CPS TECHNOLOGIES CORP/DE/ 10-K

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 26, 2020. Changes in Internal Control over Financial Reporting There were no material changes in the Company’s internal control over financial reporting during fiscal 2020. 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 26, 2020. 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 26, 2020. 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 no 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 2021 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 2020 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 www.alsic.com/investor-relations. 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 2021 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 2020 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 2021 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 2020 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 2021 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 2020 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 2021 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 2020 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. 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/ Grant C. Bennett President and Chief Executive Officer March 16, 2021 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/ Grant C. Bennett President and Chief Executive Officer March 16, 2021 Grant C. Bennett /s/ Charles K. Griffith Jr. Chief Financial Officer March 16, 2021 Charles K. Griffith Jr. /s/ Francis J. Hughes, Jr. Director March 16, 2021 Francis J. Hughes /s/ Daniel C. Snow Director March 16, 2021 Daniel C. Snow /s/ Thomas M. Culligan Director March 16, 2021 Thomas M. Culligan /s/ Ralph M. Norwood Director March 16, 2021 Ralph M. Norwood CPS TECHNOLOGIES CORP. EXHIBIT INDEX Exhibit No. Description 3.1* Restated Certificate of Incorporation of the Company, as amended, is incorporated herein by reference to Exhibit 3 to the Company’s Registration Statement on Form 8-A (File No. 0-16088) 3.2* By-laws of the Company, as amended, are incorporated herein by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (File No. 33-14616)(the ‘1987 S-1Registration Statement’) 3.3* Certificate of Amendment of Restated Certificate of Incorporation of the Company dated May 14, 2014 3.4* Certificate of Ownership and Merger Merging CPS Superconductor Corporation into Ceramics Process Systems Corporation dated March 15, 2007 4.1* Specimen certificate for shares of Common Stock of the Company is incorporated herein by reference to Exhibit 4 to the 1987 S-1 Registration Statement 4.2* Description of Capital Stock contained in the Restated Certificate of Incorporation of the Company, as amended, filed as Exhibit 3.1 4.3 Amendment dated May 12, 2020 to Credit and Security Agreement by and between CPS Technologies Corp. and The Massachusetts Business Development Corporation dated September 25, 2019 4.5 CNC Associates, Inc. Notification of Approval of Financing dated May 26, 2020. 4.6 Credit and Security Agreement by and between CPS Technologies Corp. and The Massachusetts Business Development September 25, 2019 10.2* Amendment No. 1 dated November 7, 2008 to Standard Form Commercial Lease by and between Gifford Investments, Inc.(lessor) and Ceramics Process Systems Corporation dated July 19, 2006 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* Amendment No. 2 dated May 7, 2009 to Standard Form Commercial Lease by and between Gifford Investments, Inc.(lessor) and Ceramics Process Systems dated July 19, 2006. 10.7* Third Amendment dated January 6, 2015 to Standard Form Commercial Lease by and between Gifford Investments, Inc.(lessor) and CPS Technologies Corp. dated July 19, 2006 10.8* Fourth Amendment dated February 28, 2018 to Standard Form Commercial Lease by and between Gifford Investments, Inc. and CPS Technologies Corp. dated July 19, 2006 10.9* Fifth Amendment dated January 25, 2021 to Standard Form Commercial Lease by and between Gifford Investments, Inc. and CPS Technologies Corp. dated July 19, 2006 10.21* 1999 Stock Incentive Plan adopted by the Company’s Board of Directors on January 22, 1999 10.22* 2009 Stock Incentive Plan ("2009 Plan") on December 10, 2009. 10.23*(1) 2020 Stock Incentive Plan (“2020 Plan”) on March 3, 2020 10.24*(1) Amended and Restated 2009 Stock Incentive Plan 10.26*(1) Form of Stock Option Agreement for 2020 Equity Incentive Plan and Amended and Restated 2009 Stock Option Plan 23.1 Consent of Wolf & Company, P.C. 31.1 Certification Pursuant to Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * 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. INDEX TO FINANCIAL STATEMENTS OF CPS TECHNOLOGIES CORP. Report of Independent Registered Public Accounting Firm Balance Sheets as of December 26, 2020 and December 28, 2019 Statements of Operations for the years ended December 26, 2020 and December 28, 2019 Statements of Stockholders’ Equity for the years ended December 26, 2020 and December 28, 2019 Statements of Cash Flows for the years ended December 26, 2020 and December 28, 2019 Notes to Financial Statements Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of CPS Technologies Corp. Opinion on the Financial Statements We have audited the accompanying balance sheets of CPS Technologies Corp. (the "Company") as of December 26, 2020 and December 28, 2019, the related statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 26, 2020, 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 26, 2020 and December 28, 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 26, 2020, 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 Matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ Wolf & Company, P.C. Boston, Massachusetts March 16, 2021 We have served as the Company's auditor since 2005. CPS TECHNOLOGIES CORP. BALANCE SHEETS December 26, December 28, 2020 2019 ASSETS Current assets: Cash and cash equivalents $ 195,203 $ 133,965 Accounts receivable-trade, net 2,914,800 4,086,945 Inventories 3,709,471 3,099,824 Prepaid expenses and other current assets 71,506 147,786 Total current assets 6,890,980 7,468,520 Property and equipment: Production equipment 10,265,471 9,649,169 Furniture and office equipment 568,846 508,423 Leasehold improvements 951,384 934,195 Total cost 11,785,701 11,091,787 Accumulated depreciation and amortization (10,558,816) (10,110,663) Construction in progress 61,062 255,754 Net property and equipment 1,287,947 1,236,878 Right-of-use lease asset (note 4, leases) 25,000 171,000 Deferred taxes, net 117,000 147,873 Total assets $ 8,320,927 $ 9,024,271 (continued) See accompanying notes to financial statements. CPS TECHNOLOGIES CORP. BALANCE SHEETS December 26, December 28, 2020 2019 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Borrowings against line of credit $ — 1,249,588 Notes payable, current portion 58,134 — Accounts payable 909,291 1,436,417 Accrued expenses 804,091 815,166 Deferred revenue 12,177 21,110 Lease liability, current portion 25,000 148,000 Total current liabilities 1,808,693 3,670,281 Notes payable less current portion 154,570 — Long term lease liability — 23,000 Total liabilities 1,963,263 3,693,281 Commitments & Contingencies Stockholders’ Equity: Common stock, $0.01 par value, authorized 20,000,000 shares; issued 13,746,242 and 13,427,492 shares; outstanding 13,313,790 and 13,207,436; at December 26, 2020 and December 28, 2019, respectively 137,462 134,275 Additional paid-in capital 36,688,894 36,094,201 Accumulated deficit (29,472,369) (30,380,433) Less cost of 432,452 and 220,056 common shares repurchased at December 26, 2020 and December 28, 2019, respectively (996,323) (517,053) Total stockholders’ equity 6,357,664 5,330,990 Total liabilities and stockholders’ equity $ 8,320,927 $ 9,024,271 See accompanying notes to financial statements. CPS TECHNOLOGIES CORP. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 26, 2020 AND DECEMBER 28, 2019 2020 2019 Product sales $ 20,872,611 $ 21,468,414 Cost of product sales 16,702,848 18,928,173 Gross margin 4,169,763 2,540,241 Selling, general, and Administrative expenses 3,255,527 3,137,440 Income (loss) from operations 914,236 (597,199) Other income (expense) (14,720) (35,547) Income (loss) before income tax 899,516 (632,746) Income tax provision (benefit) (8,548) 5,456 Net income (loss) $ 908,064 $ (638,202) Net income (loss) per basic common share $ 0.07 $ (0.05) Weighted average number of basic common shares outstanding 13,251,521 13,207,097 Net income (loss) per diluted common share $ 0.07 $ (0.05) Weighted average number of diluted common shares outstanding 13,348,582 13,207,097 See accompanying notes to financial statements. CPS TECHNOLOGIES CORP. STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 26, 2020 AND DECEMBER 28, 2019 Common stock Additional Stock- Number of Par Paid-in Accumulated Stock holders’ shares issued Value capital deficit repurchased equity Balance at December 29, 2018 13,425,992 $ 134,260 $ 35,960,545 $ (29,742,231) $ (517,053) $ 5,835,521 Share-based compensation expense — — 131,421 — — 131,421 Issuance of Common Stock 1,500 15 2,235 — — 2,250 Net (loss) — — — (638,202) — (638,202) Balance at December 28, 2019 13,427,492 $ 134,275 36,094,201 $ (30,380,433 ) $ (517,053) $ 5,330,990 Share-based compensation expense — — 117,842 — — 117,842 Issuance of common stock 500 5 763 — — 768 Employee option exercises 318,250 3,182 476,088 — (479,270) — Net income — — — 908,064 — 908,064 Balance at December 26, 2020 13,746,242 $ 137,462 36,688,894 $ (29,472,369) $ (996,323) $ 6,357,664 See accompanying notes to financial statements. CPS TECHNOLOGIES CORP. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 26, 2020 AND DECEMBER 28, 2019 2020 2019 Cash flows from operating activities: Net income (loss) $ 908,064 $ (638,202) Adjustments to reconcile net income (loss) to cash provided (used) by operating activities: Share-based compensation 117,842 133,671 Depreciation and amortization 530,420 525,783 Deferred taxes 30,873 38,874 Gain on sale of property and equipment (11,000) (6,946) Changes in operating assets and liabilities: Accounts receivable – trade 1,172,145 (1,033,854) Inventories (609,647) 93,109 Prepaid expenses and other current assets 76,280 8,552 Accounts payable (527,126) (243,846) Accrued expenses (11,075) (160,149) Deferred revenue (8,933) 21,110 Net cash provided (used) by operating activities 1,667,843 (1,261,898) Cash flows from investing activities: Purchases of property and equipment (322,991) (489,475) Proceeds from sale of property and equipment 11,000 6,946 Net cash used by investing activities (311,991) (482,529) Cash flows from financing activities: Net borrowings (repayments) on line of credit (1,249,588) 1,249,588 Proceeds from employee stock options 768 — Payment on notes payable (45,794) — Net cash provided by financing activities (1,294,614) 1,249,588 Net increase (decrease) in cash and cash equivalents 61,238 (494,839) Cash and cash equivalents at beginning of year 133,965 628,804 Cash and cash equivalents at end of year $ 195,203 $ 133,965 Supplemental cash flow information: Cash paid (refunded) for income taxes $ (8,548) $ (67,311) Cash paid for interest $ 104,488 $ 44,113 Supplemental disclosures of non-cash activity: Net exercise of stock options $ 479,270 — Issuance of long term debt to finance equipment purchases $ 247,807 — See accompanying notes to financial statements. CPS Technologies Corp . Years Ended December 26, 2020 and December 28, 2019 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 doubtful accounts. 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. 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 doubtful accounts of $10,000 as of December 26, 2020 and December 28, 2019. (2)(c) Inventories Inventories are stated at the lower of cost, 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 write off obsolete inventory when there has been no activity on a particular part for a twelve month period and there are no pending 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 five years for production equipment and three to five 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 26, 2020 and December 28, 2019, the Company believes that there has been no impairment of its long-lived assets. (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. 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. 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 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. 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 26, 2020 there are no contracts with variable consideration. 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 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. 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 26, 2020 there are no products on consignment. 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 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 26, 2020 and December 28, 2019, the Company has no accruals for interest or penalties related to income tax matters. The Company does not have any uncertain tax positions at December 26, 2020 or December 28, 2019 which required accrual or disclosure. (2)(h) Net Income (Loss) Per Common Share Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is calculated by dividing net income (loss) by the sum of the weighted average number of common shares plus additional common shares that would have been outstanding if potential dilutive common shares had been issued for granted stock 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”). Based upon this review, 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 years 2020 and 2019 each consisted of 52 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 one 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 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 26, 2020 and December 28, 2019 inventories consisted of the following: 2020 2019 Raw materials $ 752,760 $ 778,409 Work in process 2,800,226 1,898,916 Finished goods 592,640 871,861 Gross Inventory 4,145,626 3,549,186 Reserve for obsolescence (436,155) (449,362) Total $ 3,709,471 $ 3,099,824 (4) Leases The Company had two real estate leases in 2020—one expiring in February 2021 and one expiring December 2020. The latter lease was not renewed. 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 2021 (the “Norton facility lease’) is included as a right-of-use lease asset and corresponding lease liability on the balance sheet. This asset and liability are based on the present value of remaining lease payments over the remaining lease term using the Company’s incremental borrowing rate at date of adoption of the lease guidance. 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 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 are $152 thousand through maturity. The following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s capitalized operating leases as of December 26, 2020 (Dollars in Thousands) December 26, 2020 Maturity of capitalized lease payments Lease payments 2021 25 Total undiscounted operating lease payments $ 25 Less: Imputed interest — Present value of operating lease liability $ 25 Balance Sheet Classification Current lease liability $ 25 Long-term lease liability — Total operating lease liability $ 25 Other Information Weighted-average remaining lease term for capitalized operating leases 2 months Weighted-average discount rate for capitalized operating leases 6.5% Cash Flows Cash paid for the amounts included in the present value of operating lease liabilities was $152 thousand during 2020 and is included in operating cash flows. Operating Lease Costs Operating lease cost was $152 thousand during 2020. This cost is related to its long-term operating lease. All other short-term leases were immaterial. Finance Leases The company does not have any finance leases that qualify for capitalization. Subsequent to year end, the Company renewed the Norton facility lease for an additional 5 years. Estimated monthly payments under the terms of the renewed lease, which is not reflected in the 2020 lease asset or liability escalate from approximately $12 thousand to $16 thousand over the lease term (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 nonstatutory 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 ten years from the date of grant. The options granted to employees generally vest in equal annual installments over a five-year period. The options granted to directors generally vest immediately on date of grant. Under the 2020 Plan a total of 1,500,000 shares of common stock are available for issuance, of which 1,386,000 shares remain available for grant as of December 26, 2020. A summary of stock option activity as of December 26, 2020 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 1,794,105 $ 1.73 Granted 119,000 $ 1.49 Exercised (318,250) $ 1.51 Forfeited (77,000) $ 1.41 Expired (226,355) $ 1.52 Outstanding at end of year 1,251,500 $ 1.82 5.08 $ 753,320 Options exercisable at year-end 992,600 $ 1.90 4.38 $ 557,052 No options were exercised during fiscal 2019 and 199,500 options were granted during fiscal 2019. 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 2020 and 2019: 2020 2019 Risk-free interest rate .84%- .91% 2.48% Expected life in years 6-7 6.1 Expected volatility 54% 54% Expected dividend yield 0 0 Weighted average fair value of grants $ .78 $ .79 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 $117,842 and $133,671 as stock based compensation expense in 2020 and 2019, respectively. As of December 26, 2020, there was $146,017 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plan; that cost is expected to be recognized over a weighted average period of 2.05 years. (6) Accrued Expenses Accrued expenses at December 26, 2020 and December 28, 2019 consist of the following: 2020 2019 Accrued legal and accounting $ 71,671 $ 62,725 Accrued payroll and related costs 626,063 518,015 Accrued other 106,357 234,426 $ 804,091 $ 815,166 (7) Revolving Line of Credit In September 2019, the Company entered into a 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. In May of 2020 this credit line was increased to $3.0 million. 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. The Company is subject to certain financial and non-financial covenants, all of which have been waived by BDC for 2020. At December 26, 2020 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. Total Interest Expense for 2020 was $104 thousand. (8) Notes Payable In March 2020, the company acquired a Sonoscan ultrasound microscope for a price of $208 thousand. The full amount was financed through a 5 year note payable with Crest Capital Corporation. The note is collateralized by the microscope and is being paid in monthly installments of $4 thousand, consisting of principal plus interest at a rate of 6.47%. 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, resulting in an implied interest rate of 1.90%. 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 2021 $ 58,114 FY 2022 $ 55,906 FY 2023 $ 43,837 FY 2024 $ 46,757 FY 2025 $ 8,090 Total 212,704 Total interest expense on notes payable during 2020 was $10,816. (9) Income Taxes Components of income tax expense (benefit) for each year are as follows: 2020 2019 Current: Federal $ (39,877) $ (33,874) State 456 456 Current income tax provision (benefit): (39,421) (33,418) Deferred: Federal 33,873 (6,387) State (3,000) 45,261 Deferred income tax provision (benefit), net 30,873 38,874 Total $ (8,548) $ 5,456 Deferred tax assets as of December 26, 2020 and December 28, 2019 are as follows: December 26, 2020 December 28, 2019 Deferred Tax Assets: Net operating loss carryforwards $ 746,397 $ 884,508 Stock compensation 540,281 543,614 Credit carryforwards 1,288,897 1,317,445 Inventory 116,153 316,943 Accrued liabilities 22,140 18,920 Depreciation 250,093 237,449 Other 2,732 2,732 Gross deferred tax assets 2,966,693 3,321,611 Valuation allowance (2,849,693) (3,173,738) Net deferred tax assets $ 117,000 $ 147,873 At December 26, 2020 and December 28, 2019 the Company had net operating loss carryforwards of approximately $2,754,601 and $3,278,463, respectively, available to offset future income for U.S. Federal income tax purposes. These net operating loss carryforwards occurred over several years, which begin to expire in the year ended 12/31/2036. The Company established a valuation reserve as it is judged more likely than not that all or a portion of the tax credits will not be used before they expire. This decision was initially reached in 2018 after giving greater weight to its losses over the last three years compared with its forecast of the future. A summary of the change in the deferred tax asset is as follows: 2020 2019 Gross deferred tax balance at beginning of year $ 3,321,611 $ 3,150,155 Deferred tax benefit (provision) (354,918) 171,456 Valuation allowance (2,849,693) (3,173,738) Balance at end of year, net $ 117,000 $ 147,873 Income tax expense is different from the amounts computed by applying the U.S. federal statutory income tax rate of 21 percent to pretax income as a result of the following: 2020 2019 Tax at statutory rate $ 188,899 $ (125,527) State tax, net of federal benefit 360 360 Net operating loss and credit carryforwards 33,873 153,204 Valuation allowance (324,045) 210,836 Other 92,365 (233,417) Total $ (8,548) $ 5,456 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 2017 through 2020. (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 and as determined each year by the Board of Directors. During 2020 the Company matched ½% of each of the first 2% of employee contributions amounting to $64 thousand. In 2019 the Company did not offer a 401k match. (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 such cash deposits in a high credit quality financial institution. 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. 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 2020 and 2019 were as follows: Percent of Total Revenues Significant Customer 2020 2019 A 36% 43% B 21% 14% C 16% 13% As of December 26, 2020, the Company had trade accounts receivable due from these three customers that accounted for 70% of total trade accounts receivable as of that date. No other customer balances constitute 10% or more of accounts receivable at December 26, 2020. 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. Management believes that any credit risks have been properly provided for in the accompanying financial statements. The Company’s revenue was derived from the following countries in 2020 and 2019: Percent of Total Revenues Country 2020 2019 United States of America 23% 25% Germany 36% 44% Other 41% 31% Many of the Company’s customers based in the United States conduct design, purchasing and payable functions in the United States, but manufacture overseas. Revenue generated from shipments made to customers’ locations outside the United States accounted for 77% and 75% of total revenue in 2020 and 2019, respectively. All of the Company’s long-lived assets and operations are located in the United States. (12) Net Income (Loss) Per Share The following reconciles the basic and diluted net income (loss) per share calculations. Dec. 26, Dec. 28, 2020 2019 Basic EPS Computation: Numerator: Net income (loss) $ 908,064 $ (638,202) Denominator: Weighted average Common shares Outstanding 13,251,521 13,207,097 Basic EPS $ 0.07 $ (0.05) Diluted EPS Computation: Numerator: Net income (loss) $ 908,064 $ (638,202) Denominator: Weighted average Common shares Outstanding 13,251,521 13,207,097 Dilutive effect of stock options 97,061 — Total shares 13,348,582 13,207,097 Diluted net income (loss) per share $ 0.07 $ (0.05)