CPS TECHNOLOGIES CORP/DE/ 10-K

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 metal matrix composite components for 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 and green lifestyles. 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 the internet backbone.  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 heatspreaders 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.   Metal matrix composites (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.   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 electronics world can be divided into power processing and signal processing.  Power processing consists of converting the electrical power provided by the power source into the appropriate voltage and amperage needed for 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, these requirements 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 on circuit boards; 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 in which the differences in the expansion rates of the materials in the assembly do not cause a failure from breaking, delaminating, etc.   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 blueprint. The CPS process technology allows most products to be made to net shape, requiring little or no final machining.   In the metal matrix composite world, the Company primarily manufactures AlSiC components. Nevertheless, its proprietary Quickset- Quickcast process technology can be used to produce other metal-matrix composites to meet future market needs. 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 Markets Overview   Armor has traditionally been steel panels.   As threat levels have increased the amount of steel required to provide ballistic protection has reached a point where the weight degrades 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 declines 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; declines in the costs of all these components is 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 allow for 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 the 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 vehicle (EVs) at an increasing rate. This focus on more energy efficient vehicles is being driven by concerns about climate change. There are many varieties of HEVs and EVs, but all HEVs and EVs contain an electric motor and contain 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 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 are in the general area where those who want to save on short term costs are perfectly fine using power modules with copper baseplates, while those who want longer term reliability, more the luxury market, will use power modules with an MMC (AlSiC) baseplate.   Of particular interest on this topic is the fact that there is a move to using Silicon Carbide (SiC) semiconductors instead of silicon semiconductors. SiC has proven to be more efficient than silicon allowing, among other things for EV’s and HEV’s to run for longer periods on a single charge of the auto’s battery. This is important to CPS as SiC semiconductors run hotter than silicon semiconductors. As such, the voltage levels for which AlSiC would be preferred over copper would be lower meaning the AlSiC baseplate would be the better choice for manufacturers currently on the margin when it comes to the voltage levels being utilized in their vehicles.   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 will be the source of significant and long-term growth for the Company.         Hermetic Packages   The prime use of hermetic packaging is for space, flight 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 2x2 inch package, provide the computing technology of today's typical server or yesterday's small mainframe.   These HMA’s have been used since the late 50’s in various radar and sophisticated shipboard surveillance systems, including early nuclear deterrent systems such as the Minuteman missile. CPS has provided technological advances from the old silo-based systems to space based deterrence far beyond what was even dreamed of even a few decades ago. We also support all types of communication satellites and are looking forward to being a part of the wide-ranging programs that will define the manner of how we talk to one another for decades to come.   CPS is the only producer of hermetic packages with AlSiC bases, combining our expertise in hermetic package production with our expertise in MMC production. This ability provides tremendous benefits regarding a much lighter weight package which is 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 2021, our three largest customers accounted for 24%, 16%, and 11% of revenues, respectively. In 2021, approximately 77% of our revenues were derived from commercial applications and 23% 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 25, 2021, the Company had 11 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 are 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 $25 million as of December 25, 2021. This backlog consists of orders received from customers and which are for the most part scheduled to ship in 2022. Readers should be aware that under certain circumstances customers may be able to cancel existing orders, some of which 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 metal-matrix composites, 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 metal matrix composites is Denka, a large chemical company based in Japan.  We see manufacturers in China seeking to penetrate our markets. We believe they offer their products at lower prices but have generally not yet been to be able to provide the delivery, performance, quality and reliability required by the market.   Regarding hermetic packages, the market is much more fragmented. There are a number of different hermetic package types allowing certain companies to specialize in a particular area of the overall hermetic package market. Some of these companies are competitors of CPS, while others focus on product types not sold by CPS. In 2021 CPS significantly expanded its technical competence through the hire of several employees who are allowing the Company to expand its presence in areas in which we previously did not participate. Combined with our emphasis on quality and customer service we expect to see continued growth in our hermetic package product line. Management believes our main domestic competitors in this arena are Egide, Ametek, and Hermetic Solutions Group.   The company currently has contracts to produce its HybridTech Armor® panels. To our knowledge, we do not have any direct competitors in this market. Our competition in this area would be alternatives to our HybridTech Armor® which would involve various tradeoffs regarding cost, weight, anti-ballistic properties and things of that nature. 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 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 25, 2021, we had 90 permanent full-time employees. 79 were engaged in manufacturing and engineering and 11 in sales and administration, including finance, HR and general management. We also have approximately 8 manufacturing people working with us through temporary employment agencies. During 2021, the Company made a concerted effort to increase factory efficiency while also expanding its sales force.         None of our employees are covered by a collective bargaining agreement. We consider our relations with our employees to be excellent.