CPS TECHNOLOGIES CORP/DE/ 10-Q

ITEM 1 FINANCIAL STATEMENTS (Unaudited)   CPS TECHNOLOGIES CORP. Balance Sheets (Unaudited)       July 1,     December 31,       2023     2022   ASSETS                                   Current assets:                 Cash and cash equivalents   $ 8,681,225     $ 8,266,753   Accounts receivable-trade, net     5,074,559       3,777,975   Accounts receivable-other     74,639       685,668   Inventories, net     4,813,753       4,875,901   Prepaid expenses and other current assets     288,315       211,242                     Total current assets     18,932,491       17,817,539                     Property and equipment:                 Production equipment     11,028,500       10,770,427   Furniture and office equipment     952,883       952,883   Leasehold improvements     985,649       985,649                     Total cost     12,967,032       12,708,959                     Accumulated depreciation and amortization     ( 11,699,870 )     ( 11,446,901 ) Construction in progress     240,415       64,910                     Net property and equipment     1,507,578       1,326,968                     Right-of-use lease asset     400,000       466,000   Deferred taxes, net     1,664,032       2,069,436                     Total assets   $ 22,504,101     $ 21,679,943     See accompanying notes to financial statements.   (continued)         CPS TECHNOLOGIES CORP. Balance Sheets (Unaudited) (concluded)       July 1,     December 31,       2023     2022   LIABILITIES AND STOCKHOLDERS` EQUITY                                   Current liabilities:                 Note payable, current portion   $ 56,681     $ 43,711   Accounts payable     2,359,532       1,836,865   Accrued expenses     861,514       820,856   Deferred revenue     1,828,068       2,521,128   Lease liability, current portion     158,000       157,000                     Total current liabilities     5,263,795       5,379,560                     Note payable less current portion     20,437       54,847   Deferred revenue – long term     31,277       231,020   Long term lease liability     242,000       309,000                     Total liabilities     5,557,509       5,974,427                     Commitments and contingencies (note 4)                                       Stockholders` equity:                 Common stock, $ 0.01 par value, authorized 20,000,000 shares; issued 14,546,487 and 14,460,486 shares; outstanding 14,511,544 and 14,450,470 shares; at July 1, 2023 and December 31, 2022, respectively     145,465       144,605   Additional paid-in capital     39,978,453       39,726,851   Accumulated deficit     ( 23,065,388 )     ( 24,125,092 ) Less cost of 34,943 and 10,016 common shares repurchased at July 1, 2023 and December 31, 2022, respectively     ( 111,938 )     ( 40,848 )                   Total stockholders` equity     16,946,592       15,705,516                     Total liabilities and stockholders` equity   $ 22,504,101     $ 21,679,943     See accompanying notes to financial statements.           CPS TECHNOLOGIES CORP. Statements of Operations (Unaudited)       Three Months Ended     Six Months Ended       July 1,     July 2,     July 1,     July 2,       2023     2022     2023     2022   Revenues:                                 Product sales   $ 7,418,138     $ 7,070,743     $ 14,518,405     $ 13,723,457                                     Total revenues     7,418,138       7,070,743       14,518,405       13,723,457                                     Cost of product sales     5,221,880       5,242,106       10,077,444       9,931,330                                     Gross Margin     2,196,259       1,828,637       4,440,961       3,792,127                                     Selling, general, and administrative expense     1,465,349       1,159,157       3,015,871       2,575,550                                     Income from operations     730,910       669,480       1,425,090       1,216,577                                     Interest income (expense), net     79,652       1,594       95,242       ( 319 )                                   Net income before income tax     810,562       671,074       1,520,332       1,216,258   Income tax provision     210,058       215,966       460,628       341,714                                     Net income   $ 600,503     $ 455,108     $ 1,059,704     $ 874,544                                     Net income per basic common share   $ 0.04     $ 0.03     $ 0.07     $ 0.06                                     Weighted average number of basic common shares outstanding     14,493,970       14,431,825       14,473,128       14,410,064                                     Net income per diluted common share   $ 0.04     $ 0.03     $ 0.07     $ 0.06                                     Weighted average number of diluted common shares outstanding     14,621,929       14,708,646       14,630,765       14,682,516     See accompanying notes to financial statements.           CPS TECHNOLOGIES CORP. STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JULY 1, 2023 AND JULY 2, 2022       Common Stock     Additional             Total       Number of             paid-in     Accumulated     Stock     stockholders'       shares issued     Par Value     capital     deficit     repurchased     equity   Balance at April 1, 2023     14,467,487     $ 144,675     $ 39,867,507       ( 23,665,891 )     ( 41,638 )     16,304,653   Share-based compensation expense     --       --       17,316       --       --       17,316   Issuance of common stock     --       --       --       --       --       --   Employee option exercises     79,000       790       93,630       --       ( 70,300 )     24,120   Net income     --       --       --       600,503       --       600,503   Balance at July 1, 2023     14,546,487       145,465       39,978,453       ( 23,065,388 )     ( 111,938 )     16,946,592         Common Stock     Additional                     Total       Number of             paid-in     Accumulated     Stock     stockholders'       shares issued     Par Value     capital     deficit     repurchased     equity   Balance at December 31, 2022     14,460,486     $ 144,605     $ 39,726,851       ( 24,125,092 )     ( 40,848 )     15,705,516   Share-based compensation expense     --       --       147,757       --       --       147,757   Issuance of common stock     --       --       --       --       --       --   Employee options Exercised     86,001       860       103,845       --       ( 71,090 )     33,615   Net income     --       --       --       1,059,704       --       1,059,704   Balance at July 1, 2023     14,546,487       145,465       39,978,453       ( 23,065,388 )     ( 111,938 )     16,946,592         Common Stock     Additional                     Total       Number of             paid-in     Accumulated     Stock     stockholders'       shares issued     Par Value     capital     deficit     repurchased     equity   Balance at April 2, 2022     14,423,486     $ 144,235     $ 39,546,975       ( 25,837,056 )     ( 5,623 )     13,848,531   Share-based compensation expense     --       --       39,384       --       --       39,384   Issuance of common stock     --       --       ( 8,144 )     --       --       ( 8,144 ) Employee option exercises     15,300       153       21,870       --       ( 15,226 )     6,797   Net income     --       --       --       455,108       --       455,108   Balance at July 2, 2022     14,438,786       144,388       39,600,085       ( 25,381,948 )     ( 20,849 )     14,341,676         Common Stock     Additional                     Total       Number of             paid-in     Accumulated     Stock     stockholders'       shares issued     Par Value     capital     deficit     repurchased     equity   Balance at December 25, 2021     14,350,786     $ 143,508     $ 39,281,810       ( 26,256,492 )     ( 2,515 )     13,166,311   Share-based compensation expense     --       --       163,855       --       --       163,855   Issuance of common stock     --       --       ( 17,758 )     --       --       ( 17,758 ) Employee options Exercised     88,000       880       172,178       --       ( 18,334 )     154,724   Net income     --       --       --       874,544       --       874,544   Balance at July 2, 2022     14,438,786       144,388       39,600,085       ( 25,381,948 )     ( 20,849 )     14,341,676     See accompanying notes to financial statements.           CPS TECHNOLOGIES CORP. Statements of Cash Flows (Unaudited)       Six Months Ended       July 1,     July 2,       2023     2022                     Cash flows from operating activities:                 Net income   $ 1,059,704     $ 874,544   Adjustments to reconcile net income to cash provided by (used in) operating activities:                 Depreciation and amortization     252,969       211,641   Share-based compensation     147,757       163,855                     Changes in:                 Accounts receivable-trade     ( 1,296,584 )     333,048   Accounts receivable-other     611,028       --   Inventories     62,148       ( 754,117 ) Prepaid expenses and other current assets     ( 77,073 )     ( 87,628 ) Accounts payable     522,667       ( 478,973 ) Accrued expenses     40,658       ( 438,249 ) Deferred taxes     405,404       341,258   Deferred revenue     ( 892,803 )     45,405                     Net cash provided by operating activities     835,875       210,784                     Cash flows from investing activities:                 Purchases of property and equipment     ( 433,579 )     ( 291,631 )                   Net cash used in investing activities     ( 433,579 )     ( 291,631 )                   Cash flows from financing activities:                 Proceeds from exercise of employee stock options, net of repurchases     33,615       154,724   Proceeds from issuance of common stock, net of expenses     --       ( 17,758 ) Payments on note payable     ( 21,439 )     ( 30,149 )                   Net cash provided by financing activities     12,176       106,817                     Net increase in cash and cash equivalents     414,472       25,970                     Cash and cash equivalents at beginning of period     8,266,753       5,050,312                     Cash and cash equivalents at end of period   $ 8,681,225     $ 5,076,282                     Supplemental disclosures of cash flows information:                 Cash paid for interest     2,902       4,353       Cash paid for taxes     79,456       79,456                     Supplemental disclosures of non-cash activity:                 Net exercise of stock options     71,090       18,334     See accompanying notes to financial statements.         CPS TECHNOLOGIES CORP. Notes to Financial Statements (Unaudited)       ( 1 )                   Nature of Business CPS Technologies Corp. (the “Company” or “CPS”) provides advanced material solutions to the electronics, power generation, automotive and other industries. The Company’s primary advanced material solution is metal-matrix composites (MMC’s) which are a combination of metal and ceramic.   CPS also assembles housings and packages for hybrid circuits. These housings and packages may include components made of metal-matrix composites or they may include components made of more traditional materials such as aluminum, copper-tungsten, etc.   Using its proprietary MMC technology, the Company also produces light-weight armor, particularly for extreme environments and heavy ballistic threat levels.   The Company sells into several end markets including the aerospace & defense markets, wireless communications infrastructure market, high-performance microprocessor market, motor controller market, and other microelectronic markets.         ( 2 )               Summary of Significant Accounting Policies As permitted by the rules of the Securities and Exchange Commission applicable to quarterly reports on Form 10 -Q, these notes are condensed and do not contain all disclosures required by generally accepted accounting principles.   The accompanying financial statements are unaudited. In the opinion of management, the unaudited financial statements of CPS reflect all normal recurring adjustments which are necessary to present fairly the financial position and results of operations for such periods.   The Company’s balance sheet at December 31, 2022 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.   For further information, refer to the financial statements and footnotes thereto included in the Registrant’s Annual Report on Form 10 -K for the year ended December 31, 2022 and in CPS’s other SEC reports, which are accessible on the SEC’s website at www.sec.gov and the Company’s website at www.cpstechnologysolutions.com.   The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.         ( 3 )                 Net Income Per Common and Common Equivalent Share Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share is calculated by dividing net income 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 options 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.         The following table presents the calculation of both basic and diluted EPS:       Three Months Ended     Six Months Ended       July 1,     July 2,     July 1,     July 2,       2023     2022     2023     2022   Basic EPS Computation:                                 Numerator:                                 Net income (loss)   $ 600,503     $ 455,108     $ 1,059,704     $ 874,544                                     Denominator:                                 Weighted average                                 Common shares                                 Outstanding     14,493,970       14,431,825       14,473,128       14,410,064                                     Basic EPS   $ 0.04     $ 0.03     $ 0.07     $ 0.06                                     Diluted EPS Computation:                                 Numerator:                                 Net income (loss)   $ 600,503     $ 455,108     $ 1,059,704     $ 874,544                                     Denominator:                                 Weighted average                                 Common shares                                 Outstanding     14,493,970       14,431,825       14,473,128       14,410,064   Dilutive effect of stock options     127,959       276,821       157,637       272,452                                     Total Shares     14,621,929       14,708,646       14,630,765       14,682,516                                     Diluted EPS   $ 0.04     $ 0.03     $ 0.07     $ 0.06           ( 4 )                   Commitments & Contingencies   Commitments   Leases The Company has one real estate lease expiring in February 2026. 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 2026 (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 was recognized on March 1, 2021 based on the present value of lease payments over the lease term using the Company’s incremental borrowing rate at commencement date. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.         Operating Leases   The Norton facility lease comprises approximately 38 thousand square feet. The lease is 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 renew the lease starting in March 2026 through February 2032. Annual rental payments range from $ 160 thousand to $ 165 thousand through maturity.   The following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s capitalized operating lease as of July 1, 2023   (Dollars in Thousands)   July 1, 2023   Maturity of capitalized lease liabilities   Lease payments             2023     81   2024     165   2025     165   2026     28   Total undiscounted operating lease payments   $ 439   Less: Imputed interest     ( 39 ) Present value of operating lease liability   $ 400       Balance Sheet Classification         Current lease liability   $ 158   Long-term lease liability     242   Total operating lease liability   $ 400             Other Information         Remaining lease term for capitalized operating lease (months)     32   Discount rate for capitalized operating leases     6.6 %   Operating Lease Costs and Cash Flows Operating lease cost and cash paid was $ 41 thousand during the second quarter of 2023 and $ 81 thousand for the six months ended July 1, 2023. These costs are related to its long-term operating lease. All other short-term leases were immaterial.   Finance Leases The company does not have any finance leases.         ( 5 )                   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. Reductions in compensation expense associated with the forfeited options are estimated at the date of grant, 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 the stock options granted.         During the quarter ended July 1, 2023, a total of 60,000 stock options were granted to employees under the Company’s 2020 Equity Incentive Plan Stock Incentive Plan (the “Plan”) and no stock options were granted to outside directors during the quarter ended July 1, 2023, issued at a weighted average price of $ 2.66 per share. During the quarter ended July 2, 2022, a total of 15,000 stock options were granted to employees under the Company’s 2020 Equity Incentive Plan Stock Incentive Plan (the “Plan”) and no stock options were granted to outside directors during the quarter ended July 2, 2022, issued at a weighted average price of $ 4.41 per share.   During the three and six months ended July 1, 2023, there were 79,000 and 86,000 options exercised and corresponding shares issued at a weighted average price of $ 1.20 and $ 1.22 , respectively. During the three and six months ended July 2, 2022, there were 15,300 and 88,000 options exercised and corresponding shares issued at a weighted average price of $ 1.44 and $ 1.97 , respectively.    During the three and six months ended July 1, 2023, the Company repurchased 24,642 and 24,927 shares, respectively, for employees to facilitate their exercise of stock options. During the three and six months ended July 2, 2022, the Company repurchased 3,143 and 3,983 shares, respectively, for employees to facilitate their exercise of stock options.    There were also 754,800 shares outstanding at a weighted average price of $ 2.61 with a weighted average remaining term of 5.67 years as of July 1, 2023, and there were 551,000 shares exercisable at a weighted average price of $ 2.45 with a weighted average remaining term of 4.75 years as of July 1, 2023. The Plan, as amended, is authorized to issue 1,500,000 shares of common stock. As of July 1, 2023, there were 1,036,400 shares available for future grants.   As of July 1, 2023, there was $ 294 thousand of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan; that cost is expected to be recognized over a weighted average period of 1.92 years.   During the three and six months ended July 1, 2023, the Company recognized $ 17,316 and $ 147,757 , respectively, as shared-based compensation expense related to previously granted shares under the Plan.   During the three and six months ended July 2, 2022, the Company recognized $ 39,384 and $ 163,855 , respectively, as shared-based compensation expense related to previously granted shares under the Plan.         ( 6 )                   Inventories Inventories consist of the following:       July 1,     December 31,       2023     2022                     Raw materials   $ 2,886,278     $ 2,645,442   Work in process     1,603,511       1,863,512   Finished goods     516,889       525,872                     Total inventory     5,006,678       5,034,826                     Reserve for obsolescence     ( 192,925 )     ( 158,925 )                   Inventories, net   $ 4,813,753     $ 4,875,901             ( 7 )                   Accrued Expenses Accrued expenses consist of the following:       July 1,     December 31,       2023     2022                     Accrued legal and accounting   $ 51,489     $ 35,398   Accrued payroll and related expenses     685,785       760,305   Accrued other     124,240       25,153                         $ 861,514     $ 820,856           ( 8 )               Line of Credit In May 2023, the Company terminated its $ 3.0 million revolving line of credit (LOC) with Massachusetts Business Development Corporation (BDC). A new LOC in the amount of $ 3.0 million was entered into with Rockland Trust Company. The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of the National Prime Rate as published by the Wall Street Journal. On July 1, 2023, the Company had $ 0 of borrowings under this LOC and its borrowing base at the time would have permitted an additional $ 3.0 million to have been borrowed.           ( 9 )             Note Payable           In March 2020, the Company acquired inspection equipment for a price of $ 208 thousand. The full amount was financed through a 5 year note payable with a third -party equipment finance company.   The note is collateralized by the equipment and is being paid in monthly installments of $ 4 thousand, consisting of principal plus interest at a rate of 6.47 %.   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 2023   $ 22,272   FY 2024   $ 46,757   FY 2025   $ 8,090   Total     77,119     Total interest expense on notes payable during 2023 was $ 2,902 .         ( 10 )                   Income Taxes For the three and six months ended July 1, 2023 there were charges against the deferred tax asset of $ 179 and $ 405 , respectively.           ITEM 2 MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   The following discussion and analysis of financial condition and results of operations is based upon and should be read in conjunction with the financial statements of the Company and notes thereto included in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 and in CPS’s other SEC reports, which are accessible on the SEC’s website at www.sec.gov and the Company’s website at www.cpstechnologysolutions.com.   Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. There are a number of factors that could cause the Company’s actual results to differ materially from those forecasted or projected in such forward-looking statements. This includes the impact of the COVID-19 pandemic and the Russian invasion of Ukraine, which are discussed in Item 3 of this report. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or changed circumstances after the date hereof or to reflect the occurrence of unanticipated events.   Critical Accounting Policies The critical accounting policies utilized by the Company in preparation of the accompanying financial statements are set forth in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. There have been no material changes to these policies since December 31, 2022.   Overview Products we provide include baseplates for motor controllers used in high-speed electric trains, subway cars, wind turbines, and hybrid and electric vehicles. We provide baseplates and housings used in radar, satellite and avionics applications. We provide lids and heat spreaders used with high performance integrated circuits for use in internet switches and routers. We provide baseplates and housings used in modules built with Wide Band Gap Semiconductors like Silicon Carbide (“SiC”) and Gallium Nitride (“GaN”), collectively Metal Matrix Composites (“MMC”). 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, cold rolled steel and Kovar. Using its proprietary MMC technology, the Company also produces light-weight vehicle armor, particularly for extreme environments and heavy threat levels.   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. CPS’ 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 such as engineering, tooling design and fabrication, process engineering, and others. 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 MMC, housings for hybrid circuits and our proprietary armor solution 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.         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, we changed our name from Ceramics Process Systems Corporation to CPS Technologies Corporation.   Results of Operations for the Second Fiscal Quarter of 2023 (Q2 2023) Compared to the Second Fiscal Quarter of 2022 (Q2 2022); (all $ in 000 ’ s)   Revenues totaled $7,418 in Q2 2023 compared with $7,100 generated in Q1 2022, an increase of 4%. This increase was mainly due to increased shipments of armor for the US Navy in 2023 as compared to 2022.   Gross margin in Q2 2023 totaled $2,196 or 30% of sales. This compares with gross margin in Q2 2022 of $1,829 or 26% of sales. This percentage increase was due to the company’s continuing efforts to improve manufacturing efficiencies as well as the impact of higher sales volumes on fixed costs.   Selling, general and administrative (SG&A) expenses totaled $1,465 in Q2 2023 compared with SG&A expenses of $1,159 in Q2 2022. There were three major reasons for this increase. First there was a significant increase in travel expenses. In 2022 we were just beginning to come out of the Covid-19 pandemic. Many conferences continued to be virtual and many customers continued to prohibit outside visitors. In 2023 this has changed, thus our business development team, in particular, have been doing significantly more travel than a year ago. Secondly, the company increased its 401k matching formula in 2023 resulting in increased payroll costs. Lastly, the Company accrued severance to a long time employee whose service with the Company was terminated   The Company experienced an operating profit of $731 in Q2 2023 compared with an operating profit of $669 in Q2 2022, an increase of 9%. This increase was a result of the increased gross margin, partially offset by the increase in SG&A expenses.   Results of Operations for the First Six Months of 2023 Compared to the First Six Months of 2022 (all $ in 000s)   Total revenue was $14,518 in the first half of 2023, a 6% increase compared with total revenue of $13,723 in the first half of 2022. This increase was mainly due to increased shipments of armor for the US Navy in 2023 as compared to 2022.   Gross margin in the first six months of 2023 totaled $4,441 or 31% of sales. In the first six months of 2022 gross margin totaled $3,792 or 28% of sales. This increase was due to the increase in revenue and the increased coverage of our fixed costs.   Selling, general and administrative (SG&A) expenses were $3,016 during the first six months of 2023, up 17% compared with SG&A expenses of $2,576 in the first six months of 2022. Increased variable compensation accruals due to higher 2023 profitability as well as the travel costs, payroll costs and severance, mentioned above, were the primary reasons for this increase.         During the first half of 2023, the Company had net interest income of $95. This compares with interest expense of $0 incurred during the first half of 2022. The increase in interest income is due to our strong cash position and higher interest rates.   In the first six months of 2023 the Company had operating income of $1,425 compared with $1,217 in the same period last year. The net income for the first six months of 2023 totaled $1,060 versus $875 in the first six months of 2022.   The Company has had extremely minimal sales to both Russia and Ukraine over the last several years, the loss of which would be immaterial to these financial statements. Neither does CPS rely on raw materials from that part of the world. As a result, we do not believe that the Russian invasion of Ukraine will have a direct impact on our results. Nevertheless, there could be an indirect impact regarding supply chain and inflationary issues as a result of this war.   Inflation has had an impact on our costs. Thus far, we have been able to pass along these increases to our customers, but there is no guarantee that we will be able to continue this in the future. In addition, there is often a lag between when the costs increase and when we can adjust customer prices. Some of our larger customers will have pricing agreements, typically for one year, and we must wait for those agreements to end before making any pricing adjustments. Wage increases are also part of the inflation impact. We have instituted a combination of wage increases as well as richer benefits, such as the increased 401k match mentioned above, in order to retain the folks making up our workforce.   These factors combine to create a higher degree of uncertainty regarding future financial performance.   Liquidity and Capital Resources (all $ in 000 ’ s unless noted) The Company’s cash and cash equivalents at July 1, 2023 totaled $8,681. This compares to cash and cash equivalents at December 31, 2022 of $8,267. The increase in cash was due primarily to the Company’s profitability, partially offset by increase in working capital required for this growth.   Accounts receivable at July 1, 2023 totaled $5,148 compared with $4,464 at December 31, 2022. Days Sales Outstanding (DSO) increased from 56 days at the end of 2022 to 62 days at the end of Q2 2023. The increase in DSO was due to the inclusion of deferred revenue of $0.6M in the year end accounts receivable balance, which was collected during Q1 2023. The accounts receivable balances at December 31, 2022, and July 1, 2023 were both net of an allowance for doubtful accounts of $10.         Inventories totaled $4,814 at July 1, 2023 compared with inventory totaling $4,876 at December 31, 2022. The inventory turnover in the most recent four quarters ending Q2 2023 was 4.1 times (based on a 5 point average) compared with 4.2 times averaged during the four quarters of 2022.   The Company financed its increase in non-cash working capital in Q1 2023 from its profit and usage of cash on hand. The Company expects it will continue to be able to fund its operations for the remainder of 2023 from operations and existing cash balances.   The Company continues to sell to a limited number of customers and the loss of any one of these customers 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.   Management believes that existing cash balances will be sufficient to fund our cash requirements for the foreseeable future. However, there is no assurance that we will be able to generate sufficient revenues or reduce certain discretionary spending in the event that planned operational goals are not met such that we will be able to meet our obligations as they become due.   Contractual Obligations (all $ in 000 ’ s unless otherwise noted)   In May 2023, the Company terminated its $3.0 million revolving line of credit (LOC) with Massachusetts Business Development Corporation (BDC). A new LOC in the amount of $3.0 million was entered into with Rockland Trust Company. The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of the National Prime Rate as published by the Wall Street Journal. On July 1, 2023, the Company had $0 of borrowings under this LOC and its borrowing base at the time would have permitted an additional $3.0 million 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%   The Company has one real estate lease expiring in February 2026. CPS also has a few other leases for equipment which are minor in nature and are generally short-term in duration. None of these have been capitalized. (Note 4, Leases)