CPS TECHNOLOGIES CORP/DE/ 10-Q

ITEM 1 FINANCIAL STATEMENTS (Unaudited) CPS TECHNOLOGIES CORP. Balance Sheets (Unaudited) March 27, December 26, 2021 2020 ASSETS Current assets: Cash and cash equivalents $ 167,918 $ 195,203 Accounts receivable-trade, net 3,778,203 2,914,800 Inventories, net 3,631,152 3,709,471 Prepaid expenses and other current assets 293,275 71,506 Total current assets 7,870,548 6,890,980 Property and equipment: Production equipment 10,326,614 10,265,471 Furniture and office equipment 568,846 568,846 Leasehold improvements 951,384 951,384 Total cost 11,846,844 11,785,701 Accumulated depreciation and amortization (10,698,338) (10,558,816) Construction in progress 36,172 61,062 Net property and equipment 1,184,678 1,287,947 Right-of-use lease asset (note 4, leases) 664,000 25,000 Deferred taxes, net 117,000 117,000 Total Assets $ 9,836,226 $ 8,320,927 See accompanying notes to financial statements. (continued) CPS TECHNOLOGIES CORP. Balance Sheets (Unaudited) (concluded) LIABILITIES AND STOCKHOLDERS’ March 27, December 26, EQUITY 2021 2020 Current liabilities: Borrowings against line of credit $ 193,395 $ — Note payable, current portion 58,833 58,134 Accounts payable 1,503,327 909,291 Accrued expenses 531,548 804,091 Deferred revenue 319,216 12,177 Lease liability, current portion 148,000 25,000 Total current liabilities 2,754,319 1,808,693 Note payable less current portion 139,608 154,570 Long term lease liability 516,000 — Total liabilities 3,409,927 1,963,263 Commitments & Contingencies Stockholders’ equity: Common stock, $0.01 par value, authorized 20,000,000 shares; issued 14,360,042 and 13,746,242 shares; outstanding 13,807,394 and 13,313,790 shares; at March 27, 2021 and December 26, 2020, respectively 143,600 137,462 Additional paid-in capital 37,925,674 36,688,894 Accumulated deficit (29,441,466) (29,472,369) Less cost of 552,648 and 432,452 common shares repurchased at March 27, 2021 and December 26, 2020, respectively (2,201,509) (996,323) Total stockholders’ equity 6,426,299 6,357,664 Total liabilities and stockholders’ equity $ 9,836,226 $ 8,320,927 See accompanying notes to financial statements. CPS TECHNOLOGIES CORP. Statements of Operations (Unaudited) Fiscal Quarters Ended March 27, March 28, 2021 2020 Revenues: Product sales $ 4,865,708 $ 6,511,571 Total revenues 4,865,708 6,511,571 Cost of product sales 3,921,568 4,961,361 Gross Margin 944,140 1,550,210 Selling, general, and administrative expense 908,471 928,590 Income from operations 35,669 621,620 Other income (expense), net (4,310) (19,966) Income before taxes 31,359 601,654 Income tax provision 456 — Net income $ 30,903 $ 601,654 Net income per basic common share $ 0.00 $ 0.05 Weighted average number of basic common shares outstanding 13,584,376 13,207,436 Net income per diluted common share $ 0.00 $ 0.05 Weighted average number of diluted common shares outstanding 14,264,890 13,247,131 See accompanying notes to financial statements. CPS TECHNOLOGIES CORPORATION STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 27, 2021 AND MARCH 28, 2020 Common Stock Number of Additional Total shares Par paid-in Accumulated Stock stockholders’ issued 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 — — 27,422 — — 27,422 Employee options exercises 613,800 6,138 1,209,358 — (1,205,186) 10,310 Net income — — — 30,903 — 30,903 Balance at March 27, 2021 14,360,042 143,600 37,925,674 (29,441,466) (2,201,509) 6,426,299 Balance at December 28, 2019 13,427,492 $ 134,275 $ 36,094,201 (30,380,433) (517,053) 5,330,990 Share-based compensation expense — — 65,673 — — 65,673 Net income — — — 601,654 — 601,654 Balance at March 28, 2020 13,427,492 134,275 36,159,874 (29,778,779) (517,053) 5,998,317 See accompanying notes to financial statements. CPS TECHNOLOGIES CORP. Statements of Cash Flows (Unaudited) Fiscal Quarters Ended March 27, March 28, 2021 2020 Cash flows from operating activities: Net income $ 30,903 $ 601,654 Adjustments to reconcile net income to cash used in operating activities: Depreciation and amortization 148,743 128,759 Share-based compensation 27,422 65,673 Gain on sale of property and equipment (12,000) (5,000) Changes in: Accounts receivable-trade (863,403) (1,872,279) Inventories 78,319 (495,514) Prepaid expenses and other current assets (221,769) (79,673) Accounts payable 594,037 1,185,445 Accrued expenses (272,543) (123,245) Deferred revenue 307,039 360,106 Net cash used in operating activities (183,252) (234,074) Cash flows from investing activities: Purchases of property and equipment (42,488) (107,600) Proceeds from sale of property and equipment 12,000 5,000 Net cash used in investing activities (30,488) (102,600) Cash flows from financing activities: Net borrowings on line of credit 193,395 327,918 Proceeds from exercise of employee stock options 10,310 — Payments on note payable (17,250) (2,954) Net cash provided by financing activities 186,455 324,964 Net decrease in cash and cash equivalents (27,285) (11,710) Cash and cash equivalents at beginning of period 195,203 133,965 Cash and cash equivalents at end of period $ 167,918 $ 122,255 Supplemental disclosures of cash flows information: Cash paid for interest $ 14,831 $ 33,216 Supplemental disclosures of non-cash activity: Net exercise of stock options $ 1,205,186 $ — Issuance of note payable to finance equipment purchase $ — $ 208,583 See accompanying notes to financial statements. CPS TECHNOLOGIES CORP. Notes to Financial Statement (Unaudited) (1) Nature of Business CPS Technologies Corporation (the “Company” or “CPS”) provides advanced material solutions to the electronics, power generation, automotive and other industries. The Company’s primary advanced material solution is metal-matrix composites which are a combination of metal and ceramic. CPS also assembles housings and packages for hybrid circuits. These housings and packages may include components made of metal-matrix composites or they may include components made of more traditional materials such as aluminum, copper-tungsten, etc. 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 March 27, March 28, 2021 2020 Basic EPS Computation: Numerator: Net income $ 30,903 $ 601,654 Denominator: Weighted average Common shares Outstanding 13,584,376 13,207,436 Basic EPS $ 0.00 $ 0.05 Diluted EPS Computation: Numerator: Net income (loss) $ 30,903 $ 601,654 Denominator: Weighted average Common shares Outstanding 13,584,376 13,207,436 Dilutive effect of stock options 680,514 39,395 Total Shares 14,264,890 13,247,131 Diluted EPS $ 0.00 $ 0.05 (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 27, 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 March 27, 2021 (Dollars in Thousands) March 27, 2021 Maturity of capitalized lease liabilities Lease payments 2021 114 2022 2023 2024 2025 2026 160 162 165 165 28 Total undiscounted operating lease payments $ 794 Less: Imputed interest (130) Present value of operating lease liability $ 664 Balance Sheet Classification Current lease liability $ 148 Long-term lease liability 516 Total operating lease liability $ 664 Other Information Weighted-average remaining lease term for capitalized operating leases 59 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 first quarter of 2021. This cost is related to its long-term operating lease. All other short-term leases were immaterial. Finance Leases The company does not have any finance leases. (5) Share-Based Payments The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. That cost is recognized over the period during which an employee is required to provide services in exchange for the award, the requisite service period (usually the vesting period). The Company provides an estimate of forfeitures at initial grant date. Reductions in compensation expense associated with the forfeited options are estimated at the date of grant, and this estimated forfeiture rate is adjusted periodically based on actual forfeiture experience. The company uses the Black-Scholes option pricing model to determine the fair value of the stock options granted. During the quarters ended March 27, 2021 and March 28, 2020 a total of 200,000 and 59,000 stock options, respectively, were granted to employees under the Company’s 2020 Equity Incentive Plan (the “Plan”) and a total of 0 and 60,000 stock options, respectively, were granted to outside directors during the quarters ended March 27, 2021 and March 28, 2020. During the quarter ended March 27, 2021 there were 613,800 options exercised and corresponding shares issued at a weighted average price of $1.98 . During the quarter ended March 28, 2020 there were no shares exercised or issued. During the quarter ended March 27, 2021, the Company repurchased 120,196 shares for employees to facilitate their exercise of stock options. During the quarter ended March 28, 2020 there were no shares repurchased. There were also 837,700 shares outstanding at a weighted average price of $1.92 with a weighted average remaining term of 6.74 years as of March 27, 2021, and there were 450,100 shares exercisable at a weighted average price of $1.74 with a weighted average remaining term of 4.92 years as of March 28, 2020. The Plan, as amended, is authorized to issue 1,500,000 shares of common stock. As of March 27, 2021, there were 1,186,000 shares available for future grants. As of March 27, 2021, there was $391 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 1.79 years. During the quarters ended March 27, 2021 and March 28, 2020, the Company recognized approximately $27 thousand and $66 thousand, respectively, as shared-based compensation expense related to previously granted shares under the Plan. (6) Inventories Inventories consist of the following: March 27, December 26, 2021 2020 Raw materials $ 831,480 $ 752,760 Work in process 2,539,880 2,800,226 Finished goods 695,947 592,640 Gross inventory 4,067,307 4,145,626 Reserve for obsolescence (436,155) (436,155) Inventories, net $ 3,631,152 $ 3,709,471 (7) Accrued Expenses Accrued expenses consist of the following: March 27, December 26, 2021 2020 Accrued legal and accounting $ 42,219 $ 71,671 Accrued payroll and related expenses 412,923 626,063 Accrued other 76,406 106,357 Total Accrued Expenses $ 531,548 $ 804,091 (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 650 basis points. On March 27, 2021 the Company had $193 thousand of borrowings under this LOC and its borrowing base at the time would have permitted an additional $2.6 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 2021 $ 43,851 FY 2022 $ 55,906 FY 2023 $ 43,837 FY 2024 $ 46,757 FY 2025 $ 8,090 Total 198,441 Total interest expense on notes payable during 2021 was $2,986. (10) Income Taxes A valuation allowance against deferred tax assets is required to be established or maintained when it is "more likely than not" that all or a portion of deferred tax assets will not be realized. In December 2018, the Company established a valuation allowance reserve, as it is judged more likely than not that all or a portion of its deferred tax assets will not be utilized before they expire. This decision was reached after giving greater weight to the Company’s losses in recent years as compared to its forecasts. The Coronavirus Aid, Relief and Economic Security Act (“Act”) became law on March 27, 2020. The Act contains two provisions that provide a tax benefit to the Company. The Act suspends the current 80% limitation on the utilization of net operating losses for taxable years beginning in 2018, 2019 and 2020. The Act also allows net operating losses arising in 2018, 2019 and 2020 to be carried back five years. The Act also accelerates the ability of the Company to recover Federal alternative minimum tax credits. The Company recorded a reduction of the valuation allowance reserve of $8 thousand during the quarter ended March 27, 2021 to account for the utilization of deferred tax assets to reduce the current tax liability for the quarter ended March 27, 2021. As a result of the utilization of deferred tax assets, the Company did not record a provision for income taxes for the quarter ended March 27, 2021. 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’s other SEC reports, which are accessible on the SEC’s website at www.sec.gov and the Company’s website at www.alsic.com. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. There are a number of factors that could cause the Company’s actual results to differ materially from those forecasted or projected in such forward-looking statements. This includes the impact of the COVID-19 pandemic, which is discussed in Item 3 of this report. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or changed circumstances after the date hereof or to reflect the occurrence of unanticipated events. Critical Accounting Policies The critical accounting policies utilized by the Company in preparation of the accompanying financial statements are set forth in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 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 Corporation. Results of Operations for the First Fiscal Quarter of 2021 (Q1 2021) Compared to the First Fiscal Quarter of 2020 (Q1 2020); (all $ in 000’s) Revenues totaled $4,866 in Q1 2021 compared with $6,512 generated in Q1 2020, a decrease of 25%. Reduced demand from our largest customer accounted for more than the total decrease in revenues. In 2020, in anticipation of potential supply disruptions due to the COVID-19 pandemic, this customer accelerated Q2 2020 purchases into Q1. Mid-year 2020, this customer then experienced a significant reduction in their demand due to the COVID-19 pandemic. Reduced demand from this customer has been partially offset by increased business from our aerospace customers. Gross margin in Q1 2021 totaled $944 or 19% of sales. This compares with gross margin in Q1 2020 of $1,550 or 24% of sales. While increased manufacturing efficiencies mitigated the reduction in gross margin, fixed costs which do not vary with decreased sales volumes were the predominate reason for this reduction. Selling, general and administrative (SG&A) expenses totaled $908 in Q1 2021 compared with SG&A expenses of $929 in Q1 2020. The hiring of our new Chief Operating Officer and increased costs associated with printing and distributing our proxy statement were offset by reduced variable compensation amounts due to a lower operating profit. The Company experienced an operating profit of $36 in Q1 2021 compared with an operating profit of $622 in Q1 2020 as a result of the reduced gross margin. The Company is part of the Defense Industrial Base and thus has been open and operating throughout the COVID-19 pandemic. The COVID-19 pandemic did affect financial results for the quarter ended March 27, 2021 primarily by causing reductions in demand from certain customers. The Company believes the worst of the pandemic is now behind us and expects to show continued improvement in upcoming quarters. Since the outbreak of the pandemic, the Company has aggressively implemented CDC guidelines in the workplace to prevent the spread of COVID-19. For example, the Company has staggered shifts to eliminate overlap at shift changes, reorganized workstations to ensure social distancing, implemented daily screening of all employees by taking employees’ temperatures, etc. These factors combine to create a higher degree of uncertainty regarding future financial performance. Liquidity and Capital Resources (all $ in 000’s unless noted) The Company’s net cash and cash equivalents at March 27, 2021 totaled ($25). (Net cash is defined as cash and cash equivalents less bank borrowings.) This compares to net cash and cash equivalents at December 26, 2020 of $195. Payment terms for customers range from payment in advance to 90 days from shipment and are based on factors such as credit worthiness, volume of business, etc. The decrease in net cash was due primarily to increased accounts receivable offset by lesser increases in accounts payable, accrued expenses and deferred revenue. Accounts receivable at March 27, 2021 totaled $3,778 compared with $2,915 at December 26, 2020. Days Sales Outstanding (DSO) increased from 62 days at the end of 2020 to 70 days at the end of Q1 2021. The increase in DSO was due to higher sales at the end of the quarter compared to the beginning of the quarter. The accounts receivable balances at December 26, 2020, and March 27, 2021 were both net of an allowance for doubtful accounts of $10. Inventories totaled $3,631 at March 27, 2021 compared with inventory totaling $3,709 at December 26, 2020. The inventory turnover in the most recent four quarters ending Q1 2021 was 4.1 times (based on a 5 point average) compared with 4.5 times averaged during the four quarters of 2020. The reduction in inventory turnover was due primarily to raw material purchases for the Company’s armor contract scheduled to begin shipping in Q2 2021. The Company financed its decrease in working capital in Q1 2021 from its profit and increased borrowings of $193 from its line of credit with BDC Capital. The Company expects it will continue to be able to fund its operations for the remainder of 2021 from existing cash balances and bank borrowings. The Company continues to sell to a limited number of customers and the loss of any one of these customers could cause the Company to require additional external financing. Failure to generate sufficient revenues, raise additional capital or reduce certain discretionary spending could have a material adverse effect on the Company’s ability to achieve its business objectives. 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 (all $ in 000’s unless otherwise noted) In September 2019, the Company entered into revolving line of credit (LOC) with Massachusetts Business Development Corporation (BDC) in the amount of $2.5 million. This agreement was amended in May 2020 to increase the line to $3.0 million. The agreement includes a demand note allowing the Lender to call the loan at any time. The Company may terminate the agreement without a termination fee after 3 years. The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of LIBOR plus 650 basis points . The Company was in compliance with all debt covenants as of March 27, 2021, had $193 borrowings under this LOC and its borrowing base at the time would have permitted an additional $2.6 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)