See accompanying notes to financial statements.
See accompanying notes to financial statements.
See accompanying notes to financial statements.
See accompanying notes to financial statements.
See accompanying notes to financial statements.
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 25, 2021 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.
For further information, refer to the financial statements and footnotes thereto included in the Registrant’s Annual Report on Form 10-K for the year ended December 25, 2021 and in CPS’s other SEC reports, which are accessible on the SEC’s website at www.sec.gov and the Company’s website at www.cpstechnologysolutions.com.
The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
(3) Net Income Per Common and Common Equivalent Share
Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share is calculated by dividing net income by the sum of the weighted average number of common shares plus additional common shares that would have been outstanding if potential dilutive common shares had been issued for granted stock options and stock purchase rights. Common stock equivalents are excluded from the diluted calculations when a net loss is incurred as they would be anti-dilutive.
The following table presents the calculation of both basic and diluted EPS:
| | Three Months Ended | |
| | April 2 2022 | | | March 27, 2021 | |
| | | | | | | | |
Basic EPS Computation: | | | | | | | | |
Numerator: | | | | | | | | |
Net income | | $ | 419,436 | | | $ | 30,903 | |
Denominator: | | | | | | | | |
Weighted average | | | | | | | | |
Common shares | | | | | | | | |
Outstanding | | | 14,389,857 | | | | 13,584,376 | |
Basic EPS | | $ | 0.03 | | | $ | 0.00 | |
Diluted EPS Computation: | | | | | | | | |
Numerator: | | | | | | | | |
Net income (loss) | | $ | 419,436 | | | $ | 30,903 | |
Denominator: | | | | | | | | |
Weighted average | | | | | | | | |
Common shares | | | | | | | | |
Outstanding | | | 14,389,857 | | | | 13,584,376 | |
Dilutive effect of stock options | | | 268,082 | | | | 680,514 | |
Total Shares | | | 14,657,939 | | | | 14,264,890 | |
Diluted EPS | | $ | 0.03 | | | $ | 0.00 | |
(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 April 2, 2022 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 April 2, 2022
(Dollars in Thousands) |
|
April 2, 2022 |
|
Maturity of capitalized lease liabilities |
|
Lease payments |
|
2022 |
|
|
122 |
|
2023 |
|
|
162 |
|
2024 |
|
|
165 |
|
2025 |
|
|
165 |
|
2026 |
|
|
28 |
|
Total undiscounted operating lease payments |
|
$ |
642 |
|
Less: Imputed interest |
|
|
(84 |
) |
Present value of operating lease liability |
|
$ |
558 |
|
Balance Sheet Classification |
|
|
|
|
Current lease liability |
|
$ |
157 |
|
Long-term lease liability |
|
|
401 |
|
Total operating lease liability |
|
$ |
558 |
|
Other Information |
|
|
|
|
Weighted-average remaining lease term for capitalized operating leases (in months) |
|
|
47 |
|
Weighted-average discount rate for capitalized operating leases |
|
|
6.6 |
% |
Operating Lease Costs and Cash Flows
Operating lease cost and cash paid was $39 thousand during the first quarter of 2022. 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 April 2, 2022 and March 27, 2021, a total of 170,000 and 200,000 stock options, respectively, were granted to employees under the Company’s 2020 Equity Incentive Plan (the “Plan”) and a total of 38,000 and 0 stock options, respectively, were granted to outside directors during the quarters ended April 2, 2022 and March 27, 2021.
During the quarter ended April 2, 2022, there were 72,700 options exercised and corresponding shares issued at a weighted average price of $2.08. 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 April 2, 2022, the Company repurchased 840 shares for employees to facilitate their exercise of stock options. During the quarter ended March 27, 2021, the Company repurchased 120,196 shares for employees to facilitate their exercise of stock options.
There were also 971,600 shares outstanding at a weighted average price of $2.37 with a weighted average remaining term of 6.67 years as of April 2, 2022, and there were 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. The Plan, as amended, is authorized to issue 1,500,000 shares of common stock. As of April 2, 2022, there were 941,000 shares available for future grants. 513,700 grants remain exercisable under the Company’s Equity Incentive Plans.
As of April 2, 2022, there was $622 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 April 2, 2022 and March 27, 2021, the Company recognized approximately $124 thousand and $27 thousand, respectively, as shared-based compensation expense related to previously granted shares under the Plan.
(6) Inventories
Inventories consist of the following:
|
|
April 2, 2022 |
|
|
December 25, 2021 |
|
|
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
2,166,385 |
|
|
$ |
2,080,778 |
|
Work in process |
|
|
1,880,465 |
|
|
|
1,309,572 |
|
Finished goods |
|
|
987,076 |
|
|
|
805,159 |
|
|
|
|
|
|
|
|
|
|
Gross inventory |
|
|
5,033,926 |
|
|
|
4,195,509 |
|
Reserve for obsolescence |
|
|
(328,400 |
) |
|
|
(283,907 |
) |
|
|
|
|
|
|
|
|
|
Inventories, net |
|
$ |
4,705,526 |
|
|
$ |
3,911,602 |
|
(7) Accrued Expenses
Accrued expenses consist of the following:
|
|
April 2, 2022 |
|
|
December 25, 2021 |
|
|
|
|
|
|
|
|
|
|
Accrued legal and accounting |
|
$ |
44,724 |
|
|
$ |
79,917 |
|
Accrued payroll and related expenses |
|
|
526,128 |
|
|
|
905,698 |
|
Accrued other |
|
|
146,630 |
|
|
|
100,814 |
|
|
|
|
|
|
|
|
|
|
Total Accrued Expenses |
|
$ |
717,482 |
|
|
$ |
1,086,429 |
|
(8) Line of Credit
In September 2019, the Company entered into a revolving line of credit (LOC) with Massachusetts Business Development Corporation (BDC) in the amount of $2.5 million. The agreement includes a demand note allowing the Lender to call the loan at any time. The Company may terminate the agreement without a termination fee after 3 years. In May of 2020 this credit line was increased to $3.0 million. The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of LIBOR plus 550 basis points. On April 2, 2022, the Company had $0 thousand of borrowings under this LOC and its borrowing base at the time would have permitted an additional $3.0 million to have been borrowed.
The line of credit is subject to certain financial covenants, all of which have been met.
(9) Note Payable
In March 2020, the Company acquired inspection equipment for a price of $208 thousand. The full amount was financed through a 5 year note payable with a third party equipment finance company. The note is collateralized by the equipment and is being paid in monthly installments of $4 thousand, consisting of principal plus interest at a rate of 6.47%.
In July 2020 CPS placed into service a piece of manufacturing equipment which it financed with the machine’s vendor. The equipment cost of $40 thousand will be paid at the rate of $2 thousand per month over 2 years, resulting in an implied interest rate of 1.90%.
The aggregate maturities of the notes payable based on the payment terms of the agreement are as follows:
Remaining in: | | Payments due by period | |
FY 2022 | | $ | 41,050 | |
FY 2023 | | $ | 43,837 | |
FY 2024 | | $ | 46,757 | |
FY 2025 | | $ | 8,090 | |
Total | | | 139,734 | |
Total interest expense on notes payable during 2022 was $2,269.
(10) Income Taxes
A valuation allowance against deferred tax assets is required to be established or maintained when it is "more likely than not" that all or a portion of deferred tax assets will not be realized. In December 2018, the Company established a valuation allowance reserve, as it is judged more likely than not that all or a portion of its deferred tax assets will not be utilized before they expire. This decision was reached after giving greater weight to the Company’s losses in recent years as compared to its forecasts.
In September 2021 this decision was reevaluated in light of the Company’s recent profitability and its forecasts for future profitability. The Company concluded that it is “more likely than not” that the Company will be able to fully utilize the deferred tax asset. This reversal of the valuation allowance was made net of the expected tax liability for 2021. For the first quarter of 2022 a charge against the reserve of $125,748 for the estimated tax liability on Q1 income was made.