What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2022-03-10 compared with 2021-03-17 · 189 added, 11 removed, 3 unchanged (99% of the section changed)

Market for Registrant’s Common

Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities.

Market for Registrant ’

s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities.

CPS Technologies Corp.

shares have traded on

The Nasdaq Capital Market, under the symbol “CPSH”.

On December 26, 2020, we had approximately 2,000 shareholders.

shares have traded on The Nasdaq Capital Market, under the symbol “CPSH”.

On December 25, 2021, we had approximately 100 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.

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.

Selected Financial Data

Smaller reporting companies are not required

to provide the information required by this item.

Smaller reporting companies are not required to provide the information required by this item.

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.

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 heatspreaders used with high performance integrated circuits for 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, etc. 

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.

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 2021 the Company’s top three customers accounted for 51% of revenue and the remaining 49% of revenue was derived from 57 other customers.

In 2020 the top three customers accounted for 73% of revenue and the remaining 27% of revenue was derived from approximately 61 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 2021 we saw a gradual improvement in the ability of our customers and suppliers to deal with the pandemic as we begin to return to normalcy.

We continue to see some level of volatility from individual customers with some showing significant increases in their business with us compared to 2020, while others have reduced their business.

We believe that those who have reduced their business have done so because they have seen a reduction in their business from their customers.

Most of the reductions have come from customers who are using our parts for mass transit applications which have been and still are negatively affected by the pandemic.

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

We have implemented several programs to encourage our employees to get vaccinated and believe that well over 75% of our employees are now fully vaccinated, although not necessarily boosted.

Application of Critical Accounting Policies

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:

Allowance for doubtful accounts

The Company performs ongoing monitoring of the status of its receivables based on the payment history and the credit worthiness 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.

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, virtually100% 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 write off obsolete 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, in order 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.

The Company has not experienced 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.

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 2018 the Company concluded that it was more likely than not that a portion or all of the Deferred Tax Asset would not be used before it expires.

As of September 25, 2021 the Company re-evaluated the need for this reserve, in light of recent profitability and expected future profitability.

It was determined that this reserve was no longer needed as it is now more likely than not that the Company would be able to fully utilize its Deferred Tax Asset.

At December 25, 2021, the Company’s Deferred Tax Asset 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%.

Results of Operations (all $ in millions unless noted)

Results of Operations for the year 2021 ( “

2021 ”

) compared with the year 2020 ( “

2020 ”

Total revenue was $22.4 million in 2021, a 7% increase compared with total revenue of $20.9 million in 2020.

This increase was due primarily to an increase in the sales from our largest customer and the beginning of our armor production in 2021. 

The aforementioned increases were partially offset by a reduction in sales to the customer with the highest 2020 sales. 

Much of this customer’s sales go to railroad companies who experienced significant reductions in ridership due to the Covid-19 pandemic.

Gross margin in 2021 totaled $4.8 million or 21% of sales. 

This compares with $4.2 million, or 20% of sales, generated during 2020.

The improvement in margin was primarily due to product mix in 2021 as compared to 2020.

Selling, general and administrative (SG&A) expenses were $4.3 million during 2021, an increase of 30% compared with SG&A expenses of $3.3 million incurred during 2020. 

Several factors contributed to this increase.

The Company incurred $0.3M of one time restructuring costs in 2021.

The Company paid the salaries and benefits for both Grant Bennett, our now retired CEO, and Michael McCormack, our new CEO, during the first half of 2021, adding about $0.1M to our SG&A expenses.

The Company also added 3 new sales positions in 2021 which contributed to an overall increase in compensation of $0.3M (excluding the previously mentioned CEO position).

The Company generated operating income of $0.5 million in 2021, compared with an operating income of $0.9 in 2020.

This decrease was due primarily to the increase in SG&A expenses discussed above.

The Company recorded net income of $3.2M in 2021 compared to $0.9M in 2020.

This increase is due to the reversal of the Company’s deferred tax reserve.

A valuation allowance against deferred tax assets is required to be established or maintained when it is "more likely than not" that all or a portion of deferred tax assets will not be realized.

In December 2018, the Company established a valuation allowance reserve, as it was judged more likely than not that all or a portion of its deferred tax assets would not be utilized before they expire.

This decision was reached after giving greater weight to the Company’s losses in recent years as compared to its forecasts.

In September 2021 this decision was reevaluated in light of the Company’s recent profitability and its forecasts for future profitability.

It is now judged that it is “more likely than not”

that the Company will be able to fully utilize the deferred tax asset.

This reversal of the valuation allowance was made net of the expected tax liability for 2021.

Significant Fourth Quarter Activity in 2021:

Revenues totaled $6.2 million in the fourth quarter of 2021 versus $4.2 million in the fourth quarter of 2020, an increase of 48%. 

This increase was due primarily to the increase in sales for armor and hermetic packages in Q4 2021 as well as the impact of the Covid-19 pandemic on sales in Q4 2020.

Gross margin increased in the fourth quarter of 2021 compared with the fourth quarter of 2020 to $1.4 million from $0.5 million. 

This increase was directly associated with the increase in revenue.

SG&A expenses totaled $1.0 million during the quarter, an increase of 25% compared to $0.8 million in the same quarter of 2020. 

This increase was due to the increase in sales employees and shifting of expenses from cost of sales discussed above, in addition to an increase in commission expense due to higher sales volume. 

Primarily as a result of the revenue increase, the Company recorded operating income of $0.3 million in the fourth quarter of 2021 compared to an operating loss of $0.3 million in the fourth quarter of 2020.

The Company recorded net income of $0.2 million in the fourth quarter of 2021 compared to a net loss of $0.2 million in the fourth quarter of 2020.

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

The Company’s cash and cash equivalents at December 25, 2021 totaled $5.1 compared with cash and cash equivalents at December 26, 2020 of $0.2. 

This increase was due to the Company’s implementation of an ATM capital raise which netted $3.4. 

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

Accounts receivable at December 25, 2021 totaled $4.9 compared to $2.9 at December 26, 2020.

Days Sales Outstanding (DSO) increased to 72 days at the end of 2021 compared to 62 days at the end of 2020.

This change was due to the inclusion of $0.6 of deferred revenue in the 2021 year end accounts receivable.

Excluding this amount the DSO at the end of 2021 comes to 63 days. 

The accounts receivable balances at December 25, 2021, and December 26, 2020 were both net of an allowance for doubtful accounts of $10 thousand.

Inventories increased to $3.9 at December 25, 2021 from $3.7 at December 26, 2020.

The inventory turnover in the most recent four quarters ending was 4.7 times, up from 4.5 times averaged during the four quarters of 2020 (each based on a 5 point average). 

In 2021 we were able to significantly reduce our “traditional”

inventory while adding the inventory necessary for our armor production.

The Company had no inventory on consignment at any customers at the end of 2020 or 2021.

At December 25, 2021 and December 26, 2020 inventory of, $0.4 and $1.6, respectively, was located at vendor locations pursuant to inventory agreements.

The Company funded its operations from its profit in 2021.

The Company expects it will continue to be able to fund its operations during 2022 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 September 2019, the Company entered into revolving line of credit (LOC) with Massachusetts Business Development Corporation (BDC) in the amount of $2.5 million, which was increased to 3.0 million in May of 2020. 

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

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

The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of LIBOR plus 550 basis points.

BDC requires that the total earnings before taxes for 2021 be at least $270 thousand, which was achieved. 

BDC also required $412 thousand earnings before taxes for the fourth quarter of 2021.

A blanket waiver of compliance was issued by BDC for this and any other 2021 activity. 

At December 25, 2021 the Company had $0 borrowings under this LOC and its borrowing base at the time would have permitted an additional $2.9 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 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%

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 25, 2021, the Company had $247 thousand of construction in progress and no outstanding commitments to purchase production equipment.

$154 thousand of this is for the acquisition of Made to Manage ERP software expected to be placed in service during the third quarter of 2022.

During 2021, 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 continue at $152 thousand.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Inflation had no material effect on the results of operations or financial condition during the last few years, although the Company has begun to see price increases in certain commodities during the last quarter of 2021.

There can be no assurance that inflation will not affect our operations or business in the future.

Quantitative and Qualitative Disclosure about Market Risk

Smaller reporting companies are not required to provide the information required by this item.

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.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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 5. Market for Registrant’s Common Equity