What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2023-03-16 compared with 2022-03-10 · 36 added, 45 removed, 147 unchanged (36% of the section changed)

2 unchanged sentences

CPS Technologies Corp.

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

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

On December 31, 2022, we had approximately 100 shareholders of record.

27 unchanged sentences

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 lids and heatspreaders used with high performance integrated circuits in internet switches and routers.

We provide armor for naval and other military applications. 

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In 2021 the top three customers accounted for 51% of revenue and the remaining 49% of revenue was derived from approximately 57 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

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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.

The Company’s general obsolescence policy is to reserve against inventory when there has been no activity on a particular part for a twelve month period and there are no pending or expected customer orders.

In some cases, customers place blanket purchase orders and request the Company to maintain inventory sufficient to respond quickly upon receiving a shipment request.

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Total revenue was $26.6 million in 2022, a 19% increase compared with total revenue of $22.4 million in 2021.

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.

This increase was due primarily to an increase in the sales of armor, which did not start until May of 2021, and the recovery of business from a major customer who was particularly affected by the COVID-19 pandemic in 2021. 

Gross margin in 2022 totaled $7.3 million or 27% of sales. 

This compares with $4.8 million, or 21% of sales, generated during 2021.

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

The improvement in margin was primarily due to the impact of increased sales on the absorption of fixed costs.

Selling, general and administrative (SG&A) expenses were $5.1 million during 2022, an increase of 19% compared with SG&A expenses of $4.3 million incurred during 2021. 

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 hired a Chief Development Officer in early 2022 which was a new position.

The Company incurred higher variable compensation costs in 2022 due to its strong financial performance.

Travel costs were significantly higher in 2022 due to the limited nature of travel in 2021 due to the COVID-19 pandemic.

Lastly, higher sales lead to higher commission costs in 2022, compared to 2021. 

The Company generated operating income of $2.2 million in 2022, compared with an operating income of $0.5 in 2021.

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

This increase was due primarily to the increase in Sales and its resulting impact on the absorption of fixed costs, discussed above.

The Company recorded net income of $2.1M in 2022 compared to $3.2M in 2021.

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

In 2022 the Company had a provision for income taxes of 0.8 million.

In addition, the Company filed for the Employee Retention Tax Credit of 0.7 million in 2022. 

In 2021 the Company reevaluated its valuation allowance against its deferred tax asset which resulted in a tax benefit in 2021 of $2.8 million. 

For further explanation see below.

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.

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Significant Fourth Quarter Activity in 2022:

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.

Revenues totaled $6.1 million in the fourth quarter of 2022 versus $6.2 million in the fourth quarter of 2021, a decrease of 2%. 

This decrease was due primarily to sales orders due to ship from our plating vendors not being shipped in late December as scheduled.

Gross margin increased in the fourth quarter of 2022 compared with the fourth quarter of 2021 to $1.6 million from $1.4 million. 

This increase was directly associated with the increase in revenue.

This increase was due to operating efficiencies that the Company implemented throughout 2022 in its production process.

SG&A expenses totaled $1.3 million during the quarter, an increase of 30% compared to $1.0 million in the same quarter of 2021. 

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.

This increase was primarily due to the increased variable compensation costs and travel costs discussed above. 

The Company recorded operating income of $0.3 million in the fourth quarter of 2022 compared to operating income of $0.3 million in the fourth quarter of 2021. 

The Company recorded net income of $0.3 million in the fourth quarter of 2022 compared to net income of $0.2 million in the fourth quarter of 2021. 

The reduction in sales and increase in SG&A expenses, offset by the increase in gross margin, all discussed above, accounted for this.

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

The Company’s cash and cash equivalents at December 31, 2022 totaled $8.3 compared with cash and cash equivalents at December 25, 2021 of $5.1. 

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.

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

Accounts receivable at December 31, 2022 totaled $3.8 compared to $4.9 at December 25, 2021.

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. 

Days Sales Outstanding (DSO) decreased to 52 days at the end of 2022 compared to 72 days at the end of 2021.

This change was due to the reduction of deferred revenue occurring in the 4 th quarter.

Prepayments received in 2021 were used to pay for shipments shipped in the 4 th quarter thus immediately reducing accounts receivable, rather than the customer paying 30-45 days later.

Prepaid billings of $0.9 were shipped in the 4 th quarter. 

The accounts receivable balances at December 31, 2022, and December 25, 2021 were both net of an allowance for doubtful accounts of $10 thousand.

Inventories increased to $4.9 at December 31, 2022 from $3.9 at December 25, 2021.

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 inventory turnover in the four quarters ending 2022 was 4.2 times, down from 4.7 times averaged during the four quarters of 2021 (each based on a 5 point average). 

In 2022 we had several large orders in inventory that were not scheduled to ship until early 2023.

The Company had no inventory on consignment at any customers at the end of 2022 or 2021.

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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.

BDC requires that quarterly and year to date earnings may not be less than projected amounts provided to the bank and the Company may not incur capital expenditures in excess of $50 thousand per year over its depreciation expense, or $25 thousand per transaction. 

The Company met the earnings covenant and has received a waiver for its capital expenditures. 

At December 31, 2022 the Company had $0 borrowings under this LOC and its borrowing base at the time would have permitted an additional $2.9 million to have been borrowed.

In March 2020, the Company acquired a scanning acoustic microscope for a price of $208 thousand. 

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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 31, 2022, the Company had $65 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 2022, our leasing arrangements consisted of the Norton, MA facility lease.

1 unchanged sentence

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.

Annual rental payments were $160 thousand in 2022.

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.

Thus far inflation has not had a significant impact on our profitability.

We have had higher than normal wage increases, have implemented other programs to ameliorate the effects of inflation on our employees (for example, we increased the Company share of health insurance premiums and increased the Company 401k match in 2022) and seen price increases from some of our suppliers.

We have been able to pass along many of these price increases to our customers.

There can be no assurance that our customers will continue to accept further price increases, that our employees will continue to be satisfied with their wage and benefit increases and that inflation will not affect our operations or business in the future.

Quantitative and Qualitative Disclosure about Market Risk

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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 5. Market for Registrant’s Common Equity