CPSH 10-K
Cps Technologies Corp/De/ (CPSH)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
or
Commission file number:
CPS TECHNOLOGIES CORP.
(Exact Name of Registrant as Specified in its Charter)
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒
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. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☒
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions 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 ☐
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):
The aggregate market value of the voting Common Stock held by non-affiliates of the Registrant was $
Number of shares of Common Stock outstanding as of February 12, 2024:
Portions of the Proxy Statement to be filed for the Company’s 2024 meeting of stockholders are incorporated by reference into Part III of this form 10-K.
Part I
Item 1. Business.
CPS Technologies Corp. (the ‘Company’ or ‘CPS’) provides advanced material solutions for the transportation, automotive, energy, computing/internet, telecommunications, aerospace and defense markets. CPS products are important elements in electrifying the green economy and in the protection of military personnel around the world.
Our primary material solution is metal matrix composites (MMCs). We design, manufacture and sell custom MMC components that improve the performance and reliability of systems in the end markets described above.
The Company is an important participant in the growing movement towards alternative energy. The Company’s products are used in high-speed trains, mass transit, hybrid and electric cars, wind-turbines for electricity generation, routers, switches and fiber optic components for internet infrastructure. The Company’s products are used in high reliability communications and power modules for avionics and satellite applications such as the current generation of GPS satellites. The Company also produces housings and heat spreaders for high-performance microprocessors, graphics processing chips, and application-specific integrated circuits. All of these applications involve electrical energy use or energy generation; the Company’s products allow higher performance and improved energy efficiency.
Using its proprietary MMC technology, the Company also produces light-weight armor. Due to its ability to withstand extreme environments and high threat levels, CPS armor has been selected as the solution for the U.S. Navy’s crew served weapons station program. Its light weight also makes it an ideal solution for aircraft and other vehicles requiring a high strength to weight ratio.
MMCs are a class of materials consisting of a combination of metals and ceramics. Compared to conventional materials, MMCs provide superior thermal conductivity, improved thermal expansion matching, greater stiffness and lighter weight. These factors, in particular the lighter weight, are among the reasons CPS parts are on the last two Mars Rovers as well as many satellites.
CPS is a fully qualified manufacturer for many of the world’s largest electronics OEMs.
In 2022 CPS resumed its participation in the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, sponsored by the US Small Business Administration. These programs provide funding for innovative research and development to domestic small businesses, who maintain certain intellectual property rights. The technologies developed by the Company during these programs will further enhance CPS’ intellectual property portfolio.
CPS management believes our business model of providing advanced material solutions to a portfolio of high growth end markets 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.
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, the Company changed its name from Ceramics Process Systems Corporation to CPS Technologies Corp.
CPS’ website is http://www.cpstechnologysolutions.com.
Overview of Markets and Products
Electronics Markets Overview
The applications for electronics can typically be characterized as either power processing or signal processing. Power processing consists of converting the electrical power provided by the power source into the appropriate voltage and amperage needed by the device using the power. Signal processing consists of the myriad ways digital and analog signals are used in computing, communications, and related applications.
In both power processing and signal processing, end-user demand continues to motivate the electronics industry to produce products which:
- operate with lower losses and/or at higher speeds;
- are smaller in size; and
- operate with higher reliability.
While these three requirements result in products of ever-increasing performance, they also create a fundamental challenge for the designer to manage the heat generated by the system operating at higher speeds and/or higher power. Smaller assemblies further concentrate the heat and increase the difficulty of removing it.
This challenge is found at each level in an electronic assembly: at the integrated circuit level, speeds are increasing and line widths are decreasing; at the circuit board level, higher density devices are placed closer together; and at the system level higher density circuit boards are being assembled closer together.
The designer must resolve the thermal management issues or the system will fail. For every 10 degree Celsius rise in temperature above a threshold level, the reliability of an integrated circuit is decreased by approximately half. In addition, heat usually causes changes in parameters which degrade the performance of both active and passive electronic components.
To resolve thermal management issues, the designer is primarily concerned with two properties of the materials which comprise the system: 1) thermal conductivity, which is the rate at which heat moves through materials, and 2) thermal expansion rate (Coefficient of Thermal Expansion or CTE), which is the rate at which materials expand or contract as temperature changes. The designer must ensure that the temperature of an electronic assembly stays within a range that ensures that the expansion rates of the materials in the assembly do not result in a failure due to breaking, delaminating, or related causes.
CPS combines at the microstructural level a ceramic with a metal to produce a metal matrix composite which has the thermal conductivity needed to remove heat, and a thermal expansion rate which is sufficiently close to other components in the assembly to ensure the assembly is reliable. The ceramic is silicon carbide (SiC), the metal is aluminum (Al), and the composite is aluminum silicon carbide (AlSiC), a metal-matrix composite. CPS can adjust the thermal expansion rate of AlSiC components to match the specific application by modifying the amount of SiC compared to the amount of Al in the component. The Company also has the capability of encapsulating pyrolytic graphite inserts to enhance the thermal conductivity of the AlSiC composite.
CPS produces products made of AlSiC in the shapes and configurations required for each application, for example, in the form of lids, substrates, housings, etc. Every product is made to a customer’s specifications. The CPS process technology allows most products to be made to net shape, requiring little or no final machining.
The Company primarily manufactures MMC components comprised of AlSiC. Nevertheless, its proprietary Quickset- Quickcast process technology can be used to produce other MMCs to meet market requirements. For example, CPS is able to combine aluminum with other ceramic fillers such as graphite and fibers.
An important development in power processing is the emergence of wide-band gap semiconductors, particularly SiC semiconductors. SiC chips are more efficient than Si chips and are being used more frequently in power applications. Modules using SiC chips run at higher temperatures, increasing the need for improved thermal management, a need which the Company’s products meet.
Armor Market Overview
Armor has traditionally been comprised of steel panels. As threat levels have increased, the amount of steel required to provide sufficient ballistic protection has become unacceptably detrimental to a vehicle’s performance. The U.S. military has increasingly used ceramic armor in weight sensitive applications. However, ceramic armor has several limitations, including limited multi-hit capability. By embedding ceramic armor tiles in a metal matrix, these problems are overcome; the result is armor that is light-weight, has excellent ballistic protection, and environmental durability.
The Company’s HybridTech Armor® panels are particularly well suited for extreme environments – the panels do not degrade in salt spray or extreme heat. The Company is producing armor panel strikefaces for the U.S. Navy and believes it will increasingly be used in these and other surface vessel applications.
Specific Markets and Products
Motor Controller Applications (Insulated Gate Bipolar Transistor ("IGBT") Applications)
The electrification of the economy – particularly the use of electric motors and power modules to control electric motors of all sizes – is growing. This growth is the result of several factors including emerging high-power applications which demand power controllers such as trains, subways and certain industrial equipment, and cost reductions in power modules which increasingly make variable speed drives cost effective. Power semiconductors are a very significant portion of the cost of variable speed drives, and the cost of the module housing and thermal management system are also significant; cost reductions of all these components are driving increased use of variable speed drives.
We provide baseplates and heat spreaders on which power semiconductors are mounted to produce modules for motor control. The power semiconductors are typically IGBTs and these applications are often referred to as IGBT applications. Our MMC (AlSiC) baseplates have sufficient thermal conductivity to enable removal of heat through the baseplate and have a thermal expansion rate sufficiently similar to the other components in the assembly to ensure reliability over time as the assembly thermally cycles. We believe this market will continue to grow as the use of power modules penetrates additional motor applications, and as electric motors themselves penetrate new applications such as hybrid and electric vehicles.
Today our primary products for IGBT applications are used in electric trains, subway cars, wind turbines and hybrid and electric vehicles.
Major automobile companies around the world are introducing hybrid electric vehicles (HEVs) and electric vehicles (EVs) at an increasing rate. There are many varieties of HEVs and EVs, but all HEVs and EVs contain an electric motor and one or more motor controller modules. The Company provides baseplates on which motor controller modules are assembled; these baseplates are lighter weight and provide greater reliability than baseplates made from more conventional materials, typically copper.
Copper is less expensive than the Company’s MMC solution, but its rate of thermal expansion is significantly different than that of the silicon semiconductors mounted to the baseplates. In low voltage applications, this is not a problem as the heat being generated is not enough to degrade the reliability of the power module. As voltage levels and the heat related to them go up, MMC baseplates become the preferred solution. Currently, HEV/EV manufacturers who want to save on short term costs are using power modules with copper baseplates, while those who want longer term reliability, such as those in the luxury vehicle market, will use power modules with an MMC (AlSiC) baseplate.
Of particular interest is the move to using Silicon Carbide (SiC) semiconductors instead of silicon semiconductors. SiC is more efficient than silicon allowing, among other things, for EVs and HEVs to run for longer distances on a single battery charge. This is important to CPS, as SiC semiconductors run hotter than silicon semiconductors. As such, the voltage level at which AlSiC becomes preferred over copper would be lower, creating expanded opportunities for AlSiC baseplates.
The Company is working with multiple tier one and tier two suppliers to the automobile industry on several new designs, including SiC modules, for future introduction. The Company believes the HEV and EV markets may be the source of significant and long-term growth for the Company.
Hermetic Packages
Hermetic packaging products are primarily used for space applications such as satellites, flight applications such as avionics and undersea applications such as torpedoes, submarines and communications buoys. Hermetic packages allow the assembly of multiple semiconductor devices known as Hybrid Microelectronic Assemblies (HMA). Today’s HMA technology can, in a CPS 2”x2” package, provide the computing technology of today's typical server or yesterday's small mainframe.
CPS is the only producer of hermetic packages with AlSiC bases, combining our expertise in hermetic package production with our expertise in MMC production. The CPS AlSiC hermetic package provides tremendous benefits in terms of reduced weight and CTE matching which are extremely important for space-based programs. CPS hermetic packages are used in every current generation GPS satellite, the Mars Perseverance rover as well as many other aerospace applications.
Customers
We sell primarily to major microelectronics systems houses in the United States, Europe and Asia. Our customers typically purchase prototype and evaluation quantities of our products over a one to three year period before purchasing production volumes.
In 2023, our three largest customers accounted for 33%, 18%, and 9% of revenues, respectively. In 2023, approximately 52% of our revenues were derived from commercial applications and 48% from defense-related applications.
Availability of Raw Materials
We use a variety of raw materials from numerous domestic and foreign suppliers. These materials are primarily aluminum ingots, ceramic powders, chemicals and hermetic assembly components. The raw materials we use are available from domestic and foreign sources and none is believed to be scarce or restricted for national security reasons. We use no conflict metals.
Patents and Trade Secrets
As of December 30, 2023, the Company had 9 United States patents. In addition, the Company had several international patents covering the same subject matter as the U.S. patents.
We intend to continue to apply for domestic and foreign patent protection in appropriate cases. In other cases, we believe we are better served by reliance on trade secret protection. In all cases, we seek protection for our technological developments to preserve our competitive position.
Backlog and Contracts
Virtually 100% of the Company's product sales are custom in that they are based on customers’ drawings and the large majority of these sales are "designed in" and sold over multiple years. Major customers typically give the Company a non-binding forecast of demand for a one-year period and then negotiate a pricing agreement with the Company valid for that one-year period. These and other customers typically issue purchase orders to be shipped on a particular date, or to be drawn against and shipped under releases. The Company has a backlog of $20 million as of December 30, 2023. This backlog consists of orders received from customers which are, for the most part, scheduled to ship in 2024. Under certain circumstances, customers may be able to cancel existing orders or extend the period over which orders may be shipped. Some of these changes may be significant, which would reduce this backlog.
Competition
We have developed and expect to continue to develop products for a number of different end markets, and we will encounter competition from different producers of MMCs, hermetic packages, armor, and other competing materials.
We believe that the principal competitive factors in our end markets today include technical competence, product performance, quality, reliability, price, delivery performance, corporate reputation, and strength of sales and marketing resources. We believe our proprietary processes, reputation, and the price at which we can offer products for sale will enable us to compete successfully in the many electronics, aerospace and defense end markets.
Our primary direct competitor in MMCs is Denka, a large chemical company based in Japan. We also see manufacturers in China seeking to penetrate our markets. We believe they offer their products at lower prices, but they have generally not yet been to be able to provide the delivery, performance, quality and reliability required by the market.
The market for hermetic packages is much more fragmented. There are a number of different hermetic package types, allowing different manufacturers to specialize in a particular area of the hermetic package market. Some of these companies are competitors of CPS, while others focus on product types not sold by CPS. CPS continues to expand its technical competence to increase its offerings in areas in which we previously did not participate. Based on these increased offerings, combined with our emphasis on quality and customer service, we expect to see continued growth in our hermetic package product line. Our main domestic competitors in this arena include Egide, Ametek, and Qnnect (formerly Hermetic Solutions Group).
The company currently has orders to produce its HybridTech Armor® panels. To our knowledge, we do not have any direct competitors who produce encapsulated armor. Our competition in this area consists of alternatives to our HybridTech Armor® which involve tradeoffs regarding cost, weight, anti-ballistic properties, etc. As CPS expands its armor capabilities, we could begin to see more direct competition from more established armor producers.
Government Regulation
We produce non-nuclear, non-medical hazardous waste in our development and manufacturing operations. The disposal of such waste is governed by state and federal regulations. Various customers, vendors, and collaborative development agreement partners of CPS may reside abroad, thereby possibly requiring export and import by CPS of raw materials, intermediate products, and finished products, as well as potential technology transfer abroad under collaborative development agreements. These types of activities are regulated by bureaus within the Departments of Commerce, State and Treasury.
Employees
As of December 30, 2023, we had 100 permanent full-time employees. 90 were engaged in manufacturing and engineering and 10 in sales and administration, including finance, human resources and general management. We also have approximately 20 manufacturing people working with us through temporary employment agencies. During 2023, the Company continued its efforts to increase factory efficiency both in terms of employee training as well as increased automation.
None of our employees is covered by a collective bargaining agreement. We consider our relations with our employees to be excellent.
Item 1A. Risk Factors.
The risks set forth below may not be the only risk factors relating to the Company. Any of these factors, many of which are beyond our control, could materially adversely affect our business, financial condition, operating results, cash flow and stock price.
Business or economic disruptions or global health concerns could seriously harm our business.
Broad-based business, economic disruptions or global health concerns could adversely affect our business and the sale of our products. For example, in December 2019 an outbreak of a novel strain of the coronavirus disease (COVID-19) originated in Wuhan, China, and has since spread to a number of other countries, including the United States. Initially, this outbreak resulted in extended shutdowns of certain businesses in the Wuhan region and had ripple effects to businesses around the world. While the impact of this pandemic has largely subsided, a resurgence of this virus or another could have an impact on our business. Although the Company has remained open throughout the COVID-19 pandemic, complete or partial government shutdowns of many businesses, schools, bars and restaurants have occurred. The Russian invasion of Ukraine and the conflict in Israel and Gaza could also adversely affect our business in spite of the immaterial amount of direct business we have done in this region in the past. We cannot presently predict the scope and severity of any future business shutdowns or disruptions to us, but if we or any of the third parties with whom we engage, including our customers, suppliers and other third parties, were to experience extended shutdowns or other business disruptions, our ability to conduct our business could be materially and negatively impacted, and could have a material adverse effect on our business and our results of operation and financial condition.
A pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide may adversely affect our business.
Our operations expose us to risks associated with pandemics, epidemics or other public health emergencies, such as the outbreak of coronavirus disease (COVID-19) that subsequently spread around the world. Outbreaks such as these have resulted, and can continue to result, in governments around the world implementing increasingly stringent measures to help control the spread, including quarantines, "shelter in place" and "stay at home" orders, travel restrictions, business curtailments, school closures, and other measures. Government imposed requirements regarding vaccines, testing etc., could negatively impact the Company’s ability to hire or retain certain employees who are important to our business operations. These actions with respect to the COVID-19 outbreak have negatively impacted, and could continue to have negative impacts on, our operations, supply chain, transportation networks, customers and employees. Any continuing economic downturn as a result of this pandemic could adversely affect, demand for our products, and negatively impact our business or results of operations through the temporary closure of our operating locations or those of our customers or suppliers.
The extent to which a COVID-19 resurgence may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the severity of an outbreak and the effectiveness of actions globally to contain or mitigate its effects, including the deployment and efficacy of vaccines.
We have a highly concentrated customer base so that changes in ordering patterns, delays or order cancellations could have a material adverse effect on our business and results of operations.
Three customers accounted for 60% of revenue in 2023 and 53% of revenue in 2022. We believe that our relationships with these customers are positive and may provide us with ongoing continuous sustainability for years to come, however a large customer, if lost, would be difficult to be replace, and our inability to do so may have a material adverse effect on our business and financial condition. We expect that orders from a relatively limited number of customers will continue to account for a substantial portion of our business. The mix and type of customers, and sales to any single customer, may vary significantly from quarter to quarter and from year to year. If any of our significant customers do not place orders, or they substantially reduce, delay or cancel orders, we may not be able to replace the business in a timely manner or at all, which can and has had a material adverse effect on our results of operations and financial condition. Major customers may also seek, and on occasion receive, pricing, payment or other commercial terms that are less favorable to us and can hurt our competitive position.
Our lengthy and variable sales cycle makes it difficult to predict our financial results.
The sales cycle for our products is often lengthy, ranging from several months to several years. In many cases potential customers must evaluate the properties of our product against their current solution, which may not be as robust as the CPS solution, but is often less expensive. In many cases potential customers must redesign other components of the end product they are making to realize the full benefits of using our products. The lengthy sales cycle makes forecasting the volume and timing of sales difficult and raises additional risks that customers may cancel or delay introduction of their end-products into the marketplace, thus affecting our demand. The length of the sales cycle depends on the size and complexity of the project, and the depth of the evaluation of our products conducted by the customers.
Because a significant portion of our operating expenses is fixed, we have and may continue to incur substantial expense before we earn associated revenue. If customer cancellations occur, they could result in the loss of anticipated sales without allowing us sufficient time to reduce our operating expenses.
Our success is highly dependent on managerial contributions of key individuals and we may be unable to retain these individuals or recruit others.
We depend on our senior executives and certain key managers as well as engineering, research and development, sales, marketing and manufacturing personnel, who are critical to our business. While we have employment agreements with certain executives, none of these agreements would prevent any such person from leaving the Company. Furthermore, larger competitors may be able to offer more generous compensation packages to our executives and key employees, and therefore we risk losing key personnel to those competitors. If we were to lose the services of any of our key personnel, or if we fail to attract and train qualified personnel, our engineering, product development, manufacturing and sales efforts could be slowed. In particular, we have, from time to time, experienced difficulty in hiring and retaining skilled engineers with appropriate qualifications to support our growth strategy. Our success depends on our ability to identify, hire, train and retain qualified engineering personnel. Specifically, we need to continue to attract and retain product development, materials and manufacturing engineers to work with our direct sales force to technically qualify and perform on new sales opportunities and orders, and to demonstrate our products.
We may also incur increased operating expenses and be required to divert the attention of our senior executives to search for replacements. The integration of any new personnel could disrupt our ongoing operations.
Acquisitions can result in an increase in our operating costs, divert management’s attention away from other operational matters and expose us to other associated risks.
From time to time, we evaluate potential acquisitions of businesses and technologies, and we consider targeted acquisitions that expand our core competencies to be an important part of our future growth strategy. We expect that any acquisitions of other businesses will have synergistic products, services and technologies.
Acquisitions involve numerous risks, which include but are not limited to:
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difficulties and increased costs in connection with the integration of the personnel, operations, technologies, services and products of the acquired companies into our existing facilities and operations; |
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diversion of management’s attention from other operational matters; |
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failure to commercialize the acquired technology; |
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the potential loss of key employees of the acquired companies; |
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lack of synergy, or inability to realize expected synergies, resulting from the acquisitions; |
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the risk that the issuance of our common stock, if any, in an acquisition or merger could be dilutive to our shareholders; |
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the inability to obtain and protect intellectual property rights in key technologies; and |
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the acquired assets becoming impaired as a result of technological advancements or worse-than-expected performance of the acquired assets. |
The conditions of the markets in which we operate are volatile. The demand for our products and the profitability of our products can change significantly from period to period as a result of numerous factors.
The industries in which we operate are characterized by ongoing changes, including:
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the availability of funds for research and development; |
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global and regional economic conditions; |
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governmental budgetary and political constraints; and |
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changes in technology. |
For these and other reasons, our results of operations for past periods may not necessarily be indicative of future operating results.
Volatile and cyclical demand for our products may make it difficult for us to accurately budget our expense levels, which are based in part on our projections of future revenues.
When cyclical fluctuations result in lower-than-expected revenue levels, operating results may be materially adversely affected and cost reduction measures may be necessary for us to remain competitive and financially sound. During a down cycle, we must be able to make timely adjustments to our cost and expense structure to correspond to the prevailing market conditions. In addition, during periods of rapid growth, we must be able to increase manufacturing capacity and the number of our personnel to meet customer demand, which may require additional liquidity. We can provide no assurance that these objectives can be met in a timely manner in response to changes within the industry cycles in which we operate. If we fail to respond to these cyclical changes, our business could be seriously harmed.
We do not have long-term volume production contracts with our customers, and we do not control the timing or volume of orders placed by our customers. Whether and to what extent our customers place orders for any specific products, and the mix and quantities of products included in those orders are factors beyond our control. Insufficient orders would result in under-utilization of our manufacturing facilities and infrastructure, and will negatively affect our financial position and results of operations.
We face significant competition, are relatively small in size and have fewer resources in comparison with some of our competitors.
We face significant competition throughout the world, which may increase as certain markets in which we operate continue to evolve. Our future performance depends, in part, upon our ability to continue to compete successfully worldwide. Some of our competitors are diversified companies that have substantially greater financial resources and more extensive research, engineering, manufacturing, marketing and customer service and support capabilities than we can provide. Our failure to compete successfully with these other companies would seriously harm our business. There is a risk that larger, better financed competitors will develop and market more advanced products than those we currently offer, or that competitors with greater financial resources may decrease prices, thereby putting us under financial pressure.
We may experience increasing price pressure.
Our historical business strategy for many of our products has focused on product performance and customer service rather than on price. As a result of budgetary constraints, many of our customers are extremely price sensitive when purchasing our products. Recent inflationary trends could further exacerbate this issue. If we are unable to obtain prices that allow us to continue to compete on the basis of product performance and customer service, our profit margins will be reduced.
Manufacturing interruptions or delays could affect our ability to meet customer demand and lead to higher costs.
We may experience significant interruptions of our manufacturing operations, delays in our ability to deliver products or services, increased costs or customer order cancellations as a result of:
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volatility in the availability and cost of materials; |
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difficulties or delays in obtaining required import or export approvals; |
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information technology or infrastructure failures; |
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natural disasters or other events beyond our control (such as earthquakes, floods or storms, regional economic downturns, pandemics, social unrest, political instability, terrorism, or acts of war); and |
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the effects of a global pandemic on our employees, suppliers and other third-parties upon which we rely. |
Continued growth could result in the need to move or expand our facilities. The costs of such a move or expansion could be significant to our profitability.
Our ability to meet our customer’s needs including the on-time shipment of products, is paramount to our success. Our current facility may not be able to adequately handle future growth and our ability to meet the needs of our customers. This could result in our having to relocate to a new facility which could have a material impact on our profitability.
We have made investments in our proprietary technologies. If third parties violate our proprietary rights, or accuse us of infringing upon their proprietary rights, such events could result in a loss of value of some of our intellectual property or costly litigation.
Our success is dependent in part on our technologies and our other proprietary rights. We believe that while patents can be useful and may be utilized by us in the future, they are not always necessary or feasible to protect our intellectual property. The process of seeking patent protection is lengthy and expensive, and we cannot be certain that applications will actually result in issued patents or that issued patents will be of sufficient scope or strength to provide meaningful protection or commercial advantage to us. In addition to patent protection, we have also historically protected our proprietary information and intellectual property such as design specifications, blueprints, technical processes and employee know-how, by limiting access to this confidential information and trade secrets and through the use of non-disclosure agreements. Other companies and individuals, including our competitors, may develop technologies that are similar or superior to our technology, or design around the intellectual property that we own or license. Our failure to adequately protect our intellectual property, could result in the reduction or extinguishment of our rights to such intellectual property. We also assert rights to certain trademarks relating to certain of our products and product lines.
While patent, copyright and trademark protection for our intellectual property may be important, we believe our future success in highly dynamic markets is most dependent upon the technical competence and creative skills of our personnel. We attempt to protect our trade secrets and other proprietary information through confidentiality agreements with our customers, suppliers, employees and consultants, and through other internal security measures. However, these employees, consultants and third parties may breach these agreements, and we may not have adequate remedies for wrongdoing. In addition, the laws of certain territories in which we sell our products may not protect our intellectual property rights to the same extent as do the laws of the United States.
We may receive communications from other parties asserting the existence of patent rights or other intellectual property rights that they believe cover certain of our products, processes, technologies or information. If such cases arise, we will evaluate our position and consider the available alternatives, which may include seeking licenses to use the technology in question on commercially reasonable terms, or defending our position. Nevertheless, we cannot ensure that we will be able to obtain licenses, or, if we are able to obtain licenses, that related terms will be acceptable, or that litigation or other administrative proceedings will not occur. Defending our intellectual property rights through litigation could be very costly. If we are not able to negotiate the necessary licenses on commercially reasonable terms or successfully defend our position, our financial position and results of operations could be materially and adversely affected.
The price of our common shares is volatile and could decline significantly.
The stock market has at times over the last 15 years experienced periods of high and extreme volatility. If these market fluctuations continue, the trading price of our common shares could decline significantly independent of the overall market, and stockholders could lose all or a substantial part of their investment. The market price of our common shares could fluctuate significantly in response to several factors, including, among others:
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difficult macroeconomic conditions, including inflation, unfavorable geopolitical events, and general stock market uncertainties, such as those occasioned by a global liquidity crisis and a failure of large financial institutions; |
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receipt of large orders or cancellations of orders for our products; |
|
| ● |
issues associated with the performance and reliability of our products; |
|
| ● |
actual or anticipated variations in our results of operations; |
|
| ● |
announcements of financial developments or technological innovations; |
|
| ● |
changes in recommendations and/or financial estimates by investment research analysis; |
|
| ● |
strategic transactions, such as acquisitions, divestitures, or spin-offs; and |
|
| ● |
the occurrence of major catastrophic events, including the effects of a possible resurgence of the novel coronavirus (COVID-19). |
Significant price and value fluctuations have occurred with respect to our publicly traded securities. The price of our common shares is likely to be volatile in the future. In the past, securities class action litigation often has been brought against a company following periods of volatility in the market price of its securities. If similar litigation were pursued against us, it could result in substantial costs and a diversion of management’s attention and resources, which could materially and adversely affect our financial condition, results of operations, and liquidity.
If we are subject to cyber-attacks, we could incur substantial costs and, if such attacks are successful, we could incur significant liabilities, reputational harm, and disruption to our operations.
We manage, store and transmit proprietary information and sensitive data relating to our operations. We may be subject to breaches of the information technology systems we use for these purposes. Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate and/or compromise our confidential information (and or third-party confidential information), create system disruptions, or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our systems or our products, or that otherwise exploit any security vulnerabilities.
The costs to address the foregoing security problems and security vulnerabilities before or after a cyber-incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays, or cessation of service, and loss of existing or potential customers, impeding our sales, manufacturing, distribution, or other critical functions. In addition, breaches of our security measures and the unapproved dissemination of proprietary information or sensitive data about us, our customer, or other third parties, could expose us, our customers, or other third parties to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our reputation, or otherwise harm our business.
Item 1B. Unresolved Staff Comments.
Smaller reporting companies are not required to provide the information required by this item.
Item 1C. Cybersecurity
Cybersecurity is an area of increasing concern to management of and investors in CPS. While CPS has been ITAR compliant for many years, that in itself does not completely mitigate the risks of a cybersecurity incident. The Company is currently also working towards full compliance with NIST 800-171. In working towards this goal, CPS has retained an outside consulting firm to work through this process and help us implement the policies, processes and procedures to further mitigate cybersecurity risks. CPS generally keeps all employee personally identifiable information with its payroll service provider. Each year the provider furnishes us with their SOC report which includes their cybersecurity policies and procedures.
Management is not aware of any previous cybersecurity incidents of any significance. Nevertheless, there is always a risk that a phishing attempt, ransomware or other attack by a bad actor could be successful. Although CPS is generally down the supply chain from prime contractors, the fact that we do work in the aerospace and defense industries does make us a potential target. Please refer to the risk factors titled “Manufacturing interruptions or delays could affect our ability to meet customer demand and lead to higher costs” and “If we are subject to cyber-attacks, we could incur substantial costs and, if such attacks are successful, we could incur significant liabilities, reputational harm, and disruption to our operations” in “Risk Factors” in Part I, Item 1A of this Form 10-K for more information on the risks posed to us by cybersecurity threats. Based on information currently available, management does not believe that there is a reasonably likely risk of these issues, nevertheless the possibility of one occurring cannot be completely ruled out.
Item 2. Properties
As of December 30, 2023, all of our manufacturing, engineering, sales and administrative operations were located in leased facilities in Norton, Massachusetts.
In February 2021, the Company extended the lease for the Norton facility through February 2026. 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 for 2023 were $162 thousand.
While adequate for current business volumes, continued expected growth of our business may result in the need to move to a larger location, open a second location or expand our footprint at our current location.
Item 3. Legal Proceedings
We are not a party to any litigation which could have a material adverse effect on us or on our business. The Company has received a letter from the attorney of a former European outside sales representative stating that under European law the representative is entitled to compensation as a result of his termination. The Company completely disagrees with the claims. Should this result in litigation the Company will defend itself to the fullest extent of the law and estimates any losses incurred to be immaterial.
Item 4. Mine Safety Disclosures
Not applicable
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities.
CPS Technologies Corp. shares trade on The Nasdaq Capital Market, under the symbol “CPSH”. On December 30, 2023, we had approximately 80 shareholders of record. We have never paid cash dividends on our Common Stock. We currently plan to reinvest our earnings, if any, for use in the business and do not intend to pay cash dividends in the foreseeable future. Future dividend policy will depend, among other factors, upon our earnings and financial condition.
Item 6. Selected Financial Data
Smaller reporting companies are not required to provide the information required by this item.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This document contains forward-looking statements, based on numerous assumptions, subject to risks and uncertainties. Although we believe that the forward-looking statements are reasonable, we do not and cannot give any assurance that our beliefs and expectations will prove to be correct. Many factors could significantly affect our operations and cause our actual results to be substantially different from our expectations. Those factors include, but are not limited to: (i) general economic and business conditions; (ii) customer acceptance of our products; (iii) materials and manufacturing costs; (iv) the financial condition of customers, competitors and suppliers; (v) technological developments; (vi) increased competition; (vii) changes in capital market conditions; (viii) governmental and business conditions in countries where our products are manufactured and sold; (ix) changes in trade regulations; (x) the effect of acquisition activity; (xi) changes in our plans, strategies, objectives, expectations or intentions; and (xii) other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission. Actual results might differ materially from results suggested by any forward-looking statements in this report. We do not have an obligation to publicly update any forward-looking statements, whether as a result of the receipt of new information, the occurrence of future events or otherwise.
Overview
The Company’s products contribute to the electrification of the green economy. The 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 hermetic packages used in radar, satellite and avionics applications. We provide lids and heat spreaders used with high performance integrated circuits in internet switches and routers. We provide armor for naval and other military applications.
We provide baseplates and housings used in modules built with Wide Band Gap Semiconductors like SiC and GaN. CPS also assembles housings and packages for hybrid circuits. These housings and packages may include MMC components; they may include components made of more traditional materials such as aluminum, copper-tungsten, and others.
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 engineering, tooling design and fabrication, process engineering, etc. Accordingly, particularly given our current size, changes in sales volume generally result in even greater changes in financial performance on a percentage basis as fixed costs are spread over a larger or smaller base. Sales volume is therefore a key financial metric used by management.
The Company believes the underlying demand for metal matrix composites is growing as the electronics and other industries seek higher performance, higher reliability, and reduced costs. CPS believes that the Company is well positioned to offer our solutions to current and new customers as these demands grow. In 2023 the Company’s top three customers accounted for 60% of revenue and the remaining 40% of revenue was derived from 57 other customers. In 2022 the top three customers accounted for 53% of revenue and the remaining 47% of revenue was derived from approximately 49 customers.
Critical Accounting Estimates
Financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. As such, the Company is required to make certain estimates, judgments and assumptions that it believes are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. CPS’s significant accounting policies are presented within Note 2 to the financial statements; the significant accounting policies which management believes are most critical to aid in fully understanding and evaluating its reported financial results include the following:
| a) |
Allowance for credit losses |
The Company performs ongoing monitoring of the status of its receivables based on the payment history and the creditworthiness of our customers, as determined by a review of their current credit information. Management continually monitors collections and payments from customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been low and within expectations, there is no guarantee that we will continue to experience the same credit loss rates as in the past. Although the Company’s major customers are large and have a favorable payment history, a significant change in the liquidity or financial position of one of them could have a material adverse impact on the collectability of accounts receivable and future operating results. To further mitigate the potential for credit losses the Company has acquired a credit insurance policy covering most of our sales to non-US accounts.
| b) |
Inventory valuation |
The Company has a build-to-order business model and manufactures product to ship against specific purchase orders; occasionally CPS manufactures product in advance of anticipated purchase orders to level load production or prepare for a ramp-up in demand. In addition, virtually 100% of the Company’s products are custom, meaning they are produced to a customer’s design and generally cannot be used for any other purpose. Purchase orders generally have cancellation provisions which vary from customer to customer, but which can result occasionally in CPS producing product which the customer is not obligated to purchase. However, once a product has gone into production, most customer orders are recurring and order cancellations are rare. The Company’s general obsolescence policy is to reserve against inventory when there has been no activity on a particular part for a twelve month period and there are no pending or expected customer orders.
In some cases, customers place blanket purchase orders and request the Company to maintain inventory sufficient to respond quickly upon receiving a shipment request. The Company manufactures to specifications and the products typically have a life which extends over several years and does not deteriorate over time. Therefore, the risk of obsolescence due to the passage of time, per se, is minimal. However, to more efficiently schedule production or to meet agreements with customers to have inventory in the pipeline, the Company occasionally manufactures products in advance of purchase orders. In these instances, the Company bears the risk that it will be left with product manufactured to specification for which there are no customer purchase orders. The Company scrutinizes its inventory and, in the absence of pending orders or strong evidence of future sales, establishes an obsolescence reserve when there has been no activity or pending or expected customer orders on a particular part for a twelve month period.
In determining inventory cost, the Company uses the first-in, first-out method and states inventory at the lower of cost or net realizable value. Virtually, all of the Company’s inventory is customer specific; as a result, if a customer’s order is cancelled, it is unlikely that CPS would be able to sell that inventory to another customer. Likewise, if the Company chooses to manufacture product in advance of anticipated purchase orders and those orders do not materialize, it is unlikely that it would be able to sell that inventory to another customer. The value of CPS’s work in process and finished goods is based on the assumption that specific customers will take delivery of specific items of inventory. Raw materials are less unique to specific products. AlSiC raw materials are used for all AlSiC parts and therefore they are continuously in production. Hermetic package and armor raw materials present a mix of raw material items, some of which are used in multiple parts and others in only specific parts. These raw material items are evaluated using the same criteria as the finished goods into which they go and are reserved against when there has been no activity for that finished good in the prior 12 months or expectation of future activity. The Company has not experienced significant losses to date as a result of customer cancellations and has not established a reserve for such cancellations.
The Company typically buys ‘lots’ of components for its hermetic packaging products. Often all the components in a lot are not necessary to complete the order. Annually the company reviews this unused material and establishes an obsolescence reserve for the amount it does not expect to use over the next three years.
| c) |
Valuation of deferred tax assets |
Deferred tax assets and liabilities are based on the net tax effects of tax credits, operating loss carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company considers many factors in assessing whether or not a valuation allowance for its deferred tax asset is warranted. In light of recent profitability and expected future profitability. It was determined that a reserve is not needed, as it is more likely than not that the Company would be able to fully utilize its deferred tax asset.
At December 30, 2023, the Company’s deferred tax asset and other temporary differences will require taxable income of approximately $7.6 million and reversals of existing temporary differences to fully utilize the deferred tax asset, assuming a statutory corporate tax rate of 21%.
Results of Operations (all $ in millions unless noted)
Results of Operations for the year 2023 (“2023”) compared with the year 2022 (“2022”):
Total revenue was $27.6 million in 2023, a 4% increase compared with total revenue of $26.6 million in 2022. This increase was due primarily to an increase in the sales of armor compared to 2022, partially offset by a quality problem with the product for one of our major customers which resulted in significant product returns as well as a reserve for potential future returns. Based on information received from the customer subsequent to December 30, 2023, this issue appears to be under control and is not expected to have a material impact on 2024 results.
Gross profit in 2023 totaled $6.8 million or 25% of sales. This compares with $7.3 million, or 27% of sales, generated during 2022. The decrease in margin was primarily due to the impact of the quality issue described above.
Selling, general and administrative (SG&A) expenses were $5.1 million during 2023, virtually the same as SG&A expenses of $5.1 million incurred during 2022. Several offsetting factors lead to this result. The Company incurred lower variable compensation costs in 2023 due to its reduction in operating profit compared to 2022. Conversely, travel costs were significantly higher in 2023 as customer and trade show exhibiting continued to recover from the limitations due to the Covid-19 pandemic.
The Company generated operating income of $1.7 million in 2023, compared with an operating income of $2.2 in 2022. This decrease was due almost entirely to the quality problem, discussed above. The Company recorded net income of $1.4M in 2023 compared to $2.1M in 2022. In 2023 the Company had a provision for income taxes of $0.6 million compared to $0.8 million in 2022. In addition, the Company filed for the Employee Retention Tax Credit of $0.7 million in 2022.
Significant Fourth Quarter Activity in 2023:
Revenues totaled $6.7 million in the fourth quarter of 2023 versus $6.1 million in the fourth quarter of 2022, an increase of 10%. This increase was consistent with our expectations, but was also mitigated by the quality issues described above.
Gross margin decreased in the fourth quarter of 2023 compared with the fourth quarter of 2022 to $1.1 million from $1.6 million. This decrease was due to the quality issue described above.
SG&A expenses totaled $1.0 million during the quarter, a decrease of 23% compared to $1.3 million in the same quarter of 2022. This decrease was primarily due to the decreased variable compensation costs discussed above.
The Company recorded operating income of $0.1 million in the fourth quarter of 2023 compared to operating income of $0.3 million in the fourth quarter of 2022.
The Company recorded net income of $0.1 million in the fourth quarter of 2023 compared to net income of $0.3 million in the fourth quarter of 2022.
Liquidity and Capital Resources (all $ in millions unless noted)
The Company’s cash and cash equivalents at December 30, 2023 totaled $8.8 compared with cash and cash equivalents at December 31, 2022 of $8.3. This increase was primarily due to the Company’s profitability for the year offset primarily by the decrease in deferred revenue from $2.8 at the end of 2022 to $0.3 at the end of 2023.
Accounts receivable at December 30, 2023 totaled $4.4 compared to $3.8 at December 31, 2022. Days Sales Outstanding (DSO) increased to 60 days at the end of 2023 compared to 52 days at the end of 2022. This change was due to the reduction of deferred revenue occurring in the 4th quarter of 2022. Prepayments received in 2021 were used to pay for shipments shipped in the 4th quarter of 2022 thus immediately reducing accounts receivable, rather than the customer paying 30-45 days later. The accounts receivable balances at December 30, 2023, and December 31, 2022 were both net of an allowance for doubtful accounts of $10 thousand.
Inventories decreased to $4.6 at December 30, 2023 from $4.9 at December 31, 2022. The inventory turnover in the four quarters ending 2023 was 4.3 times, up from 4.2 times averaged during the four quarters of 2022 (each based on a 5 point average). In July 2022 CPS implemented a new ERP computer system which, among other things, has enabled the Company to better manage its inventory.
The Company had no inventory on consignment at any customers at the end of 2023 or 2022. At December 30, 2023 and December 31, 2022 inventory of, $0.5 and $0.8, respectively, was located at vendor locations pursuant to inventory agreements.
The Company funded its operations from its profit in 2023. The Company expects it will continue to be able to fund its operations during 2024 from existing cash balances and profits.
The Company continues to sell to a limited number of customers and the loss of any one of these customers or vendors 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 May 2023, the Company terminated its $3.0 million revolving line of credit (LOC) with Massachusetts Business Development Corporation (BDC). A new LOC in the amount of $3.0 million was entered into with Rockland Trust Company. The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of the National Prime Rate as published by the Wall Street Journal. On December 30, 2023, the Company had $0 of borrowings under this LOC and its borrowing base at the time would have permitted an additional $3.0 million to have been borrowed. The LOC remains in effect until terminated per mutual agreement by both parties.
In March 2020, the Company acquired a scanning acoustic microscope for a price of $208 thousand. The full amount was financed through a 5 year note payable with a financing company. The note is collateralized by the microscope and is being paid in monthly installments of $4 thousand, consisting of principal plus interest at a rate of 6.47%
As of December 30, 2023, the Company had $282 thousand of construction in progress and no outstanding commitments to purchase production equipment.
During 2023, our leasing arrangements consisted of the Norton, MA facility lease. The Norton facility lease was renewed in February 2021, expires in February 2026 and 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 were $162 thousand in 2023.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Inflation
Thus far inflation has not had a significant impact on our profitability. We have had higher than normal wage increases, have implemented other programs to ameliorate the effects of inflation on our employees (for example, we increased the Company share of health insurance premiums and increased the Company 401k match in 2023) and seen price increases from some of our suppliers. We have been able to pass along many of these price increases to our customers. There can be no assurance that our customers will continue to accept further price increases, that our employees will continue to be satisfied with their wage and benefit increases and that inflation will not affect our operations or business in the future.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Smaller reporting companies are not required to provide the information required by this item.
Item 8. Financial Statements and Supplementary Data
See Index to the Company’s Financial Statements and the accompanying notes which are filed as part of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in Securities and Exchange Commission reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the direction of our Chief Executive Officer and Chief Financial Officer, management has carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures as such item is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of December 30, 2023.
Changes in Internal Control over Financial Reporting
There were no material changes in the Company’s internal control over financial reporting during fiscal 2023.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Rule 13a-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States and includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the direction of our Chief Executive Officer and Chief Financial Officer, management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 30, 2023. In making this assessment, management used the criteria set forth in the "Internal Control Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2013). Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 30, 2023.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Item 9B. Other Information
The Company had information required to be disclosed in a report on Form 8-K during the fourth quarter of the year covered by this Form 10-K that has not been so reported.
Part III
Item 10. Directors, Executive Officer and Corporate Governance
The information required by this Item 10 is incorporated herein by reference to our Definitive Proxy Statement, under the captions “Members of the Board of Directors, Nominees and Executive Officers,” “Certain Relationships and Related Person Transactions; Legal Proceedings,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Code of Conduct” and “Corporate Governance” and with respect to our 2024 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company’s 2023 fiscal year.
The Company has adopted the CPS Code of Conduct, which applies to all directors, officers (including the principal executive officer, principal financial officer and treasurer) and employees. A copy of this code can be found on the Company’s website at https://cpstechnologysolutions.com/investor-overview/.
Item 11. Executive Compensation
The information required by this Item 11 is incorporated herein by reference to our Definitive Proxy Statement, under the captions “Compensation” and “Compensation Discussion and Analysis” with respect to our 2024 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company’s 2023 fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 is incorporated herein by reference to our Definitive Proxy Statement, under the caption “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” with respect to our 2024 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company’s 2023 fiscal year.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 is incorporated herein by reference to our Definitive Proxy Statement, under the captions “Certain Relationships and Related Person Transactions; Legal Proceedings” and “Corporate Governance” with respect to our 2024 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company’s 2023 fiscal year.
Item 14. Principal Accountant Fees and Services
The information required by this Item 14 is incorporated herein by reference to our Definitive Proxy Statement, under the caption “Accounting Matters” with respect to our 2024 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company’s 2023 fiscal year.
Part IV
Item 15. Exhibits, Financial Statement Schedules.
(a) Documents filed as part of this Form 10-K.
1. Financial Statements
The financial statements filed as part of this Form 10-K are listed on the Index to Financial Statements of this Form 10-K.
2. Exhibits
The exhibits to this Form 10-K are listed on the Exhibit Index of this Form 10-K.
CPS TECHNOLOGIES CORP.
EXHIBIT INDEX
| Exhibit No. |
Description |
| 3.1* |
|
| 3.2* |
|
| 3.3* |
|
| 3.4* |
|
| 4.1* |
|
| 4.2* |
|
| 4.3 |
|
| 4.4 |
|
| 4.5 |
CNC Associates, Inc. Notification of Approval of Financing dated May 26, 2020. |
| 4.6 |
|
| 4.7 |
|
| 10.2* |
|
| 10.5*(1) |
Retirement Savings Plan, effective September 1, 1987 is incorporated by reference to Exhibit 10.35 to the Company’s 1989 S-1 Registration Statement |
| 10.6* |
| Exhibit No. |
Description |
| 10.7* |
|
| 10.8* |
|
| 10.9* |
|
| 10.21* |
1999 Stock Incentive Plan adopted by the Company’s Board of Directors on January 22, 1999 |
| 10.22* |
|
| 10.23*(1) |
|
| 10.24*(1) |
|
| 10.26*(1) |
|
| 23.1 |
|
| 31.1 |
|
| 31.2 |
|
| 32.1 |
|
| 97 |
|
| 101.INS |
Inline XBRL Instance Document |
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 |
Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) |
* Incorporated herein by reference.
(1) Management Contract or compensatory plan or arrangement filed as an exhibit to this Form pursuant to Items 14(a) and 14(c) of Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 CORP.
| By: |
/s/ Brian Mackey |
| President and Chief Executive Officer |
Pursuant to the Requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature |
Title |
Date |
| /s/ Brian Mackey |
President and Chief Executive Officer |
March 13, 2024 |
| Brian Mackey |
||
| /s/ Charles K. Griffith Jr. |
Chief Financial Officer |
March 13, 2024 |
| Charles K. Griffith Jr. |
||
| /s/ Francis J. Hughes, Jr. |
Director |
March 13, 2024 |
| Francis J. Hughes |
||
| /s/ Daniel C. Snow |
Director |
March 13, 2024 |
| Daniel C. Snow |
||
| /s/ Thomas M. Culligan |
Director |
March 13, 2024 |
| Thomas M. Culligan |
||
| /s/ Ralph M. Norwood |
Director |
March 13, 2024 |
| Ralph M. Norwood |
||
| /s/ Grant C. Bennett |
Director |
March 13, 2024 |
| Grant C. Bennett |
INDEX TO FINANCIAL STATEMENTS
OF
CPS TECHNOLOGIES CORP.
| Report of Independent Registered Public Accounting Firm | |
| Balance Sheets as of December 30, 2023 and December 31, 2022 | |
| Statements of Operations for the years ended December 30, 2023 and December 31, 2022 | |
| Statements of Stockholders’ Equity for the years ended December 30, 2023 and December 31, 2022 | |
| Statements of Cash Flows for the years ended December 30, 2023 and December 31, 2022 | |
| Notes to Financial Statements |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of CPS Technologies Corporation
Opinion on the Financial Statements
We have audited the accompanying balance sheets of CPS Technologies Corporation (the Company) as of December 30, 2023 and December 31, 2022, the related statements of operations, stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2023 and December 31, 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which it relates.
Reserves for product sales returns
Description of the Matter
As described in Notes 2 and 6 to the financial statements, reserves for product sales returns are recorded based on returns history and specific circumstances in which the Company anticipates returns to occur. During 2023, the Company became aware of a quality matter with products sold to a major customer that resulted in product returns and the issuance of credits to the customer.
How We Addressed the Matter in Our Audit
Our audit procedures relating to the Company’s product returns liability included, but were not limited to, the following:
We obtained management’s calculation supporting the product returns liability and performed procedures to address the completeness and accuracy of data applied as well as the reasonableness of assumptions and judgments made by management. Specifically, we performed testing to identify the scope of product sales subject to quality concerns including analysis of the sales of the particular part sold, testing to identify the remaining inventory on hand with potential quality concerns, testing the mathematical accuracy of the calculation as well as performing sensitivity analysis to assess the effect of changes in assumptions.
We also reviewed correspondence between the Company’s management and the customer which the specific quality concern was identified and confirmed accounts receivable balances for a sample of invoices outstanding with the customer.
We have served as the Company's auditor since 2005.
/s/
March 13, 2024
CPS TECHNOLOGIES CORP.
BALANCE SHEETS
| December 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable-trade, net | ||||||||
| Accounts receivable-other | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment: | ||||||||
| Production equipment | ||||||||
| Furniture and office equipment | ||||||||
| Leasehold improvements | ||||||||
| Total cost | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Construction in progress | ||||||||
| Net property and equipment | ||||||||
| Right-of-use lease asset | ||||||||
| Deferred taxes, net | ||||||||
| Total assets | $ | $ | ||||||
(continued)
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORP.
BALANCE SHEETS
| December 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Notes payable, current portion | $ | $ | ||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Deferred revenue | ||||||||
| Lease liability, current portion | ||||||||
| Total current liabilities | ||||||||
| Notes payable less current portion | ||||||||
| Deferred revenue – long term | ||||||||
| Long term lease liability | ||||||||
| Total liabilities | ||||||||
| Commitments & Contingencies | ||||||||
| Stockholders’ Equity: | ||||||||
| Common stock, $ par value, authorized shares; issued and shares; outstanding and ; at December 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Less cost of and common shares repurchased at December 30, 2023 and December 31, 2022, respectively | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORP.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 30, 2023 AND DECEMBER 31, 2022
| 2023 | 2022 | |||||||
| Product sales | $ | $ | ||||||
| Cost of product sales | ||||||||
| Gross margin | ||||||||
| Selling, general, and administrative expenses | ||||||||
| Income from operations | ||||||||
| Interest income (expense) | ||||||||
| Other income (expense) | ||||||||
| Income before income tax | ||||||||
| Income tax provision (benefit) | ||||||||
| Net income | $ | $ | ||||||
| Net income (loss) per basic common share | $ | $ | ||||||
| Weighted average number of basic common shares outstanding | ||||||||
| Net income (loss) per diluted common share | $ | $ | ||||||
| Weighted average number of diluted common shares outstanding | ||||||||
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORP.
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 30, 2023 AND DECEMBER 31, 2022
| Common stock | ||||||||||||||||||||||||
| Additional | Stock- | |||||||||||||||||||||||
| Number of | Par | Paid-in | Accumulated | Stock | holders’ | |||||||||||||||||||
| shares issued | Value | capital | deficit | repurchased | equity | |||||||||||||||||||
| Balance at December 25, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Share-based compensation expense | — | — | — | — | ||||||||||||||||||||
| Employee option exercises | — | ( | ) | |||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Share-based compensation expense | — | |||||||||||||||||||||||
| Employee option exercises | ( | ) | ||||||||||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Balance at December 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
See accompanying notes to financial statements.
CPS TECHNOLOGIES CORP.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 30, 2023 AND DECEMBER 31, 2022
| 2023 | 2022 | |||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | $ | ||||||||||
| Adjustments to reconcile net income to cash provided by operating activities: | ||||||||||||
| Share-based compensation | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Deferred taxes | ||||||||||||
| Gain on sale of property and equipment | ( | ) | ||||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable – trade | ( | ) | ||||||||||
| Accounts receivable – other | ( | ) | ||||||||||
| Inventories | ( | ) | ||||||||||
| Prepaid expenses and other current assets | ( | ) | ||||||||||
| Accounts payable | ( | ) | ||||||||||
| Accrued expenses | ( | ) | ||||||||||
| Deferred revenue | ( | ) | ||||||||||
| Net cash provided by operating activities | ||||||||||||
| Cash flows from investing activities: | ||||||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||||||
| Proceeds from sale of property and equipment | ||||||||||||
| Net cash used by investing activities | ( | ) | ( | ) | ||||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from employee stock options | ||||||||||||
| Payment on notes payable | ( | ) | ( | ) | ||||||||
| Net cash provided (used) by financing activities | ( | ) | ||||||||||
| Net increase in cash and cash equivalents | ||||||||||||
| Cash and cash equivalents at beginning of year | ||||||||||||
| Cash and cash equivalents at end of year | $ | $ | ||||||||||
| Supplemental cash flow information: | ||||||||||||
| Cash paid for income taxes | $ | $ | ||||||||||
| Cash paid for interest | $ | $ | ||||||||||
| Supplemental disclosures of non-cash activity: | ||||||||||||
| Net exercise of stock options | $ | |||||||||||
See accompanying notes to financial statements.
CPS Technologies Corp.
Years Ended December 30, 2023 and December 31, 2022
Notes to Financial Statements
(1) Nature of Business
CPS Technologies Corp. (the ‘Company’ or ‘CPS’) provides advanced material solutions to the transportation, automotive, energy, computing/internet, telecommunications, aerospace, defense and oil and gas end markets.
Our primary material solution is metal matrix composites. We design, manufacture and sell custom metal matrix composite components which improve the performance and reliability of systems in these end markets.
(2) Summary of Significant Accounting Policies
(2)(a) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents.
(2)(b) Accounts Receivable
The Company reports its accounts receivable at the invoiced amount less an allowance for credit losses. The Company’s management provides appropriate provisions for uncollectible accounts based upon factors surrounding the credit risk and activity of specific customers, historical trends, economic conditions and other information to estimate future expected losses. Adjustments to the allowance are charged to operations in the period in which information becomes available that may affect the allowance. The Company maintains an allowance for credit losses of $
(2)(b)(1) Accounts Receivable-Other
As of December 30, 2023 this amount was primarily VAT paid by CPS, but due to be repaid by its European customers with future shipments. In 2022 the Company filed for the Employee Retention Tax Credit (ERTC) in the amount of $
(2)(c) Inventories
Inventories are stated at the lower of cost (cost is based on standard costs which approximate actual costs), as determined under the first-in, first-out method (FIFO), or net realizable value. A reserve for obsolete inventories is based on factors regarding the sales and usage of such inventories, including inventories manufactured for specific customers. The Company’s general obsolescence policy is to reserve against obsolete inventory when there has been no activity on a particular part for a twelve month period and there are no expected customer orders.
(2)(d) Property and Equipment
Property and equipment are stated at cost. Depreciation of equipment is calculated on a straight-line basis over the estimated useful life, generally years for production equipment and to years for furniture and office equipment. Leasehold improvements are depreciated over the shorter of the lease term or their useful life. Maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost and related accumulated depreciation or amortization are removed from their respective accounts. Any gains or losses on the disposition of property and equipment are included in the results of operations in the period in which they occur.
(2)(e) Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered. Recoverability is assessed based on estimated undiscounted future cash flows. As of December 30, 2023 and December 31, 2022, the Company believes that there has been
(2)(f) Revenue Recognition
Revenue is recognized in accordance with the five-step method under Accounting Standards Codification (ASC) 606, “Revenue from Contracts with Customers.”
Identifying the Contract with the Customer
The Company identifies contracts with customers as agreements that create enforceable rights and obligations. In the case of a few large customers the Company has executed long-term Master Sales Agreements (“MSA”). These are umbrella agreements which typically define the terms and conditions under which a customer can order goods from CPS. These in themselves do not constitute a contract as no products are committed to be transferred and the customer has no obligation to make payments. In the case of SBIRs an enforceable contract is signed by both the customer and CPS.
The Company contract is only enforceable once both parties have approved it and is usually in the form of a written purchase order from a customer combined with acknowledgement from the Company.
In cases without an MSA, the customer submits a blueprint for a product, the Company provides a quote and the customer responds with a purchase order. In these cases the Company’s acceptance of the purchase order constitutes an enforceable contract.
Identifying the Performance Obligations in the Contract
For each contract, the Company considers the promise to transfer products, each of which are distinct, to be the identified performance obligations. For SBIRs the Company is obligated to provide certain services over the life of the agreement and the customer is obligated to pay for those services, generally monthly, as they are performed.
Shipping and handling activities for which the Company is responsible are not a separate promised service but instead are activities to fulfill the entity’s promise to transfer goods. Shipping and handling fees will be recognized at the same time as the related performance obligations are satisfied.
The Company provides an assurance-type warranty. This guarantees that the product functions as promised and meets specifications. Under its terms and conditions the Company offers a 30 day warranty and replaces defective or non-conforming products. The expense of replacement is recorded at the time the Company agrees to replace a defective or non-conforming product. This assurance type warranty is not considered to be a distinct performance obligation.
Determining the Transaction Price
The Company determines the transaction price as the amount of consideration specified in the contract that it expects to receive in exchange for transferring promised goods or services to the customer. Amounts collected from customers for sales value added and other taxes are excluded from the transaction prices. Product sales are recorded net of trade discounts and sales returns. The Company will establish a reserve for product returns when necessary based on returns history and specific circumstances in which the Company anticipates returns to occur. Such product return reserves are recorded as a reduction to revenue.
If a contract includes a variable amount, such as a rebate, then the Company estimates the transaction price using either the expected value or the most likely amount of consideration to be received, depending upon the specific facts and circumstances. The Company includes estimated variable consideration in the transaction price only to the extent it is probable that a significant reversal of revenue will not occur when the uncertainty is resolved. The Company updates its estimate of variable consideration at the end of each reporting period to reflect changes in facts and circumstances. As of December 30, 2023 there are
When credit is granted to customers, payment is typically due 30 to 90 days from billing and accordingly our contracts with customers do not include a significant financing component.
Allocating the Transaction Price to the Performance Obligations
In virtually all cases the transaction price is tied to a specific product or service in the contract obviating the need for any allocation.
Recognizing Revenue When (or as) the Performance Obligations are Satisfied
The Company recognizes revenue at the point in time when it transfers control of the promised goods or services to the customer, which typically occurs once the product has shipped or has been delivered to the customer or the service has been performed. Occasionally, for the purpose of ensuring a steady flow of product, the Company ships products on consignment. In these instances, delivery is deemed to have occurred when the customer pulls inventory out of the warehouse for use in their production, or upon a specified period of time as agreed upon by both parties. As of December 30, 2023 there are
The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. The costs are recorded within, selling, general and administrative expenses.
The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
(2)(g) Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recorded for the expected future tax consequences of temporary differences between the financial reporting and income tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in affect when the differences reverse. A valuation allowance is established to reduce net deferred tax assets to the amount expected to be realized.
The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. As of December 30, 2023 and December 31, 2022, the Company has
(2)(h) Net Income Per Common Share
Basic net income per common share is calculated by dividing net income 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 option 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.
(2)(i) Reclassification
Certain amounts in prior year’s financial statements have been reclassified to conform to the current year’s presentation.
(2)(j) Recent Accounting Pronouncements
In the normal course of business, management evaluates all the new accounting pronouncements issued by the Financial Accounting Standard Board (“FASB”). Effective January 1, 2023, the Company adopted FASB Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments, which changed the way entities recognize credit losses of most financial assets. Short-term and long-term financial assets, as defined by the standard, are impacted by immediate recognition of estimated credit losses in the financial statements, reflecting the net amount expected to be collected. The adoption of this standard had an immaterial impact on our financial statements. Management does not expect any of the recently issued accounting pronouncements, which have not already been adopted, to have a material impact on the Company’s financial statements.
(2)(k) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses recorded during the reporting period. Such estimates are adjusted by management periodically as a result of existing or anticipated economic changes which effect, or may effect, the Company’s financial statements. Actual results could differ from these estimates.
(2)(l) Fiscal Year-End
The Company’s fiscal year end is the last Saturday in December which could result in a 52 or 53 week year. Fiscal year 2023 consisted of 52 weeks and 2022 consisted of 53 weeks.
(2)(m) 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, 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 stock options granted.
(2)(n) Segment Reporting
The Company views its operations and manages its business as segment. The Company produces and sells advanced material solutions, primarily metal matrix composites, to assemblers of high density electronics and other specialty components and subassemblies. The Company also assembles housings and packages for hybrid circuits, selling to the same customers mentioned above. These customers represent a single market or segment with similar stringent and well-defined requirements. The Company’s customers, in turn, sell the components and subassemblies which incorporate the products into many different end markets, however, these end markets are two to three levels removed from the Company. The Company also sells armor strike faces to armor manufacturers, using the same manufacturing process used in its other product solutions. The Company makes operating decisions and assesses financial performance only for the Company as a whole and does not make operating decisions or assess financial performance by the end markets which ultimately use the products.
(3) Inventories
As of December 30, 2023 and December 31, 2022 inventories consisted of the following:
| 2023 | 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Gross Inventory | ||||||||
| Reserve for obsolescence | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
(4) Leases
The Company had real estate lease in 2023 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 equipment leases have been capitalized as 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.
The real estate lease expiring in 2026 (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 are based on the present value of remaining lease payments over the remaining lease term using the Company’s incremental borrowing rate at the commencement date of the lease. The Company does not separate lease components from non-lease components. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Norton facility lease comprises approximately 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 are through maturity are reflected in the table below.
The following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s capitalized operating lease as of December 30, 2023:
| (Dollars in Thousands | December 30, 2023 | |||
| Maturity of capitalized lease liability | Lease payments | |||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| Total undiscounted operating lease payments | $ | |||
| Less: Imputed interest | ( | ) | ||
| Present value of operating lease liability | $ | |||
| Balance Sheet Classification | ||||
| Current lease liability | $ | |||
| Long-term lease liability | ||||
| Total operating lease liability | $ | |||
| Other Information | ||||
| Weighted-average remaining lease term for capitalized operating leases (in months) | ||||
| Weighted-average discount rate for capitalized operating leases | % |
Operating Lease Costs and Cash Flows
Operating lease cost and cash paid was $
Estimated monthly payments under the terms of the Norton facility lease, escalate from $
(5) Share-Based Compensation Plans
The Company adopted the 2020 Equity Incentive Plan ("2020 Plan") on March 3, 2020. Under the terms of the 2020 Plan all of the Company’s employees, officers, directors, consultants and advisors are eligible to be granted options, restricted stock awards, or other stock-based awards. Some outstanding options are non-statutory stock options; some are incentive stock options. All options granted are exercisable at the fair market value of the stock on the date of grant and expire years from the date of grant. The options granted to employees generally vest in equal annual installments over a -year period. The options granted to directors generally vest immediately on date of grant. Certain options also remain issued and outstanding under the 2009 Stock Incentive Plan.
Under the 2020 Plan a total of
A summary of stock option activity as of December 30, 2023 and changes during the year then ended is presented below:
| Weighted | Weighted | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Exercise | Contractual | Intrinsic | ||||||||||||||
| Shares | Price | Life (years) | Value | |||||||||||||
| Outstanding at beginning of year | | $ | | |||||||||||||
| Granted | | $ | | |||||||||||||
| Exercised | ( | ) | $ | | ||||||||||||
| Forfeited | ( | ) | $ | | ||||||||||||
| Expired | ( | ) | $ | | ||||||||||||
| Outstanding at end of year | | $ | | | $ | | ||||||||||
| Options exercisable at year-end | | $ | | | $ | | ||||||||||
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following table presents the annualized weighted average values of the significant assumptions used to estimate the fair values of the options granted during 2023 and 2022:
| 2023 | 2022 | |||||||||||
| Risk-free interest rate |
| - |
| | - | | ||||||
| Expected life in years | | - | | | - | | ||||||
| Expected volatility | | | ||||||||||
| Expected dividend yield | | | ||||||||||
| Weighted average fair value of grants |
| $ |
|
| ||||||||
All options are granted with an exercise price equal to the fair market value of the underlying common stock on the date of grant.
The Company recognized $
(6) Accrued Expenses
Accrued expenses at December 30, 2023 and December 31, 2022 consist of the following:
| 2023 | 2022 | |||||||
| Accrued legal and accounting | $ | $ | ||||||
| Accrued payroll and related costs | ||||||||
| Accrued other | ||||||||
| $ | $ | |||||||
Included in Accrued other is $
(7) Revolving Line of Credit
In May 2023, the Company terminated its $
(8) Notes Payable
In March 2020, the Company acquired a Sonoscan ultrasound microscope for a price of $
The aggregate maturities of the notes payable based on the payment terms of the agreement are as follows:
| Remaining in: | Payments due by period | |||
| FY 2024 | $ | |||
| FY 2025 | $ | |||
| Less Interest | $ | ( | ) | |
| Total Principal Payments | $ | |||
Total interest expense on notes payable during 2023 was $
(9) Income Taxes
Components of income tax expense (benefit) for each year are as follows:
| 2023 | 2022 | |||||||
| Current: | ||||||||
| Federal | $ | $ | 1,270 | |||||
| State | ||||||||
| Current income tax provision (benefit): | ||||||||
| Deferred: | ||||||||
| Federal | ||||||||
| State | ||||||||
| Deferred income tax provision (benefit), net | ||||||||
| Total | $ | $ | ||||||
Deferred tax assets as of December 30, 2023 and December 31, 2022 are as follows:
| December 30, 2023 | December 31, 2022 | |||||||
| Deferred Tax Assets: | ||||||||
| Net operating loss carryforwards | $ | $ | ||||||
| Stock compensation | ||||||||
| Credit carryforwards | ||||||||
| Inventory | ||||||||
| Accrued liabilities | ||||||||
| Depreciation | ||||||||
| Capitalized R&D, net | ||||||||
| Other | ||||||||
| Net deferred tax assets | $ | $ | ||||||
A summary of the change in the deferred tax asset is as follows:
| 2023 | 2022 | |||||||
| Gross deferred tax balance at beginning of year | $ | $ | ||||||
| Deferred tax benefit (provision) | ( | ) | ( | ) | ||||
| Balance at end of year, net | $ | $ | ||||||
Income tax expense is different from the amounts computed by applying the U.S. federal statutory income tax rate of
| 2023 | 2022 | |||||||
| Tax at statutory rate | $ | $ | ||||||
| State tax, net of federal benefit | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
The Company’s income tax filings are subject to review and examination by federal and state taxing authorities. The Company is currently open to audit under the applicable statutes of limitations for the years 2020 through 2023.
(10) Retirement Savings Plan
The Company sponsors a Retirement Savings Plan (the ‘Plan’) under the provisions of Section 401 of the Internal Revenue Code. Employees, as defined in the Plan, are eligible to participate in the Plan after 30 days of employment. Under the terms of the Plan, the Company may match employee contributions under such method as described in the Plan. During 2023 the Company elected to match 1% of each of the first
(11) Concentrations of Credit Risk, Significant Customers and Geographic Information
Financial instruments which subject the Company to concentrations of credit risk consist principally of cash, cash equivalents and trade accounts receivable. The Company maintains cash deposits in a sweep account, whereby funds are automatically moved in increments of $250,000 to various FDIC insured financial institutions on a nightly basis.
The Company extends credit to customers who consist principally of microelectronics systems companies in the United States, Europe and Asia. The Company generally does not require collateral or other security as a condition of sale rather relying on credit approval, balance limitation and monitoring procedures to control credit risk of trade accounts receivable. The Company also maintains a credit insurance policy covering most of its non-US customers to further mitigate credit risk. Management conducts on-going credit evaluations of its customers, and historically the Company has not experienced any significant credit-related losses with respect to its trade accounts receivable.
Revenues from significant customers as a percentage of total revenues in 2023 and 2022 were as follows:
| Percent of Total Revenues | ||||||||
| Significant Customer | 2023 | 2022 | ||||||
| A | % | % | ||||||
| B | % | % | ||||||
| C | % | % | ||||||
As of December 30, 2023, the Company had trade accounts receivable due from these customers that accounted for
The Company’s revenue was derived from the following countries in 2023 and 2022:
| Percent of Total Revenues | ||||||||
| Country | 2023 | 2022 | ||||||
| United States of America | % | % | ||||||
| Germany | % | % | ||||||
| Other | % | % | ||||||
Many of the Company’s customers based in the United States conduct design, purchasing and payable functions in the United States, but manufacture overseas.
All of the Company’s long-lived assets and operations are located in the United States.
(12) Net Income Per Share
The following reconciles the basic and diluted net income per share calculations.
| Dec. 30, | Dec. 31, | |||||||
| 2023 | 2022 | |||||||
| Basic EPS Computation: | ||||||||
| Numerator: | ||||||||
| Net income | $ | $ | ||||||
| Denominator: | ||||||||
| Weighted average | ||||||||
| Common shares | ||||||||
| Outstanding | ||||||||
| Basic EPS | $ | $ | ||||||
| Diluted EPS Computation: | ||||||||
| Numerator: | ||||||||
| Net income | $ | $ | ||||||
| Denominator: | ||||||||
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(13) Commitments and Contingencies
We are subject to contingencies, including legal proceedings and claims arising in the normal course of business that cover a wide range of matters including, among others, contract and employment claims; workers compensation claims; product liability; warranty and modification; and adjustment or replacement of units sold.
Direct costs associated with the estimated resolution of contingencies are accrued at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated financial position or results of operations. It is possible, however, that future results of operations for any particular future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of our control.
Notwithstanding the above, the Company has received a letter from an attorney representing a former European sales representative alleging that under European law the representative is entitled to compensation as a result of his termination. The Company completely disagrees with the claims. Should this result in litigation the Company will defend itself to the fullest extent of the law and estimates any losses incurred to be immaterial.