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 MMC components that improve 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. 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 internet infrastructure. 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 heat spreaders 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. 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. In 2022 CPS resumed its participation in the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, sponsored by the US Small Business Administration. These programs provide funding for innovative research and development to domestic small businesses, who maintain certain intellectual property rights. The technologies developed by the Company during these programs will further enhance CPS’ intellectual property portfolio. 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 applications for electronics can typically be characterized as either power processing or signal processing. Power processing consists of converting the electrical power provided by the power source into the appropriate voltage and amperage needed by 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, they 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; 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 that ensures that the expansion rates of the materials in the assembly do not result in a failure due to breaking, delaminating, or related causes. 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 specifications. The CPS process technology allows most products to be made to net shape, requiring little or no final machining. The Company primarily manufactures MMC components comprised of AlSiC. Nevertheless, its proprietary Quickset- Quickcast process technology can be used to produce other MMCs to meet market requirements. 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 Market Overview Armor has traditionally been comprised of steel panels. As threat levels have increased, the amount of steel required to provide sufficient ballistic protection has become unacceptably detrimental to 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 reductions 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; cost reductions of all these components are 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 enable 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 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 vehicles (EVs) at an increasing rate. There are many varieties of HEVs and EVs, but all HEVs and EVs contain an electric motor and 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 the 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 who want to save on short term costs are using power modules with copper baseplates, while those who want longer term reliability, such as those in the luxury vehicle market, will use power modules with an MMC (AlSiC) baseplate. Of particular interest is the move to using Silicon Carbide (SiC) semiconductors instead of silicon semiconductors. SiC is more efficient than silicon allowing, among other things, for EVs and HEVs to run for longer distances on a single battery charge. This is important to CPS, as SiC semiconductors run hotter than silicon semiconductors. As such, the voltage level at which AlSiC becomes preferred over copper would be lower, creating expanded opportunities for AlSiC baseplates. 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 may be the source of significant and long-term growth for the Company. Hermetic Packages Hermetic packaging products are primarily used for space applications such as satellites, flight applications such as avionics 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 2”x2” package, provide the computing technology of today's typical server or yesterday's small mainframe. CPS is the only producer of hermetic packages with AlSiC bases, combining our expertise in hermetic package production with our expertise in MMC production. The CPS AlSiC hermetic package provides tremendous benefits in terms of reduced weight and CTE matching which are 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 2023, our three largest customers accounted for 33%, 18%, and 9% of revenues, respectively. In 2023, approximately 52% of our revenues were derived from commercial applications and 48% 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 30, 2023, the Company had 9 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 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 $20 million as of December 30, 2023. This backlog consists of orders received from customers which are, for the most part, scheduled to ship in 2024. Under certain circumstances, customers may be able to cancel existing orders or extend the period over which orders may be shipped. Some of these changes 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 MMCs, 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 MMCs is Denka, a large chemical company based in Japan. We also see manufacturers in China seeking to penetrate our markets. We believe they offer their products at lower prices, but they have generally not yet been to be able to provide the delivery, performance, quality and reliability required by the market. The market for hermetic packages is much more fragmented. There are a number of different hermetic package types, allowing different manufacturers to specialize in a particular area of the hermetic package market. Some of these companies are competitors of CPS, while others focus on product types not sold by CPS. CPS continues to expand its technical competence to increase its offerings in areas in which we previously did not participate. Based on these increased offerings, combined with our emphasis on quality and customer service, we expect to see continued growth in our hermetic package product line. Our main domestic competitors in this arena include Egide, Ametek, and Qnnect (formerly Hermetic Solutions Group). The company currently has orders to produce its HybridTech Armor® panels. To our knowledge, we do not have any direct competitors who produce encapsulated armor. Our competition in this area consists of alternatives to our HybridTech Armor® which involve tradeoffs regarding cost, weight, anti-ballistic properties, etc. 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 by CPS 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 30, 2023, we had 100 permanent full-time employees. 90 were engaged in manufacturing and engineering and 10 in sales and administration, including finance, human resources and general management. We also have approximately 20 manufacturing people working with us through temporary employment agencies. During 2023, the Company continued its efforts to increase factory efficiency both in terms of employee training as well as increased automation. None of our employees is covered by a collective bargaining agreement. We consider our relations with our employees to be excellent.