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What changed in CPS TECHNOLOGIES CORP/DE/'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of CPS TECHNOLOGIES CORP/DE/'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+88 added−94 removedSource: 10-K (2024-03-14) vs 10-K (2023-03-16)

Top changes in CPS TECHNOLOGIES CORP/DE/'s 2023 10-K

88 paragraphs added · 94 removed · 80 edited across 5 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeOf particular interest is the move to using Silicon Carbide (SiC) semiconductors instead of silicon semiconductors. SiC has proven to be more efficient than silicon allowing, among other things for EV’s and HEV’s to run for longer distance on a single charge of the auto’s battery. This is important to CPS as SiC semiconductors run hotter than silicon semiconductors.
Biggest changeSiC is more efficient than silicon allowing, among other things, for EVs and HEVs to run for longer distances on a single battery charge. This is important to CPS, as SiC semiconductors run hotter than silicon semiconductors. As such, the voltage level at which AlSiC becomes preferred over copper would be lower, creating expanded opportunities for AlSiC baseplates.
We believe this market will continue to grow as the use of power modules penetrates additional motor applications, and as electric motors themselves penetrate new applications such as the hybrid and electric vehicles. Today our primary products for IGBT applications are used in electric trains, subway cars, wind turbines and hybrid and electric vehicles.
We believe this market will continue to grow as the use of power modules penetrates additional motor applications, and as electric motors themselves penetrate new applications such as hybrid and electric vehicles. Today our primary products for IGBT applications are used in electric trains, subway cars, wind turbines and hybrid and electric vehicles.
The Company provides baseplates on which motor controller modules are assembled; these baseplates are lighter weight and provide greater reliability than baseplates made from more conventional materials, typically copper. Copper is less expensive than the Company’s MMC solution, but its rate of thermal expansion is significantly different than that of the silicon semiconductors mounted to baseplates.
The Company provides baseplates on which motor controller modules are assembled; these baseplates are lighter weight and provide greater reliability than baseplates made from more conventional materials, typically copper. Copper is less expensive than the Company’s MMC solution, but its rate of thermal expansion is significantly different than that of the silicon semiconductors mounted to the baseplates.
In all cases, we seek protection for our technological developments to preserve our competitive position. Backlog and Contracts Virtually 100% of the Company's product sales are custom in that they are based on customers’ drawings and the large majority of these sales are "designed in" and are sold over multiple years.
In all cases, we seek protection for our technological developments to preserve our competitive position. Backlog and Contracts Virtually 100% of the Company's product sales are custom in that they are based on customers’ drawings and the large majority of these sales are "designed in" and sold over multiple years.
The disposal of such waste is governed by state and federal regulations. Various customers, vendors, and collaborative development agreement partners of CPS may reside abroad, thereby possibly requiring export and import of raw materials, intermediate products, and finished products, as well as potential technology transfer abroad under collaborative development agreements.
The disposal of such waste is governed by state and federal regulations. Various customers, vendors, and collaborative development agreement partners of CPS may reside abroad, thereby possibly requiring export and import by CPS of raw materials, intermediate products, and finished products, as well as potential technology transfer abroad under collaborative development agreements.
While these three requirements result in products of ever-increasing performance, these requirements also create a fundamental challenge for the designer to manage the heat generated by the system operating at higher speeds and/or higher power. Smaller assemblies further concentrate the heat and increase the difficulty of removing it.
While these three requirements result in products of ever-increasing performance, they also create a fundamental challenge for the designer to manage the heat generated by the system operating at higher speeds and/or higher power. Smaller assemblies further concentrate the heat and increase the difficulty of removing it.
Power processing consists of converting the electrical power provided by the power source into the appropriate voltage and amperage needed for the device using the power. Signal processing consists of the myriad ways digital and analog signals are used in computing, communications, and related applications.
Power processing consists of converting the electrical power provided by the power source into the appropriate voltage and amperage needed by the device using the power. Signal processing consists of the myriad ways digital and analog signals are used in computing, communications, and related applications.
The Company’s products are used in high-speed trains, mass transit, hybrid and electric cars, wind-turbines for electricity generation, routers, switches and fiber optic components for the internet backbone. The Company’s products are used in high reliability communications and power modules for avionics and satellite applications such as the current generation of GPS satellites.
The Company’s products are used in high-speed trains, mass transit, hybrid and electric cars, wind-turbines for electricity generation, routers, switches and fiber optic components for internet infrastructure. The Company’s products are used in high reliability communications and power modules for avionics and satellite applications such as the current generation of GPS satellites.
The Company also has the capability of encapsulating pyrolytic graphite inserts to enhance the thermal conductivity of the AlSiC composite. CPS produces products made of AlSiC in the shapes and configurations required for each application, for example, in the form of lids, substrates, housings, etc. Every product is made to a customer’s blueprint.
The Company also has the capability of encapsulating pyrolytic graphite inserts to enhance the thermal conductivity of the AlSiC composite. CPS produces products made of AlSiC in the shapes and configurations required for each application, for example, in the form of lids, substrates, housings, etc. Every product is made to a customer’s specifications.
The Company is working with multiple tier one and tier two suppliers to the automobile industry on several new designs, including SiC modules, for future introduction. The Company believes the HEV and EV markets will be the source of significant and long-term growth for the Company.
The Company is working with multiple tier one and tier two suppliers to the automobile industry on several new designs, including SiC modules, for future introduction. The Company believes the HEV and EV markets may be the source of significant and long-term growth for the Company.
We believe they offer their products at lower prices but have generally not yet been to be able to provide the delivery, performance, quality and reliability required by the market. Regarding hermetic packages, the market is much more fragmented.
We believe they offer their products at lower prices, but they have generally not yet been to be able to provide the delivery, performance, quality and reliability required by the market. The market for hermetic packages is much more fragmented.
This growth is the result of several factors including emerging high-power applications which demand power controllers such as trains, subways and certain industrial equipment, and cost declines in power modules which increasingly make variable speed drives cost effective.
This growth is the result of several factors including emerging high-power applications which demand power controllers such as trains, subways and certain industrial equipment, and cost reductions in power modules which increasingly make variable speed drives cost effective.
Our competition in this area is alternatives to our HybridTech Armor® which involve tradeoffs regarding cost, weight, anti-ballistic properties, etc. As CPS expands its armor capabilities, we could begin to see more direct competition from more established armor producers. Government Regulation We produce non-nuclear, non-medical hazardous waste in our development and manufacturing operations.
Our competition in this area consists of alternatives to our HybridTech Armor® which involve tradeoffs regarding cost, weight, anti-ballistic properties, etc. As CPS expands its armor capabilities, we could begin to see more direct competition from more established armor producers. Government Regulation We produce non-nuclear, non-medical hazardous waste in our development and manufacturing operations.
Metal matrix composites (MMCs) are a class of materials consisting of a combination of metals and ceramics. Compared to conventional materials, MMCs provide superior thermal conductivity, improved thermal expansion matching, greater stiffness and lighter weight. These factors, in particular the lighter weight, are among the reasons CPS parts are on the last two Mars Rovers as well as many satellites.
MMCs are a class of materials consisting of a combination of metals and ceramics. Compared to conventional materials, MMCs provide superior thermal conductivity, improved thermal expansion matching, greater stiffness and lighter weight. These factors, in particular the lighter weight, are among the reasons CPS parts are on the last two Mars Rovers as well as many satellites.
The Company also produces housings and heatspreaders for high-performance microprocessors, graphics processing chips, and application-specific integrated circuits. All of these applications involve electrical energy use or energy generation; the Company’s products allow higher performance and improved energy efficiency. Using its proprietary MMC technology, the Company also produces light-weight armor.
The Company also produces housings and heat spreaders for high-performance microprocessors, graphics processing chips, and application-specific integrated circuits. All of these applications involve electrical energy use or energy generation; the Company’s products allow higher performance and improved energy efficiency. Using its proprietary MMC technology, the Company also produces light-weight armor.
We also have approximately 20 manufacturing people working with us through temporary employment agencies. During 2022, the Company continued its efforts to increase factory efficiency both in terms of employee training as well as increased automation. None of our employees are covered by a collective bargaining agreement. We consider our relations with our employees to be excellent.
We also have approximately 20 manufacturing people working with us through temporary employment agencies. During 2023, the Company continued its efforts to increase factory efficiency both in terms of employee training as well as increased automation. None of our employees is covered by a collective bargaining agreement. We consider our relations with our employees to be excellent.
Today’s HMA technology can, in a CPS 2x2 inch package, provide the computing technology of today's typical server or yesterday's small mainframe. CPS is the only producer of hermetic packages with AlSiC bases, combining our expertise in hermetic package production with our expertise in MMC production.
Today’s HMA technology can, in a CPS 2”x2” package, provide the computing technology of today's typical server or yesterday's small mainframe. CPS is the only producer of hermetic packages with AlSiC bases, combining our expertise in hermetic package production with our expertise in MMC production.
There are a number of different hermetic package types allowing certain companies to specialize in a particular area of the overall hermetic package market. Some of these companies are competitors of CPS, while others focus on product types not sold by CPS.
There are a number of different hermetic package types, allowing different manufacturers to specialize in a particular area of the hermetic package market. Some of these companies are competitors of CPS, while others focus on product types not sold by CPS.
We believe our proprietary processes, reputation, and the price at which we can offer products for sale will enable us to compete successfully in the many electronics, aerospace and defense end markets. Our primary direct competitor in metal matrix composites is Denka, a large chemical company based in Japan. We see manufacturers in China seeking to penetrate our markets.
We believe our proprietary processes, reputation, and the price at which we can offer products for sale will enable us to compete successfully in the many electronics, aerospace and defense end markets. Our primary direct competitor in MMCs is Denka, a large chemical company based in Japan. We also see manufacturers in China seeking to penetrate our markets.
The raw materials we use are available from domestic and foreign sources and none is believed to be scarce or restricted for national security reasons. We use no conflict metals. Patents and Trade Secrets As of December 31, 2022, the Company had 11 United States patents.
The raw materials we use are available from domestic and foreign sources and none is believed to be scarce or restricted for national security reasons. We use no conflict metals. Patents and Trade Secrets As of December 30, 2023, the Company had 9 United States patents.
We feel these programs will further enhance CPS’ intellectual property portfolio. CPS management believes our business model of providing advanced material solutions to a portfolio of high growth end markets in various stages of the technology adoption lifecycle provides CPS with the opportunity for sustained growth and a diversified customer base.
The technologies developed by the Company during these programs will further enhance CPS’ intellectual property portfolio. CPS management believes our business model of providing advanced material solutions to a portfolio of high growth end markets in various stages of the technology adoption lifecycle provides CPS with the opportunity for sustained growth and a diversified customer base.
Hermetic Packages The prime uses of hermetic packaging are for space applications such as satellites, flight applications such as avionics and undersea applications such as torpedoes, submarines and communications buoys. Hermetic packages allow the assembly of multiple semiconductor devices known as Hybrid Microelectronic Assemblies (HMA).
Hermetic Packages Hermetic packaging products are primarily used for space applications such as satellites, flight applications such as avionics and undersea applications such as torpedoes, submarines and communications buoys. Hermetic packages allow the assembly of multiple semiconductor devices known as Hybrid Microelectronic Assemblies (HMA).
In 2022, approximately 65% of our revenues were derived from commercial applications and 35% from defense-related applications. Availability of Raw Materials We use a variety of raw materials from numerous domestic and foreign suppliers. These materials are primarily aluminum ingots, ceramic powders, chemicals and hermetic assembly components.
In 2023, approximately 52% of our revenues were derived from commercial applications and 48% from defense-related applications. Availability of Raw Materials We use a variety of raw materials from numerous domestic and foreign suppliers. These materials are primarily aluminum ingots, ceramic powders, chemicals and hermetic assembly components.
Management believes our main domestic competitors in this arena are Egide, Ametek, and Qnnect (formerly Hermetic Solutions Group). The company currently has contracts to produce its HybridTech Armor® panels. To our knowledge, we do not have any direct competitors who produce encapsulated armor.
Our main domestic competitors in this arena include Egide, Ametek, and Qnnect (formerly Hermetic Solutions Group). The company currently has orders to produce its HybridTech Armor® panels. To our knowledge, we do not have any direct competitors who produce encapsulated armor.
Customers We sell primarily to major microelectronics systems houses in the United States, Europe and Asia. Our customers typically purchase prototype and evaluation quantities of our products over a one to three year period before purchasing production volumes. In 2022, our three largest customers accounted for 21%, 17%, and 15% of revenues, respectively.
Customers We sell primarily to major microelectronics systems houses in the United States, Europe and Asia. Our customers typically purchase prototype and evaluation quantities of our products over a one to three year period before purchasing production volumes. In 2023, our three largest customers accounted for 33%, 18%, and 9% of revenues, respectively.
CPS is a fully qualified manufacturer for many of the world’s largest electronics OEMs. In 2022 CPS resumed its participation in the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, sponsored by the US Small Business Administration. These programs provide funding for innovative research and development.
CPS is a fully qualified manufacturer for many of the world’s largest electronics OEMs. In 2022 CPS resumed its participation in the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, sponsored by the US Small Business Administration. These programs provide funding for innovative research and development to domestic small businesses, who maintain certain intellectual property rights.
These types of activities are regulated by bureaus within the Departments of Commerce, State and Treasury. Employees As of December 31, 2022, we had 86 permanent full-time employees. 74 were engaged in manufacturing and engineering and 12 in sales and administration, including finance, human resources and general management.
These types of activities are regulated by bureaus within the Departments of Commerce, State and Treasury. Employees As of December 30, 2023, we had 100 permanent full-time employees. 90 were engaged in manufacturing and engineering and 10 in sales and administration, including finance, human resources and general management.
Modules using SiC chips run at higher temperatures, increasing the need for improved thermal management, a need which the Company’s products meet. Armor Markets Overview Armor has traditionally been steel panels. As threat levels have increased the amount of steel required to provide ballistic protection has reached a point where the weight degrades a vehicle’s performance.
Modules using SiC chips run at higher temperatures, increasing the need for improved thermal management, a need which the Company’s products meet. Armor Market Overview Armor has traditionally been comprised of steel panels. As threat levels have increased, the amount of steel required to provide sufficient ballistic protection has become unacceptably detrimental to a vehicle’s performance.
In March 2007, the Company changed its name from Ceramics Process Systems Corporation to CPS Technologies Corp. CPS website is http://www.cpstechnologysolutions.com. Overview of Markets and Products Electronics Markets Overview The electronics world can be divided into power processing and signal processing.
In March 2007, the Company changed its name from Ceramics Process Systems Corporation to CPS Technologies Corp. CPS’ website is http://www.cpstechnologysolutions.com. Overview of Markets and Products Electronics Markets Overview The applications for electronics can typically be characterized as either power processing or signal processing.
We design, manufacture and sell custom metal matrix composite components for the performance and reliability of systems in the end markets described above. The Company is an important participant in the growing movement towards alternative energy and green lifestyles.
We design, manufacture and sell custom MMC components that improve the performance and reliability of systems in the end markets described above. The Company is an important participant in the growing movement towards alternative energy.
The CPS process technology allows most products to be made to net shape, requiring little or no final machining. In the metal matrix composite world, the Company primarily manufactures AlSiC components. Nevertheless, its proprietary Quickset- Quickcast process technology can be used to produce other metal-matrix composites to meet future market needs.
The CPS process technology allows most products to be made to net shape, requiring little or no final machining. The Company primarily manufactures MMC components comprised of AlSiC. Nevertheless, its proprietary Quickset- Quickcast process technology can be used to produce other MMCs to meet market requirements.
Our MMC (AlSiC) baseplates have sufficient thermal conductivity to allow for removal of heat through the baseplate and have a thermal expansion rate sufficiently similar to the other components in the assembly to ensure reliability over time as the assembly thermally cycles.
The power semiconductors are typically IGBTs and these applications are often referred to as IGBT applications. Our MMC (AlSiC) baseplates have sufficient thermal conductivity to enable removal of heat through the baseplate and have a thermal expansion rate sufficiently similar to the other components in the assembly to ensure reliability over time as the assembly thermally cycles.
Major automobile companies around the world are introducing hybrid electric vehicles (HEVs) and electric vehicle (EVs) at an increasing rate. This focus on more energy efficient vehicles is being driven by concerns about climate change. There are many varieties of HEVs and EVs, but all HEVs and EVs contain an electric motor and contain one or more motor controller modules.
Major automobile companies around the world are introducing hybrid electric vehicles (HEVs) and electric vehicles (EVs) at an increasing rate. There are many varieties of HEVs and EVs, but all HEVs and EVs contain an electric motor and one or more motor controller modules.
The designer must ensure that the temperature of an electronic assembly stays within a range in which the differences in the expansion rates of the materials in the assembly do not cause a failure from breaking, delaminating, etc.
The designer must ensure that the temperature of an electronic assembly stays within a range that ensures that the expansion rates of the materials in the assembly do not result in a failure due to breaking, delaminating, or related causes.
Currently HEV/EV manufacturers are in the general area where those who want to save on short term costs are fine using power modules with copper baseplates, while those who want longer term reliability, more the luxury market, will use power modules with an MMC (AlSiC) baseplate.
Currently, HEV/EV manufacturers who want to save on short term costs are using power modules with copper baseplates, while those who want longer term reliability, such as those in the luxury vehicle market, will use power modules with an MMC (AlSiC) baseplate. Of particular interest is the move to using Silicon Carbide (SiC) semiconductors instead of silicon semiconductors.
Competition We have developed and expect to continue to develop products for a number of different end markets and we will encounter competition from different producers of metal-matrix composites, hermetic packages, armor, and other competing materials.
Some of these changes may be significant, which would reduce this backlog. Competition We have developed and expect to continue to develop products for a number of different end markets, and we will encounter competition from different producers of MMCs, hermetic packages, armor, and other competing materials.
The Company has a backlog of $22 million as of December 31, 2022. This backlog consists of orders received from customers and which are for the most part scheduled to ship in 2023. Readers should be aware that under certain circumstances customers may be able to cancel existing orders, some of which may be significant, which would reduce this backlog.
The Company has a backlog of $20 million as of December 30, 2023. This backlog consists of orders received from customers which are, for the most part, scheduled to ship in 2024. Under certain circumstances, customers may be able to cancel existing orders or extend the period over which orders may be shipped.
In 2022 CPS significantly expanded its technical competence through the hire of several employees who are allowing the Company to expand its presence in areas in which we previously did not participate. Combined with our emphasis on quality and customer service we expect to see continued growth in our hermetic package product line.
CPS continues to expand its technical competence to increase its offerings in areas in which we previously did not participate. Based on these increased offerings, combined with our emphasis on quality and customer service, we expect to see continued growth in our hermetic package product line.
Power semiconductors are a very significant portion of the cost of variable speed drives, and the cost of the module housing and thermal management system are also significant; declines in the costs of all these components is driving increased use of variable speed drives.
Power semiconductors are a very significant portion of the cost of variable speed drives, and the cost of the module housing and thermal management system are also significant; cost reductions of all these components are driving increased use of variable speed drives. We provide baseplates and heat spreaders on which power semiconductors are mounted to produce modules for motor control.
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We provide baseplates and heat spreaders on which power semiconductors are mounted to produce modules for motor control. The power semiconductors are typically IGBTs and these applications are often referred to as IGBT applications.
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As such, the voltage levels for which AlSiC would be preferred over copper would be lower meaning the AlSiC baseplate would be the better choice for manufacturers currently on the margin when it comes to the voltage levels being utilized in their vehicles.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeWe depend on our senior executives and certain key managers as well as engineering, research and development, sales, marketing and manufacturing personnel, who are critical to our business. We do not have long-term employment agreements with our key employees.
Biggest changeWe depend on our senior executives and certain key managers as well as engineering, research and development, sales, marketing and manufacturing personnel, who are critical to our business. While we have employment agreements with certain executives, none of these agreements would prevent any such person from leaving the Company.
We cannot presently predict the scope and severity of any future business shutdowns or disruptions to us, but if we or any of the third parties with whom we engage, including our customers, suppliers and other third parties with whom we conduct business, were to experience extended shutdowns or other business disruptions, our ability to conduct our business could be materially and negatively impacted, and could have a material adverse effect on our business and our results of operation and financial condition.
We cannot presently predict the scope and severity of any future business shutdowns or disruptions to us, but if we or any of the third parties with whom we engage, including our customers, suppliers and other third parties, were to experience extended shutdowns or other business disruptions, our ability to conduct our business could be materially and negatively impacted, and could have a material adverse effect on our business and our results of operation and financial condition.
Although the Company has remained open throughout the COVID-19 pandemic, complete or partial government shutdowns of many businesses, schools, bars and restaurants have occurred. The Russian invasion of Ukraine could also adversely affect our business in spite of the immaterial amount of direct business we have done in this region in the past.
Although the Company has remained open throughout the COVID-19 pandemic, complete or partial government shutdowns of many businesses, schools, bars and restaurants have occurred. The Russian invasion of Ukraine and the conflict in Israel and Gaza could also adversely affect our business in spite of the immaterial amount of direct business we have done in this region in the past.
Our success depends on our ability to identify, hire, train and retain qualified engineering personnel with experience in equipment design. Specifically, we need to continue to attract and retain product development, materials and manufacturing engineers to work with our direct sales force to technically qualify and perform on new sales opportunities and orders, and to demonstrate our products.
Our success depends on our ability to identify, hire, train and retain qualified engineering personnel. Specifically, we need to continue to attract and retain product development, materials and manufacturing engineers to work with our direct sales force to technically qualify and perform on new sales opportunities and orders, and to demonstrate our products.
We may experience significant interruptions of our manufacturing operations, delays in our ability to deliver products or services, increased costs or customer order cancellations as a result of: ● the failure or inability of suppliers to timely deliver sufficient quantities of materials and components on a cost-effective basis; ● volatility in the availability and cost of materials; ● difficulties or delays in obtaining required import or export approvals; ● information technology or infrastructure failures; ● natural disasters or other events beyond our control (such as earthquakes, floods or storms, regional economic downturns, pandemics, social unrest, political instability, terrorism, or acts of war); and ● the effects of a global pandemic on our employees, suppliers and other third-parties upon which we rely.
We may experience significant interruptions of our manufacturing operations, delays in our ability to deliver products or services, increased costs or customer order cancellations as a result of: ● the failure or inability of suppliers to timely deliver sufficient quantities of materials and components on a cost-effective basis; ● volatility in the availability and cost of materials; ● unforeseen equipment failures resulting in the need to delay or outsource certain production processes; ● difficulties or delays in obtaining required import or export approvals; ● information technology or infrastructure failures; ● natural disasters or other events beyond our control (such as earthquakes, floods or storms, regional economic downturns, pandemics, social unrest, political instability, terrorism, or acts of war); and ● the effects of a global pandemic on our employees, suppliers and other third-parties upon which we rely.
We have a highly concentrated customer base so that changes in ordering patterns, delays or order cancellations could have a material adverse effect on our business and results of operations. Three customers accounted for 53% of revenue in 2022 and 51% of revenue in 2021.
We have a highly concentrated customer base so that changes in ordering patterns, delays or order cancellations could have a material adverse effect on our business and results of operations. Three customers accounted for 60% of revenue in 2023 and 53% of revenue in 2022.
A pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide may adversely affect our business. Our operations expose us to risks associated with pandemics, epidemics or other public health emergencies, such as the recent outbreak of coronavirus disease (COVID-19) which has spread around the world.
A pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide may adversely affect our business. Our operations expose us to risks associated with pandemics, epidemics or other public health emergencies, such as the outbreak of coronavirus disease (COVID-19) that subsequently spread around the world.
The COVID-19 outbreak could materially and adversely affect us. Any continuing economic downturn as a result of this pandemic could adversely affect, demand for our products, and negatively impact our business or results of operations through the temporary closure of our operating locations or those of our customers or suppliers.
Any continuing economic downturn as a result of this pandemic could adversely affect, demand for our products, and negatively impact our business or results of operations through the temporary closure of our operating locations or those of our customers or suppliers.
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While we expect this matter to materially and adversely impact our financial results, the current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial impact cannot be reasonably estimated at this time.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeItem 2. Properties As of December 31, 2022, all of our manufacturing, engineering, sales and administrative operations were located in leased facilities in Norton, Massachusetts. In February 2021, the Company extended the lease for the Norton facility through February 2026. The leased facilities comprise approximately 38 thousand square feet.
Biggest changeItem 2. Properties As of December 30, 2023, all of our manufacturing, engineering, sales and administrative operations were located in leased facilities in Norton, Massachusetts. In February 2021, the Company extended the lease for the Norton facility through February 2026. The leased facilities comprise approximately 38 thousand square feet.
The lease is a triple net lease wherein the Company is responsible for payment of all real estate taxes, operating costs and utilities. The Company also has an option to buy the property and a first right of refusal during the term of the lease. Annual rental payments for 2022 were $160 thousand.
The lease is a triple net lease wherein the Company is responsible for payment of all real estate taxes, operating costs and utilities. The Company also has an option to buy the property and a first right of refusal during the term of the lease. Annual rental payments for 2023 were $162 thousand.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeItem 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities. CPS Technologies Corp. shares trade on The Nasdaq Capital Market, under the symbol “CPSH”. On December 31, 2022, we had approximately 100 shareholders of record. We have never paid cash dividends on our Common Stock.
Biggest changeItem 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities. CPS Technologies Corp. shares trade on The Nasdaq Capital Market, under the symbol “CPSH”. On December 30, 2023, we had approximately 80 shareholders of record. We have never paid cash dividends on our Common Stock.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeThe Company had no inventory on consignment at any customers at the end of 2022 or 2021. At December 31, 2022 and December 25, 2021 inventory of, $0.8 and $0.4, respectively, was located at vendor locations pursuant to inventory agreements. The Company funded its operations from its profit in 2022.
Biggest changeAt December 30, 2023 and December 31, 2022 inventory of, $0.5 and $0.8, respectively, was located at vendor locations pursuant to inventory agreements. The Company funded its operations from its profit in 2023. The Company expects it will continue to be able to fund its operations during 2024 from existing cash balances and profits.
Therefore, the risk of obsolescence due to the passage of time, per se, is minimal. However, in order to more efficiently schedule production or to meet agreements with customers to have inventory in the pipeline, the Company occasionally manufactures products in advance of purchase orders.
Therefore, the risk of obsolescence due to the passage of time, per se, is minimal. However, to more efficiently schedule production or to meet agreements with customers to have inventory in the pipeline, the Company occasionally manufactures products in advance of purchase orders.
We provide baseplates and housings used in modules built with Wide Band Gap Semiconductors like SiC and GaN. CPS also assembles housings and packages for hybrid circuits. These housings and packages may include MMC components; they may include components made of more traditional materials such as aluminum, copper-tungsten, etc. CPS’s products are custom rather than catalog items.
We provide baseplates and housings used in modules built with Wide Band Gap Semiconductors like SiC and GaN. CPS also assembles housings and packages for hybrid circuits. These housings and packages may include MMC components; they may include components made of more traditional materials such as aluminum, copper-tungsten, and others. CPS’s products are custom rather than catalog items.
Application of Critical Accounting Policies Financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. As such, the Company is required to make certain estimates, judgments and assumptions that it believes are reasonable based upon the information available.
Critical Accounting Estimates Financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. As such, the Company is required to make certain estimates, judgments and assumptions that it believes are reasonable based upon the information available.
We have had higher than normal wage increases, have implemented other programs to ameliorate the effects of inflation on our employees (for example, we increased the Company share of health insurance premiums and increased the Company 401k match in 2022) and seen price increases from some of our suppliers.
We have had higher than normal wage increases, have implemented other programs to ameliorate the effects of inflation on our employees (for example, we increased the Company share of health insurance premiums and increased the Company 401k match in 2023) and seen price increases from some of our suppliers.
During 2022, our leasing arrangements consisted of the Norton, MA facility lease. The Norton facility lease was renewed in February 2021, expires in February 2026 and is a triple net lease wherein the Company is responsible for payment of all real estate taxes, operating costs and utilities.
During 2023, our leasing arrangements consisted of the Norton, MA facility lease. The Norton facility lease was renewed in February 2021, expires in February 2026 and is a triple net lease wherein the Company is responsible for payment of all real estate taxes, operating costs and utilities.
The products we provide include baseplates for motor controllers used in high-speed electric trains, subway cars, wind turbines, and hybrid and electric vehicles. We provide hermetic packages used in radar, satellite and avionics applications. We provide lids and heatspreaders used with high performance integrated circuits in internet switches and routers. We provide armor for naval and other military applications.
The products we provide include baseplates for motor controllers used in high-speed electric trains, subway cars, wind turbines, and hybrid and electric vehicles. We provide hermetic packages used in radar, satellite and avionics applications. We provide lids and heat spreaders used with high performance integrated circuits in internet switches and routers. We provide armor for naval and other military applications.
CPS’s significant accounting policies are presented within Note 2 to the financial statements; the significant accounting policies which management believes are most critical to aid in fully understanding and evaluating its reported financial results include the following: a) Allowance for doubtful accounts The Company performs ongoing monitoring of the status of its receivables based on the payment history and the credit worthiness of our customers, as determined by a review of their current credit information.
CPS’s significant accounting policies are presented within Note 2 to the financial statements; the significant accounting policies which management believes are most critical to aid in fully understanding and evaluating its reported financial results include the following: a) Allowance for credit losses The Company performs ongoing monitoring of the status of its receivables based on the payment history and the creditworthiness of our customers, as determined by a review of their current credit information.
The Company also has an option to buy the property and a first right of refusal during the term of the lease. Annual rental payments were $160 thousand in 2022. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. Inflation Thus far inflation has not had a significant impact on our profitability.
The Company also has an option to buy the property and a first right of refusal during the term of the lease. Annual rental payments were $162 thousand in 2023. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. Inflation Thus far inflation has not had a significant impact on our profitability.
The note is collateralized by the microscope and is being paid in monthly installments of $4 thousand, consisting of principal plus interest at a rate of 6.47% As of December 31, 2022, the Company had $65 thousand of construction in progress and no outstanding commitments to purchase production equipment.
The note is collateralized by the microscope and is being paid in monthly installments of $4 thousand, consisting of principal plus interest at a rate of 6.47% As of December 30, 2023, the Company had $282 thousand of construction in progress and no outstanding commitments to purchase production equipment.
Results of Operations (all $ in millions unless noted) Results of Operations for the year 2022 ( “ 2022 ” ) compared with the year 2021 ( “ 2021 ” ): Total revenue was $26.6 million in 2022, a 19% increase compared with total revenue of $22.4 million in 2021.
Results of Operations (all $ in millions unless noted) Results of Operations for the year 2023 ( “ 2023 ” ) compared with the year 2022 ( “ 2022 ” ): Total revenue was $27.6 million in 2023, a 4% increase compared with total revenue of $26.6 million in 2022.
In 2022 the Company’s top three customers accounted for 53% of revenue and the remaining 47% of revenue was derived from 49 other customers. In 2021 the top three customers accounted for 51% of revenue and the remaining 49% of revenue was derived from approximately 57 customers.
In 2023 the Company’s top three customers accounted for 60% of revenue and the remaining 40% of revenue was derived from 57 other customers. In 2022 the top three customers accounted for 53% of revenue and the remaining 47% of revenue was derived from approximately 49 customers.
At December 31, 2022, the Company’s Deferred Tax Asset and other temporary differences will require taxable income of approximately $10 million and reversals of existing temporary differences to fully utilize the Deferred Tax Asset, assuming a statutory corporate tax rate of 21%.
At December 30, 2023, the Company’s deferred tax asset and other temporary differences will require taxable income of approximately $7.6 million and reversals of existing temporary differences to fully utilize the deferred tax asset, assuming a statutory corporate tax rate of 21%.
The Company recorded operating income of $0.3 million in the fourth quarter of 2022 compared to operating income of $0.3 million in the fourth quarter of 2021. The Company recorded net income of $0.3 million in the fourth quarter of 2022 compared to net income of $0.2 million in the fourth quarter of 2021.
The Company recorded net income of $0.1 million in the fourth quarter of 2023 compared to net income of $0.3 million in the fourth quarter of 2022.
The Company recorded net income of $2.1M in 2022 compared to $3.2M in 2021. In 2022 the Company had a provision for income taxes of 0.8 million. In addition, the Company filed for the Employee Retention Tax Credit of 0.7 million in 2022.
In 2023 the Company had a provision for income taxes of $0.6 million compared to $0.8 million in 2022. In addition, the Company filed for the Employee Retention Tax Credit of $0.7 million in 2022.
At December 31, 2022 the Company had $0 borrowings under this LOC and its borrowing base at the time would have permitted an additional $2.9 million to have been borrowed. In March 2020, the Company acquired a scanning acoustic microscope for a price of $208 thousand.
On December 30, 2023, the Company had $0 of borrowings under this LOC and its borrowing base at the time would have permitted an additional $3.0 million to have been borrowed. The LOC remains in effect until terminated per mutual agreement by both parties. In March 2020, the Company acquired a scanning acoustic microscope for a price of $208 thousand.
The Company typically buys ‘lots’ of components for its hermetic packaging products. Often all the components in a lot are not necessary to complete the order.
The Company has not experienced significant losses to date as a result of customer cancellations and has not established a reserve for such cancellations. The Company typically buys ‘lots’ of components for its hermetic packaging products. Often all the components in a lot are not necessary to complete the order.
As of September 25, 2021 the Company re-evaluated the need for this reserve, in light of recent profitability and expected future profitability. It was determined that this reserve was no longer needed as it is now more likely than not that the Company would be able to fully utilize its Deferred Tax Asset.
The Company considers many factors in assessing whether or not a valuation allowance for its deferred tax asset is warranted. In light of recent profitability and expected future profitability. It was determined that a reserve is not needed, as it is more likely than not that the Company would be able to fully utilize its deferred tax asset.
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.
The Company continues to sell to a limited number of customers and the loss of any one of these customers or vendors could cause the Company to require additional external financing. Failure to generate sufficient revenues, raise additional capital or reduce certain discretionary spending could have a material adverse effect on the Company’s ability to achieve its business objectives.
This increase was primarily due to the Company’s profitability for the year. Accounts receivable at December 31, 2022 totaled $3.8 compared to $4.9 at December 25, 2021. Days Sales Outstanding (DSO) decreased to 52 days at the end of 2022 compared to 72 days at the end of 2021.
This increase was primarily due to the Company’s profitability for the year offset primarily by the decrease in deferred revenue from $2.8 at the end of 2022 to $0.3 at the end of 2023. Accounts receivable at December 30, 2023 totaled $4.4 compared to $3.8 at December 31, 2022.
This change was due to the reduction of deferred revenue occurring in the 4 th quarter. Prepayments received in 2021 were used to pay for shipments shipped in the 4 th quarter thus immediately reducing accounts receivable, rather than the customer paying 30-45 days later. Prepaid billings of $0.9 were shipped in the 4 th quarter.
Prepayments received in 2021 were used to pay for shipments shipped in the 4 th quarter of 2022 thus immediately reducing accounts receivable, rather than the customer paying 30-45 days later. The accounts receivable balances at December 30, 2023, and December 31, 2022 were both net of an allowance for doubtful accounts of $10 thousand.
The reduction in sales and increase in SG&A expenses, offset by the increase in gross margin, all discussed above, accounted for this. Liquidity and Capital Resources (all $ in millions unless noted) The Company’s cash and cash equivalents at December 31, 2022 totaled $8.3 compared with cash and cash equivalents at December 25, 2021 of $5.1.
Liquidity and Capital Resources (all $ in millions unless noted) The Company’s cash and cash equivalents at December 30, 2023 totaled $8.8 compared with cash and cash equivalents at December 31, 2022 of $8.3.
The inventory turnover in the four quarters ending 2022 was 4.2 times, down from 4.7 times averaged during the four quarters of 2021 (each based on a 5 point average). In 2022 we had several large orders in inventory that were not scheduled to ship until early 2023.
Inventories decreased to $4.6 at December 30, 2023 from $4.9 at December 31, 2022. The inventory turnover in the four quarters ending 2023 was 4.3 times, up from 4.2 times averaged during the four quarters of 2022 (each based on a 5 point average).
Contractual Obligations 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, which was increased to 3.0 million in May of 2020. The agreement includes a demand note allowing the Lender to call the loan at any time.
Contractual Obligations In May 2023, the Company terminated its $3.0 million revolving line of credit (LOC) with Massachusetts Business Development Corporation (BDC). A new LOC in the amount of $3.0 million was entered into with Rockland Trust Company.
SG&A expenses totaled $1.3 million during the quarter, an increase of 30% compared to $1.0 million in the same quarter of 2021. This increase was primarily due to the increased variable compensation costs and travel costs discussed above.
This decrease was primarily due to the decreased variable compensation costs discussed above. The Company recorded operating income of $0.1 million in the fourth quarter of 2023 compared to operating income of $0.3 million in the fourth quarter of 2022.
The value of CPS’s work in process and finished goods is based on the assumption that specific customers will take delivery of specific items of inventory. The Company has not experienced losses to date as a result of customer cancellations and has not established a reserve for such cancellations.
The value of CPS’s work in process and finished goods is based on the assumption that specific customers will take delivery of specific items of inventory. Raw materials are less unique to specific products. AlSiC raw materials are used for all AlSiC parts and therefore they are continuously in production.
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 LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of the National Prime Rate as published by the Wall Street Journal.
This compares with $4.8 million, or 21% of sales, generated during 2021. The improvement in margin was primarily due to the impact of increased sales on the absorption of fixed costs. Selling, general and administrative (SG&A) expenses were $5.1 million during 2022, an increase of 19% compared with SG&A expenses of $4.3 million incurred during 2021.
The decrease in margin was primarily due to the impact of the quality issue described above. Selling, general and administrative (SG&A) expenses were $5.1 million during 2023, virtually the same as SG&A expenses of $5.1 million incurred during 2022. Several offsetting factors lead to this result.
Lastly, higher sales lead to higher commission costs in 2022, compared to 2021. The Company generated operating income of $2.2 million in 2022, compared with an operating income of $0.5 in 2021. This increase was due primarily to the increase in Sales and its resulting impact on the absorption of fixed costs, discussed above.
The Company generated operating income of $1.7 million in 2023, compared with an operating income of $2.2 in 2022. This decrease was due almost entirely to the quality problem, discussed above. The Company recorded net income of $1.4M in 2023 compared to $2.1M in 2022.
Gross margin increased in the fourth quarter of 2022 compared with the fourth quarter of 2021 to $1.6 million from $1.4 million. This increase was due to operating efficiencies that the Company implemented throughout 2022 in its production process.
Gross margin decreased in the fourth quarter of 2023 compared with the fourth quarter of 2022 to $1.1 million from $1.6 million. This decrease was due to the quality issue described above. SG&A expenses totaled $1.0 million during the quarter, a decrease of 23% compared to $1.3 million in the same quarter of 2022.
Removed
The Company considers many factors in assessing whether or not a valuation allowance for its Deferred Tax Asset is warranted. In 2018 the Company concluded that it was more likely than not that a portion or all of the Deferred Tax Asset would not be used before it expires.
Added
Hermetic package and armor raw materials present a mix of raw material items, some of which are used in multiple parts and others in only specific parts.
Removed
This increase was due primarily to an increase in the sales of armor, which did not start until May of 2021, and the recovery of business from a major customer who was particularly affected by the COVID-19 pandemic in 2021. Gross margin in 2022 totaled $7.3 million or 27% of sales.
Added
These raw material items are evaluated using the same criteria as the finished goods into which they go and are reserved against when there has been no activity for that finished good in the prior 12 months or expectation of future activity.
Removed
Several factors contributed to this increase. The Company hired a Chief Development Officer in early 2022 which was a new position. The Company incurred higher variable compensation costs in 2022 due to its strong financial performance. Travel costs were significantly higher in 2022 due to the limited nature of travel in 2021 due to the COVID-19 pandemic.
Added
This increase was due primarily to an increase in the sales of armor compared to 2022, partially offset by a quality problem with the product for one of our major customers which resulted in significant product returns as well as a reserve for potential future returns.
Removed
In 2021 the Company reevaluated its valuation allowance against its deferred tax asset which resulted in a tax benefit in 2021 of $2.8 million. For further explanation see below.
Added
Based on information received from the customer subsequent to December 30, 2023, this issue appears to be under control and is not expected to have a material impact on 2024 results. Gross profit in 2023 totaled $6.8 million or 25% of sales. This compares with $7.3 million, or 27% of sales, generated during 2022.
Removed
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.
Added
The Company incurred lower variable compensation costs in 2023 due to its reduction in operating profit compared to 2022. Conversely, travel costs were significantly higher in 2023 as customer and trade show exhibiting continued to recover from the limitations due to the Covid-19 pandemic.
Removed
In December 2018, the Company established a valuation allowance reserve, as it was judged more likely than not that all or a portion of its deferred tax assets would 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.
Added
Significant Fourth Quarter Activity in 2023: Revenues totaled $6.7 million in the fourth quarter of 2023 versus $6.1 million in the fourth quarter of 2022, an increase of 10%. This increase was consistent with our expectations, but was also mitigated by the quality issues described above.
Removed
In September 2021 this decision was reevaluated in light of the Company’s recent profitability and its forecasts for future profitability. It is now judged 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.
Added
Days Sales Outstanding (DSO) increased to 60 days at the end of 2023 compared to 52 days at the end of 2022. This change was due to the reduction of deferred revenue occurring in the 4 th quarter of 2022.
Removed
Significant Fourth Quarter Activity in 2022: Revenues totaled $6.1 million in the fourth quarter of 2022 versus $6.2 million in the fourth quarter of 2021, a decrease of 2%. This decrease was due primarily to sales orders due to ship from our plating vendors not being shipped in late December as scheduled.
Added
In July 2022 CPS implemented a new ERP computer system which, among other things, has enabled the Company to better manage its inventory. The Company had no inventory on consignment at any customers at the end of 2023 or 2022.
Removed
The accounts receivable balances at December 31, 2022, and December 25, 2021 were both net of an allowance for doubtful accounts of $10 thousand. Inventories increased to $4.9 at December 31, 2022 from $3.9 at December 25, 2021.
Removed
The Company expects it will continue to be able to fund its operations during 2023 from existing cash balances and profits. The Company continues to sell to a limited number of customers and the loss of any one of these customers or vendors could cause the Company to require additional external financing.
Removed
BDC requires that quarterly and year to date earnings may not be less than projected amounts provided to the bank and the Company may not incur capital expenditures in excess of $50 thousand per year over its depreciation expense, or $25 thousand per transaction. The Company met the earnings covenant and has received a waiver for its capital expenditures.

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