CPS Technologies Corp: Form 10-Q for the period ended Jun 29, 2024

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 30, 2023 and in CPS’s other SEC reports, which are accessible on the SEC’s website at www.sec.gov (http://www.sec.gov) and the Company’s website at www.cpstechnologysolutions.com (http://www.cpstechnologysolutions.com).

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. There are a number of factors that could cause the Company’s actual results to differ materially from those forecasted or projected in such forward-looking statements. This includes the impact of the Russian invasion of Ukraine and other conflicts and potential conflicts throughout the world and the impact of a strong dollar on the prices the Company charges to foreign customers, which are 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 Estimates

The critical accounting estimates utilized by the Company in preparation of the accompanying financial statements are set forth in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 30, 2023, 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 30, 2023.

Overview

Products we provide include baseplates for motor controllers used in high-speed electric trains, subway cars, wind turbines, and hybrid and electric vehicles. We provide baseplates and housings used in radar, satellite and avionics applications. We provide lids and heat spreaders used with high performance integrated circuits for use in internet switches and routers. We provide baseplates and housings used in modules built with Wide Band Gap Semiconductors like Silicon Carbide (“SiC”) and Gallium Nitride (“GaN”), collectively Metal Matrix Composites (“MMC”). CPS also assembles housings and packages for hybrid circuits. These housings and packages may include MMC components; they may include components made of more traditional materials such as aluminum, cold rolled steel and Kovar. Using its proprietary MMC technology, the Company also produces light-weight vehicle armor, particularly for extreme environments and heavy threat levels. In addition the Company engages in research and development activities with the goal of developing new products that address challenging customer requirements. These activities typically leverage the company’s extensive knowledge base in the development and volume manufacturing of advanced materials.

CPS’s products are custom rather than catalog items. They are made to customers’ designs and are used as components in systems built and sold by our customers. At any point in time our product mix will consist of some products with on-going production demand, and some products which are in the prototyping or evaluation stages at our customers. The Company seeks to have a portfolio of products which include products in every stage of the technology adoption lifecycle at our customers. CPS’ growth is dependent upon the level of demand for those products already in production, as well as its success in achieving new "design wins" for future products.

As a manufacturer of highly technical and custom products, the Company incurs fixed costs needed to support the business, but which do not vary significantly with changes in sales volume. These costs include the fixed costs of applications such as engineering, tooling design and fabrication, process engineering, and others. Accordingly, particularly given our current size, changes in sales volume generally result in even greater changes in financial performance on a percentage basis as fixed costs are spread over a larger or smaller base. Sales volume is therefore a key financial metric used by management.

The Company believes the underlying demand for MMC, housings for hybrid circuits and our proprietary armor solution is growing as the electronics and other industries seek higher performance, higher reliability, and reduced costs. CPS believes that the Company is well positioned to offer our solutions to current and new customers as these demands grow.

CPS was incorporated in Massachusetts in 1984 as Ceramics Process Systems Corporation and reincorporated in Delaware in April 1987 through a merger into a wholly-owned Delaware subsidiary organized for purposes of the reincorporation. In July 1987, CPS completed our initial public offering of 1.5 million shares of our Common Stock. In March 2007, we changed our name from Ceramics Process Systems Corporation to CPS Technologies Corporation.

Results of Operations for the Second Fiscal Quarter of 2024 (Q2 2024) Compared to the Second Fiscal Quarter of 2023 (Q2 2023); (all $ in 000’s)

Revenues totaled $5,030 in Q2 2024 compared with $7,418 generated in Q2 2023, a decrease of 32%. This decrease was mainly due to the completion of the armor contract for the US Navy in Q2 2024 as compared to 2023. In addition, one of the Company’s major customers in 2023 significantly reduced their purchases in Q2 due to their having excess inventory that they are in the process of working down.

Gross loss in Q2 2024 totaled $230 or -5% of sales. This compares with gross profit in Q2 2023 of $2,196 or 30% of sales. This percentage decrease was due to several factors including the impact of fixed costs on significantly lower revenues, as well as abnormally low production yield levels in some of our hermetic package products.

Selling, general and administrative (SG&A) expenses totaled $1,085 in Q2 2024 compared with SG&A expenses of $1,465 in Q2 2023. This decrease was primarily due to the reduction in variable compensation as a result of weaker results from operations in Q2 2024 as compared to Q2 2023. In addition, the Company was able to reduce its outside consulting costs.

The Company experienced an operating loss of $1,315 in Q2 2024 compared with an operating profit of $731 in Q2 2023, a decrease of 280%. This decrease was a result of the decreased gross margin, partially offset by the decrease in SG&A expenses.

Results of Operations for the First Six Months of 2024 Compared to the First Six Months of 2023 (all $ in 000s)

Total revenue was $10,943 in the first half of 2024, a 25% decrease compared with total revenue of $14,518 in the first half of 2023. This decrease was mainly due to the completion of our armor order for the US Navy in 2024 as compared to 2023. In addition, one of the Company’s major customers in 2023 significantly reduced their purchases in both Q1 and Q2 due to their having excess inventory that they are in the process of working down.

Gross margin in the first six months of 2024 totaled $676 or 6% of sales. In the first six months of 2023 gross margin totaled $4,441 or 31% of sales. This decrease was due to the decrease in revenue and the decreased coverage of our fixed costs, as well as the increased costs incurred by the Company in non-revenue producing activities, designed to increase revenue in the future, including fiber reinforced aluminum and new armor configurations. .

Selling, general and administrative (SG&A) expenses were $2,251 during the first six months of 2024, down 25% compared with SG&A expenses of $3,016 in the first six months of 2023. Decreased variable compensation accruals due to lower 2024 profitability as well as reduced commission and consulting expenses were the primary reasons for this decrease.

During the first half of 2024, the Company had net interest income of $170. This compares with interest income of $95 realized during the first half of 2023. The increase in interest income is primarily due to higher interest rates.

In the first six months of 2024 the Company had an operating loss of $1,575 compared with operating income $1,425 in the same period last year. The net loss for the first six months of 2024 totaled $1,097 versus operating income of $1,060 in the first six months of 2023.

CPS does not rely on raw materials from Ukraine, Russia, Israel or Gaza. As a result, we do not believe that the Russian invasion of Ukraine or the conflict in Israel and Gaza will have a direct impact on our results. Nevertheless, there could be an indirect impact regarding supply chain and inflationary issues as a result of these conflicts.

Inflation has had an impact on our costs. Thus far, we have been able to pass along these increases to our customers, but there is no guarantee that we will be able to continue this in the future. In addition, there is often a lag between when the costs increase and when we can adjust customer prices. Some of our larger customers will have pricing agreements, typically for one year, and we must wait for those agreements to end before making any pricing adjustments. Further, several of our larger customers buy from our major competitor in Japan. The devaluation of the Japanese yen related to the US dollar has made it more difficult for us to increase our prices in an amount necessary to fully make up for higher costs.

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 liquid assets at June 29, 2024 consist of cash and cash equivalents of $6,306 and marketable debt securities with a fair value of $759. This compares to cash and cash equivalents at December 30, 2023 of $8,814 and no marketable debt securities held at December 30, 2023. The decrease in cash was due primarily to a decrease in working capital, higher expenditures for capital equipment acquired to improve future performance as well as the operating losses incurred in 2024.

Accounts receivable at June 29, 2024 totaled $4,263 compared with $4,472 at December 30, 2023. Days Sales Outstanding (DSO) increased from 60 days at the end of 2023 to 77 days at the end of Q2 2024. The increase in DSO was due to several large payments due at the end of Q2 2024 being delayed to the beginning of Q3 2024, as well as significantly higher sales volumes at the end of Q2 2024 as compared to the beginning of Q2 2024. The accounts receivable balances at December 30, 2023, and June 29, 2024 were both net of an allowance for doubtful accounts of $10.

Inventories totaled $4,122 at June 29, 2024 compared with inventory totaling $4,582 at December 30, 2023. The inventory turnover in the most recent four quarters ending Q2 2024 was 4.6 times (based on a 5 quarter end average) compared with 4.3 times averaged during the four quarters of 2023.

The Company expects it will continue to be able to fund its operations for the remainder of 2024 from operations and 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 existing cash balances 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 May 2023, the Company terminated its $3.0 million revolving line of credit (LOC) with Massachusetts Business Development Corporation (BDC). A new LOC in the amount of $3.0 million was entered into with Rockland Trust Company. The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of the National Prime Rate as published by the Wall Street Journal. On June 29, 2024, the Company had $0 of borrowings under this LOC and its borrowing base at the time would have permitted an additional $3.0 million to have been borrowed.

In March 2020, the company acquired a scanning acoustic microscope for a price of $208 thousand. The full amount was financed through a 5 year note payable with a financing company. The note is collateralized by the microscope and is being paid in monthly installments of $4 thousand, consisting of principal plus interest at a rate of 6.47%

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

The Company is not significantly exposed to the direct impact of interest rate changes or foreign currency fluctuations. Nevertheless, one of the Company’s major competitors is located in Japan. The relative strength of the US dollar versus the Japanese yen can have a negative impact on the Company’s ability to raise prices when necessary to offset increasing costs. The Company has not used derivative financial instruments.

Although CPS has not been directly impacted by the war in Ukraine, potential supply chain disruptions and its impact on energy costs are areas where we could be impacted in the future.

Inflation is an area where we have seen some impact on our business. We have seen significant price increases in commodity raw materials, such as aluminum, as well as increases in other costs of doing business. As we receive new orders we have been able to pass on most of these costs to our customers. In the case of longer term pricing agreements, we have been able to pass on some of these costs through surcharges and in other ways to mitigate the impact on our profit. As inflation continues, our ability to continue to absorb higher costs by raising customer prices cannot be guaranteed.

(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.