CPS TECHNOLOGIES CORP/DE/ 10-K

Item 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities. CPS Technologies Corp. shares trade on The Nasdaq Capital Market, under the symbol “CPSH”. On December 30, 2023, we had approximately 80 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. Item 6. Selected Financial Data Smaller reporting companies are not required to provide the information required by this item. Item 7. 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. Overview 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 heat spreaders used with high performance integrated circuits 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, and others. 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 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 2023 the Company’s top three customers accounted for 60% of revenue and the remaining 40% of revenue was derived from 57 other customers. In 2022 the top three customers accounted for 53% of revenue and the remaining 47% of revenue was derived from approximately 49 customers. Critical Accounting Estimates 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: a) Allowance for credit losses The Company performs ongoing monitoring of the status of its receivables based on the payment history and the creditworthiness 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. b) 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, virtually 100% 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 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. 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, 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. Raw materials are less unique to specific products. AlSiC raw materials are used for all AlSiC parts and therefore they are continuously in production. Hermetic package and armor raw materials present a mix of raw material items, some of which are used in multiple parts and others in only specific parts. These raw material items are evaluated using the same criteria as the finished goods into which they go and are reserved against when there has been no activity for that finished good in the prior 12 months or expectation of future activity. The Company has not experienced significant 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. c) 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 light of recent profitability and expected future profitability. It was determined that a reserve is not needed, as it is more likely than not that the Company would be able to fully utilize its deferred tax asset. At December 30, 2023, the Company’s deferred tax asset and other temporary differences will require taxable income of approximately $7.6 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 2023 ( “ 2023 ” ) compared with the year 2022 ( “ 2022 ” ): Total revenue was $27.6 million in 2023, a 4% increase compared with total revenue of $26.6 million in 2022. This increase was due primarily to an increase in the sales of armor compared to 2022, partially offset by a quality problem with the product for one of our major customers which resulted in significant product returns as well as a reserve for potential future returns. Based on information received from the customer subsequent to December 30, 2023, this issue appears to be under control and is not expected to have a material impact on 2024 results. Gross profit in 2023 totaled $6.8 million or 25% of sales. This compares with $7.3 million, or 27% of sales, generated during 2022. The decrease in margin was primarily due to the impact of the quality issue described above. Selling, general and administrative (SG&A) expenses were $5.1 million during 2023, virtually the same as SG&A expenses of $5.1 million incurred during 2022. Several offsetting factors lead to this result. The Company incurred lower variable compensation costs in 2023 due to its reduction in operating profit compared to 2022. Conversely, travel costs were significantly higher in 2023 as customer and trade show exhibiting continued to recover from the limitations due to the Covid-19 pandemic. The Company generated operating income of $1.7 million in 2023, compared with an operating income of $2.2 in 2022. This decrease was due almost entirely to the quality problem, discussed above. The Company recorded net income of $1.4M in 2023 compared to $2.1M in 2022. In 2023 the Company had a provision for income taxes of $0.6 million compared to $0.8 million in 2022. In addition, the Company filed for the Employee Retention Tax Credit of $0.7 million in 2022. Significant Fourth Quarter Activity in 2023: Revenues totaled $6.7 million in the fourth quarter of 2023 versus $6.1 million in the fourth quarter of 2022, an increase of 10%. This increase was consistent with our expectations, but was also mitigated by the quality issues described above. Gross margin decreased in the fourth quarter of 2023 compared with the fourth quarter of 2022 to $1.1 million from $1.6 million. This decrease was due to the quality issue described above. SG&A expenses totaled $1.0 million during the quarter, a decrease of 23% compared to $1.3 million in the same quarter of 2022. This decrease was primarily due to the decreased variable compensation costs discussed above. The Company recorded operating income of $0.1 million in the fourth quarter of 2023 compared to operating income of $0.3 million in the fourth quarter of 2022. The Company recorded net income of $0.1 million in the fourth quarter of 2023 compared to net income of $0.3 million in the fourth quarter of 2022. Liquidity and Capital Resources (all $ in millions unless noted) The Company’s cash and cash equivalents at December 30, 2023 totaled $8.8 compared with cash and cash equivalents at December 31, 2022 of $8.3. This increase was primarily due to the Company’s profitability for the year offset primarily by the decrease in deferred revenue from $2.8 at the end of 2022 to $0.3 at the end of 2023. Accounts receivable at December 30, 2023 totaled $4.4 compared to $3.8 at December 31, 2022. Days Sales Outstanding (DSO) increased to 60 days at the end of 2023 compared to 52 days at the end of 2022. This change was due to the reduction of deferred revenue occurring in the 4 th quarter of 2022. Prepayments received in 2021 were used to pay for shipments shipped in the 4 th quarter of 2022 thus immediately reducing accounts receivable, rather than the customer paying 30-45 days later. The accounts receivable balances at December 30, 2023, and December 31, 2022 were both net of an allowance for doubtful accounts of $10 thousand. Inventories decreased to $4.6 at December 30, 2023 from $4.9 at December 31, 2022. The inventory turnover in the four quarters ending 2023 was 4.3 times, up from 4.2 times averaged during the four quarters of 2022 (each based on a 5 point average). In July 2022 CPS implemented a new ERP computer system which, among other things, has enabled the Company to better manage its inventory. The Company had no inventory on consignment at any customers at the end of 2023 or 2022. At December 30, 2023 and December 31, 2022 inventory of, $0.5 and $0.8, respectively, was located at vendor locations pursuant to inventory agreements. The Company funded its operations from its profit in 2023. The Company expects it will continue to be able to fund its operations during 2024 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 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 December 30, 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. The LOC remains in effect until terminated per mutual agreement by both parties. 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% As of December 30, 2023, the Company had $282 thousand of construction in progress and no outstanding commitments to purchase production equipment. During 2023, 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 were $162 thousand in 2023. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. Inflation 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 2023) 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. Item 7A. Quantitative and Qualitative Disclosure about Market Risk Smaller reporting companies are not required to provide the information required by this item. Item 8. 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. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.