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 28, 2024, we had approximately 70 shareholders of record. A substantially greater number of holders of CPS common stock are “street name” or beneficial holders, whose shares are held by banks, brokers and other financial institutions. 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’ 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 2024 the Company’s top three customers accounted for 57% of revenue and the remaining 43% of revenue was derived from 45 other customers. In 2023 the top three customers accounted for 60% of revenue and the remaining 40% of revenue was derived from approximately 57 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 28, 2024, the Company’s deferred tax asset and other temporary differences will require taxable income of approximately $12 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 2024 ( “ 2024 ” ) compared with the year 2023 ( “ 2023 ” ): Total revenue was $21.1 million in 2024, a 24% decrease compared with total revenue of $27.6 million in 2023. This decrease was due primarily to the successful completion of the armor contract in April 2024 compared to a full year of revenue from armor production in 2023, partially offset by increased revenue from AlSiC baseplates. Gross profit in 2024 totaled $(0.1) million or (1)% of sales. This compares with $6.8 million, or 25% of sales, generated during 2023. The decrease in margin was primarily due to the impact of the completion of the armor contract described above. As CPS incurs significant fixed costs in its operations, a reduction in revenue has a significant impact on margin. In addition, then growth of AlSiC baseplate sales in Q4 of 2024 required the hiring and training of new employees as well as the incurring of additional expenses for the ramp up of production. A new employee is trained for 2-3 weeks before even beginning their actual work on the shop floor. It can then take a few months before they are fully up to speed. Selling, general and administrative (SG&A) expenses were $4.3 million during 2024, down from SG&A expenses of $5.1 million incurred during 2023. This decrease was primarily due to a reduction in variable compensation expense, due to the reduction in revenue and profit year over year, as well as a reduction in salaries paid for selling and administrative personnel. The Company generated an operating loss of $4.4 million in 2024, compared with operating income of $1.7 in 2023. This decrease was due almost entirely to the reduction in revenue and additional expenses due to end of year sales growth, discussed above. The Company recorded a net loss of $3.1M in 2024 compared to net income of $1.4M in 2023. In 2024 the Company recorded an income tax benefit of $1.0 million compared to a provision for income taxes $0.6 million in 2023. Significant Fourth Quarter Activity in 2024: Revenues totaled $5.9 million in the fourth quarter of 2024 versus $6.7 million in the fourth quarter of 2023, a decrease of 12%. This decrease was the result of the completion of our armor contract earlier in 2024, partially offset by an increase in AlSiC baseplate sales. Gross margin decreased in the fourth quarter of 2024 compared with the fourth quarter of 2023 to $(0.3) million from $1.1 million. This decrease was due to lower revenue as well as the costs associated with the production ramp up described above. SG&A expenses totaled $1.0 million during the quarter, compared to $1.0 million in the same quarter of 2023. The Company recorded an operating loss of $1.3 million in the fourth quarter of 2024 compared to operating income of $0.1 million in the fourth quarter of 2023. The Company recorded a net loss of $1.0 million in the fourth quarter of 2024 compared to net income of $0.1 million in the fourth quarter of 2023. Liquidity and Capital Resources (all $ in millions unless noted) The Company’s cash and cash equivalents at December 28, 2024 totaled $3.3, restricted cash of $85 thousand and marketable debt securities with a fair value of $1.0. compared with cash and cash equivalents at December 30, 2023 of $8.8 and no restricted cash or marketable debt securities. This decrease was primarily due to the Company’s losses for the year as well as the increase in receivables of $0.6. Accounts receivable at December 28, 2024 totaled $4.9 compared to $4.4 at December 30, 2023. Days Sales Outstanding (DSO) increased to 75 days at the end of 2024 compared to 60 days at the end of 2023. This change was due to continued growth of sales throughout the 4 th quarter. This resulted in collections on the earlier lower sales, while the higher later sales remained in receivables. The accounts receivable balances at December 28, 2024, and December 30, 2023 were both net of an allowance for credit losses of $10 thousand. Inventories decreased to $4.3 at December 28, 2024 from $4.6 at December 30, 2023. The inventory turnover in the four quarters ending 2024 was 4.8 times, up from 4.3 times averaged during the four quarters of 2023 (each based on a 5 point average). The Company had no inventory on consignment at any customers at the end of 2024 or 2023. At December 28, 2024 and December 30, 2023 inventory of, $0.8 and $0.5, respectively, was located at vendor locations pursuant to inventory agreements. The Company funded its operations from its cash balances in 2024. The Company expects it will continue to be able to fund its operations during 2025 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 a line of credit (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 28, 2024, 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 which can be done by either party. 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 28, 2024, the Company had $109 thousand of construction in progress and no outstanding commitments to purchase production equipment. During 2024, 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 $165 thousand in 2024. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. Inflation Recent inflationary trends have had an 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, such as improvements to our benefit package, and seen price increases from some of our suppliers. We have been able to pass along many of these price increases to our customers, however in some cases we have had to absorb these price increases for a period of time, before being able to pass them along. 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 further 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.