CPS TECHNOLOGIES CORP / DE / MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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 25, 2021and in CPS ‘other SEC reports, which are accessible on the SEC’s website at www.sec.gov and the Company’s website at 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. 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 25, 2021, 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 25, 2021.



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 lightweight armor, particularly for extreme environments and heavy threat levels.

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 2007we changed our name from Ceramics Process Systems Corporation this CPS Technologies Corporation.

Results of Operations for the Second Fiscal Quarter of 2022 (Q2 2022) Compared to the Second Fiscal Quarter of 2021 (Q2 2021); (all $ in 000s)

Total revenue was $ 7,071 in Q2 2022, a 21% increase compared with total revenue of $ 5,862 in Q2 2021. This increase was due primarily to increased shipments of armor panels and hermetic packages, but in particular baseplates which last year bore the biggest negative impact of the Covid-19 pandemic.

Gross margin in Q2 2022 totaled $ 1,829 or 26% of sales. In Q2 2021, gross margin was $ 1,352 or 23% of sales. This increase in margin was primarily due to the impact of higher sales on certain factory costs which are fixed relative to increased sales.

Selling, general and administrative expenses (SG&A) were $ 1,159 in Q2 2022, up 5% when compared with SG&A expenses of $ 1,099 in Q2 2021. This increase in SG&A expense was due to increased compensation expense as a result of the addition of our new Corporate Development Officer (CDO) and other salary increases.

In Q2, 2022, the Company incurred interest expense of $ 2 due to notes payable. This compares with interest expense of $ 14 in Q2 of 2021. The decrease in interest is due to the elimination of line of credit borrowings based on the Company’s current cash position.

The Company experienced operating income of $ 669 compared with an operating income of $ 253 in the same quarter last year. This increase in operating income is due primarily to the increase in revenue and gross margin, discussed above. The net income for Q2 2022 totaled $ 455 versus $ 239 in Q2 2021.

Results of Operations for the First Six Months of 2022 Compared to the First Six Months of 2021 (all $ in 000s)

Total revenue was $ 13,723 in the first half of 2022, a 28% increase compared with total revenue of $ 10,728 in the first six months of 2021. This increase was due primarily to the impact of the Covid-19 pandemic on Q1 2021 compared to the lessening impact of the pandemic on Q2 2022 and a full six months of armor sales in 2022 compared to about 2 months of sales in the first half of 2021.

Gross margin in the first six months of 2022 totaled $ 3,792 or 28% of sales. In the first six months of 2021 gross margin totaled $ 2,296 or 21% of sales. This increase was due to the increase in revenue and the increased coverage of our fixed costs.

Selling, general and administrative (SG&A) expenses were $ 2,576 during the first six months of 2022, up 28% compared with SG&A expenses of $ 2.007 in the first six months of 2021. The hiring of our new CDO, increased variable compensation accruals due to higher 2022 profitability and increased costs associated commissions on armor product shipments were the primary reasons for this increase.

--------------------------------------------------------------------------------

During the first half of 2022, the Company incurred interest expense of $ 4 due to notes payable. This compares with interest expense of $ 18 incurred during the first half of 2021. The decrease in interest is due to decreased borrowings as the result of our cash position.

In the first six months of 2022 the Company had operating income of $ 1,217
compared with $ 289 in the same period last year. The net income for the first six months of 2022 totaled $ 875 versus $ 270 in the first six months of 2021. This increase was due primarily to the impact on the Covid-19 pandemic on Q1 2021 compared to the lack of impact of the pandemic on Q1 2022 as well as increased sales of armor in 2022.

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

The Company’s cash and cash equivalents at July 2, 2022 totaled $ 5,076 . This compares to cash and cash equivalents at December 25, 2021of $ 5,050. The neutrality of cash was primarily due to our net profit and reduction in accounts receivable, offset by increased inventory to support higher sales and reductions in accounts payable and accrued expenses.

Accounts receivable at July 2, 2022totaled $ 4.537 compared with $ 4,870 at
December 25, 2021. Days Sales Outstanding (DSO) decreased from 69 days at the end of 2021 to 58 days at the end of Q2 2022. The decrease in DSO was due to higher sales to large customers with shorter payment terms in 2022 as compared to 2021. The accounts receivable balances at December 25, 2021and July 2, 2022were both net of an allowance for doubtful accounts of $ 10.

Inventories totaled $ 4,666 at July 2, 2022compared with inventory totaling
$ 3,912 at December 25, 2021. This increase was due to the buildup of inventory for our armor order. The inventory turnover in the most recent four quarters ending Q2 2022 was 4.6 times, slightly down from 4.7 times averaged during the four quarters of 2021 (based on a 5-point average).

The Company financed its increase in working capital in Q2 2021 from its profit and usage of cash on hand. The Company expects it will continue to be able to fund its operations for the remainder of 2022 from existing cash balances.

The Company continues to sell to a limited number of customers and the loss of any one of these customers could cause the Company to require additional external financing. Failure to generate sufficient revenues, raise additional capital or reduce certain discretionary spending could have a material adverse effect on the Company’s ability to achieve its business objectives.


Contractual Obligations


In September 2019the Company entered into revolving line of credit (LOC) with Massachusetts Business Development Corporation (BDC) in the amount of $ 2.5 million. This agreement was amended in May 2020 to increase the line to $ 3.0 million. The agreement includes a demand note allowing the Lender to call the loan at any time. The Company may terminate the agreement without a termination fee after 3 years. The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of LIBOR plus 550 basis points. The Company was in compliance with all debt covenants as of July 2, 2022had $ 0
borrowings under this LOC and its borrowing base at the time would have permitted $ 3.0 to have been borrowed.

In March 2020the 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 thousandconsisting of principal plus interest at a rate of 6.47%

--------------------------------------------------------------------------------

In July 2020 CPS placed into service a piece of manufacturing equipment which it financed with the machine’s vendor. The equipment cost of $ 40 thousand will be paid at the rate of $ 2 thousand per month over 2 years with an interest rate of 1.9%.

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)

© Edgar Online, source Glimpses

.

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button

Adblock Detected

Please consider supporting us by disabling your ad blocker