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 June 29, 201927, 2020

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)

(508) 222-0614
Registrant’s Telephone Number, including Area Code:

CPS Technologies Corporation

111 South Worcester Street

Norton, MA 02766-2102

None

(Former Name, Former Address and Former Fiscal Year if Changed since Last Report)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 or a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]   Accelerated filer [ ]   Non-accelerated filer [X]   Smaller reporting company [X]

Emerging growth company[ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):

[ ] Yes       [X] No

Securities registered pursuant to Section 12(b) of the Act:

Title of each class                         Trading Symbol(s)       Name of each exchange on which registered

Common Stock, $0.01 par value             CPSH                           NASDAQ Capital Markets

APPLICABLE ONLY TO CORPORATE ISSUERS:

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 August 2, 2019: 13,207,436.July 31, 2020: 13,296,168.

PART I  FINANCIAL INFORMATION

ITEM 1  FINANCIAL STATEMENTS (Unaudited)

CPS TECHNOLOGIES CORPORATION

Balance Sheets (Unaudited)

See accompanying notes to financial statements.

(continued)

CPS TECHNOLOGIES CORPORATION

Balance Sheets (Unaudited)

(concluded)

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORPORATION

Statements of Operations (Unaudited)

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORPORATION
STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 29, 201927, 2020 AND JUNE 30, 201829, 2019

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORPORATION

Statements of Cash Flows (Unaudited)

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 (MMC’s) 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)        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 29, 201828, 2019 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 29, 201828, 2019 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.alsic.com.

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

New Accounting Pronouncements

Pronouncements adopted in 2019

The Company adopted Accounting Standards Codification (ASC) 842 for leases effective at the beginning of the fiscal year, December 30, 2018, using the cumulative-effect adjustment transition method, which applies the provisions of the standard at the effective date without adjusting the comparative periods presented. 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.

We have lease agreements with lease and non-lease components, which are generally accounted for separately. We have not elected the practical expedient to account for lease and non-lease components as one lease component. The Company has elected certain practical expedients upon adoption and therefore has not reassessed whether any expired or existing contracts contain leases, has not reassessed the lease classification for any expired or existing leases and has not reassessed initial direct costs for any existing leases.

Adoption of the standard resulted in the recognition of operating lease right-of-use assets and corresponding lease liabilities of $310 thousand on the consolidated balance sheet as of December 30, 2018. The standard did not materially impact operating results or liquidity. Disclosures related to the amount, timing and uncertainty of cash flows arising from leases are included in Note 4, Leases.

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

Basic net income (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 (loss)  per common share is calculated by dividing net income (loss) 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:

(4)  Commitments & Contingencies

Commitments

Leases

The Company has two real estate leases—one expiring in February 2021 and one with a 12an 11 month duration with options to extend additional years. Since the latter is not reasonably certain that any options will be exercised, it has not been recorded on the balance sheet in accordance with the accounting policy elected in Note 2.sheet. 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.

The lease expiring in 2021 (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 December 30, 2018 based on the present value of remaining lease payments over the remaining lease term using the Company’s incremental borrowing rate at date of adoption.commencement dates. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Operating Leases

Lease expense for operating leases is recognized on a straight-line basis over the lease term. Lease expense is allocated between Cost of Product Sales and Selling, General and Administrative Expense in the income statementstatement.

The following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s capitalized operating leases as of June 29, 201927, 2020

Additionally, the Company has short-term lease commitments not reflected in the schedule above and not recorded as a right-of-use asset in accordance with the Company’s accounting policy.

Operating Lease Costs and Cash Flows

An initial right-of-use asset of $310 thousand was recognized as a non-cash asset addition with the adoption of the newOperating lease accounting standard. Cashcost and cash paid for the amounts included in the present value of operating lease liabilities was $76 thousand during the first half year of 2019 and is included in operating cash flows.

Operating Lease Costs

Operating lease cost was $76 thousand during the first half year of 2019.2020. 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.

Loss contingency

The Company manufactures baseplates for power module manufacturers. Most baseplates manufactured by CPS require a nickel coating be applied to the baseplate (“Ni plating”). CPS warranties its baseplates meet the Ni plating specifications required by our customers, and flows this requirement to its Ni plating vendors.

On January 24, 2018 the Company received a “Claim and Non-Conformance Notification” from one of its European customers relating to the Ni plating on our baseplates. Upon investigation, it was determined that one employee of the Ni plating vendor used by CPS had deviated from the prescribed work instruction for Ni plating from mid-September 2017 until mid-January 2018. The Company's Ni plating vendor acknowledged this violation and worked with the customer to resolve the problem.

On April 11, 2018 the Company received a “Follow-up Claim and Non-Conformance Notification” from the European customer.  The customer estimated the total value of the claim to be $1.0 million “as of today”, and reserves the right to claim additional damages in the future.

The Company informed its insurer of this claim and the Ni plating vendor did the same with its insurer. No amounts for damages had been recorded in the financial statements as management believed that it was not possible at the time to quantify the potential impact, if any, to the Company.

On July 9, 2019, the Company received confirmation from its customer accepting the settlement offer of the Company’s insurer.  The settlement is covered by the Company’s insurance policy and the Company does not expect to incur any losses as part of the settlement.

(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.

There were 75,000 stock options granted during the quarter ended June 29, 2019 and 5,000 stock options granted during the quarter ended June 30, 2018

There were no options exercised duringDuring the quarters ended June 27, 2020 and June 29, 2019 ora total of 0 and 75,000 stock options, respectively, were granted to employees under the Company’s 2020 Equity Incentive Plan and 2009 Stock Incentive Plan, respectively (collectively the “Plan”)

During the quarters ended June 30, 2018.27, 2020 and June 29, 2019 there were no shares issued.  

During the three and six months ended June 29, 2019,27, 2020, the Company recognized $26,412$17,390 and $85,397,$83,063, respectively, as shared-based compensation expense related to previously granted shares under the Plan.

During the three and six months ended June 30, 2018,29, 2019, the Company recognized $31,000$26,411 and $103,029,$85,397, respectively, as shared-based compensation expense related to previously granted shares under the Plan.

(6)  Inventories

Inventories consist of the following:

(7)  Accrued Expenses

Accrued expenses consist of the following:

(8)        Line of Credit

In MaySeptember 2019, the Company amended itsentered into revolving line of credit with The Massachusetts Business Development Corporation (BDC) in the amount of $2.5 million.  In May of 2020 this credit line with Santander Bankwas increased to $1.25$3.0 million.  The agreement maturesincludes a demand note allowing the Lender to call the loan at any time.  CPS may terminate the end of September 2019.agreement without a termination fee after 3 years.  The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of primeLIBOR plus 100650 basis points. Under the terms of the agreement, the Company is required to maintain its operating accounts with Santander Bank. The Company is also subject to certain financial covenants.  These include specific EBITDA levels, a targeted current ratio and a targeted debt to tangible net worth ratio at the end of subsequent quarters.  The covenants exclude the requirements of Accounting Standards Codification (ASC) 842 for leases.  At June 29, 2019, the Company was in compliance with all existing covenants.  Also, at June 29, 201927, 2020 the Company had $800 thousand$1.027 million of borrowings under this LOC and its borrowing base at the time would have permitted an additional $450 thousand$1.973 million to have been borrowed.

The line of credit is subject to certain financial covenants, all of which have been met or waived.

(9)        Note Payable

In March 2020, the company acquired a Sonoscan ultrasound microscope for a price of $208 thousand.  The full amount was financed through a 5 year note payable with Crest Capital Corporation.  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%. 

(9)(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 partial valuation allowance reserve, as it is judged more likely than not that all or a majorityportion of its tax deferred tax assets will not be usedutilized before they expire. This decision was reached after giving greater weight to the Company’s losses in recent years as compared to its losses over the previous three years compared with its forecast of the future. Consistent with this conclusion, no income tax provision/(benefit) has been recorded for the quarter and six month ending June 29, 2019.forecasts.

The Company recorded a tax benefit of $67 thousand and $227 thousandNo provision for federal income taxes was provided during the threequarter and six months ended June 30, 2018, respectively. The27, 2020, as the Company recordedcontinues to maintain a full valuation allowance against the majority of its deferred tax benefit of $13assets and $43 thousandno current tax is forecasted for state income taxes during the three and six months ended June 30, 2018, respectively.year.

ITEM 2       MANAGEMENT’S 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 29, 2018.28, 2019.

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 29, 2018,28, 2019, 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 29, 2018, other than the adoption of ASU No. 2016-02, Leases.28, 2019.

Overview

CPS Technologies Corporation (the ‘Company’ or ‘CPS’) provides advanced material solutions to the electronics, power generation, automotive and other industries.

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-turbinesProducts we provide include baseplates 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, wind turbines, and wind turbines.   CPS supplieshybrid and electric vehicles.  We provide baseplates and housings used in radar, satellite and avionics applications.  We provide lids and heat spreaders lidsused with high performance integrated circuits for use in internet switches and routers.   We provide baseplates to customersand housings used in these end markets. CPS is a fully qualified manufacturer for many of the world’s largest electronics OEMs.

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 components made of metal-matrix composites;MMC components; they may include components made of more traditional materials such as aluminum, copper-tungsten, etc.

WeCPS’s products are also actively workingcustom 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 customerson-going production demand, and some products which are in end marketsthe prototyping or evaluation stages at the beginning stagesour customers. The Company seeks to have a portfolio of products which include products in every stage of the technology adoption lifecycle.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. 

The manufacturing process for MMCs (infusing ceramic materials with molten metals) is complicated and results in varying yields, which poses challenges to profitability for less developed manufacturers.

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 its hybrid hard face armor tiles will find application in many military vehiclesthe Company is well positioned to offer our solutions to current and new customers as well as armored commercial vehicles.

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 Corporation.

Results of Operations for the Second Fiscal Quarter of 20192020 (Q2 2019)2020) Compared to the Second Fiscal Quarter of 20182019 (Q2 2018)2019); (all $ in 000s)

Total revenue was $6,367$5,758 in Q2 2019,2020, a 22% increase10% decrease compared with total revenue of $5,229$6,367 in Q2 2018.2019. This increasedecrease was due primarily to an increasea decrease in the sale of baseplates and tothe shipment of a lesser degree, to an increase in the sale of hermetic packages and armor revenue. There were no significant price changeslarge infrequent order in Q2 20192019. Price increases of 10% offset the overall revenue decrease in Q2 2020 revenue compared with Q2 2018.2019.

Gross margin in Q2 20192020 totaled $1,175$1,183 or 18%21% of sales.  In Q2 2018,2019, gross margin was $606$1,175 or 12%18% of sales.   This increase in margin was primarily due to higher sales volumeincreased pricing and product mix.

Selling, general and administrative expenses (SG&A) were $917$853 in Q2 2019,2020, down slightly7% when compared with SG&A expenses of $931$917 in Q2 2018.  During 8 weeks of Q2 20192019.  This reduction in SG&A expense was due, almost equally, to reduced sales commissions on reduced revenue, and reduced travel expenses, as virtually all company travel was shut down due to the company incurred the salaries of both the incoming CFO and the retiring CFO resulting in an extra $25k of SG&A salaries.  Without this duplication SG&A spend would have been down by 4%.Covid-19 pandemic.

In Q2, 2019,2020, the Company incurred interest expense of $7$32 due to bank borrowings.  This compares with interest expense of $12$7 in Q2 of 2018.2019.  The increase in interest is due to increased borrowings to finance the growth of accounts receivable and inventory

The Company experienced operating income of $258$331 compared with an operating lossincome of $326$258 in the same quarter last year. This increase in operating income is due primarily to the increasedecrease in revenue,SG&A expense, discussed above. Increased revenue resulted in higher gross margin due to more coverage of fixed factory overhead. The net income for Q2 20192020 totaled $251$299 versus a net loss of $257$251 in Q2 2018.2019.

Results of Operations for the First Six Months of 20192020 Compared to the First Six Months of 20182019 (all $ in 000s)

Total revenue was $11,636$12,270 in the first half of 2019,2020, a 24%5% increase compared with total revenue of $9,384$11,636 in the first six months of 2018.2019. This increase was due primarily to ana 12% increase in the sale of baseplates as well as housings and packages for hybrid circuits. There were no significant price changespricing during the first half of 20192020 compared with the first half of 2018.2019.

Gross margin in the first six months of 20192020 totaled $1,334$2,734 or 11%22% of sales.  In the first six months of 20182019 gross margin totaled $750$1,334 or 8%11% of sales.  This increase was almost entirely due to the increase in revenues, as well as a change inpricing, and product mix.

Selling, general and administrative (SG&A) expenses were $1,821$1,781 during the first six months of 2019,2020, down 1%2% compared with SG&A expenses of $1,839$1,821 in the first six months of 2018  During 8 weeks of 2019  This reduction is due primarily to reductions in travel due to the company incurred the salaries of both the incoming CFO and the retiring CFO resulting in an extra $25k of SG&A salaries.  Without this duplication SG&A spend would have been down by 2%.Covid-19 pandemic.

During the first half of 2019,2020, the Company incurred interest expense of $7$66 due to bank borrowings.  This compares with interest expense of $12$7 incurred during the first half of 2018.2019.  The increase in interest is due to increased borrowings to finance the growth of accounts receivable and inventory

In the first six months of 20192020 the Company incurred anhad operating lossincome of $486$952 compared with an operating loss of $1,090$486 in the same period last year.  The net lossincome for the first six months of 20192020 totaled $494$901 versus a net loss of $832$494 in the first six months of 2018.2019. 

Liquidity and Capital Resources (all $ in 000s unless noted)

The Company’s cash and cash equivalents at June 29, 201927, 2020 totaled $162.$117.  The Company’s net cash, which considers the $800$1,027 of bank borrowings, totaled a negative $638$910 at the end of the second quarter. This compares to cash and cash equivalents at December 29, 201828, 2019 of $629.$134 and net cash of negative $1,116. The decreaseimprovement in net cash was due to the increase in working capital i.e. receivables and inventory less payables and accruals, coupled with the lossgains from operations.

Accounts receivable at June 29, 201927, 2020 totaled $4,110$4,976 compared with $3,053$4,087 at December 29, 2018.28, 2019.

Days Sales Outstanding (DSO) increased from 4567 days at the end of 20182019 to 5878 days at the end of Q2 2019. DSO’s at the end of 2018 were unusually low due to the fact that sales during Q4 2018 were more heavily loaded toward the front end of the quarter. Whereas DSOs at the end of Q2 2019 were higher2020.  The increase in DSO was due to higher sales at the end of the quarter.to one large customer with longer payment terms. The accounts receivable balances at December 29, 2018,2019, and June 29, 201927, 2020 were both net of an allowance for doubtful accounts of $10.

Inventories totaled $2,901$3,873 at June 29, 201927, 2020 compared with inventory totaling $3,193$3,100 at December 29, 2018.28, 2019. This decreaseincrease was due primarily to the decision to begin the summer manufacturing vacation period the final week of Q2 instead of the first week of Q3.increased finished goods awaiting outside plating services for our two largest customers.  The inventory turnover in the most recent four quarters ending Q2 20192020 was 6.25.5 times, updown from 6.06.2 times averaged during the four quarters of 20182019 (based on a 5 point average).

All consigned inventory is shipped under existing purchase orders and per customers’ requests. At June 29, 2019 and December 29, 2018, $1,288 and $1,556, respectively, was located at customer locations pursuant to consigned inventory agreements.

The Company financed its increase in working capital during the first half of 2019in Q2 2020 from a combination of its cash at the beginning of the year and bank borrowings.profit.  The Company expects it will continue to be able to fund its working capital requirementsoperations for the remainder of 20192020 from existing cash balances and bank borrowings.

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.

Contractual Obligations

In MaySeptember 2019, the Company amended itsentered 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 with Santander Bank to $1.25$3.0 million.  The agreement maturesincludes a demand note allowing the Lender to call the loan at any time.  The Company may terminate the end of September 2019.agreement without a termination fee after 3 years.  The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of primeLIBOR plus 100650 basis points.  Under the terms of the agreement, the Company is required to maintain its operating accounts with Santander Bank. The Company is also subject to certain financial covenants.  These include specific EBITDA levels, a targeted current ratio and a targeted debt to tangible net worth ratio at the end of subsequent quarters.  The covenants exclude the requirements of Accounting Standards Codification (ASC) 842 for leases.  At June 29, 2019, the Company was in compliance with all existing covenants.  Also, at June 29, 201927, 2020 the Company had $800 thousand$1.03 million of borrowings under this LOC and its borrowing base at the time would have permitted an additional $450 thousand$1.97 million to have been borrowed.

The financial covenant requirement atincreased availability has allowed the Company to end its policy of Q2, 2019 are shown below, together withallowing prompt pay discounts to certain customers. This has and should continue to have a positive effect on the actual ratios achieved:Company’s earnings going forward.

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

As of June 29, 2019,27, 2020 the Company had $158$320 of construction in progress and no outstanding commitments to purchase production equipment.

As of June 29, 2019, all our manufacturing, engineering, sales and administrative operations were and continue to be located in leased facilities in Norton, Massachusetts and Attleboro, Massachusetts.

In February 2018, the Company signed a lease for the Norton facilities through February 2021. The leased facilities comprise approximately 38 thousand square feet. 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 continue at $152 thousand.

In February 2011, the Company entered into a lease for an additional 13.8 thousand square feet in Attleboro, MA. The Attleboro facility lease expires in February 2020 and the Company has two one-year options at the current annual rental payments of $83, with minor escalation for real estate tax increases.leases—one expiring in February 2021 and one with an 11 month duration with options to extend additional years. Since the latter is not reasonably certain that any options will be exercised, it has not been recorded on the balance sheet. 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).

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.

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.

The COVID-19 pandemic presents several risks for the Company.  The Company is part of the Defense Industrial Base and thus has remained open and operating throughout the pandemic.  The primary risks resulting from the pandemic are potential declines in customer demand and increased operating costs resulting from pandemic-related factors such as increased freight costs and increased employee absenteeism causing labor inefficiencies and increased use of overtime.

 The COVID-19 pandemic did affect financial results for the quarter ended June 27, 2020.  One of our major customers increased inventory above normal levels in Q1 to protect against the risk that their  suppliers, including CPS, would be unable to meet their demands due to the pandemic.  In addition, demand from their customers has declined.   This has resulted in this customer reducing Q2 purchases, and most likely will result in reduced Q3 and Q4 purchases.  The Company believes there will continue to be negative effects on financial results, at least modestly, in upcoming quarters, due to the risks described above.

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.

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 20182019 Form 10-K

ITEM 2             UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3             DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4             MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5             OTHER INFORMATION

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 April 8, 2019 the Company filed a report on form 8-K announcing the selection of Charles Griffith as its new CFO, to assume those responsibilities on May 6, 2019.

On May 2, 2019 the Company filed a report on Form 8-K of its earnings report for the fiscal first quarter ended March 30, 2019.

On May 7 2019 the Company filed a report on form 8-K announcing the retirement of Ralph Norwood as CFO and the appointment of Charles Griffith as the new CFO.

On May 14, 201928, 2020 the Company filed a report on Form 8-K which included final tabulation of votes from the Company’s Annual Meeting of Shareholders held on May 13, 2019.April 24, 2020.

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:    August 8, 20197, 2020
/s/        Grant C. Bennett
Grant C. Bennett
Chief Executive Officer

Date:    August 8, 20197, 2020

/s/        Charles K. Griffith Jr.

Charles K. Griffith Jr.

Chief Financial Officer