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' other SEC reports, which are accessible on the SEC's website at
www.sec.gov and the Company's website at www.alsic.com.
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 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.
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
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
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 Corp.
Results of Operations for the Second Fiscal Quarter of 2021 (Q2 2021) Compared
to the Second Fiscal Quarter of 2020 (Q2 2020); (all $ in 000s)
Total revenue was $5,862 in Q2 2021, a 2% increase compared with total revenue
of $5,758 in Q2 2020. This increase was due primarily to the initial shipments
of armor panels and increased sales of hermetic packages, offset by a decrease
in the sale of baseplates to a major customer.
Gross margin in Q2 2021 totaled $1,352 or 23% of sales. In Q2 2020, gross
margin was $1,183 or 21% of sales. This increase in margin was primarily due
to moderate price increases and product mix.
Selling, general and administrative expenses (SG&A) were $1,099 in Q2 2021, up
28% when compared with SG&A expenses of $853 in Q2 2020. This increase in SG&A
expense was due to increased compensation expense as a result of the addition of
our new COO and the delay in certain Director's compensation from Q1 to Q2.
In Q2, 2021, the Company incurred interest expense of $14 due to bank
borrowings. This compares with interest expense of $32 in Q2 of 2020. The
decrease in interest is due to decreased borrowings as a result of the
The Company experienced operating income of $253 compared with an operating
income of $331 in the same quarter last year. This decrease in operating income
is due primarily to the increase in SG&A expense, discussed above. The net
income for Q2 2021 totaled $239 versus $299 in Q2 2020.
Results of Operations for the First Six Months of 2021 Compared to the First Six
Months of 2020 (all $ in 000s)
Total revenue was $10,728 in the first half of 2021, a 13% decrease compared
with total revenue of $12,270 in the first six months of 2020. This decrease was
due primarily to the impact on the Covid-19 pandemic on Q1 2021 compared to the
lack of impact of the pandemic on Q1 2020.
Gross margin in the first six months of 2021 totaled $2,296 or 21% of sales. In
the first six months of 2020 gross margin totaled $2,734 or 22% of sales. This
decrease was due to the decrease in revenue and the reduced coverage of our
Selling, general and administrative (SG&A) expenses were $2,007 during the first
six months of 2021, up 13% compared with SG&A expenses of $1,781 in the first
six months of 2020. The hiring of our new Chief Operating Officer and increased
costs associated with printing and distributing our proxy statement were the
primary reasons for this increase.
During the first half of 2021, the Company incurred interest expense of $18 due
to bank borrowings. This compares with interest expense of $66 incurred during
the first half of 2020. The decrease in interest is due to decreased borrowings
as the result of our move to profitability from 2019 to 2020 and the
At-the-Market offering in Q2 2021.
In the first six months of 2021 the Company had operating income of $289
compared with $952 in the same period last year. The net income for the first
six months of 2021 totaled $270 versus $901 in the first six months of 2020.
This decrease was due primarily to the impact on the Covid-19 pandemic on Q1
2021 compared to the lack of impact of the pandemic on Q1 2020.
Liquidity and Capital Resources (all $ in 000s unless noted)
The Company's cash and cash equivalents at June 26, 2021 totaled $3,016 . This
compares to cash and cash equivalents at December 26, 2020 of $195 . The
improvement in cash and net cash was primarily due to equity raised through the
At the Market offering ("ATM") discussed below.
Accounts receivable at June 26, 2021 totaled $4,432 compared with $2,915 at
December 26, 2020.
Days Sales Outstanding (DSO) increased from 62 days at the end of 2020 to 69
days at the end of Q2 2021. The increase in DSO was due to higher sales to two
large customers with longer payment terms. The accounts receivable balances at
December 26, 2020, and June 26, 2021 were both net of an allowance for doubtful
accounts of $10.
Inventories totaled $3,989 at June 26, 2021 compared with inventory totaling
$3,709 at December 26, 2020. This increase was due to the buildup of inventory
for our armor order. The inventory turnover in the most recent four quarters
ending Q2 2021 was 4.0 times, down from 4.5 times averaged during the four
quarters of 2020 (based on a 5 point average).
On April 26, 2021, we entered into a sales agreement (the "Sales Agreement")
with Craig-Hallum Capital Group LLC ("C-H") pursuant to which the Company may
issue and sell, from time to time, shares of the Company's common stock having
an aggregate offering price of up to $25.0 million in at-the-market offerings
("ATM"). On the same day, the Company filed a prospectus supplement under a
shelf registration relating to the Sales Agreement. C-H will act as sales agent
and will be paid a 3% commission on each sale under the Sales Agreement. The
Company's common stock will be sold at prevailing market prices at the time of
the sale, and, as a result, prices will vary. From date of inception until June
26, 2021, the Company sold approximately 479 thousand shares of common stock
under the Sales Agreement, for gross proceeds of approximately $3.4 million.
Subsequent to June 26, 2021, the Company has not sold any additional shares.
The Company financed its increase in working capital in Q2 2021 from its profit
and the ATM offering. The Company expects it will continue to be able to fund
its operations for the remainder of 2021 from existing cash balances.
The Company continues to sell to a limited number of customers and the loss of
any one of these customers could cause the Company to require additional
external financing. Failure to generate sufficient revenues, raise additional
capital or reduce certain discretionary spending could have a material adverse
effect on the Company's ability to achieve its business objectives.
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.
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 had an interest rate of LIBOR plus 650 basis points.
In May of 2021 the interest rate was reduced to LIBOR plus 550 basis points. On
June 26, 2021 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
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
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)
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