cpsh20220326

cpsh20220326_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the period ended April 2, 2022

☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number 0-16088

CPS TECHNOLOGIES CORP.

(Exact Name of Registrant as Specified in its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)	04-2832509 (I.R.S. Employer Identification No.)

111 South Worcester Street Norton MA (Address of principal executive offices)	02766-2102 (Zip Code)

(508) 222-0614

Registrant’s Telephone Number, including Area Code:

CPS TECHNOLOGIES CORP.

111 South Worcester Street

Norton, MA 02766-2102

Former Name, Former Address and Former Fiscal Year if Changed since Last Report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer or a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒

Emerging growth company ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

Yes ☐ No ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):

☐ Yes ☒ No

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	CPSH	Nasdaq Capital Market

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Number of shares of common stock outstanding as of April 24, 2022: 14,429,009.

PART I FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS (Unaudited)

CPS TECHNOLOGIES CORP.

Balance Sheets (Unaudited)

	April 2, 2022			December 25, 2021
ASSETS

Current assets:
Cash and cash equivalents	$	4,699,694		$	5,050,312
Accounts receivable-trade, net		4,902,518			4,870,021
Inventories, net		4,705,526			3,911,602
Prepaid expenses and other current assets		334,963			225,873
Total current assets		14,642,701			14,057,808
Property and equipment:
Production equipment		10,526,008			10,489,729
Furniture and office equipment		738,205			673,305
Leasehold improvements		968,509			951,384
Total cost		12,232,722			12,114,418

Accumulated depreciation and amortization		(11,133,276	)		(11,028,154	)
Construction in progress		223,048			246,669
Net property and equipment		1,322,494			1,332,933
Right-of-use lease asset (note 4, leases)		558,000			586,000
Deferred taxes, net		2,698,686			2,823,978
Total Assets	$	19,221,881		$	18,800,719

See accompanying notes to financial statements.

(continued)

CPS TECHNOLOGIES CORP.

Balance Sheets (Unaudited)

(concluded)

	April 2, 2022			December 25, 2021
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Note payable, current portion		51,620			55,906
Accounts payable		2,251,122			2,100,251
Accrued expenses		717,482			1,086,429
Deferred revenue		1,707,138			1,707,138
Lease liability, current portion		157,000			155,000

Total current liabilities		4,884,362			5,104,724

Note payable less current portion		87,988			98,684
Long term lease liability		401,000			431,000

Total liabilities		5,373,350			5,634,408
Commitments & Contingencies
Stockholders’ equity:
Common stock, $0.01 par value,authorized 20,000,000 shares; issued 14,423,486 and 14,350,786 shares; outstanding 14,422,311 and 14,350,451 shares; at April 2, 2022 and December 25, 2021, respectively		144,235			143,508
Additional paid-in capital		39,546,975			39,281,810
Accumulated deficit		(25,837,056	)		(26,256,492	)
Less cost of 1,175 and 335 common shares repurchased at April 2, 2022 and December 25, 2021, respectively		(5,623	)		(2,515	)

Total stockholders’ equity		13,848,531			13,166,311

Total liabilities and stockholders’equity	$	19,221,881		$	18,800,719

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORP.

Statements of Operations (Unaudited)

	Fiscal Quarters Ended
	April 2, 2022			March 27, 2021

Revenues:
Product sales	$	6,652,714		$	4,865,708

Total revenues		6,652,714			4,865,708
Cost of product sales		4,689,224			3,921,568

Gross Margin		1,963,490			944,140
Selling, general, and administrative expense		1,416,393			908,471

Income from operations		547,097			35,669
Other income (expense), net		(1,913	)		(4,310	)

Income before taxes		545,184			31,359
Income tax provision		125,748			456

Net income	$	419,436		$	30,903

Net income per basic common share	$	0.03		$	0.00

Weighted average number of basic common shares outstanding		14,389,857			13,584,376

Net income per diluted common share	$	0.03		$	0.00

Weighted average number ofdiluted common sharesoutstanding		14,657,939			14,264,890

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORPORATION
STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED APRIL 2, 2022 AND MARCH 27, 2021

	Common Stock
	Number of shares issued		Par Value		Additional paid-in capital			Accumulated deficit			Stock repurchased			Total stockholders’ 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		—		—		124,471			—			—			124,471
Issuance of Common Stock		—		—		(9,614	)		—			—			(9,614	)
Employee options exercises		72,700		727		150,308			—			(3,108	)		147,927
Net income		—		—		—			419,436			—			419,436
Balance at April 2, 2022		14,423,486		144,235		39,546,975			(25,837,056	)		(5,623	)		13,848,531

Balance at December 26, 2020		13,746,242	$	137,462	$	36,688,894			(29,472,369	)		(996,323	)		6,357,664
Share-based compensation expense		—		—		27,422			—			—			27,422
Employee options exercises		613,800		6,138		1,209,358			—			(1,205,186	)		10,310
Net income		—		—		—			30,903			—			30,903
Balance at March 27, 2021		14,360,042		143,600		37,925,674			(29,441,466	)		(2,201,509	)		6,426,299

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORP.

Statements of Cash Flows (Unaudited)

	Fiscal Quarters Ended
	April 2, 2022			March 27, 2021

Cash flows from operating activities:
Net income	$	419,436		$	30,903
Adjustments to reconcile net income to cash used in operating activities:
Depreciation and amortization		105,121			148,743
Share-based compensation		124,471			27,422
Gain on sale of property and equipment		--			(12,000	)
Changes in:
Accounts receivable-trade		(32,497	)		(863,403	)
Inventories		(793,924	)		78,319
Prepaid expenses and other current assets		(109,090	)		(221,769	)
Accounts payable		150,871			594,037
Accrued expenses		(368,947	)		(272,543	)
Deferred Taxes		125,292
Deferred revenue		--			307,039

Net cash used in operating activities		(379,267	)		(183,252	)

Cash flows from investing activities:
Purchases of property and equipment		(94,683	)		(42,488	)
Proceeds from sale of property and equipment		--			12,000

Net cash used in investing activities		(94,683	)		(30,488	)

Cash flows from financing activities:
Net borrowings on line of credit		--			193,395
Proceeds from exercise of employee stock options		138,313			10,310
Payments on note payable		(14,981	)		(17,250	)

Net cash provided by financing activities		123,332			186,455

Net decrease in cash and cash equivalents		(350,618	)		(27,285	)
Cash and cash equivalents at beginning of period		5,050,312			195,203

Cash and cash equivalents at end of period	$	4,699,694		$	167,918

Supplemental disclosures of cash flows information:
Cash paid for interest	$	2,269		$	14,831
Supplemental disclosures of non-cash activity:
Net exercise of stock options	$	3,108		$	1,205,186

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORP.

Notes to Financial Statement

(Unaudited)

(1) Nature of Business

CPS Technologies Corporation (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 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 threat levels.

The Company sells into several end markets including the wireless communications infrastructure market, high-performance microprocessor market, motor controller market, and other microelectronic and structural 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 25, 2021 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 25, 2021 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
	April 2 2022		March 27, 2021

Basic EPS Computation:
Numerator:
Net income	$	419,436	$	30,903
Denominator:
Weighted average
Common shares
Outstanding		14,389,857		13,584,376
Basic EPS	$	0.03	$	0.00
Diluted EPS Computation:
Numerator:
Net income (loss)	$	419,436	$	30,903
Denominator:
Weighted average
Common shares
Outstanding		14,389,857		13,584,376
Dilutive effect of stock options		268,082		680,514
Total Shares		14,657,939		14,264,890
Diluted EPS	$	0.03	$	0.00

(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 April 2, 2022 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 $152 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 leases as of April 2, 2022

(Dollars in Thousands)	April 2, 2022
Maturity of capitalized lease liabilities	Lease payments
2022		122
2023		162
2024		165
2025		165
2026		28
Total undiscounted operating lease payments	$	642
Less: Imputed interest		(84	)
Present value of operating lease liability	$	558
Balance Sheet Classification
Current lease liability	$	157
Long-term lease liability		401
Total operating lease liability	$	558
Other Information
Weighted-average remaining lease term for capitalized operating leases (in months)		47
Weighted-average discount rate for capitalized operating leases		6.6	%

Operating Lease Costs and Cash Flows

Operating lease cost and cash paid was $39 thousand during the first quarter of 2022. This cost is 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 quarters ended April 2, 2022 and March 27, 2021, a total of 170,000 and 200,000 stock options, respectively, were granted to employees under the Company’s 2020 Equity Incentive Plan (the “Plan”) and a total of 38,000 and 0 stock options, respectively, were granted to outside directors during the quarters ended April 2, 2022 and March 27, 2021.

During the quarter ended April 2, 2022, there were 72,700 options exercised and corresponding shares issued at a weighted average price of $2.08. During the quarter ended March 27, 2021, there were 613,800 options exercised and corresponding shares issued at a weighted average price of $1.98.

During the quarter ended April 2, 2022, the Company repurchased 840 shares for employees to facilitate their exercise of stock options. During the quarter ended March 27, 2021, the Company repurchased 120,196 shares for employees to facilitate their exercise of stock options.

There were also 971,600 shares outstanding at a weighted average price of $2.37 with a weighted average remaining term of 6.67 years as of April 2, 2022, and there were 837,700 shares outstanding at a weighted average price of $1.92 with a weighted average remaining term of 6.74 years as of March 27, 2021. The Plan, as amended, is authorized to issue 1,500,000 shares of common stock. As of April 2, 2022, there were 941,000 shares available for future grants. 513,700 grants remain exercisable under the Company’s Equity Incentive Plans.

As of April 2, 2022, there was $622 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 1.79 years.

During the quarters ended April 2, 2022 and March 27, 2021, the Company recognized approximately $124 thousand and $27 thousand, respectively, as shared-based compensation expense related to previously granted shares under the Plan.

(6) Inventories

Inventories consist of the following:

	April 2, 2022			December 25, 2021

Raw materials	$	2,166,385		$	2,080,778
Work in process		1,880,465			1,309,572
Finished goods		987,076			805,159

Gross inventory		5,033,926			4,195,509
Reserve for obsolescence		(328,400	)		(283,907	)

Inventories, net	$	4,705,526		$	3,911,602

(7) Accrued Expenses

Accrued expenses consist of the following:

	April 2, 2022		December 25, 2021

Accrued legal and accounting	$	44,724	$	79,917
Accrued payroll and related expenses		526,128		905,698
Accrued other		146,630		100,814

Total Accrued Expenses	$	717,482	$	1,086,429

(8) Line of Credit

In September 2019, the Company entered into a revolving line of credit (LOC) with Massachusetts Business Development Corporation (BDC) in the amount of $2.5 million. The agreement includes a demand note allowing the Lender to call the loan at any time. The Company may terminate the agreement without a termination fee after 3 years. In May of 2020 this credit line was increased to $3.0 million. The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of LIBOR plus 550 basis points. On April 2, 2022, the Company had $0 thousand 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 line of credit is subject to certain financial covenants, all of which have been met.

(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%.

In July 2020 CPS placed into service a piece of manufacturing equipment which it financed with the machine’s vendor. The equipment cost of $40 thousand will be paid at the rate of $2 thousand per month over 2 years, resulting in an implied interest rate of 1.90%.

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 2022	$	41,050
FY 2023	$	43,837
FY 2024	$	46,757
FY 2025	$	8,090
Total		139,734

Total interest expense on notes payable during 2022 was $2,269.

(10) Income Taxes

A valuation allowance against deferred tax assets is required to be established or maintained when it is "more likely than not" that all or a portion of deferred tax assets will not be realized. In December 2018, the Company established a valuation allowance reserve, as it is judged more likely than not that all or a portion of its deferred tax assets will not be utilized before they expire. This decision was reached after giving greater weight to the Company’s losses in recent years as compared to its forecasts.

In September 2021 this decision was reevaluated in light of the Company’s recent profitability and its forecasts for future profitability. The Company concluded that it is “more likely than not” that the Company will be able to fully utilize the deferred tax asset. This reversal of the valuation allowance was made net of the expected tax liability for 2021. For the first quarter of 2022 a charge against the reserve of $125,748 for the estimated tax liability on Q1 income was made.

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 25, 2021 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 25, 2021, 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 25, 2021.

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 First Fiscal Quarter of 2022 (Q1 2022) Compared to the First Fiscal Quarter of 2021 (Q1 2021); (all $ in 000’s)

Revenues totaled $6,653 in Q1 2022 compared with $4,866 generated in Q1 2021, an increase of 37%. Two factors in particular contributed to this growth. In Q1 of 2021 we were just beginning to see a turnaround in reduced sales due to the COVID-19 pandemic. We saw significant sales growth from each of our top 5 customers from Q1 2021 to Q1 2022. Our shipments of armor for the US Navy did not begin until Q2 of 2021, also giving rise to a portion of the increase from Q1 2021 to Q1 2022.

Gross margin in Q1 2022 totaled $1,963 or 30% of sales. This compares with gross margin in Q1 2021 of $944 or 19% of sales. Both increased manufacturing efficiencies and the impact of increased sales volumes on fixed costs, which do not vary with increased sales volumes, were the predominate reason for this increase.

Selling, general and administrative (SG&A) expenses totaled $1,416 in Q1 2022 compared with SG&A expenses of $908 in Q1 2021. Compensation costs made up a little over half of this increase. In particular, increased accruals for variable compensation due to the better results in Q1 2022 as compared to Q1 2021 and 3 additional members of our sales team hired subsequent to Q1 2021, made up part of the compensation differential. In addition, issuance of immediately vested stock options to directors was delayed in Q1 2021 due to market uncertainty. The Company reverted back to its standard practice of issuing these immediately vested options in Q1 2022 as the market stabilized. The other significant portion of this increase was due to commission expenses incurred as a result of the increased sales.

The Company experienced an operating profit of $547 in Q1 2022 compared with an operating profit of $36 in Q1 2021 as a result of the increased gross margin, partially offset by the increase in SG&A expenses.

The Company is part of the Defense Industrial Base and thus has been open and operating throughout the COVID-19 pandemic. The Company believes the worst of the pandemic is now behind us and expects to show continued improvement in upcoming quarters.

The Company has had extremely minimal sales to both Russia and Ukraine over the last several years, the loss of which would likely not even be noticeable to a reader of 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.

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 April 2, 2022 totaled $4,700. This compares to cash and cash equivalents at December 25, 2021 of $5,050. The decrease in cash was due primarily to increases in inventory and reductions in accrued expenses offset by net profit.

Accounts receivable at April 2, 2022 totaled $4,903 compared with $4,870 at December 25, 2021. Days Sales Outstanding (DSO) decreased from 72 days at the end of 2021 to 66 days at the end of Q1 2022. The decrease 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 2022. The accounts receivable balances at December 25, 2021, and April 2, 2022 were both net of an allowance for doubtful accounts of $10.

Inventories totaled $4,706 at April 2, 2022 compared with inventory totaling $3,912 at December 25, 2021. The inventory turnover in the most recent four quarters ending Q1 2022 was 4.6 times (based on a 5 point average) compared with 4.7 times averaged during the four quarters of 2021.

The Company financed its increase in working capital in Q1 2022 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 2022 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 September 2019, the Company entered into revolving line of credit (LOC) with Massachusetts Business Development Corporation (BDC) in the amount of $2.5 million. This agreement was amended in May 2020 to increase the line to $3.0 million. The agreement includes a demand note allowing the Lender to call the loan at any time. The Company may terminate the agreement without a termination fee after 3 years. The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of LIBOR plus 550 basis points. The Company was in compliance with all debt covenants as of April 2, 2022, had $0 borrowings under this LOC and its borrowing base at the time would have permitted $3.0 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%

In July 2020 CPS placed into service a piece of manufacturing equipment which it financed with the machine’s vendor. The equipment cost of $40 thousand will be paid at the rate of $2 thousand per month over 2 years with an interest rate of 1.9%.

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)

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is not significantly exposed to the impact of interest rate changes or foreign currency fluctuations. The Company has not used derivative financial instruments.

The COVID-19 pandemic presents several risks for the Company. The Company is part of the Defense Industrial Base and thus has remained open and operating throughout the pandemic. The primary risks resulting from the pandemic are potential declines in customer demand due to government-mandated business closures and increased operating costs resulting from pandemic-related factors such as increased freight costs and increased employee absenteeism causing labor inefficiencies and increased use of overtime.

The COVID-19 pandemic had a minimal impact on financial results for the quarter ended April 2, 2022. There were several COVID related absences during the quarter which required the use of overtime in order to meet production needs. The Company expects these mild disruptions to continue as COVID becomes more endemic. Nevertheless the possibility of a more dangerous variant could result in a negative impact on the Company’s business in the future.

Although CPS has not been directly impacted by the war in Ukraine, potential supply chain disruptions and its impact on energy costs are areas where we could be impacted in the future.

Inflation is an area where we have seen some impact on our business. We have seen significant price increases in commodity raw materials, such as aluminum, as well as increases in other costs of doing business. As we receive new orders we have been able to pass on most of these costs to our customers. In the case of longer term pricing agreements, we have been able to pass on some of these costs through surcharges and in other ways to mitigate the impact on our profit. As inflation continues, our ability to continue to absorb higher costs by raising customer prices cannot be guaranteed.

ITEM 4

CONTROLS AND PROCEDURES

(a) The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d - 14(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Form 10-Q (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, 1) the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports the Company files under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and 2) the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

(b) Changes in Internal Controls. There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1

LEGAL PROCEEDINGS

None.

ITEM 1A

RISK FACTORS

There have been no material changes to the risk factors as discussed in our 2021 Form 10-K.

ITEM 2

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. None.

ITEM 3

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5

OTHER INFORMATION

Not applicable.

ITEM 6

EXHIBITS AND REPORTS ON FORM 8-K:

(a)

Exhibits:

Exhibit 31.1 Certification Of Chief Executive Officer Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002

Exhibit 31.2 Certification Of Chief Financial Officer Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002

Exhibit 32.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002

101.INS Inline XBRL Instance Document

101.SCH Inline XBRL Taxonomy Extension Schema Document

101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document

104 Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

(b)	Reports on Form 8-K:

On March 7, 2022 the Company filed a report on Form 8-K relating to the announcement of its financial results for the year ended December 25, 2021 as presented in a press release dated March 3, 2022.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CPS TECHNOLOGIES CORPORATION

(Registrant)

Date: May 9, 2022

/s/ Michael E. McCormack

Michael E. McCormack

Chief Executive Officer

Date: May 9, 2022

/s/ Charles K. Griffith Jr.

Charles K. Griffith Jr.

Chief Financial Officer

SEC Form 10-Q filed by CPS Technologies Corp.