CPS TECHNOLOGIES CORP/DE/ — Interim / Quarterly Report 2023

May 9, 2023

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 1, 2023

or

☐ 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 ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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 25, 2023: 14,469,677 .

PART I FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS (Unaudited)

CPS TECHNOLOGIES CORP.

Balance Sheets (Unaudited)

	April 1, 2023
ASSETS
Current assets:
Cash and cash equivalents	$ 7,369,863	$	8,266,753
Accounts receivable-trade, net	4,714,138		3,777,975
Accounts receivable-other	700,703		685,668
Inventories, net	4,692,655		4,875,901
Prepaid expenses and other current assets	299,601		211,242
Total current assets	17,776,960		17,817,539
Property and equipment:
Production equipment	10,900,344		10,770,427
Furniture and office equipment	952,883		952,883
Leasehold improvements	985,649		985,649
Total cost	12,838,876		12,708,959
Accumulated depreciation and amortization	( 11,571,509	)	( 11,446,901	)
Construction in progress	111,612		64,910
Net property and equipment	1,378,979		1,326,968
Right-of-use lease asset (note 4, leases)	433,000		466,000
Deferred taxes, net	1,842,992		2,069,436
Total Assets	$ 21,431,931		21,679,943
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Note payable, current portion	44,424		43,711
Accounts payable	2,046,893		1,836,865
Accrued expenses	731,454		820,856
Deferred revenue	1,828,068		2,521,128
Lease liability, current portion	157,000		157,000
Total current liabilities	4,807,839		5,379,560
Note payable less current portion	43,439		54,847
Deferred Revenue – Long term	-		231,020
Long term lease liability	276,000		309,000
Total liabilities	5,127,278		5,974,427
Commitments & Contingencies
Stockholders’ equity:
Common stock, $ 0.01 par value, authorized 20,000,000 shares; issued 14,467,487 and 14, 460,486 shares; outstanding 14,457,186 and 14, 450,470 shares; at April 1, 2023 and December 31, 2022, respectively	144,675		144,605
Additional paid-in capital	39,867,507		39,726,851
Accumulated deficit	( 23,665,891	)	( 24,125,092	)
Less cost of 10,301 and 10,016 common shares repurchased at April 1, 2023 and December 31, 2022, respectively	( 41,638	)	( 40,848	)
Total stockholders’ equity	16,304,653		15,705,516
Total liabilities and stockholders’equity	$ 21,431,931	$	21,679,943

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORP.

Statements of Operations (Unaudited)

	Fiscal Quarters Ended — April 1, 2023	April 2, 2022
Revenues:
Product sales	$ 7,100,267	$ 6,652,714
Total revenues	7,100,267	6,652,714
Cost of product sales	4,855,564	4,689,224
Gross Margin	2,244,703	1,963,490
Selling, general, and administrative expense	1,550,522	1,416,393
Income from operations	694,181	547,097
Other income (expense), net	15,590	( 1,913	)
Income before taxes	709,771	545,184
Income tax provision	250,570	125,748
Net income	$ 459,201	$ 419,436
Net income per basic common share	$ 0.03	$ 0.03
Weighted average number of basic common shares outstanding	14,452,284	14,389,857
Net income per diluted common share	$ 0.03	$ 0.03
Weighted average number of diluted common shares outstanding	14,639,600	14,657,939

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORPORATION STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) FOR THE THREE MONTHS ENDED APRIL 1, 2023 AND April 2, 2022

Number of shares issued		Par Value	Additional paid-in capital	Accumulated deficit			Stock repurchased		Total stockholders’ equity
Balance at December 31, 2022	14,460,486	$ 144,605	39,726,851	$	( 24,125,092	)	$ ( 40,848	)	$ 15,705,516
Share-based compensation expense	—	—	130,441		—		—		130,441
Employee options exercises	7,001	70	10,215		—		( 790	)	9,495
Net income	—	—	—		459,201		—		459,201
Balance at April 1, 2023	14,467,487	144,675	39,867,507		( 23,665,891	)	( 41,638	)	16,304,653
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

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORP.

Statements of Cash Flows (Unaudited)

	Fiscal Quarters Ended — April 1, 2023	April 2, 2022
Cash flows from operating activities:
Net income	$ 459,201	$	419,436
Adjustments to reconcile net income to cash used in operating activities:
Depreciation and amortization	124,608		105,121
Share-based compensation	130,441		124,471
Changes in:
Accounts receivable - trade	( 936,163	)	( 32,497	)
Accounts receivable - other	( 15,035	)	--
Inventories	183,246		( 793,924
Prepaid expenses and other current assets	( 88,359	)	( 109,090	)
Accounts payable	210,028		150,871
Accrued expenses	( 89,402	)	( 368,947	)
Deferred Taxes	226,444		125,292
Deferred revenue	( 924,080	)	--
Net cash used in operating activities	( 719,071	)	( 379,267	)
Cash flows from investing activities:
Purchases of property and equipment	( 176,618	)	( 94,683	)
Proceeds from sale of property and equipment	--		--
Net cash used in investing activities	( 176,618	)	( 94,683	)
Cash flows from financing activities:
Net borrowings on line of credit	--		--
Proceeds from exercise of employee stock options	9,495		138,313
Payments on note payable	( 10,696	)	( 14,981	)
Net cash provided by financing activities	( 1,201	)	123,332
Net decrease in cash and cash equivalents	( 896,890	)	( 350,618	)
Cash and cash equivalents at beginning of period	8,266,753		5,050,312
Cash and cash equivalents at end of period	$ 7,369,863	$	4,699,694
Supplemental disclosures of cash flows information:
Cash paid for interest	$ 1,538	$	2,269
Supplemental disclosures of non-cash activity:
Net exercise of stock options	$ 790	$	3,108

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 defense 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 31, 2022 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 31, 2022 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 1, 2023	April 2, 2022
Basic EPS Computation:
Numerator:
Net income	$ 459,201	$ 419,436
Denominator:
Weighted average
Common shares
Outstanding	14,452,284	14,389,857
Basic EPS	$ 0.03	$ 0.03
Diluted EPS Computation:
Numerator:
Net income	$ 459,201	$ 419,436
Denominator:
Weighted average
Common shares
Outstanding	14,452,284	14,389,857
Dilutive effect of stock options	187,316	268,082
Total Shares	14,639,600	14,657,939
Diluted EPS	$ 0.03	$ 0.03

( 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 1, 2023 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. The Company is not reasonably certain these extensions will be exercised at this time, and therefore are not included in the lease asset or liability. 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 1, 2023

(Dollars in Thousands)	April 1, 2023
Maturity of capitalized lease liabilities	Lease payments
Remaining 2023	121
2024	165
2025	165
2026	28
Total undiscounted operating lease payments	$ 479
Less: Imputed interest	( 46	)
Present value of operating lease liability	$ 433
Balance Sheet Classification
Current lease liability	$ 157
Long-term lease liability	276
Total operating lease liability	$ 433
Other Information
Weighted-average remaining lease term for capitalized operating leases (in months)	35
Weighted-average discount rate for capitalized operating leases	6.6	%

Operating Lease Costs and Cash Flows

Operating lease cost and cash paid was $ 41 thousand during the first quarter of 2023. 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 1, 2023 and April 2, 2022, a total of 0 and 170,000 stock options, respectively, were granted to employees under the Company’s 2020 Equity Incentive Plan (the “Plan”) and a total of 50,000 and 38,000 stock options, respectively, were granted to outside directors during the quarters ended April 1, 2023 and April 2, 2022.

During the quarter ended April 1, 2023, there were 7,001 options exercised and corresponding shares issued at a weighted average price of $ 1.47 . 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 April 1, 2023, the Company repurchased 285 shares for employees to facilitate their exercise of stock options. During the quarter ended April 2, 2022, the Company repurchased 840 shares for employees to facilitate their exercise of stock options.

There were also 1,004,400 options outstanding at a weighted average price of $ 2.51 with a weighted average remaining term of 6.10 years as of April 1, 2023, and there were 971,600 options outstanding at a weighted average price of $ 2.37 with a weighted average remaining term of 6.67 years as of April 2, 2022. The Plan, as amended, is authorized to issue 1,500,000 shares of common stock. As of April 1, 2023, there were 865,800 shares available for future grants. 639,100 grants remain exercisable under the Company’s Equity Incentive Plans.

As of April 1, 2023, there was $ 523 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 1.41 years.

During the quarters ended April 1, 2023 and April 2, 2022, the Company recognized approximately $ 130 thousand and $ 124 thousand, respectively, as shared-based compensation expense related to previously granted shares under the Plan.

( 6 ) Inventories

Inventories consist of the following:

Raw materials	April 1, 2023 — $ 2,732,661	$	2,645,442
Work in process	1,726,410		1,863,512
Finished goods	483,009		525,872
Gross inventory	4,942,081		5,034,826
Reserve for obsolescence	( 249,425	)	( 158,925	)
Inventories, net	$ 4,692,655	$	4,875,901

( 7 ) Accrued Expenses

Accrued expenses consist of the following:

	April 1, 2023	December 31, 2022
Accrued legal and accounting	$ 32,500	$ 35,398
Accrued payroll and related expenses	576,532	760,305
Accrued other	122,422	25,153
Total Accrued Expenses	$ 731,454	$ 820,856

( 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 1, 2023, 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 %.

The aggregate maturities of the notes payable based on the payment terms of the agreement are as follows:

Remaining in:
FY 2023	33,016
FY 2024	$ 46,757
FY 2025	$ 8,090
Total	87,863

Total interest expense on notes payable during Q1 2023 was $ 1,538 compared to $ 2,269 in Q1 2022.

( 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 2023 a charge against the deferred tax asset of $ 226 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 31, 2022 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 31, 2022, 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 31, 2022.

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 2023 (Q1 2023) Compared to the First Fiscal Quarter of 2022 (Q1 2022); (all $ in 000 ’ s)

Revenues totaled $7,100 in Q1 2023 compared with $6,653 generated in Q1 2022, an increase of 7%. Two factors in particular contributed to this growth. One of our largest customers, which was particularly hard hit by the Covid-19 pandemic, has continued to grow as that pandemic has subsided. Additionally, our shipments of armor for the US Navy also saw significant growth from 2022 to 2023.

Gross margin in Q1 2023 totaled $2,245 or 32% of sales. This compares with gross margin in Q1 2022 of $1,963 or 30% of sales. This moderate percentage increase was due to the company’s continuing efforts to improve manufacturing efficiencies as well as the impact of higher sales volumes on fixed costs.

Selling, general and administrative (SG&A) expenses totaled $1,551 in Q1 2023 compared with SG&A expenses of $1,416 in Q1 2022. There were two primary reasons for this increase. First there was a significant increase in travel expenses. In 2022 we were just beginning to come out of the Covid-19 pandemic. Many conferences continued to be virtual and many customers continued to prohibit outside visitors. In 2023 this has changed thus our business development team, in particular, have been doing significantly more travel than a year ago. Secondly, the company increased its 401k matching formula in 2023 resulting in increased payroll costs.

The Company experienced an operating profit of $694 in Q1 2023 compared with an operating profit of $547 in Q1 2022, an increase of 27%. This increase was a result of the increased gross margin, partially offset by the increase in SG&A expenses.

The Company has had extremely minimal sales to both Russia and Ukraine over the last several years, the loss of which would be immaterial to 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.

Inflation has had an impact on our costs. Thus far, we have been able to pass along these increases to our customers, but there is no guarantee that we will be able to continue this in the future. In addition, there is often a lag between when the costs increase and when we can adjust customer prices. Some of our larger customers will have pricing agreements, typically for one year, and we must wait for those agreements to end before making any pricing adjustments. Wage increases are also part of the inflation impact. We have instituted a combination of wage increases as well as richer benefits, such as the increased 401k match mentioned above, in order to retain the folks making up our workforce.

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 1, 2023 totaled $7,370. This compares to cash and cash equivalents at December 31, 2022 of $8,267. The decrease in cash was due primarily to increases in accounts receivable and significant reductions in deferred revenue offset by net profit.

Accounts receivable at April 1, 2023 totaled $5,415 compared with $4,464 at December 31, 2022. Days Sales Outstanding (DSO) increased from 56 days at the end of 2022 to 60 days at the end of Q1 2023. The increase 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 2023. The accounts receivable balances at December 31, 2022, and April 1, 2023 were both net of an allowance for doubtful accounts of $10.

Inventories totaled $4,693 at April 1, 2023 compared with inventory totaling $4,876 at December 31, 2022. The inventory turnover in the most recent four quarters ending Q1 2023 was 4.1 times (based on a 5 point average) compared with 4.2 times averaged during the four quarters of 2021.

The Company financed its increase in non-cash working capital in Q1 2023 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 2023 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 1, 2023, 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%

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.

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 Acting President and Chief Financial Officer has 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 2022 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 Acting President and 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)

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 8, 2023

/s/ Charles K. Griffith Jr.

Charles K. Griffith Jr.

Acting President and Chief Financial Officer