What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-17 compared with 2020-03-13 · 119 added, 104 removed, 170 unchanged (57% of the section changed)

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whether as a result of the receipt of new information, the occurrence of future events or otherwise.

Products we provide include baseplates for motor controllers

used in high-speed electric trains, subway cars, wind turbines, and hybrid and electric vehicles.

We provide baseplates and housings

used in radar, satellite and avionics applications.

We provide lids and heatspreaders used with high performance integrated circuits

for in internet switches and routers.

We provide baseplates and housings used in modules built with Wide Band Gap Semiconductors

like SiC and GaN.

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 baseplates and housings used in radar, satellite and avionics

applications.

We provide lids and heatspreaders used with high performance integrated circuits for in internet switches and

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, etc.

include components made of more traditional materials such as aluminum, copper-tungsten, etc.

CPS’s products are custom rather than

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from approximately 60 customers.

COVID-19 Pandemic

As a provider of essential services products and services,

CPS has been open and operating throughout the novel coronavirus pandemic.

To date most of our customers remain open and operational.

In the second half of 2020 we saw significant increased volatility on the part of some of our customers, while for others it has

been business as usual.

We expect that this volatility will continue for at least the next several quarters.

Unexpected significant

reductions in demand by our largest customer led to a reduction in third and fourth quarter revenue.

As these reductions were

originally unexpected, by both CPS and our customer, inventory at various stages of production was built to meet expected demand,

remains in inventory.

This inventory was somewhat reduced in Q4, but will likely continue to remain somewhat inflated over the

next quarter or two until it reaches equilibrium with current demand.

CPS continues to follow CDC and OSHA guidance in our workplace.

Employees’ temperatures are taken at the beginning of each shift, shifts have been staggered to reduce employee overlap,

workstations have been rearranged to ensure social distancing, all employees are using facemasks, etc.

The pandemic has had very

little impact on our ability to produce and ship customer orders.

Application of Critical Accounting Policies

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and evaluating its reported financial results include the following:

a) Allowance for doubtful accounts

Allowance for doubtful accounts

The Company performs ongoing monitoring of the status of

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a credit insurance policy covering most of our sales to non-US accounts.

b) Inventory valuation

Inventory valuation

The Company has a build-to-order business model and manufactures

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reviews this unused material and establishes an obsolescence reserve for the amount it does not expect to use over the next three

c) Valuation of deferred tax assets

Valuation of deferred tax assets

Deferred tax assets and liabilities are based on the net

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and other temporary differences will require taxable income of approximately $15 million and reversals of existing temporary differences

to fully utilize the Deferred Tax Asset, assuming a statutory corporate tax rate of 21% based on the recently enacted Tax Cuts

and Jobs Act.

d) Initial adoption of ASU No.

2016-02 (Leases)

In February 2016 the FASB issued ASU No.

2016-02, Leases,

which requires a lessee

recognize lease liabilities for the lessee’s obligation to make lease payments arising from a lease, measured on a discounted

basis, and right-of-use assets, representing the lessee’s right to use, or control the use of, specified assets for the lease

The ASU became effective and the Company adopted it on December 30, 2018 (Q1 of 2019).

The assets and liabilities increased

by approximately $310 thousand based upon the present value of remaining lease payments for leases in place at the adoption date.

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 2019 (“2019”) compared

with the year 2018 (“2018”):

Results of Operations for the year 2020 (“2020”)

compared with the year 2019 (“2019”):

Total revenue was $20.9 million in 2020, a 3% decrease compared with

total revenue of $21.4 million in 2019.

This decrease was due primarily to a decrease in the sale of baseplates partially offset

by an increase in the sale of hermetic packages in the third and fourth quarters.The Company negotiated new contracts with its

three largest customers which resulted in significant price increases of $0.7 million, mitigating the decrease in sales.

these contracts took effect in the fourth quarter of 2019 with the third taking effect in the first and second quarters of 2020 .

This decrease was due primarily to a decrease in the sales from our largest customer because

of the impact of the Covid-19 pandemic on their business.

Our second and third largest customers showed increased sales,

but not enough to offset the reduction from the largest customer.

Much of our largest customer’s sales go to railroad

companies who experienced significant reductions in ridership due to the pandemic.

Gross margin in 2020 totaled $4.2 million or 20% of sales.

This compares with $2.5 million, or 12% of sales, generated during 2019.

This change in margin was due to a change in product mix

resulting in an increase in material costs, partially offset by reductions in direct labor and factory overhead.

The improvement in margin was primarily due to price increases

which were fully in effect throughout 2020.

Selling, general and administrative (SG&A) expenses were $3.3

million during 2019, a decrease of 18% compared with SG&A expenses of $3.8 million incurred during 2018.

The predominant

reason for this change was a renegotiation of commission rates with our outside sales representatives.

The Company incurred an operating loss of $0.6 in 2019, compared

million during 2020, an increase of 3% compared with SG&A expenses of $3.1 million incurred during 2019.

reason for this increase was increased professional fees, including costs incurred during our search for a Chief Operating Officer.

This search was concluded in 2020;

our new Chief Operating Officer began work on January 4, 2021.

The Company generated operating income of $0.9 million in 2020, compared

with an operating loss of $0.6 in 2019.

This improvement was due to the decrease in SG&A expenses, as discussed above.

net loss in 2019 totaled $0.6 versus a net loss of $3.7 in 2018.

In the 2018 the Company established a valuation reserve against

its deferred tax asset, which accounted for $2.8 of the net loss.

This improvement was due primarily to the price increases, as discussed above;

to operating efficiencies.

The net income in 2020 totaled $0.9 versus a net loss of $0.6 in 2019.

Significant Fourth Quarter Activity in 2020:

totaled $5.4 million versus $6.1 million in the last quarter of 2018, representing a decrease of 11%.

This decrease was due primarily

to a decrease in the sale of baseplates partially offset by an increase in the sale of hermetic packages The impact of price changes

was significant in the quarter, increasing sales by $0.7 million, compared to third quarter pricing, partially mitigating the

sales decline.

Revenues totaled $4.2 million in the fourth quarter of 2020 versus

$5.4 million in the fourth quarter of 2019, a decrease of 24%.

This decrease was due primarily to a decrease in the sales

of baseplates with our two largest customers.

Both of these customers were negatively affected in the fourth quarter by Covid-19,

although one showed growth for the year, but was down in the fourth quarter.

Gross margin decreased in the fourth quarter of 2020 compared with

the fourth quarter of 2018 from $1.2 million to $1.0 million.

This decrease was directly associated with the decrease in sales.

SG&A expenses totaled $0.6 million during the quarter a reduction

the fourth quarter of 2019 to $0.5 million from $1.0 million.

This decrease was directly associated with the decrease in

SG&A expenses totaled $0.8 million during the quarter, an increase

of 29% compared to $0.6 million in the same quarter of 2019.

The predominant reason for this change was a renegotiation of commission

rates with our outside sales representatives, along with the elimination of the position of Senior Vice President Sales and Marketing.

Primarily as a result of the reduction of SG&A expenses, the

Company generated an operating profit of $0.4 million compared to $0.2 million in the fourth quarter of 2018.

The Company generated net income of $0.4 million in the last quarter

In the last quarter of 2018 the Company established a valuation reserve against its deferred tax asset.

Due in large part

to this reserve, the Company recorded a net loss for the quarter of $2.9 million.

Liquidity and Capital Resources (all $ in millions unless noted)

The primary reason for this increase was increased professional

fees, including costs incurred during our search for a Chief Operating Officer.

Primarily as a result of the revenue decrease, the Company recorded

an operating loss of $0.3 million in the fourth quarter of 2020 compared to a income of $0.4 million in the fourth quarter of 2019.

The Company recorded a net loss of $0.2 million in the fourth quarter

of 2020 compared to a net earnings of $0.4 million in the fourth quarter of 2019.

The operating loss in the fourth quarter of 2020

was reduced due to the sales of equipment as a result of the closing of the Attleboro facility.

Liquidity and Capital Resources (all $ in millions unless

The Company’s cash and cash equivalents at December 26, 2020

totaled $0.2 compared with cash and cash equivalents at December 28, 2019 of $0.1.

The decrease in net cash was due to the combination

of losses from operations, coupled with an increase in working capital associated with the increase in receivables, less payables

and accruals.

The Company elected to end its 2% 30 day payment discount with its largest customer in the fourth quarter of 2019,

accounting for much of the increase in receivables and reduction in cash.

Accounts receivable at December 28, 2019 totaled $4.1 compared with

The Company’s net cash (cash and

equivalents offset by borrowings under its line of credit) increased to $0.2 at December 26, 2020 from negative $1.1 at December

The increase was primarily due to the Company’s profitability for the year.

Accounts receivable at December 26, 2020 totaled $2.9 compared to

$4.1 at December 28, 2019.

Days Sales Outstanding (DSO) increased to 67 days at the end of 2019 compared to 45 days at the end

Days Sales Outstanding (DSO) decreased to 62 days at the end of 2020 compared to 67 days at the end

This change was due in large part to the fact that sales were more front-end loaded in the quarter in 2020 and, as

a result, a higher percentage of sales were collected during the quarter and due to the elimination of the 2% net 30 day discount

with the Company’s largest customer which terms reverted to net 60 days.

a result, a higher percentage of sales were collected during the quarter.

The accounts receivable balances at December 26,

2020, and December 28, 2019 were both net of an allowance for doubtful accounts of $10 thousand.

Inventories were essentially flat and totaled $3.1 and $3.2 at December

28, 2019 and December 29, 2018 , respectively.

The inventory turnover in the most recent four quarters ending was 6.2 times, up

from 6.0 times averaged during the four quarters of 2018 (each based on a 5 point average).

Inventories increased to $3.7 at December 26, 2020 from $3.1 at December

The inventory turnover in the most recent four quarters ending was 4.5 times, down from 6.2 times averaged during the

four quarters of 2019 (each based on a 5 point average).

The majority of our inventory is for our two largest customers,

both of whom significantly decreased their projected purchases in the fourth quarter of 2020.

The Company had no inventory on consignment at any customers at the

At December 28, 2019 and December 29, 2018 inventory of, $1.2 and $1.5, respectively, was located at vendor locations

pursuant to inventory agreements.

The Company financed its losses from operations and an increase in

working capital during 2019 from a combination of its cash at the beginning of the year and bank/lender borrowings during the year.

The Company expects it will continue to be able to fund its operations during 2020 from existing cash balances and the existing

credit facility.

end of 2019 or 2020.

At December 26, 2020 and December 28, 2019 inventory of, $1.6 and $1.2, respectively, was located at vendor

locations pursuant to inventory agreements.

The Company funded its operations from its profit in 2020.

expects it will continue to be able to fund its operations during 2021 from existing cash balances, the existing credit facility

The Company continues to sell to a limited number of customers and

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Contractual Obligations

In September 2019, the Company entered into revolving line of credit

(LOC) with Massachusetts Business Development Corporation (BDC) in the amount of $2.5 million.

This agreement replaces the $1.25

million line of credit with Santander Bank.

The agreement includes a demand note allowing the Lender to call the loan at any time.

The Company may terminate the agreement without a termination fee after 3 years.

The LOC is secured by the accounts receivable

and other assets of the Company and has an interest rate of LIBOR plus 650 basis points.

BDC requires that the total loss for

2019 be at most $640 thousand before the Company will be able to access the final $500 thousand of the line.

In September 2019, the Company entered into revolving line of

credit (LOC) with Massachusetts Business Development Corporation (BDC) in the amount of $2.5 million.

The agreement

includes a demand note allowing the Lender to call the loan at any time.

The Company may terminate the agreement

without a termination fee after 3 years.

The LOC is secured by the accounts receivable and other assets of the Company

and has an interest rate of LIBOR plus 650 basis points.

BDC requires that the total earnings before taxes for 2020 be at

least $749 thousand, which was achieved.

BDC also required a $201 thousand earnings before taxes for the fourth quarter

A blanket waiver of compliance was issued by BDC for this and any other 2020 activity.

At December 26, 2020

the Company had $1.25 million of borrowings under this LOC and its borrowing base at the time would have permitted an additional

$750 thousand to have been borrowed.

The increased availability has allowed the Company to end its policy of allowing prompt pay

discounts to certain customers.

This has and should continue to have a positive effect on the Company’s earnings going forward.

As of December 28, 2019 the Company had $256 thousand of

construction in progress and no outstanding commitments to purchase production equipment.

leasing arrangements consist of the Norton, MA and Attleboro, MA facility leases.

The Norton facility lease expires in February

2021 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

continue at $152 thousand.

The Attleboro lease, initially set to expire in February 2020, has been amended.

The amended lease expires

in December 2020 and reduces the leased space to 2.0 thousand square feet to be used primarily for storage.

Annual rental payments

will now be $24 thousand with no additional charges .

the Company had $0 borrowings under this LOC and its borrowing base at the time would have permitted an additional $2.2 to

have been borrowed.

In March 2020, the company acquired a scanning acoustic

microscope for a price of $208 thousand.

The full amount was financed through a 5 year note payable with a financing

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%

In July 2020 CPS placed into service a piece of manufacturing equipment

which it financed with the machine’s vendor.

The equipment cost of $40 thousand will be paid at the rate of $2 thousand

per month over 2 years with an interest rate of 1.9%.

As of December 26, 2020 the Company had $61 thousand of construction

in progress and no outstanding commitments to purchase production equipment.

During 2020 our leasing arrangements consisted of

the Norton, MA and Attleboro, MA facility leases.

The Norton facility lease expires in February 2021 and is a triple net lease

wherein the Company is responsible for payment of all real estate taxes, operating costs and utilities.

In January 2021

the company entered into an amendment to the lease, extending its term for five years to February 2026.

The Company also has an

option to buy the property and a first right of refusal during the term of the lease.

Annual rental payments continue at $152

The Attleboro lease expired December 31, 2020 and has not been renewed.

Off-Balance Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis