accounts receivable to support higher sales.

Accounts receivable at September 30, 2023 totaled $5,023 compared with $4,464 at December 31, 2022. The 2022 total includes $641 receivable for the ERTC.

Days Sales Outstanding (DSO) increased from 52 days at the end of 2022 to 72 days at the end of Q3 2023, based on trade receivables. This change was due to the reduction of deferred revenue occurring in the 4th quarter of 2022. Prepayments received in 2021 were used to pay for shipments shipped in the 4th quarter thus immediately reducing accounts receivable, rather than the customer paying 30-45 days later.  The accounts receivable balances at September 30, 2023, and December 31, 2022 were both net of an allowance for doubtful accounts of $10.

Inventories totaled $4,828 at September 30, 2023 compared with inventory totaling $4,876 at December 31, 2022. The inventory turnover in the most recent four quarters ending Q3 2023 was 4.1 times, slightly down from 4.2 times averaged during the four quarters of 2022 (based on a 5 point average).

The Company financed its working capital during the first nine months of 2023 from its net profit during the period. The Company expects it will continue to be able to fund its working capital requirements for the remainder of 2023 from existing cash balances.

Although the Company’s customer base is expanding, the Company continues to sell to a limited number of customers and the loss of any one of these customers could have significant negative consequences on future results. Although the Company is in a good cash position today, failure to generate sufficient revenues, raise additional capital or reduce certain discretionary spending could have a material adverse effect on the Company’s ability to achieve its business objectives.

Contractual Obligations

In May 2023, the Company terminated its $3.0 million revolving line of credit (LOC) with Massachusetts Business Development Corporation (BDC). A new LOC in the amount of $3.0 million was entered into with Rockland Trust Company. The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of the National Prime Rate as published by the Wall Street Journal. On September 30, 2023, 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 LOC remains in effect until terminated per mutual agreement by both parties.

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%

The Company has one real estate lease expiring in February 2026. CPS also has a few 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.

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
(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

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

None

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)

Brian T. Mackey
Chief Executive Officer

Charles K. Griffith Jr.

Chief Financial Officer