UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the period ended March 31,June 30, 2012
or

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to

 

Commission file number 0-16088

 

CPS TECHNOLOGIES CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

Delaware
(State or Other Jurisdiction
of Incorporation or Organization)Organization
04-2832509
(I.R.S. Employer
Identification No.)

 

111 South Worcester Street
Norton MA
(Address of principal executive offices)

 

 

02766-2102
(Zip Code)

 

 

(508) 222-0614
Registrant`sRegistrants Telephone Number, including Area Code:

 

CPS TECHNOLOGIES CORPORATION
Technologies Corporation

111 South Worcester Street

Norton, MA 02766-2102

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 ][X] Yes [ ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer or a smaller reporting company.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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer`sissuers classes of common stock, as of the latest practicable date. Number of shares of common stock outstanding as of May 1,August 5, 2012: 12,865,659.

12,891,659.

 
 

PART I FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS (Unaudited)

CPS TECHNOLOGIES CORPORATION
Balance Sheets (Unaudited)
(continued on next page)

 

 March 31, December 31, June 30, December 31,
 2012 2011 2012 2011
ASSETS ------------- -------------  
Current assets:              
Cash and cash equivalents $621,050 $1,142,429  $374,328  $1,142,429 
Accounts receivable-trade              
net of allowance for doubtful accounts      
of $10,000 at March 31, 2012      
and December 31, 2011 2,485,125  3,112,960 
net of allowance for doubtful accounts and sales returns
of $40,000 and $10,000 at June 30, 2012 and
        
December 31, 2011, respectively  1,749,711   3,112,960 
Inventories 3,420,691  3,138,617   3,360,415   3,138,617 
Prepaid expenses and other current assets 132,729  152,444   110,632   152,444 
Deferred taxes, current portion 287,056 287,056 
Deferred taxes  —     287,056 
  
Total current assets 6,946,651  7,833,506   5,595,086   7,833,506 
  
Property and equipment:              
Production equipment 7,130,402  7,128,202   7,276,295   7,128,202 
Furniture and office equipment 353,781  353,781   353,780   353,781 
Leasehold improvements 735,099  735,099   735,099   735,099 
  
Total cost 8,219,282  8,217,082   8,365,174   8,217,082 
Accumulated depreciation              
and amortization (6,351,809)  (6,154,193)  (6,552,232)  (6,154,193)
Construction in progress 392,914  244,156   292,923   244,156 
  
Net property and equipment 2,260,387  2,307,045   2,105,865   2,307,045 
  
Deferred taxes, non-current portion 1,507,761  1,193,761   2,079,817   1,193,761 
  
Total Assets $10,714,799  $11,334,312 
Total assets $9,780,768  $11,334,312 
  

 

See accompanying notes to financial statements.

(continued)

 

 
 

CPS TECHNOLOGIES CORPORATION
Balance Sheets (Unaudited)
(concluded)

(concluded)

LIABILITIES AND STOCKHOLDERS` March 31, December 31, June 30, December 31,
EQUITY 2012 2011 2012 2011
    
Current liabilities:              
Accounts payable $1,374,762 $1,463,997  $980,866  $1,463,997 
Accrued expenses 681,688  660,031   512,391   660,031 
Current obligations under capital leases 168,657  208,504 
Current portion of obligations        
under capital leases  142,348   208,504 
  
Total current liabilities 2,225,107  2,332,532   1,635,605   2,332,532 
Obligations under capital              
leases 163,951  199,738 
leases less current portion  127,751   199,738 
  
Total liabilities 2,389,058  2,532,270   1,763,356   2,532,270 
  
Commitments              
Stockholders` equity:              
Common stock, $0.01 par value,              
authorized 15,000,000 shares;              
issued 12,921,942 shares;      
outstanding 12,865,659 shares;      
at March 31, 2012 and December 31, 2011 129,220  129,220 
issued 12,927,942 and 12,921,942 shares;        
outstanding 12,891,659 and 12,865,659 shares;        
at June 30, 2012 and December 31, 2011, respectively  129,279   129,220 
Additional paid-in capital 33,627,930  33,569,896   33,692,266   33,569,896 
Accumulated deficit (25,297,094)  (24,762,759)  (25,669,818)  (24,762,759)
Less cost of 56,283 common shares              
repurchased (134,315)  (134,315)  (134,315)  (134,315)
  
Total stockholders` equity 8,325,741  8,802,042   8,017,412   8,802,042 
  
Total liabilities and stockholders`              
equity $10,714,799 $11,334,312  $9,780,768  $11,334,312 
  

 

See accompanying notes to financial statements.

 
 

CPS TECHNOLOGIES CORPORATION
Statements of Operations (Unaudited)

  Fiscal Quarters Ended Fiscal Quarters Ended Six Month Periods Ended
 March 31, April 2, June 30, July 2, June 30, July 2,
 2012 2011 2012 2011 2012 2011
      
Revenues:                    
Product sales $3,342,653 $5,047,858 $3,529,672  $4,292,369  $6,872,325  $9,340,227 
Research and development under    
cooperative agreement 212,123 792,487
Research and development                
under cooperative agreement  98,593   549,391   310,716   1,341,878 
  
Total revenues 3,554,776 5,840,345  3,628,265   4,841,760   7,183,041   10,682,105 
Cost of product sales 3,405,575 4,219,865  3,352,442   3,380,055   6,758,017   7,599,920 
Cost of research and development                    
under cooperative agreement 183,041 764,420  82,844   502,289   265,885   1,266,709 
  
Gross Margin (33,840) 856,060  192,979   959,416   159,139   1,815,476 
Selling, general, and                    
administrative expense 808,723 816,946  845,009   927,068   1,653,732   1,744,014 
  
Income (loss) from operations (842,563) 39,114
Operating income (loss)  (652,030)  32,348   (1,494,593)  71,462 
Interest expense, net (5,772) (9,671)  (5,694)  (8,065)  (11,466)  (17,736)
  
Income (loss) before taxes (848,335) 29,443
Income tax provision (benefit) (314,000) 13,300
Net income (loss) before                
income tax expense (benefit)  (657,724)  24,283   1,506,059)  53,726 
Income tax expense (benefit)  (285,000)  11,100   (599,000)  24,400 
  
Net income (loss) ($534,335) $16,143 $(372,724) $13,183  $(907,059) $29,326 
  
Net income (loss) per                    
basic common share $(0.04) $0.00 $(0.03) $0.00  $(0.07) $0.00 
  
Weighted average number of                    
basic common shares                    
outstanding 12,865,659 12,714,819  12,869,483   12,738,390   12,867,571   12,726,168 
  
Net income (loss) per                    
diluted common share $(0.04) $0.00 $(0.03) $0.00  $(0.07) $0.00 
  
Weighted average number of                    
diluted common shares                    
outstanding 12,865,659 13,180,992  12,869,483   13,229,112   12,867,571   13,204,616 
  

 

See accompanying notes to financial statements.

 
 

CPS TECHNOLOGIES CORPORATION
Statements of Cash Flows (Unaudited)

  Fiscal Quarters Ended Six Month Periods Ended
 March 31, April 2, June 30, July 2,
 2012 2011 2012 2011
    
Cash flows from operating activities:            
Net income (loss) $(534,335) $16,143 $(907,059) $29,326 
Adjustments to reconcile net income    
Adjustments to reconcile net income (loss)        
to cash used in operating activities:            
Depreciation and amortization 197,616 180,975  398,039   363,874 
Share-based compensation 58,034 50,896  113,251   112,491 
Deferred taxes (314,000) 7,900  (599,000)  14,200 
Excess tax benefit from stock options    
exercised -- (19,550)
Excess tax benefit from stock options exercised  —     (32,050)
Changes in:            
Accounts receivable-trade 627,835 (1,308,469)
Accounts receivable-trade, net  1,363,249   89,036 
Inventories (282,074) (113,214)  (221,798)  (528,120)
Prepaid expenses and other current assets 19,715 (106,238)  41,812   (45,970)
Accounts payable (89,235) 797,845  (483,131)  133,531 
Accrued expenses 21,657 (41,764)  (147,640)  (291,637)
  
Net cash used in operating activities (294,787) (535,476)  (442,277)  (155,319)
  
Cash flows from investing activities:            
Purchases of property and equipment (150,958) (202,026)  (196,859)  (316,795)
  
Net cash used in investing            
activities (150,958) (202,026)  (196,859)  (316,795)
  
Cash flows from financing activities:            
Payment of capital lease obligations (75,634) (68,598)  (138,143)  (138,210)
Excess tax benefit from stock options exercised -- 19,550  —     32,050 
Proceeds from issuance of common stock -- 29,126  9,178   35,274 
  
Net cash used in            
financing activities (75,634) (19,922)  (128,965)  (70,886)
  
Net decrease in cash and cash equivalents (521,379) (757,424)  (768,101)  (543,000)
Cash and cash equivalents at beginning of period 1,142,429 1,803,222  1,142,429   1,803,222 
  
Cash and cash equivalents at end of period $621,050 $1,045,798 $374,328  $1,260,222 
  
Supplemental cash flow information:            
Cash paid for taxes $-- $76,500 $—    $76,500 
Interest paid $5,772 $9,671 $11,466  $17,736 

 

See accompanying notes to financial statements.

 
 

CPS TECHNOLOGIES CORPORATION
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.

In 2008 the Company also entered into a cooperative agreement with the U.S. Army to further develop its composite technology to produce armor.

 

(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 31, 2011 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. Certain items in the 2011 financial statements have been reclassified to conform with the 2012 presentation.

 

For further information, refer to the financial statements and footnotes thereto included in the Registrant`CPS`s Annual Report on Form 10-K for the year ended December 31, 2011.

The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

 

The Company’s second fiscal quarter end is the Saturday closest to June 30th, which could result in a 13 or 14 week fiscal quarter. The second quarters for fiscal 2011 and 2012 each consisted of 13 weeks.

 

(3) Net Income (Loss) Per Common and Common Equivalent Share

Basic net income or net loss per common share is calculated by dividing net income (loss) 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 optionsoption 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”):EPS:

 

For periods ended  
 Fiscal Quarters Ended Six Month Periods Ended 
 March 31, April 2, June 30, July 2, June 30, July 2,
 2012 2011 2012 2011 2012 2011
   ------------ ------------ ------------ ------------
Basic EPS Computation:          
Numerator:                      
Net income (loss) $(534,335) $16,143  $(372,724) $13,183  $(907,059) $29,326 
Denominator:                      
Weighted average                      
common shares      
Common shares                
Outstanding 12,865,659  12,714,819   12,869,483   12,738,390   12,867,571   12,726,168 
Basic EPS $(0.04) $0.00  $(0.03) $0.00  $(0.07) $0.00 
Diluted EPS Computation:                      
Numerator:                      
Net income (loss) $(534,335) $16,143  $(372,724) $13,183  $(907,059) $29,326 
Denominator:                      
Weighted average                      
common shares      
Common shares                
Outstanding 12,865,659  12,714,819   12,869,483   12,738,390   12,867,571   12,726,168 
stock options --  466,173 
Dilutive effect of stock options  —     490,722   —     478,448 
Total Shares 12,865,659  13,180,992   12,869,483   13,229,112   12,867,571   13,204,616 
Diluted EPS $(0.04) $0.00  $(0.03) $0.00  $(0.07) $0.00 

 

(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 shares granted under the 2009 Stock Incentive Plan (the “Plan”) during the quarters ended March 31,June 30, 2012 or Apriland July 2, 2011. During the quartersthree and six months ended March 31,June 30, 2012, the Company recognized $55,217 and April$113,251, respectively, as shared-based compensation expense related to previously granted shared under the Plan. During the three and six months ended July 2, 2011, the Company recognized $58,034$61,595 and $50,896$112,491, respectively, as shared-based compensation expense related to previously granted shares under the Plan. During the quarterthree months ended March 31,June 30, 2012 there were no option exercises. During the quarter ended April 2, 2011 the Company issued 43,7506,000 shares as a result of option exercises.

As of There were no option exercises during the quarter ended March 31, 2012, there was $769,4702012. During the three and six months ended July 2, 2011 the Company issued 20,000 and 63,750 shares, respectively, as a result of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans; that cost is expected to be recognized over a weighted average period of 4.25 years.

option exercises.

 

(5) Inventories

Inventories consist of the following:

March 31, December  31,  
  2012 2011
  
Raw materials $287,707  $390,281 
Work in process 1,865,748  1,686,966 
Finished goods 1,267,236  1,061,370 
  
Total Inventories $3,420,691 $3,138,617 
  

 June 30, December 31,
  2012 2011
  
Raw materials $297,996  $390,281 
Work in process  1,645,513   1,686,966 
Finished goods  1,416,906   1,061,370 
  
Inventories $3,360,415  $3,138,617 
  

 

(6) Accrued Expenses

Accrued expenses consist of the following:

March 31, December  31,  
 June 30, December 31,
 2012 2011 2012 2011
   
Accrued legal and accounting $71,700 $72,700  $56,366  $72,700 
Accrued payroll 448,654  456,322   273,145   456,322 
Accrued other 161,334  131,009   182,880   131,009 
  
Total Accrued expenses $681,688 $660,031 
  $512,391  $660,031 
 

 

(7) Line of Credit and Equipment Lease Facility Agreements

In early May 2012 the Company increased its $1 million revolving line of credit (“LOC”) to $ 2 million and renewed it $ 1.25 million equipment finance facility (“Lease Line”) with Sovereign Bank.   Both agreements mature in May 2013.  The LOC is secured by the accounts receivable and other assets of the Company, has an interest rate of prime plus one percent (1%) and a one-year term. Under the terms of the LOC agreement, the Company is required to maintain its operating accounts with Sovereign Bank.Bank and the Company borrowing capacity is the lesser of the $2million LOC or its borrowing base. At June 30, 2012 the Company’s borrowing base was $836 thousand. 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 line of creditLOC that require the Company to maintain a targeted coverage ratio as well as targeted debt to equity and current ratios. At March 31,June 30, 2012, the Company was in compliance with existing covenants and there were no borrowings outstanding. At March 31,June 30, 2012, the Company had $0.33 million net carrying value$270 thousand of capital equipment financed by the Sovereign equipment finance facility and $0.92 million$980 thousand available remaining on the Sovereign equipment finance facility.



(8) Income Taxes

At December 31, 2011, the Company had approximately $1,368,000 of net operating loss carryforwards available to offset future income for U.S. Federal income tax purpose.

 

The Company recorded a tax benefit of $240,000$227,000 and $467,000 for federal income taxes for the quarter ended March 31, 2012 and a tax benefit of $74,000$58,000 and $132,000 for state income taxes during the quarterthree and six months ended March 31, 2012.June 30, 2012, respectively. The company recorded a tax provision of $6,700 and $15,100 for federal income taxes and a tax provision of $4,400 and $9,300 for state income taxes during the three and six months ended July 2, 2011, respectively.

 

The Company has a current and non-current deferred tax asset aggregating $1,794,817$2,079,817 and $1,480,817 on the Company`s balance sheet at March 31,June 30, 2012 and December 31, 2011, 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.

 

(9)(9) Commitment

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 February 2012, the Company exercised the first of the five one year renewal options.

 

As of June 30, 2012, production equipment included $293thousand of construction in progress, and the Company had outstanding commitments to purchase $238 thousand of production equipment. The Company intends to finance production equipment in construction in progress and outstanding commitments under the lease agreement with a combination of accessing the Lease Line, cash balances and the borrowings under the LOC.



ITEM 2 MANAGEMENT`SMANAGEMENTS 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 31, 2011.

 

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 31, 2011, 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 31, 2011.

 

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 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 FirstSecond Fiscal Quarter of 2012 (Q1(Q2 2012) Compared to the FirstSecond Fiscal Quarter of 2011 (Q1(Q2 2011); (all $ in 000`s)

Total revenue was $3,555Revenue totaled $3,628 in Q1Q2 2012, a 39%25% decrease from total revenue of $5,840$4,842 generated in Q1Q2 2011. Several factors contributed to this shortfall, including: weak orders for traction products, which continue to be adversely affected by a high-speed Chinese train crash in 2011 as well as weakness in infrastructure spending in Europe as a result of the Euro crisis; a decline in the demand for headspreadersheatspreaders and lids as certain specific products approach end of life;life, a dropreduction in revenues earned from our Cooperative Agreement with the U.S.US Army Research Lab, (revenues from this Agreement reached a peak in the same quarter a year ago),Laboratory, and a decline in the sale of hermetic packages, reflecting weak customer demand.packages. The impact of these factors was partially offset by an increase in the sale of baseplates for hybrid and electric vehicle applications.

 

Gross marginMargin in Q1,Q2 2012 was a negative $ 34,totaled $193 or 5% of sales, compared with $ 856$959 or 20% of sales in Q1, 2011Q2 2011. This reduction was primarily due to two primary factors:  first, the reduction in sales volumes across most product lines which resulted in fixed costs being spread over fewer revenue dollars; in addition the Company incurred $95 of obsolescence charges in Q2 2012 compared with $0 in Q2 2011.

Selling, general and secondly,administrative (SG&A) expenses were $845 in Q2 2012, down 8% from SG&A expenses of $927 in Q2 2011. This reduction was due to lower compensation and benefit expense including the suspension of the Company’s 401K match program in Q1 2012.

The Company incurred an operating loss of $652, compared with an operating profit of $32 in the same quarter last year. This reduction was primarily due to a lesser extent,reduction in gross margin due to a drop in sales volume and partially offset by lower by lower SG&A expenses. Interest expense totaled $6 in Q2 2012 compared with $8 in Q2 2011.

The net loss for Q2 2012 totaled $373 versus net income of $13 in Q2 2011.

Results of Operations for First Six Months of 2012 Compared to First Six Months of 2011 (all in $ 000`s)

Total revenue was $7,183 in the first six months of 2012, a decrease from total revenue of $10,682 generated during the first six months of 2011. The Company continues to be adversely affected by the weak economies in Europe and the slow down in traction spending in China. Several other factors contributed to the decline in revenues including the fact that certain lids and heatspreaders are approaching end of life and a significant reduction in revenues earned from our Cooperative Agreement with the US Army Research Laboratory, as well as a decline in the sale of hermetic packages. The impact of these factors was offset in small part by an increase in the sale of baseplates for hybrid and electric vehicle applications.

Gross Margin in the first six months of 2012 totaled $159 or less than 2% of sales, compared with $1,815 or 17% of revenues in the first six months of 2011. This reduction was due in large part to lower sales volume, but also adversely affected by additional costs associated with an outside finishing operation during the quarter.   The gross margin on product sales decreased to a negative 2%which were reflected in Q1 versus 16% in Q1, 2012.  This decrease  was also due principally to the same two factors:  the decline in sales volume resulting in fixed costs being spread over fewer revenue dollars2012 and the additional finishing costs cited earlier.obsolescence charges for products that reached end of life earlier than forecast by customers.

 

Selling, general and administrative (SG&A) expenses were $809$1,654 in Q1,the first six months of 2012, a slight declinedown 5% from SG&A expenses of $817$1,744 incurred during the same period in 2011. As noted earlier, a major reason for this change was the suspension of the Company’s 401K match program in Q1 2011. 2012 and lower compensation and benefit expense.

 

               As a result of the lower volume and the additional finishing costs, theThe Company incurred an operating loss in the first six months of $843,2012 of $1,495 compared with an operating profit of $39$71 in the same quarter last year.first six months of 2011. This reduction was primarily due to the drop in sales volume, and to a lesser degree, the additional finishing costs and obsolescence charges. Interest expense dropped from $10totaled $11 in Q1,the first six months of 2012 compared with $18 on the first six months of 2011 to $6as a result of a decline in Q2, 2012, reflecting a lower level of financing capital equipment. leases.

The net loss for Q1,the first six months of 2012 totaled $534$907 versus net income of $16$29 in Q1,the first six months of 2011.

 

Liquidity and Capital Resources (all $ in 000`s)

The Company`s cash and cash equivalents at March 31,June 30, 2012 totaled $621,$374 compared with cash and cash equivalents at December 31, 2011 of $1,142.   The$1142. Cash declined primarily as a result of the loss from operations wasduring the primary factor for this decrease in cash.first six months of 2012.

 

Accounts receivable at March 31,June 30, 2012 totaled $2,485$1,750 compared with $3,113 at December 31, 2011. Days Sales Outstanding (DSOs) decreased slightly to 6343 days in Q1at the end of the second quarter 2012, fromcompared with 66 days in Q4 2011.at December 31, 2011 reflecting a mix of payment terms with customers. The accounts receivable balance at the end ofJune 30, 2012 and December 31, 2011 and March 31, 2012 wereis net of an allowance for doubtful accounts and sales returns of $10.$40 and $10, respectively.

 

Inventories increased to $3,421$3,360 at March 31,June 30, 2012 from $3,139 at December 31, 2011.  This increase reflects the Company`s expectation that business will accelerate in the second half of the year.

All consigned inventory is shipped under existing purchase orders and per customers`customers’ requests. Of$1,456 ($251 of finished goods and $1,205 awaiting an outside finishing operation) of the inventory of $3,421 at March 31,June 30, 2012 $1,474 was located at customers`customers’ locations pursuant to consigned inventory agreements. Of the total inventory of $3,138agreements; at December 31, 2011, $1,363 ($353 finished goods and $1,010 awaiting an outside finishing operation) was located at customers`customers’ locations pursuant to consigned inventory agreements.

 

The Company financed its working capital during Q1the first six months of 2012 with collections on accounts receivable and existing cash balances. The Company expects it will continue to be able to fund its working capital requirements for the remainder of 2012 from a combination of existing cash balances and borrowings under its committed bank line of credit.

. The Company’s borrowing capacity under the LOC is the lesser of $2 million or its borrowing base. At June 30, 2012 the Company’s borrowing base was $836 thousand.

 

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, raiseobtain additional capital financing or reduce certain discretionary spending could have a material adverse effect on the Company`s ability to achieve its business objectives.

 

Contractual Obligations

In early May of 2012 the Company increased its $1 million revolving line of credit (“LOC”) to $2 million and renewed it $1.25 million equipment finance facility (“Lease Line”) with Sovereign Bank.   Both agreements mature in May 2013.  The LOC is secured by the accounts receivable and other assets of the Company, has an interest rate of prime plus one percent (1%) and a one-year term. Under the terms of the agreement, the Company is required to maintain its operating accounts with Sovereign 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 line of credit that require the Company to maintain a targeted coverage ratio as well as targeted debt to equity and current ratios. At March 31,June 30, 2012, the Company was in compliance with existing covenants and there were no LOC borrowings outstanding. At March 31,June 30, 2012, the Company had $0.33 million net carrying value$270 of capital equipment financed by the Sovereign equipment finance facility and $0.92 million$980 available remaining on the Sovereign equipment finance facility.

 

As of March 31,June 30, 2012 production equipment included $393thousand$293 thousand of construction in progress, and the Company had outstanding commitments to purchase $285$238 thousand of production equipment. The Company intends to finance production equipment in construction in progress and outstanding commitments under the lease agreement with a combination of accessing the Lease Line, existing cash balances and funds generated by operations.borrowings under the LOC.

 

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 2012, the Company renewed a one-year lease, and has four additional 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.

 

The Company`s contractual obligations at March 31,June 30, 2012 consist of the following:

 

  Payments Due by Period
  Remaining inFY 2013 - 
 TotalFY 2012FY 2015FY 2016 -
Capital lease obligations including interest$ 349,360$ 141,860$ 207,500$ --
Purchase commitments for production equipment$ 285,000$ 285,000$ --$ --
Operating lease obligation for facilities$649,833$ 167,100$ 445,233$ 37,500

  Payments Due by Period 
  Remaining inFY 2013 - 
 TotalFY 2012FY 2015FY 1016
Capital lease obligations including interest$ 283,293$  75,793$ 207,500$ --

 

Purchase commitments for production equipment

$ 238,411$ 238,411$  --$ --

 

Operating lease obligation for facilities

$594,133$111,400$ 445,233$ 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 44T 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 officer has 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.

 

 
 

PART II OTHER INFORMATION

 

ITEM 1 LEGAL PROCEEDINGS
None.

 

ITEM 1A RISK FACTORS
There have been no material changes to the risk factors as discussed in our 20102009 Form 10-K.10-K

 

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.PROCEEDS
None.

 

ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.

 

ITEM 4 [REMOVED AND RESERVED]MINE SAFETY DISCLOSURES
Not applicable.

 

ITEM 5 OTHER INFORMATIONEXHIBITS
Not applicable.

ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:

Exhibit 31.1 Certification Of Chief Executive Officer Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002

Exhibit 31.2 Certification Of Chief Financial Officer Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002

Exhibit 32.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002

 

(b)Reports on Form 8-K:

On March 29,May 16, 2012 the Company filed a report on Form 8-K relating to the announcement of its financial resultsearnings report for the yearfiscal first quarter ended December 31, 2011 as presented inMarch 30, 2012.

On May 18, 2012 the Company filed a press release dated March 29,report on Form 8-K which included a transcript of the Company’s conference call held on May 16, 2012.



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

CPS TECHNOLOGIES CORPORATION
(Registrant)

 

Date: May 14,August 13, 2012
/s/ Grant C. Bennett
Grant C. Bennett
Chief Executive Officer

 

Date: May 14,August 13, 2012

/s/ Ralph M. Norwood

Ralph M. Norwood

Chief Financial Officer