[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Former Name, Former Address and Former Fiscal
Year if Changed since Last Report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period than the registrant was required to file such reports), and (2) has been subject to the filing requirements for
the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). [X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer”
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated
filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act):
[ ] Yes [X] No
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 30, 2014: 13,087,027.
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS (Unaudited)
CPS TECHNOLOGIES CORPORATION
Balance Sheets (Unaudited)
|
|
|
June 28,
|
|
|
|
December 28,
|
|
|
|
|
2014
|
|
|
|
2013
|
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,144,594
|
|
|
$
|
1,571,054
|
|
Accounts receivable-trade, net
|
|
|
3,448,955
|
|
|
|
2,900,457
|
|
Inventories, net
|
|
|
2,781,592
|
|
|
|
2,183,699
|
|
Prepaid expenses and other current assets
|
|
|
107,971
|
|
|
|
175,726
|
|
Deferred taxes
|
|
|
531,377
|
|
|
|
649,420
|
|
|
|
Total current assets
|
|
|
8,014,489
|
|
|
|
7,480,356
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Production equipment
|
|
|
7,777,208
|
|
|
|
7,728,408
|
|
Furniture and office equipment
|
|
|
404,855
|
|
|
|
383,990
|
|
Leasehold improvements
|
|
|
759,819
|
|
|
|
759,819
|
|
|
|
Total cost
|
|
|
8,941,882
|
|
|
|
8,872,217
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
and amortization
|
|
|
(7,772,631)
|
|
|
|
(7,470,815)
|
|
Construction in progress
|
|
|
626,220
|
|
|
|
431,385
|
|
|
|
Net property and equipment
|
|
|
1,795,471
|
|
|
|
1,832,787
|
|
|
|
Deferred taxes, non-current portion
|
|
|
1,838,481
|
|
|
|
1,826,482
|
|
|
|
Total assets
|
|
$
|
11,648,441
|
|
|
$
|
11,139,625
|
|
|
|
See accompanying notes to financial statements.
(continued)
CPS TECHNOLOGIES CORPORATION
Balance Sheets (Unaudited)
(concluded)
|
|
|
June 28,
|
|
|
|
December 28,
|
|
|
|
|
2014
|
|
|
|
2013
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
1,442,526
|
|
|
|
1,091,909
|
|
Accrued expenses
|
|
|
935,578
|
|
|
|
1,106,813
|
|
Current portion of obligations under capital leases
|
|
|
35,098
|
|
|
|
76,372
|
|
|
|
Total current liabilities
|
|
|
2,413,202
|
|
|
|
2,275,094
|
|
|
|
Total liabilities
|
|
|
2,413,202
|
|
|
|
2,275,094
|
|
|
|
Commitments (note 9)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value,
|
|
|
|
|
|
|
|
|
authorized 20,000,000 and 15,000,000 shares;
|
|
|
|
|
|
|
|
|
issued 13,215,942 and 13,178,042 shares;
|
|
|
|
|
|
|
|
|
outstanding 13,087,027 and 13,066,641 shares;
|
|
|
|
|
|
|
|
|
at June 28, 2014 and December 28, 2013, respectively
|
|
|
132,160
|
|
|
|
131,781
|
|
Additional paid-in capital
|
|
|
34,510,625
|
|
|
|
34,278,757
|
|
Accumulated deficit
|
|
|
(25,128,130)
|
|
|
|
(25,318,332)
|
|
Less cost of 128,915 and 111,401 common shares
|
|
|
|
|
|
|
|
|
repurchased at June 28, 2014 and December 28, 2013,
|
|
|
|
|
|
|
|
|
respectively
|
|
|
(279,416)
|
|
|
|
(227,675)
|
|
|
|
Total stockholders` equity
|
|
|
9,235,239
|
|
|
|
8,864,531
|
|
|
|
Total liabilities and stockholders`
|
|
|
|
|
|
|
|
|
equity
|
|
$
|
11,648,441
|
|
|
$
|
11,139,625
|
|
|
|
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORPORATION
Statements of Operations (Unaudited)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 28,
|
|
|
|
June 29,
|
|
|
|
June 28,
|
|
|
|
June 29,
|
|
|
|
|
2014
|
|
|
|
2013
|
|
|
|
2014
|
|
|
|
2013
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
5,130,022
|
|
|
$
|
5,240,817
|
|
|
$
|
11,082,102
|
|
|
$
|
10,154,164
|
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under cooperative agreement
|
|
|
4,640
|
|
|
|
59,725
|
|
|
|
38,611
|
|
|
|
177,456
|
|
|
|
|
|
Total revenues
|
|
|
5,134,662
|
|
|
|
5,300,542
|
|
|
|
11,120,713
|
|
|
|
10,331,620
|
|
Cost of product sales
|
|
|
4,072,492
|
|
|
|
3,887,713
|
|
|
|
8,491,852
|
|
|
|
7,906,468
|
|
Cost of research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under cooperative agreement
|
|
|
3,834
|
|
|
|
49,531
|
|
|
|
32,156
|
|
|
|
147,418
|
|
|
|
|
|
Gross Margin
|
|
|
1,058,336
|
|
|
|
1,363,298
|
|
|
|
2,596,705
|
|
|
|
2,277,734
|
|
Selling, general, and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative expense
|
|
|
1,153,214
|
|
|
|
1,008,118
|
|
|
|
2,279,002
|
|
|
|
1,908,032
|
|
|
|
|
|
Operating income (loss)
|
|
|
(94,878)
|
|
|
|
355,180
|
|
|
|
317,703
|
|
|
|
369,702
|
|
Interest expense, net
|
|
|
(539)
|
|
|
|
(12,678)
|
|
|
|
(1,501)
|
|
|
|
(22,870)
|
|
|
|
|
|
Net income (loss) before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income tax expense (benefit)
|
|
|
(95,417)
|
|
|
|
342,502
|
|
|
|
316,202
|
|
|
|
346,832
|
|
Income tax expense (benefit)
|
|
|
(38,000)
|
|
|
|
106,000
|
|
|
|
126,000
|
|
|
|
107,720
|
|
|
|
|
|
Net income (loss)
|
|
($
|
57,417)
|
|
|
$
|
236,502
|
|
|
$
|
190,202
|
|
|
$
|
239,112
|
|
|
|
|
|
Net income (loss) per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic common share
|
|
$
|
0.00
|
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
|
|
|
Weighted average number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
13,084,968
|
|
|
|
12,961,506
|
|
|
|
13,077,273
|
|
|
|
12,916,633
|
|
|
|
|
|
Net income (loss) per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted common share
|
|
$
|
0.00
|
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
|
|
|
Weighted average number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
13,084,968
|
|
|
|
13,091,084
|
|
|
|
13,705,570
|
|
|
|
13,101,855
|
|
|
|
|
|
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORPORATION
Statements of Cash Flows (Unaudited)
|
|
Six Months Ended
|
|
|
|
June 28,
|
|
|
|
June 29,
|
|
|
|
|
2014
|
|
|
|
2013
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
190,202
|
|
|
$
|
239,112
|
|
Adjustments to reconcile net income
|
|
|
|
|
|
|
|
|
to cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
301,817
|
|
|
|
317,788
|
|
Share-based compensation
|
|
|
156,344
|
|
|
|
115,765
|
|
Deferred taxes
|
|
|
126,000
|
|
|
|
107,720
|
|
Excess tax benefit from stock options exercised
|
|
|
(19,956)
|
|
|
|
(117,273)
|
|
Changes in:
|
|
|
|
|
|
|
|
|
Accounts receivable-trade, net
|
|
|
(548,498)
|
|
|
|
(785,583)
|
|
Inventories
|
|
|
(597,893)
|
|
|
|
376,898
|
|
Prepaid expenses and other current assets
|
|
|
67,755
|
|
|
|
20,343
|
|
Accounts payable
|
|
|
350,617
|
|
|
|
385,108
|
|
Accrued expenses
|
|
|
(171,235)
|
|
|
|
(104,076)
|
|
|
|
Net cash provided by (used in) operating
|
|
|
|
|
|
|
|
|
activities
|
|
|
(144,847)
|
|
|
|
555,802
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(264,501)
|
|
|
|
(278,898)
|
|
|
|
Net cash used in investing
|
|
|
|
|
|
|
|
|
activities
|
|
|
(264,501)
|
|
|
|
(278,898)
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payment of capital lease obligations
|
|
|
(41,274)
|
|
|
|
(71,986)
|
|
Proceeds from equipment lease line
|
|
|
—
|
|
|
|
163,155
|
|
Repayment of line of credit, net
|
|
|
—
|
|
|
|
(500,000)
|
|
Proceeds from issuance of common stock
|
|
|
55,947
|
|
|
|
73,469
|
|
Excess tax benefit from stock options exercised
|
|
|
19,956
|
|
|
|
117,273
|
|
Repurchase of common stock
|
|
|
(51,741)
|
|
|
|
(73,470)
|
|
|
|
Net cash used in
|
|
|
|
|
|
|
|
|
financing activities
|
|
|
(17,112)
|
|
|
|
(291,559)
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(426,460)
|
|
|
|
(14,655)
|
|
Cash and cash equivalents at beginning of period
|
|
|
1,571,054
|
|
|
|
306,854
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,144,594
|
|
|
$
|
292,199
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
34,706
|
|
|
$
|
—
|
|
Interest paid
|
|
$
|
1,501
|
|
|
$
|
22,895
|
|
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORPORATION
Notes to Financial Statements
(Unaudited)
(1) Nature of Business
CPS Technologies Corporation (the “Company”
or “CPS”) provides advanced material solutions to the electronics, power generation, automotive and other industries.
The Company’s primary advanced material solution is metal-matrix composites which are a combination of metal and ceramic.
CPS also assembles
housings and packages for hybrid circuits. These housings and packages may include components made of metal-matrix composites
or they may include components made of more traditional materials such as aluminum, copper-tungsten, etc.
The Company sells into
several end markets including the wireless communications infrastructure market, high-performance microprocessor market, motor
controller market, and other microelectronic and structural markets.
(2) Interim Financial Statements
As permitted by the rules of the Securities and
Exchange Commission applicable to quarterly reports on Form 10-Q, these notes are condensed and do not contain all disclosures
required by generally accepted accounting principles.
The accompanying financial statements are unaudited.
In the opinion of management, the unaudited financial statements of CPS reflect all normal recurring adjustments which are necessary
to present fairly the financial position and results of operations for such periods.
The Company’s balance sheet at December
28, 2013 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes
required by accounting principles generally accepted in the United States of America for complete financial statements.
For further information, refer to the financial
statements and footnotes thereto included in the Registrant’s Annual Report on Form 10-K for the year ended December 28,
2013.
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 earnings per share (“EPS”):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 28,
|
|
|
|
June 29,
|
|
|
|
June 28,
|
|
|
|
June 29,
|
|
|
|
|
2014
|
|
|
|
2013
|
|
|
|
2014
|
|
|
|
2013
|
|
Basic EPS Computation:
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(57,417)
|
|
|
$
|
236,502
|
|
|
$
|
190,202
|
|
|
$
|
239,112
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
13,087,905
|
|
|
|
12,961,506
|
|
|
|
13,078,741
|
|
|
|
12,916,633
|
|
Basic EPS
|
|
$
|
0.00
|
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
Diluted EPS Computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(57,417)
|
|
|
$
|
236,502
|
|
|
$
|
190,202
|
|
|
$
|
239,112
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
13,084,968
|
|
|
|
12,961,506
|
|
|
|
13,077,273
|
|
|
|
12,916,633
|
|
Dilutive effect of stock options
|
|
|
—
|
|
|
|
129,578
|
|
|
|
628,297
|
|
|
|
185,222
|
|
Total Shares
|
|
|
13,084,968
|
|
|
|
13,091,084
|
|
|
|
13,705,570
|
|
|
|
13,101,855
|
|
Diluted EPS
|
|
$
|
0.00
|
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
(4) 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.
There were no stock options granted under the
Plan during the quarter ended June 28, 2014.
During the quarter ended June 29, 2013, a total of 201,000 stock
options were granted to employees under the Company’s 2009 Stock Incentive Plan (the “Plan”) and a total of
30,000 stock options were granted to outside directors.
During the quarters ended June 28, 2014 and
June 29, 2013 the Company issued 5,000 and 237,000, respectively, as a result of option exercises. No stock options expired during
the quarter ended June 28, 2014. During the quarter ended June 29, 2013, 33,000 stock options expired related to previously granted
shares under the 1999 Stock Incentive Plan.
During the quarter ended June 28, 2014 and June
29, 2013 the Company repurchased 2,550 and 46,785 shares, respectively, from employees to facilitate their exercise of stock options.
During the three and six months ended June 28,
2014, the Company recognized $83,897 and $156,344, respectively, as shared-based compensation expense related to previously granted
shares under the Plan. A tax benefit of $2,670 was recognized as additional paid in capital in the quarter ended June 28, 2014,
resulting from the excess tax benefit of option exercises.
During the three and six months ended June 29,
2013, the Company recognized $62,133 and $115,765, respectively, as shared-based compensation expense related to previously granted
shares under the Plan.
(5) Inventories
Inventories consist of the following:
|
|
|
June 28,
|
|
|
|
December 28,
|
|
|
|
|
2014
|
|
|
|
2013
|
|
|
|
Raw materials
|
|
$
|
438,535
|
|
|
$
|
359,535
|
|
Work in process
|
|
|
1,621,557
|
|
|
|
1,135,413
|
|
Finished goods
|
|
|
1,122,000
|
|
|
|
1,079,251
|
|
|
|
Total inventory
|
|
|
3,182,092
|
|
|
|
2,574,199
|
|
Reserve for obsolescence
|
|
|
(400,500)
|
|
|
|
(390,500)
|
|
|
|
Inventories, net
|
|
$
|
2,781,592
|
|
|
$
|
2,183,699
|
|
|
|
(6) Accrued Expenses
Accrued expenses consist of the following:
|
|
|
June 28,
|
|
|
|
December 28,
|
|
|
|
|
2014
|
|
|
|
2013
|
|
|
|
Accrued legal and accounting
|
|
$
|
68,347
|
|
|
$
|
92,000
|
|
Accrued payroll
|
|
|
631,297
|
|
|
|
823,196
|
|
Accrued other
|
|
|
237,595
|
|
|
|
158,116
|
|
Accrued income tax
|
|
|
(1,661)
|
|
|
|
33,501
|
|
|
|
|
|
$
|
935,578
|
|
|
$
|
1,106,813
|
|
|
|
(7) Line of Credit and Equipment Lease Facility Agreements
In early May 2014, the Company renewed its $2 million revolving
line of credit (“LOC”) and $500 thousand equipment finance facility (“Lease Line”) with Santander Bank.
Both Agreements mature in May 2015. The LOC is secured by the accounts receivable and other assets of the Company, has an
interest rate of prime (3.25% at June 28, 2014) plus one half of one percent (0.5%) and a one-year term. Under the terms of the
Agreement, the Company is required to maintain its operating accounts with Santander Bank. The LOC and the Lease Line are cross
defaulted and cross collateralized. The Company is also subject to certain financial covenants within the terms of the LOC that
require the Company to maintain a targeted coverage ratio as well as targeted debt to equity and current ratios. At June 28, 2014,
the Company was in compliance with all existing covenants.
At June 28, 2014, the Company had $35 thousand
net carrying value of capital equipment financed by advances and capital lease obligations under the Lease Line and $465 thousand
available
remaining. Equipment financed by the Santander equipment lease qualifies
for treatment as a capital lease once converted from the Lease Line to a lease.
At June 28, 2014 the Company had no borrowings
under this LOC and its borrowing base at the time would have permitted an additional $2.0 million to have been borrowed.
(8) Income Taxes
At December 28, 2013, the Company had approximately
$1.71 million of net operating loss carryforwards available to offset future income for U.S. Federal income tax purpose.
The Company has a current and non-current deferred
tax asset aggregating $2,370 thousand and $2,476 thousand on the Company’s balance sheet at June 28, 2014 and December 28,
2013, respectively. A valuation allowance 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. The Company believes that it will generate sufficient future
taxable income to realize the tax benefits related to the remaining deferred tax assets and as such no valuation allowance has
been provided against the deferred tax asset.
The Company recorded a tax benefit of $30 thousand
and a tax expense of $98 thousand for federal income taxes and a tax benefit of $8 thousand and a tax expense of $28 thousand for
state income taxes during the three and six months ended June 28, 2014, respectively. The Company recorded a tax expense of $82
thousand and $83 thousand for federal income taxes and a tax expense of $24 thousand and $24 thousand for state income taxes during
the three and six months ended June 29, 2013, respectively.
(9) Commitments
In July 2006, the Company entered into a lease
for its current operating facilities of approximately 37,520 square feet of rentable space located on approximately seven acres
at its current site in Norton, MA. The term of the lease is ten years. The lease is a 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 buy the property and a first
right of refusal during the term of the lease. Annual rental payments are $100,000 in year one increasing to $150,000 in year ten.
In February 2011, the Company entered into a
one-year lease, with five options to renew for one year periods, for approximately 13,800 square feet of rentable space inside
a larger building located at 79 Walton Street, Attleboro, Massachusetts. Monthly rent, which includes utilities, is $6,900. In
October 2013, the Company renewed the lease through February, 2015. In December 2013 the Company agreed with the landlord for two
additional, one-year options. As a result, if the Company exercises all of the options, it will be able to use the space through
February 2019.
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 28, 2013.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking
statements that involve a number of risks and uncertainties. There are a number of factors that could cause the Company’s
actual results to differ materially from those forecasted or projected in such forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes
no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect
events or changed circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Critical Accounting Policies
The critical accounting policies utilized by
the Company in preparation of the accompanying financial statements are set forth in Part II, Item 7 of the Company’s Annual
Report on Form 10-K for the year ended December 28, 2013, under the heading “Management’s Discussion and Analysis
of Financial Condition and Results of Operations”. There have been no material changes to these policies since December
28, 2013.
Overview
CPS Technologies Corporation (the ‘Company’
or ‘CPS’) provides advanced material solutions to the electronics, power generation, automotive and other industries.
In 2008 the Company also entered into a cooperative agreement with the U.S. Army to further develop its composite technology to
produce armor. The Cooperative Agreement was a four-year agreement which was subsequently extended through March 31, 2015.
The Company’s products are generally used
in high-power, high-reliability applications. These applications always involve energy use or energy generation and the Company’s
products allow higher performance and improved energy efficiency. The Company is an important participant in the growing movement
towards alternative energy and "green" lifestyles. For example, the Company’s products are used in mass transit,
hybrid and electric cars, wind-turbines for electricity generation as well as routers and switches for the internet which in turn
allows telecommuting.
The Company’s primary advanced material
solution is metal matrix composites (MMCs), a new class of materials which are a combination of metal and ceramic. CPS has a leading,
proprietary position in metal matrix composites. Metal matrix composites have several superior properties compared to conventional
materials including improved thermal conductivity, thermal expansion matching, stiffness and light weight which enable higher performance
and higher reliability in our customers’ products.
Like plastics several decades ago, we believe
metal-matrix composites will penetrate many end markets over many years. CPS management believes our business model of providing
advanced material solutions to a portfolio of high growth end markets which are, at any point in time, in various stages of the
technology adoption lifecycle, provides CPS with the opportunity for sustained growth and a diversified customer base. We believe
we have validated this model as we are now supplying customers at all stages of the technology adoption lifecycle.
CPS is the leader in supplying metal matrix composites
to certain high growth electronics end markets which are well along in the adoption lifecycle and therefore generating significant
demand. These end markets include high-performance integrated circuits and circuit boards used in internet switches and routers,
as well as motor controllers used in high-speed electric trains, subway cars and wind turbines.
CPS supplies heat spreaders, lids and baseplates to customers in
these end markets. CPS is a fully qualified manufacturer for many of the world’s largest electronics OEMs.
CPS also assembles housings and packages for
hybrid circuits. These housings and packages may include components made of metal-matrix composites; they may include components
made of more traditional materials such as aluminum, copper-tungsten, etc.
A market at an earlier stage of the adoption
lifecycle is the market for hybrid and electric automobiles. The Company recently announced a multi-year supply agreement with
a major tier one automotive supplier for the supply of AlSiC pin fin baseplates for use in motor controllers for hybrid and electric
automobiles.
We are also actively working with customers in
end markets at the beginning stages of the adoption lifecycle. An example of such a market is the market for armor. In 2008 the
Company entered into a cooperative agreement with the Army Research Laboratory to further develop large hybrid metal matrix composite
modules which integrally combine metal matrix composites and ceramics by enveloping ceramic tiles with MMCs. This system offers
a lighter weight, durable, multi-hit capable and cost competitive alternative to conventional steel, aluminum and ceramic based
armor systems. CPS hybrid hard face armor modules are comprised of multiple materials completely enveloped within and mechanically
and chemically bonded to lightweight and stiff aluminum metal matrix composites.
The Company believes that its hybrid hard face
armor tiles will find application in many military vehicles as well as armored commercial vehicles.
Our products are manufactured by proprietary
processes we have developed including the QuicksetTM Injection Molding Process (‘Quickset Process’) and the QuickCastTM
Pressure Infiltration Process (‘QuickCast Process’).
CPS was incorporated in Massachusetts in 1984
as Ceramics Process Systems Corporation and reincorporated in Delaware in April 1987 through a merger into a wholly-owned Delaware
subsidiary organized for purposes of the reincorporation. In July 1987, CPS completed our initial public offering of 1.5 million
shares of our Common Stock. In March 2007, we changed our name from Ceramics Process Systems Corporation to CPS Technologies Corporation.
Results of Operations for the Second Fiscal Quarter of 2014 (Q2
2014) Compared to the Second Fiscal Quarter of 2013 (Q2 2013); (all $ in 000’s)
Total revenue was $5,135 in Q2 2014, a 3% decrease
compared with total revenue of $5,301 in Q2 2013. This decrease was due in large part to the lower sales of baseplates.
Gross margin in Q2 2014 totaled $1,058 or 21%
of sales. In Q2 2013, gross margin was $1,363 or 26% of sales. This decline in margin was due to two primary factors:
first, higher manufacturing costs and, to a lesser degree, the decrease in sales volume, offset in part by price increases of approximately
$100. The higher manufacturing costs were a combination of labor productivity, factory support cost and material yields.
Selling, general and administrative (SG&A)
expenses were $1,153 in Q2 2014, up 14% compared with SG&A expenses of $ 1,008 in Q2 2013. This increase was due
in large part to an increase in sales and planned marketing activities to generate future sales as well as an increase in legal
fees.
Primarily as a result of higher manufacturing
and marketing costs and lower sales volumes, the Company incurred an operating loss of $95, compared with an operating profit of
$343 in the same quarter last year. Interest expense totaled $1 in Q2 2014, compared with $13 in Q2 2013, reflecting an elimination
of borrowings on the line of credit and a reduction in the capitalized lease balance. The net loss for Q2 2014 totaled $57
versus net income of $237 in Q2 2013.
Results of Operations for the First Six Months of 2014 Compared
to the First Six Months of 2013 (all $ in 000’s)
Total revenue was $11,121 in the first half of
2014, a 8% increase compared with total revenue of $10,332 in the first six months of 2013. This increase was due in large part
to the sales of baseplates in Q1 2014 for traction products, but also benefitted by price increases of approximately $300.
Gross margin in the first six months of 2014
totaled $ 2,597 or 23% of sales. In the first six months of 2013 gross margin totaled $2,228 or 22% of sales. This
improvement was due to higher prices and the increase in sales volume, offset in part by higher manufacturing costs.
Selling, general and administrative (SG&A)
expenses were $ 2,279 during the first six months of 2014, up 19% compared with SG&A expenses of $ 1,908 in the first
six months of 2013. This increase was due principally to an increase in sales and marketing activities, including commissions
associated with the higher sales volume and, to a lesser degree, the cost of non-cash stock options.
As a result of the higher manufacturing and marketing
costs, offset by an increase in sales volume and higher prices, the Company earned an operating profit of $318 in the first six
months of 2014, compared with an operating profit of $370 in the same period last year. Interest expense declined to $2 in
the first six months of 2014, down from $23 in the first six months of 2013, reflecting an elimination of short-term borrowings
and lower capitalized lease balances. The net income for the first six months of 2014 totaled $190 versus net income of $239
in the first six months of 2013.
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.
Liquidity and Capital Resources (all $ in 000’s unless noted)
The Company’s cash and cash equivalents
at June 28, 2014 totaled $1,145. This compares to cash and cash equivalents at December 28, 2013 of $1,571. The decrease in cash
was due primarily to a $1.2 million increase in receivables and inventories, offset in part by an increase in payables and accruals
of $179 and earnings from operations of $318.
Accounts receivable at June 28, 2014
totaled $3.4 million compared with $2.9 million at December 28, 2013. Days Sales Outstanding (DSOs) increased from an
unusually low 51 days at the end of 2013 to a more typical 60 days at the end of Q2, 2014. During Q4 of 2013, sales were
weighted toward the front end of the quarter resulting in more collections during the quarter and fewer receivables than
normal at quarter end. The accounts receivable balances at December 28, 2013, and June 28, 2014 were both net of an allowance
for doubtful accounts of $10.
Inventories totaled $2.8 million at June 28,
2014, compared with inventories of $2.2 million at
December 28, 2013. This increase was due in part to the decision
to manufacture baseplates scheduled for delivery in the first part of Q3 2014 before the annual plant shutdown in July. The inventory
turnover in 2013 was 7.4 times (based on a 5 point average) and 7.3 times for the most recent four quarters ending Q2 2014.
All consigned inventory is shipped under existing
purchase orders and per customers’ requests. Of the inventory of $2.8 million at June 28, 2014, $928 thousand was located
at customers’ locations pursuant to consigned inventory agreements. Of the total inventory of $2.2 million at December 28,
2013, $1.0 million was located at customers’ locations pursuant to consigned inventory agreements.
The Company financed its working capital during
Q2 2014 with a combination of cash balances and funds generated from operations. The Company expects it will continue to
be able to fund its working
capital requirements for the remainder of 2014 from a combination
of operating cash flow, existing cash balances and borrowings under its line of credit, if necessary.
Contractual Obligations
In early May 2014, the Company renewed its
$2 million revolving line of credit (“LOC”) and $500 thousand of an equipment finance facility (“Lease Line”)
with Santander Bank. Both agreements mature in May 2015. The LOC is secured by the accounts receivable and other
assets of the Company, has an interest rate of prime plus one half of one percent (0.5%) and a one-year term. Under the terms of
the agreement, the Company is required to maintain its operating accounts with Santander Bank. The LOC and the Lease Line are cross
defaulted and cross collateralized. The Company is also subject to certain financial covenants within the terms of the LOC that
require the Company to maintain a targeted coverage ratio as well as targeted debt to equity and current ratios. At June 28, 2014,
the Company was in compliance with all existing covenants. At June 28, 2014, the Company had $35 thousand net carrying value of
capital equipment financed by advances and capital lease obligations under the Lease Line and $465 thousand available remaining.
Equipment financed by the Santander equipment lease qualifies for treatment as a capital lease once converted from the Lease Line
to a lease. At June 28, 2014 the Company had no borrowings under this LOC and its borrowing base at the time would have permitted
an additional $2.0 million to have been borrowed.
The financial covenants with Santander Bank are identical for the
LOC and Lease Line. The covenant requirements are shown below together with the actual ratios achieved:
Covenant
|
|
Requirement
|
|
|
Actual
|
|
Debt Service Coverage Ratio
|
|
Minimum of $1.25
|
|
|
28X
|
|
Current Ratio
|
|
Minimum of 1.5X
|
|
|
3.3X
|
|
Liabilities to Tangible Net Worth
|
|
Maximum of 1.0X
|
|
|
0.3X
|
|
|
|
|
|
|
|
|
Borrowings under the lease line
|
|
maximum of $500K
|
|
|
$ 35K
|
|
Borrowings under the line of credit*
|
|
maximum of $2M
|
|
|
None
|
|
|
|
*(based on receivables at 6/28/14)
|
|
|
|
Management believes that cash flows from operations,
existing cash balances and the leasing and credit line in place with Santander Bank 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.
As of June 28, 2014 the Company had $626 thousand
of construction in progress and no outstanding commitments to purchase production equipment. The Company intends to finance production
equipment in construction in progress and outstanding commitments under the lease agreement with existing cash balances and funds
generated by operations.
In July 2006, the Company entered into a 10-year
lease for its current operating facilities of approximately 37,520 square feet of rentable space located on approximately seven
acres at its current site in Norton, MA. The lease is a 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 buy the property and a first right of refusal
during the term of the lease. Annual rental payments are $100 thousand in year one increasing to $150 thousand in year ten.
In February 2011, the Company entered into a
lease for an additional 13.8 thousand square feet in Attleboro, MA for monthly rent, including utilities of $6,900. The lease term
was for one year and had an option to extend the lease for five additional one year periods. In October 2013 the Company renewed
the lease for one additional year through February, 2015 and also obtained two additional years of options which could extend the
Company’s use through February 2019.
The Company’s contractual obligations at
June, 28, 2014 consist of the following:
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
Remaining in
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
FY
2014
|
|
|
|
FY
2015
|
|
|
|
FY 2016-
|
|
Capital lease obligations including interest
|
|
$
|
35,872
|
|
|
$
|
35,872
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Purchase commitments for production equipment
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Operating lease obligation for facilities
|
|
$
|
310,800
|
|
|
$
|
116,400
|
|
|
$
|
156,900
|
|
|
$
|
37,500
|
|
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.