CPS Technologies(CPSH) - 2023 Q4 - Annual Report

Filing Information This section provides general information about CPS Technologies Corp., including its filing status, trading symbol, and outstanding shares General Company Information This section provides general information about CPS Technologies Corp., including its filing status as a non-accelerated filer and smaller reporting company, its NASDAQ trading symbol (CPSH), and the number of outstanding common shares as of February 12, 2024 - CPS Technologies Corp is a non-accelerated filer and a smaller reporting company[18] Company Key Information | Metric | Value | | :----- | :---- | | Trading Symbol | CPSH | | Common Stock Par Value | $0.01 | | Shares Outstanding (Feb 12, 2024) | 14,519,215 | | Market Value of Non-Affiliate Voting Stock | $34 million | | SEC Filing Status | Non-accelerated filer, Smaller reporting company | | Well-known seasoned issuer | No | | Shell company | No | Part I This part details the company's business operations, products, markets, risks, and regulatory environment Item 1. Business CPS Technologies Corp specializes in advanced material solutions, primarily metal matrix composites (MMCs), for diverse markets including transportation, automotive, energy, computing/internet, telecommunications, aerospace, and defense. The company's proprietary processes enable the production of custom components that enhance performance, reliability, and energy efficiency, particularly in thermal management and lightweight armor applications Company Overview CPS Technologies Corp, incorporated in Massachusetts in 1984 and reincorporated in Delaware in 1987, designs, manufactures, and sells custom metal matrix composite (MMC) components. These components are vital for improving system performance and reliability across various end markets, including those driving the green economy and defense - CPS Technologies Corp was incorporated in Massachusetts in 1984 and reincorporated in Delaware in 1987[46] - The company's business model focuses on providing advanced material solutions to a portfolio of high-growth end markets, aiming for sustained growth and a diversified customer base[45] Products and Markets Overview CPS's core products are Metal Matrix Composites (MMCs), specifically Aluminum Silicon Carbide (AlSiC), manufactured using proprietary Quickset™ and QuickCast™ processes. These MMCs offer superior thermal conductivity, thermal expansion matching, stiffness, and lighter weight, addressing critical thermal management challenges in electronics and providing lightweight, durable armor solutions - Primary material solution is Metal Matrix Composites (MMCs), specifically Aluminum Silicon Carbide (AlSiC), which combines ceramic (SiC) with metal (Al)[30][42] - Proprietary manufacturing processes include Quickset™ Injection Molding Process and QuickCast™ Pressure Infiltration Process[24] - MMCs provide superior thermal conductivity, improved thermal expansion matching, greater stiffness, and lighter weight compared to conventional materials[22] Electronics Markets Overview (Thermal Management) In electronics, increasing performance demands (lower losses, higher speeds, smaller size, higher reliability) lead to significant heat generation. CPS's AlSiC MMCs are critical for thermal management, providing high thermal conductivity and matched thermal expansion rates to prevent system failure and degradation of electronic components - Electronics industry demands products with lower losses, higher speeds, smaller size, and higher reliability, which creates significant thermal management challenges[27][28][47] - CPS's AlSiC MMCs address thermal management by offering high thermal conductivity and a thermal expansion rate that matches other components, ensuring reliability[30][49] - The emergence of wide-band gap semiconductors like SiC and GaN, which run hotter, increases the need for improved thermal management solutions provided by CPS[82][112] Armor Market Overview CPS produces lightweight HybridTech Armor® panels by embedding ceramic armor tiles in a metal matrix, overcoming limitations of traditional ceramic armor like limited multi-hit capability. This solution offers excellent ballistic protection, environmental durability, and is suitable for weight-sensitive applications like aircraft and U.S. Navy crew-served weapons stations - CPS produces lightweight HybridTech Armor® panels by embedding ceramic armor tiles in a metal matrix, offering superior ballistic protection and environmental durability[32][43][83] - HybridTech Armor® is used for the U.S Navy's crew-served weapons station program and other surface vessel applications[43][83] Motor Controller Applications (IGBT) CPS provides AlSiC baseplates and heat spreaders for Insulated Gate Bipolar Transistor (IGBT) applications in motor control, particularly for electric trains, subway cars, wind turbines, and hybrid/electric vehicles. These MMCs are preferred over copper in higher voltage applications due to their superior thermal expansion matching and reliability, especially with the adoption of hotter-running Silicon Carbide (SiC) semiconductors - CPS provides AlSiC baseplates and heat spreaders for IGBT applications in electric trains, subway cars, wind turbines, and hybrid/electric vehicles[33][53][85] - AlSiC baseplates become the preferred solution over copper in higher voltage applications due to better thermal expansion matching and reliability, especially with the move to Silicon Carbide (SiC) semiconductors[34][54] - The company is working with automotive suppliers on new SiC module designs, anticipating significant long-term growth from HEV and EV markets[86] Hermetic Packages CPS is the sole producer of hermetic packages with AlSiC bases, which are primarily used in space (satellites, Mars rovers), flight (avionics), and undersea applications (torpedoes, submarines). These packages offer significant benefits in reduced weight and CTE matching, crucial for high-reliability hybrid microelectronic assemblies (HMAs) in extreme environments - CPS is the only producer of hermetic packages with AlSiC bases, combining expertise in both hermetic package and MMC production[87] - Hermetic packages are used in space applications (e.g., current generation GPS satellites, Mars Perseverance rover), flight applications (avionics), and undersea applications[35][87] - These packages provide benefits in reduced weight and CTE matching, which are critical for space-based programs and high-reliability HMAs[87] Customers, Raw Materials, Patents & Trade Secrets CPS sells primarily to major microelectronics systems houses globally, with a sales cycle involving prototype evaluation before production volumes. The company relies on various domestic and foreign suppliers for raw materials, which are generally available. CPS protects its technological developments through a combination of U.S. and international patents and trade secret protection - In 2023, the top three customers accounted for 60% of total revenues (33%, 18%, and 9% respectively), indicating a concentrated customer base[36][182] - The company's products are custom-made to customer designs, with sales often recurring over multiple years after an initial prototype and evaluation period[89][140] - As of December 30, 2023, the company held 9 U.S patents and several international patents, also relying on trade secret protection for technological developments[37][58] Backlog as of December 30, 2023 | Metric | Value | | :----- | :---- | | Backlog | $20 million | | Scheduled to ship | Mostly in 2024 | Competition CPS competes based on technical competence, product performance, quality, reliability, price, and delivery. While facing direct competition in MMCs from companies like Denka and Chinese manufacturers (who often offer lower prices but lack consistent quality), CPS believes its proprietary processes and reputation enable successful competition. In the armor market, competition is primarily from alternative solutions, while the hermetic packages market is more fragmented - Principal competitive factors include technical competence, product performance, quality, reliability, price, delivery, corporate reputation, and sales/marketing strength[59] - Primary direct competitor in MMCs is Denka (Japan), with emerging competition from Chinese manufacturers offering lower prices but often lacking in delivery, performance, quality, and reliability[91] - In the armor market, CPS currently has no direct competitors producing encapsulated armor, but faces alternatives with different cost, weight, and anti-ballistic tradeoffs[60] - The hermetic packages market is fragmented, with CPS expanding its technical competence and offerings to drive growth against domestic competitors like Egide, Ametek, and Qnnect[176] Government Regulation & Employees CPS's operations involve non-nuclear, non-medical hazardous waste disposal regulated by state and federal laws. International activities, including raw material/product export/import and technology transfer, are regulated by various U.S. government departments. As of December 30, 2023, the company had 100 permanent full-time employees and approximately 20 temporary manufacturing staff, with efforts focused on increasing factory efficiency through training and automation - Operations involve hazardous waste disposal governed by state and federal regulations[61] - International trade and technology transfer activities are regulated by the Departments of Commerce, State, and Treasury[61] Employee Count (as of December 30, 2023) | Category | Number | | :------- | :----- | | Permanent Full-time Employees | 100 | | Manufacturing and Engineering | 90 | | Sales and Administration | 10 | | Temporary Manufacturing Staff | ~20 | - The company considers its relations with employees to be excellent and none are covered by a collective bargaining agreement[154] - CPS Technologies Corp provides advanced material solutions, primarily metal matrix composites (MMCs), for various high-growth markets[20][42][254] - The company's products are crucial for electrifying the green economy and protecting military personnel, used in applications like high-speed trains, electric vehicles, wind turbines, satellites, and high-performance microprocessors[20][21][139] - The company's products are crucial for electrifying the green economy and protecting military personnel, used in applications like high-speed trains, electric vehicles, wind turbines, satellites, and high-performance microprocessors[20][21][139] Item 1A. Risk Factors This section outlines various risks that could materially affect CPS Technologies Corp.'s business, financial condition, operating results, cash flow, and stock price. Key risks include broad economic disruptions, high customer concentration, lengthy and unpredictable sales cycles, dependence on key personnel, challenges associated with acquisitions, market volatility, intense competition, potential manufacturing interruptions, intellectual property disputes, stock price volatility, and cybersecurity threats - Risks include broad business/economic disruptions, global health concerns (e.g., COVID-19 resurgence), and geopolitical conflicts (e.g., Russia-Ukraine, Israel-Gaza)[64][93][94][107][177] - High customer concentration (three customers accounted for 60% of 2023 revenue) poses a significant risk if major orders are lost, reduced, or delayed[66][95] - Lengthy and variable sales cycles (several months to years) make forecasting difficult and expose the company to risks of customer cancellations or delays[67][96] - Dependence on senior executives and key managers, as well as the ability to attract and retain skilled engineers, is critical for business success[68][97] - Acquisitions, while part of the growth strategy, involve risks such as integration difficulties, diversion of management attention, failure to commercialize acquired technology, and potential loss of key employees[69][70][99][178] - The markets are characterized by ongoing changes and volatility, making it difficult to accurately budget expenses and requiring timely adjustments to cost structures[71][100][101][156] - Significant competition from larger, better-financed companies, and increasing price pressure, could harm the business and reduce profit margins[73][102][103][179] - Manufacturing interruptions or delays due to supplier issues, equipment failures, import/export difficulties, or natural disasters could affect customer demand and increase costs[74][104][129] - Risks related to intellectual property include the inability to obtain sufficient patent protection, third-party infringement, or accusations of infringing others' rights, leading to costly litigation[76][105][106][130][157] - The price of common shares is volatile and could decline significantly due to macroeconomic conditions, order changes, product performance issues, or market fluctuations[77][78][107][131] - Cybersecurity threats, including phishing, ransomware, or other attacks, could lead to substantial costs, liabilities, reputational harm, and operational disruptions, especially given the company's work in aerospace and defense[80][108][109][131][133][180] - Continued growth may necessitate facility expansion or relocation, incurring significant costs and potentially impacting profitability[75][129][158] Item 1B. Unresolved Staff Comments. This section indicates that the company, as a smaller reporting company, is not required to provide information regarding unresolved staff comments - As a smaller reporting company, CPS Technologies Corp is not required to provide information on unresolved staff comments[79][132] Item 1C. Cybersecurity Management views cybersecurity as an increasing concern and is working towards NIST 800-171 compliance with external consulting support. While no significant incidents have occurred, the company acknowledges the risk of attacks, particularly due to its involvement in the aerospace and defense industries, and maintains employee PII with a payroll service provider that furnishes SOC reports - Cybersecurity is an increasing concern for management and investors[80][109] - The company is working towards NIST 800-171 compliance with the help of an outside consulting firm to mitigate cybersecurity risks[80] - No significant cybersecurity incidents have been reported, but the company acknowledges the risk of attacks, especially given its work in aerospace and defense[133] Item 2. Properties All of CPS Technologies Corp.'s manufacturing, engineering, sales, and administrative operations are located in a single leased facility in Norton, Massachusetts. The lease for this 38,000 square foot facility was extended through February 2026 and is a triple net lease, with the company responsible for real estate taxes, operating costs, and utilities. The company also holds an option to buy the property and a first right of refusal - All operations are located in a single leased facility in Norton, Massachusetts[134] - The Norton facility lease was extended through February 2026, is a triple net lease, and includes an option to buy and a first right of refusal[81][173] Norton Facility Lease Details (2023) | Metric | Value | | :----- | :---- | | Facility Size | ~38,000 square feet | | Lease Expiration | February 2026 | | Lease Type | Triple net lease | | Annual Rental Payments (2023) | $162 thousand | Item 3. Legal Proceedings CPS Technologies Corp is not currently a party to any litigation that could have a material adverse effect on its business. The company has received a claim from a former European sales representative seeking termination compensation under European law, which the company disputes and estimates any potential losses to be immaterial - The company is not a party to any litigation with a material adverse effect on its business[135] - A claim from a former European sales representative for termination compensation is disputed, with estimated losses considered immaterial[135][322] Item 4. Mine Safety Disclosures This section states that the information required by Item 4 is not applicable to the company - Item 4, Mine Safety Disclosures, is not applicable to CPS Technologies Corp[136] Part II This part covers market information, financial data, management's discussion, controls, and procedures Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities. CPS Technologies Corp.'s common shares trade on The Nasdaq Capital Market under the symbol "CPSH." As of December 30, 2023, there were approximately 80 shareholders of record. The company has never paid cash dividends and plans to reinvest earnings for business use, with no intention to pay dividends in the foreseeable future - Common shares trade on The Nasdaq Capital Market under the symbol "CPSH"[136] - As of December 30, 2023, there were approximately 80 shareholders of record[136] - The company has never paid cash dividends and plans to reinvest earnings, with no intention to pay dividends in the foreseeable future[136] Item 6. Selected Financial Data As a smaller reporting company, CPS Technologies Corp is not required to provide the information typically presented in Item 6, Selected Financial Data - As a smaller reporting company, CPS Technologies Corp is not required to provide selected financial data[111][137] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations for fiscal years 2023 and 2022. It highlights the company's business model, critical accounting estimates, and detailed financial performance, including revenue growth, profitability changes, and liquidity management, noting the impact of a quality issue in 2023 - The company manufactures highly technical, custom products, incurring fixed costs that cause changes in sales volume to result in greater percentage changes in financial performance[113] - The company's products contribute to the electrification of the green economy and are used in high-performance electronics and military applications[139] - CPS's growth depends on demand for existing products and success in achieving new 'design wins' for future products[140] Overview CPS Technologies Corp provides baseplates, housings, and packages for modules built with Wide Band Gap Semiconductors (like SiC and GaN) and hybrid circuits. The company's custom products are components in customer systems, with a product mix spanning ongoing production and prototyping stages, aiming for a diversified portfolio across the technology adoption lifecycle - CPS provides baseplates and housings for modules using Wide Band Gap Semiconductors (SiC and GaN) and assembles housings/packages for hybrid circuits[112] - The company's products are custom-made components for customer systems, with a product mix that includes ongoing production and prototyping stages[140] - Management believes underlying demand for metal matrix composites is growing due to industry needs for higher performance, reliability, and reduced costs[182] Critical Accounting Estimates The company's financial statements rely on critical accounting estimates for allowance for credit losses, inventory valuation, and deferred tax assets. These estimates involve significant judgment, particularly given the custom nature of products and the potential impact of customer cancellations or changes in profitability on inventory and deferred tax asset realization - Critical accounting estimates include allowance for credit losses, inventory valuation, and valuation of deferred tax assets[114][115][117][141] Allowance for Credit Losses The company monitors receivables and maintains an allowance for credit losses based on historical experience and specific customer issues. While historically low, a significant change in a major customer's financial position could materially impact collectability. A credit insurance policy covers most non-U.S. accounts to mitigate this risk - Allowance for credit losses is based on payment history, creditworthiness, historical trends, and economic conditions[141][227] - A credit insurance policy covers most non-U.S accounts to mitigate potential credit losses[141][284] Allowance for Credit Losses | Metric | 2023 (Dec 30) | 2022 (Dec 31) | | :----- | :------------ | :------------ | | Allowance for doubtful accounts | $10 thousand | $10 thousand | Inventory Valuation Inventories are valued at the lower of cost (FIFO) or net realizable value. Due to the custom nature of products, customer cancellations or unmaterialized anticipated orders pose a risk of unsaleable inventory. The company reserves against inventory with no activity for 12 months or no expected future orders, and annually reviews unused hermetic packaging components for obsolescence - Inventory is valued at the lower of cost (FIFO) or net realizable value[116][229] - Virtually all inventory is customer-specific, making it difficult to sell to other customers if orders are cancelled or do not materialize[116][142] - An obsolescence reserve is established for inventory with no activity or pending/expected orders for a 12-month period[116][160][229] Valuation of Deferred Tax Assets Deferred tax assets and liabilities are based on temporary differences between financial reporting and income tax bases. Given recent and expected future profitability, management determined that a valuation allowance for its deferred tax asset is not needed, as full utilization is considered more likely than not - Deferred tax assets and liabilities are based on temporary differences and tax credits/loss carryforwards[117][262] - A valuation allowance for deferred tax assets is not needed due to recent and expected future profitability, making full utilization more likely than not[117] - As of December 30, 2023, approximately $7.6 million in taxable income and reversals of temporary differences are required to fully utilize the deferred tax asset[144] Results of Operations (Year-over-Year) In 2023, total revenue increased by 4% to $27.6 million, primarily driven by higher armor sales, but partially offset by a quality issue with a major customer. Gross profit and operating income decreased due to this quality issue, leading to a net income of $1.4 million, down from $2.1 million in 2022 Key Financial Results (2023 vs. 2022) | Metric | 2023 (in millions) | 2022 (in millions) | Change (%) | | :---------------------------------- | :----------------- | :----------------- | :--------- | | Total Revenue | $27.6 | $26.6 | +4% | | Gross Profit | $6.8 | $7.3 | -6.8% | | Gross Margin | 25% | 27% | -2 ppts | | Operating Income | $1.7 | $2.2 | -22.7% | | Net Income | $1.4 | $2.1 | -33.3% | | Income Tax Provision | $0.6 | $0.8 | -25% | | Net Income per Basic Common Share | $0.09 | $0.15 | -40% | | Net Income per Diluted Common Share | $0.09 | $0.15 | -40% | - Revenue increase was primarily due to higher armor sales, partially offset by a quality problem with a major customer[145] - The decrease in gross margin, operating income, and net income was primarily attributed to the quality issue[119][120] - Selling, general and administrative (SG&A) expenses remained virtually flat year-over-year at $5.1 million, with lower variable compensation offset by higher travel costs[146] Significant Fourth Quarter Activity in 2023 In the fourth quarter of 2023, total revenues increased by 10% to $6.7 million compared to the same period in 2022, despite being mitigated by quality issues. However, gross margin, operating income, and net income all decreased year-over-year for the quarter, primarily due to the quality problem and decreased variable compensation costs Q4 Financial Results (2023 vs. 2022) | Metric | Q4 2023 (in millions) | Q4 2022 (in millions) | Change (%) | | :---------------------------------- | :-------------------- | :-------------------- | :--------- | | Total Revenue | $6.7 | $6.1 | +10% | | Gross Margin | $1.1 | $1.6 | -31.3% | | Operating Income | $0.1 | $0.3 | -66.7% | | Net Income | $0.1 | $0.3 | -66.7% | - The increase in Q4 revenue was consistent with expectations but mitigated by quality issues[161] - SG&A expenses decreased by 23% to $1.0 million in Q4 2023, mainly due to lower variable compensation costs[148] Liquidity and Capital Resources CPS Technologies Corp funded its operations from profits in 2023 and expects to continue doing so in 2024 using existing cash balances and profits. Cash and cash equivalents increased to $8.8 million at year-end 2023. The company also established a new $3.0 million revolving line of credit with Rockland Trust Company in May 2023, with no outstanding borrowings as of December 30, 2023 - The company funded 2023 operations from profit and expects to continue funding operations in 2024 from existing cash and profits[151] Liquidity Metrics (2023 vs. 2022) | Metric | 2023 (Dec 30, in millions) | 2022 (Dec 31, in millions) | Change | | :-------------------------- | :------------------------- | :------------------------- | :----- | | Cash and Cash Equivalents | $8.8 | $8.3 | +$0.5M | | Accounts Receivable | $4.4 | $3.8 | +$0.6M | | Days Sales Outstanding (DSO) | 60 days | 52 days | +8 days | | Inventories | $4.6 | $4.9 | -$0.3M | | Inventory Turnover | 4.3 times | 4.2 times | +0.1 times | - A new $3.0 million revolving line of credit was established with Rockland Trust Company in May 2023, replacing a previous one, with no outstanding borrowings at year-end 2023[162][278] - The company has $282 thousand in construction in progress and no outstanding commitments for production equipment purchases as of December 30, 2023[126] Off-Balance Sheet Arrangements CPS Technologies Corp reports having no off-balance sheet arrangements as of December 30, 2023 - The company has no off-balance sheet arrangements[127][152] Inflation Inflation has not significantly impacted profitability to date, as the company has been able to pass along many price increases to customers. However, it has led to higher wage increases and increased employee benefits (health insurance premiums, 401k match) in 2023 - Inflation has not had a significant impact on profitability to date, as price increases have largely been passed to customers[152] - The company incurred higher wage increases and increased employee benefits (health insurance premiums, 401k match) in 2023 to ameliorate inflation effects[152] Item 7A. Quantitative and Qualitative Disclosure about Market Risk As a smaller reporting company, CPS Technologies Corp is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, CPS Technologies Corp is not required to provide quantitative and qualitative disclosure about market risk[128][185] Item 8. Financial Statements and Supplementary Data This section refers to the Index to the Company's Financial Statements and accompanying notes, which are filed as part of this Annual Report on Form 10-K - Financial statements and accompanying notes are filed as part of this Annual Report on Form 10-K[163][174] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This section states that there are no changes in or disagreements with accountants on accounting and financial disclosure - There are no changes in or disagreements with accountants on accounting and financial disclosure[7][128] Item 9A. Controls and Procedures Management, under the direction of the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures and internal control over financial reporting. Both were concluded to be effective as of December 30, 2023, with no material changes in internal control over financial reporting during fiscal 2023. The annual report does not include an attestation report from the registered public accounting firm regarding internal control over financial reporting, as permitted by SEC rules for smaller reporting companies - Disclosure controls and procedures were effective as of December 30, 2023, as concluded by the CEO and CFO[9] - Internal control over financial reporting was effective as of December 30, 2023, based on management's assessment using COSO (2013) criteria[11] - No material changes in internal control over financial reporting occurred during fiscal 2023[1] - The annual report does not include an attestation report from the registered public accounting firm regarding internal control over financial reporting, as permitted by SEC rules[4] Evaluation of Disclosure Controls and Procedures Management, led by the CEO and CFO, assessed the effectiveness of the company's disclosure controls and procedures, concluding they were effective as of December 30, 2023. These controls are designed to ensure timely recording, processing, summarizing, and reporting of information required for SEC filings - Disclosure controls and procedures were evaluated and deemed effective as of December 30, 2023[9] - Controls are designed to ensure timely recording, processing, summarizing, and reporting of SEC-required information[13] Management's Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, a process designed to provide reasonable assurance regarding financial reporting reliability and financial statement preparation in accordance with GAAP. This report acknowledges the inherent limitations of internal controls and notes that the company's registered public accounting firm did not attest to management's report - Management is responsible for establishing and maintaining adequate internal control over financial reporting[2] - Internal control over financial reporting is designed to provide reasonable assurance regarding financial reporting reliability and GAAP-compliant financial statement preparation[2] - Internal controls have inherent limitations and may not prevent or detect misstatements, and their effectiveness can deteriorate over time[3] Changes in Internal Control over Financial Reporting Management assessed the effectiveness of the company's internal control over financial reporting as of December 30, 2023, using the COSO (2013) framework, concluding it was effective. There were no material changes in internal control over financial reporting during fiscal 2023 - Management assessed the effectiveness of internal control over financial reporting as of December 30, 2023, using the COSO (2013) framework[11] - Management concluded that internal control over financial reporting was effective as of December 30, 2023[11] - No material changes in internal control over financial reporting occurred during fiscal 2023[1][10] Item 9B. Other Information CPS Technologies Corp had no information required to be disclosed in a Form 8-K during the fourth quarter of the year covered by this Form 10-K that has not already been reported - No Form 8-K reportable information from Q4 2023 was undisclosed in this 10-K[5][12] Part III This part includes information on directors, executive compensation, security ownership, and related party transactions Item 10. Directors, Executive Officer and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's Definitive Proxy Statement for the 2024 Annual Meeting of Stockholders. The company has adopted the CPS Code of Conduct, applicable to all directors, officers, and employees, available on its investor relations website - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Definitive Proxy Statement[14] - The company has adopted the CPS Code of Conduct, applicable to all directors, officers, and employees, available on its website[15] Item 11. Executive Compensation Information concerning executive compensation is incorporated by reference from the company's Definitive Proxy Statement for the 2024 Annual Meeting of Stockholders - Executive compensation information is incorporated by reference from the 2024 Definitive Proxy Statement[6] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management, as well as equity compensation plan information, is incorporated by reference from the company's Definitive Proxy Statement for the 2024 Annual Meeting of Stockholders - Information on security ownership and equity compensation plans is incorporated by reference from the 2024 Definitive Proxy Statement[164] Item 13. Certain Relationships and Related Transactions, and Director Independence Information concerning certain relationships, related person transactions, and director independence is incorporated by reference from the company's Definitive Proxy Statement for the 2024 Annual Meeting of Stockholders - Information on certain relationships, related person transactions, and director independence is incorporated by reference from the 2024 Definitive Proxy Statement[165][186] Item 14. Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's Definitive Proxy Statement for the 2024 Annual Meeting of Stockholders - Information on principal accountant fees and services is incorporated by reference from the 2024 Definitive Proxy Statement[166][186] Part IV This part lists the financial statements and exhibits filed as part of the Form 10-K Item 15. Exhibits, Financial Statement Schedules. This section lists the financial statements and exhibits filed as part of this Form 10-K. It includes the Index to Financial Statements and a detailed Exhibit Index, which incorporates various corporate documents, credit agreements, lease amendments, and stock incentive plans by reference - The section lists financial statements and exhibits filed as part of the Form 10-K[187][196] - Exhibits include corporate documents (Certificate of Incorporation, By-laws), credit agreements, lease amendments, and stock incentive plans[168][169][170][188][189][190][197][198][199] Financial Statements The financial statements filed as part of this Form 10-K are listed on the Index to Financial Statements - Financial statements are listed on the Index to Financial Statements of this Form 10-K[167] Exhibits The Exhibit Index details various documents incorporated by reference, including corporate governance documents, credit and security agreements, lease amendments for the Norton facility, and stock incentive plans. It also includes certifications required by the Sarbanes-Oxley Act and Inline XBRL taxonomy documents - Exhibit Index includes corporate documents, credit agreements, lease amendments, and stock incentive plans[168][169][170][188][189][190][197][198][199] - Certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included[190][191][200] - Inline XBRL Instance Document and Taxonomy Extension Documents are provided[192][202] Signatures This section contains the signatures of the registrant's President and Chief Executive Officer, Chief Financial Officer, and Directors, affirming the filing of the report pursuant to the Securities Exchange Act of 1934, all dated March 13, 2024 - The report is signed by the President and Chief Executive Officer, Chief Financial Officer, and Directors[194][195][203][204][213] - All signatures are dated March 13, 2024[195][213] Index to Financial Statements This section provides an index to the company's financial statements and the independent auditor's report Report of Independent Registered Public Accounting Firm Wolf & Company, P.C., the independent registered public accounting firm, issued an unqualified opinion on CPS Technologies Corp.'s financial statements for 2023 and 2022, stating they present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with GAAP. The audit did not include an opinion on internal control over financial reporting. A critical audit matter identified was the reserves for product sales returns, particularly concerning a quality issue in 2023 - Wolf & Company, P.C issued an unqualified opinion on the financial statements for 2023 and 2022[207][215] - The audit did not include an opinion on the effectiveness of the company's internal control over financial reporting[208] - A critical audit matter was identified regarding reserves for product sales returns, specifically a quality issue in 2023 that led to product returns and credits[209][210][216][217][243] - Audit procedures for the product returns liability included reviewing management's calculation, testing data accuracy, assessing assumptions, and performing sensitivity analysis[217][244] Balance Sheets The balance sheets show the financial position of CPS Technologies Corp as of December 30, 2023, and December 31, 2022. Total assets slightly decreased from $21.68 million in 2022 to $21.60 million in 2023, while total liabilities decreased from $5.97 million to $4.28 million. Stockholders' equity increased from $15.71 million to $17.32 million Balance Sheet Summary (2023 vs. 2022) | Metric | Dec 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Assets: | | | | Total Current Assets | $18,144,251 | $17,817,539 | | Net Property and Equipment | $1,556,139 | $1,326,968 | | Deferred Taxes, net | $1,569,726 | $2,069,436 | | Total Assets | $21,602,116 | $21,679,943 | | Liabilities: | | | | Total Current Liabilities | $4,068,775 | $5,379,560 | | Total Liabilities | $4,280,142 | $5,974,427 | | Stockholders' Equity: | | | | Total Stockholders' Equity | $17,321,974 | $15,705,516 | - Current assets increased, driven by higher cash and accounts receivable, while inventories decreased[247] - Total current liabilities decreased significantly, primarily due to a large reduction in deferred revenue[220] Statements of Operations The statements of operations detail CPS Technologies Corp.'s financial performance for the years ended December 30, 2023, and December 31, 2022. Total product sales increased by 4% in 2023, but gross margin, income from operations, and net income all decreased compared to 2022, largely due to a quality issue and associated costs Statements of Operations Summary (2023 vs. 2022) | Metric | 2023 | 2022 | | :----------------------------------- | :----------- | :----------- | | Product Sales | $27,550,646 | $26,586,926 | | Cost of Product Sales | $20,725,237 | $19,285,846 | | Gross Margin | $6,825,409 | $7,301,080 | | Selling, General, and Administrative Expenses | $5,126,046 | $5,066,660 | | Income from Operations | $1,699,363 | $2,234,420 | | Net Income | $1,370,296 | $2,131,400 | | Net Income per Basic Common Share | $0.09 | $0.15 | | Net Income per Diluted Common Share | $0.09 | $0.15 | - Product sales increased by 4% in 2023, but gross margin decreased from 27% to 25%[221] - Net income decreased by approximately 35.7% from $2.13 million in 2022 to $1.37 million in 2023[221] Statements of Stockholders' Equity The statements of stockholders' equity show changes in equity for the years ended December 30, 2023, and December 31, 2022 Stockholders' Equity Summary (2023 vs. 2022) | Metric | Dec 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Common Stock Par Value | $146,015 | $144,605 | | Additional Paid-in Capital | $40,180,893 | $39,726,851 | | Accumulated Deficit | $(22,754,796) | $(24,125,092) | | Less Cost of Stock Repurchased | $(250,138) | $(40,848) | | Total Stockholders' Equity | $17,321,974 | $15,705,516 | - Accumulated deficit improved from $(24.13) million in 2022 to $(22.75) million in 2023 due to net income[252] - Share-based compensation expense contributed $204,797 in 2023 and $250,359 in 2022 to additional paid-in capital[252] Statements of Cash Flows The statements of cash flows show the cash generated and used by operating, investing, and financing activities for 2023 and 2022 Statements of Cash Flows Summary (2023 vs. 2022) | Metric | 2023 | 2022 | | :----------------------------------- | :----------- | :----------- | | Net Cash Provided by Operating Activities | $1,267,453 | $3,551,399 | | Net Cash Used by Investing Activities | $(718,274) | $(436,372) | | Net Cash Provided (Used) by Financing Activities | $(2,306) | $101,414 | | Net Increase in Cash and Cash Equivalents | $546,873 | $3,216,441 | | Cash and Cash Equivalents at End of Year | $8,813,626 | $8,266,753 | - The significant decrease in net cash from operating activities was primarily due to a $2.47 million decrease in deferred revenue[253] - Purchases of property and equipment increased to $718,274 in 2023 from $439,772 in 2022[253] - Cash paid for income taxes increased substantially from $456 in 2022 to $111,456 in 2023[253] Notes to Financial Statements The notes to financial statements provide detailed information on CPS Technologies Corp.'s business, significant accounting policies, and specific financial accounts - The company operates as one segment, producing advanced material solutions, primarily metal matrix composites, for assemblers of high-density electronics and other specialty components[268] - The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts, which are adjusted periodically based on economic changes[265] - The company's fiscal year-end is the last Saturday in December, resulting in 52 or 53-week years (2023 was 52 weeks, 2022 was 53 weeks)[266] (1) Nature of Business CPS Technologies Corp provides advanced material solutions, primarily metal matrix composites, to various end markets including transportation, automotive, energy, computing/internet, telecommunications, aerospace, defense, and oil and gas. The company designs, manufactures, and sells custom MMC components to improve system performance and reliability - CPS provides advanced material solutions, primarily metal matrix composites, to diverse end markets[225][254] - The company designs, manufactures, and sells custom MMC components to improve system performance and reliability[254] (2) Summary of Significant Accounting Policies This section outlines the significant accounting policies of CPS Technologies Corp., covering cash equivalents, accounts receivable, inventory valuation, property and equipment, impairment of long-lived assets, revenue recognition, income taxes, net income per common share, reclassification, recent accounting pronouncements, use of estimates, fiscal year-end, share-based payments, and segment reporting - Cash equivalents include highly liquid investments with a maturity of three months or less[226][255] - Accounts receivable are reported at invoiced amount less an allowance for credit losses, which was $10,000 for both 2023 and 2022[227][255] - Inventories are stated at the lower of cost (FIFO) or net realizable value, with a reserve for obsolete inventories based on sales and usage[229][256] - Property and equipment are stated at cost and depreciated on a straight-line basis over estimated useful lives[230][256] - The company reviews long-lived assets for impairment when circumstances indicate carrying amounts may not be recovered, with no impairment believed to exist as of 2023 and 2022[231][256] - Revenue is recognized in accordance with ASC 606, using a five-step method, typically at the point in time when control of goods or services is transferred to the customer[232][257][288] - The company uses the asset and liability method for income taxes, recording deferred tax assets and liabilities for temporary differences[262][289] - Basic and diluted net income per common share are calculated by dividing net income by weighted average common shares outstanding, with common stock equivalents excluded from diluted calculations during net losses[263][290] - The company adopted FASB ASU 2016-13 (Measurement of Credit Losses on Financial Instruments) effective January 1, 2023, with an immaterial impact on financial statements[292] - Share-based compensation cost is measured at grant date fair value and recognized over the requisite service period, using the Black-Scholes option pricing model[267][293] (3) Inventories As of December 30, 2023, and December 31, 2022, inventories consisted of raw materials, work in process, and finished goods. Total gross inventory decreased slightly in 2023, while the reserve for obsolescence increased significantly Inventory Composition (2023 vs. 2022) | Category | Dec 30, 2023 | Dec 31, 2022 | | :------------------- | :----------- | :----------- | | Raw Materials | $2,861,333 | $2,645,442 | | Work in Process | $1,493,582 | $1,863,512 | | Finished Goods | $537,975 | $525,872 | | Gross Inventory | $4,892,890 | $5,034,826 | | Reserve for Obsolescence | $(310,960) | $(158,925) | | Total | $4,581,930 | $4,875,901 | - Raw materials increased, while work in process decreased in 2023[294] - The reserve for obsolescence nearly doubled from $158,925 in 2022 to $310,960 in 2023[294] (4) Leases The company's primary lease is for its Norton, MA facility, expiring in February 2026, which is capitalized as a right-of-use asset and corresponding lease liability. This triple net lease requires the company to pay real estate taxes, operating costs, and utilities. Other equipment leases are minor and short-term, not capitalized - The Norton facility lease is capitalized as a right-of-use lease asset and corresponding lease liability[270] - The lease is a triple net lease, with the company responsible for real estate taxes, operating costs, and utilities[296] Capitalized Operating Lease Liability (Dec 30, 2023) | Metric | Amount | | :----------------------------------------------------------------------------------- | :------- | | Current Lease Liability | $160,000 | | Long-term Lease Liability | $172,000 | | Total Operating Lease Liability | $332,000 | | Weighted-average remaining lease term | 26 months | | Weighted-average discount rate | 6.6% | Operating Lease Costs and Cash Flows | Metric | 2023 | 2022 | | :------------------- | :----------- | :----------- | | Operating Lease Cost | $162 thousand | $160 thousand | (5) Share-Based Compensation Plans The company adopted the 2020 Equity Incentive Plan, making employees, officers, directors, consultants, and advisors eligible for options, restricted stock, or other stock-based awards. Options generally vest over five years for employees and immediately for directors. Share-based compensation expense was $204,797 in 2023, with $560,815 of unrecognized cost remaining - The 2020 Equity Incentive Plan allows for options, restricted stock, or other stock-based awards to eligible personnel[299] - Options granted to employees generally vest over five years, while those for directors vest immediately[299] Stock Option Activity (Year Ended Dec 30, 2023) | Metric | Shares | Weighted Average Exercise Price | | :------------------------- | :------- | :------------------------------ | | Outstanding at beginning of year | 961,400 | $2.47 | | Granted | 344,500 | $2.90 | | Exercised | (141,000) | $1.78 | | Forfeited | (236,400) | $2.93 | | Expired | (25,000) | $1.00 | | Outstanding at end of year | 903,500 | $2.66 | | Options exercisable at year-end | 494,600 | $2.42 | Share-Based Compensation Expense | Year | Expense | | :--- | :-------- | | 2023 | $204,797 | | 2022 | $250,359 | | Unrecognized Cost (Dec 30, 2023) | $560,815 | | Weighted Average Recognition Period | 2.55 years | (6) Accrued Expenses Accrued expenses totaled $1.08 million at December 30, 2023, up from $0.82 million in 2022. This increase was primarily driven by a significant rise in 'Accrued other,' which includes a $288,000 reserve for potential credits related to a quality issue Accrued Expenses Composition (2023 vs. 2022) | Category | 2023 | 2022 | | :-------------------------- | :----------- | :----------- | | Accrued Legal and Accounting | $86,000 | $35,398 | | Accrued Payroll and Related Costs | $649,201 | $760,305 | | Accrued Other | $339,936 | $25,153 | | Total Accrued Expenses | $1,075,137 | $820,856 | - Accrued other includes a $288,000 reserve for potential credits due to a quality issue, in addition to $104,126 in sales returns for credits issued in January 2024[277] (7) Revolving Line of Credit In May 2023, CPS terminated its $3.0 million revolving line of credit (LOC) with Massachusetts Business Development Corporation and entered into a new $3.0 million LOC with Rockland Trust Company. The new LOC is secured by accounts receivable and other assets, with an interest rate tied to the National Prime Rate. As of December 30, 2023, there were no borrowings under this LOC - A new $3.0 million revolving line of credit was established with Rockland Trust Company in May 2023[278][303] - The LOC is secured by accounts receivable and other assets, with an interest rate of the National Prime Rate (8.5% at Dec 30, 2023)[278] - As of December 30, 2023, there were no borrowings under the LOC, and an additional $3.0 million could have been borrowed[278] (8) Notes Payable The company has a 5-year note payable for a Sonoscan ultrasound microscope acquired in March 2020, financed at a 6.47% interest rate. Monthly installments of $4 thousand cover principal and interest. Total interest expense on notes payable was $5,096 in 2023 and $7,954 in 2022 - A 5-year note payable financed the acquisition of a Sonoscan ultrasound microscope in March 2020[152][279][304] - The note is collateralized by the microscope, with monthly installments of $4 thousand at a 6.47% interest rate[279] Notes Payable Interest Expense | Year | Interest Expense | | :--- | :--------------- | | 2023 | $5,096 | | 2022 | $7,954 | Notes Payable Maturities | Period | Payments Due | | :----- | :----------- | | FY 2024 | $48,974 | | FY 2025 | $8,155 | | Less Interest | $(2,242) | | Total Principal Payments | $54,887 | (9) Income Taxes Income tax provision for 2023 was $582,085, down from $756,268 in 2022, comprising both current and deferred components. The deferred tax asset decreased from $2.07 million in 2022 to $1.57 million in 2023. The difference from the U.S. federal statutory rate is primarily due to state taxes and other adjustments. The company is open to audit for years 2020 through 2023 Income Tax Provision (2023 vs. 2022) | Category | 2023 | 2022 | | :----------------------------------- | :----------- | :----------- | | Current Income Tax Provision (Benefit) | $82,375 | $1,726 | | Deferred Income Tax Provision (Benefit), net | $499,710 | $754,542 | | Total | $582,085 | $756,268 | Deferred Tax Assets (2023 vs. 2022) | Category | Dec 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Net Operating Loss Carryforwards | $0 | $132,632 | | Stock Compensation | $209,609 | $209,092 | | Credit Carryforwards | $865,928 | $1,253,956 | | Inventory | $84,955 | $80,628 | | Accrued Liabilities | $0 | $5,071 | | Depreciation | $143,081 | $179,481 | | Capitalized R&D, net | $263,421 | $205,878 | | Other | $2,732 | $2,698 | | Net Deferred Tax Assets | $1,569,726 | $2,069,436 | - The deferred tax asset decreased by approximately $500,000 in 2023[315] - The company is open to audit by federal and state taxing authorities for the years 2020 through 2023[316] (10) Retirement Savings Plan CPS Technologies Corp sponsors a 401(k) Retirement Savings Plan. In 2023, the company matched 1% of the first 4% of employee contributions, totaling $232 thousand, an increase from a 0.5% match in 2022 which amounted to $94 thousand - The company sponsors a 401(k) Retirement Savings Plan[283][306] Company 401(k) Match | Year | Match Rate | Total Match | | :--- | :--------- | :---------- | | 2023 | 1% of first 4% | $232 thousand | | 2022 | 0.5% of first 4% | $94 thousand | (11) Concentrations of Credit Risk, Significant Customers and Geographic Information The company's credit risk is concentrated in cash, cash equivalents, and trade accounts receivable, with cash deposits managed across FDIC-insured institutions. A significant portion of revenue comes