CPS TECHNOLOGIES CORP/DE/ - Quarter Report: 2021 September (Form 10-Q)

cpsh20210925_10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the period ended September 25, 2021
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
Registrants 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 every Interactive Data File required to be submitted 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 such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 (15U.S.C. 7262(b)) by the registered 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 Markets

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 November 8, 2021: 14,350,452.

PART I FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS (Unaudited)

CPS TECHNOLOGIES CORP.
Balance Sheets (Unaudited)
(continued on next page)

	September 25,		December 26,
	2021		2020
ASSETS

Current assets:
Cash and cash equivalents	$	3,837,737	$	195,203
Accounts receivable-trade, net		5,032,187		2,914,800
Inventories, net		3,773,228		3,709,471
Prepaid expenses and other current assets		132,315		71,506
Total current assets		12,775,467		6,890,980
Property and equipment:
Production equipment		10,370,212		10,265,471
Furniture and office equipment		568,846		568,846
Leasehold improvements		951,384		951,384
Total cost		11,890,442		11,785,701

Accumulated depreciation and amortization		(10,964,044		(10,558,816	)
Construction in progress		248,846		61,062
Net property and equipment		1,175,244		1,287,947
Right-of-use lease asset		613,000		25,000
Deferred taxes, net		2,907,809		117,000
Total assets	$	17,471,520	$	8,320,927

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORP.
Balance Sheets (Unaudited)
(concluded)

	September 25,			December 26,
	2021			2020
LIABILITIES AND STOCKHOLDERS` EQUITY

Current liabilities:
Note payable, current portion		44,821			58,134
Accounts payable		1,699,154			909,291
Accrued expenses		902,199			804,091
Deferred revenue		1,150,797			12,177
Lease liability, current portion		153,000			25,000
Total current liabilities		3,949,971			1,808,693
Note payable less current portion		124,566			154,570
Long term lease liability		460,000			-
Total liabilities		4,534,537			1,963,263

Commitments (note 4)

Stockholders` equity:
Common stock, $0.01 par value, authorized 20,000,000 shares; issued 14,348,786 and 13,746,242, respectively; outstanding 14,348,451 and 13,313,790, respectively; at September 25, 2021 and December 26, 2020;		143,487			137,462
Additional paid-in capital		39,270,312			36,688,894
Accumulated deficit		(26,474,301	)		(29,472,368	)
Less cost of 335 and 432,452 common shares repurchased, respectively; at September 25, 2021 and December 26, 2020		(2,515	)		(996,323	)
Total stockholders` equity		12,936,983			6,357,665
Total liabilities and stockholders` equity	$	17,471,520		$	8,320,927

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORP.
Statements of Operations (Unaudited)

	Fiscal Quarters Ended				Nine Months Ended
	September 25,		September 26,		September 25,		September 26,
	2021		2020		2021		2020
Revenues:
Product sales	$	5,514,872	$	4,452,387	$	16,242,762	$	16,721,973
Total Revenues		5,514,872		4,452,387		16,242,762		16,721,973

Cost of product sales		4,375,676		3,514,813		12,807,844		13,050,860
Gross Margin		1,139,196		937,574		3,434,918		3,671,113

Selling, general and administrative expense		1,227,258		684,836		3,234,344		2,466,198
Operating income (loss)		(88,062)		252,738		200,574		1,204,915

Interest income (expense), net		(2,633)		(21,263)		(32,776)		(87,004	)
Other income (expense), net		18,665		(3)		30,728		14,446
Net income (loss) before income tax expense		(72,030)		231,472		198,526		1,132,359
Income tax provision (benefit)		(2,799,997)		456		(2,799,541)		456
Net income	$	2,727,967	$	231,016	$	2,998,067	$	1,131,901
Net income per basic common share	$	0.19	$	0.02	$	0.21	$	0.09
Weighted average number of basic common shares outstanding		14,324,136		13,288,652		13,963,563		13,234,508
Net income per diluted common share	$	0.18	$	0.02	$	0.21	$	0.09
Weighted average number of diluted common shares outstanding		14,811,259		13,456,486		14,542,356		13,320,915

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORP.
STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 25, 2021 AND SEPTEMBER 26, 2020

	Common Stock				Additional							Total
	Number of				paid-in		Accumulated		Stock			stockholders'
	shares issued		Par Value		capital		deficit		repurchased			equity
Balance at June 26, 2021		14,300,771	$	143,007	$	38,956,952		(29,202,268)		(1,770)			9,895,921
Share-based compensation expense		-		-		28,117		-		-			28,117
Issuance of common stock		47,515		475		284,503		-		-			284,978
Employee option exercises		500		5		740				(745	)		-
Net income								2,727,967		-			2,727,967
Balance at September 25, 2021		14,348,786		143,487		39,270,312		(26,474,301)		(2,515)			12,936,983

	Common Stock				Additional						Total
	Number of				paid-in		Accumulated		Stock		stockholders'
	shares issued		Par Value		capital		deficit		repurchased		equity
Balance at December 26, 2020		13,746,242	$	137,462	$	36,688,894		(29,472,368)		(996,323)		6,357,665
Share-based compensation expense		-		-		147,652		-		-		147,652
Issuance of common stock		526,804		5,268		3,417,102		-		-		3,422,370
Employee options exercised		630,400		6,304		1,235,370				(1,230,445)		11,229
Treasury shares retired		(554,660)		(5,547)		(2,218,706)		-		2,224,253		-
Net income								2,998,067		-		2,998,067
Balance at September 25, 2021		14,348,786		143,487		39,270,312		(26,474,301)		(2,515)		12,936,983

	Common Stock				Additional						Total
	Number of				paid-in		Accumulated		Stock		stockholders'
	shares issued		Par Value		capital		deficit		repurchased		equity
Balance at June 27, 2020		13,427,492	$	134,275	$	36,177,264		(29,479,548)		(517,053)		6,314,938
Share-based compensation expense		-		-		17,389		-		-		17,389
Issuance of common stock		500		5		763		-				768
Employee option exercises		288,250		2,882		438,140		-		(441,022)		-
Net (loss)								231,016		-		231,016
Balance at September 26, 2020		13,716,242		137,162		36,633,556		(29,248,532)		(958,075)		6,564,111

	Common Stock				Additional							Total
	Number of				paid-in		Accumulated		Stock			stockholders'
	shares issued		Par Value		capital		deficit		repurchased			equity
Balance at December 28, 2019		13,427,492	$	134,275	$	36,094,201		(30,380,433)		(517,053)			5,330,990
Share-based compensation expense		-		-		100,452		-		-			100,452
Issuance of common stock		500		5		763		-		-			768
Employee option exercise		288,250		2,882		438,140		-		(441,022	)		-
Net (loss)								1,131,901		-			1,131,901
Balance at September 26, 2020		13,716,242		137,162		36,633,556		(29,248,532)		(958,075)			6,564,111

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORP.
Statements of Cash Flows (Unaudited)

	Nine Month Periods Ended
	September 25,		September 26,
	2021		2020

Cash flows from operating activities:
Net income	$	2,998,067	$	1,131,901
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities
Depreciation and amortization		411,465		382,121
Share-based compensation		147,653		100,452
Deferred taxes		(2,790,809)		33,620
Gain on sale of property and equipment		(2,047)		(5,000	)

Changes in:
Accounts receivable-trade		(2,117,387)		125,339
Inventories		(63,757)		(1,087,448)
Prepaid expenses		(60,809)		(25,797)
Accounts payable		789,864		(214,775)
Deferred revenue		1,138,620		336,890
Accrued expenses		98,108		(94,984)
Net cash provided by (used in) operating activities		548,968		682,319
Cash flows from investing activities:
Purchases of property and equipment		(298,760)		(285,909)
Proceeds from sale of property and equipment		2,047		5,000
Net cash provided by (used in) investing activities		(296,713)		(280,909)

Cash flows from financing activities:
Net borrowings on line of credit		-		(414,465)
Proceeds from employee stock options		11,229		768
Proceeds from issuance of common stock		3,422,370		-
Payments on note payable		(43,320)		(9,103)
Net cash provided by (used in) financing activities		3,390,279		(422,800)
Net increase (decrease) in cash and cash equivalents		3,642,534		(21,390)
Cash and cash equivalents at beginning of period		195,203		133,965
Cash and cash equivalents at end of period	$	3,837,737	$	112,575
Supplemental disclosures of cash flows information:
Cash paid for income taxes	$	456	$	-
Cash paid for interest		32,776		87,004


Supplemental disclosures of non-cash activity:

Net exercise of stock options		47,515		441,022
Issuance of long term debt to finance equipment purchases		-		-

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORP.
Notes to Financial Statements
(Unaudited)

(1) Nature of Business

CPS Technologies Corp. (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 (MMC’s) 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.

The Company sells into several end markets including the wireless communications infrastructure market, high-performance microprocessor market, motor controller market, and other microelectronic and structural markets.

(2) Summary of Significant Accounting Policies

As permitted by the rules of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, these notes are condensed and do not contain all disclosures required by generally accepted accounting principles.

The accompanying financial statements are unaudited. In the opinion of management, the unaudited financial statements of CPS reflect all normal recurring adjustments which are necessary to present fairly the financial position and results of operations for such periods.

The Company’s balance sheet at December 26, 2020 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 26, 2020 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.alsic.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 (loss) Per Common and Common Equivalent Share

Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is calculated by dividing net income (loss) 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				Nine Months Ended
	September 25,		September 26,		September 25,		September 26,
	2021		2020		2021		2020
Basic EPS Computation:
Numerator:
Net income	$	2,727,967	$	231,016	$	2,998,067	$	1,131,901

Denominator:
Weighted average Common shares Outstanding		14,324,136		13,288,652		13,963,563		13,234,508

Basic EPS	$	0.19	$	0.02	$	0.21	$	0.09

Diluted EPS Computation:
Numerator:
Net income	$	2,727,967	$	231,016	$	2,998,067	$	1,131,901

Denominator:
Weighted average Common shares Outstanding		14,324,136		13,288,652		13,963,563		13,234,508
Dilutive effect of stock options		487,124		167,834		578,793		87,217

Total Shares		14,811,259		13,456,486		14,542,356		13,320,915

Diluted EPS	$	0.18	$	0.02	$	0.21	$	0.09

(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 based on the present value of lease payments over the lease term using the Company’s incremental borrowing rate at commencement date. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Operating Leases

The Norton facility lease comprises approximately 38 thousand square feet. The lease is triple net lease wherein the Company is responsible for payment of all real estate taxes, operating costs and utilities. The Company also has an option to renew the lease starting in March 2026 through February 2032. Annual rental payments range from $152 thousand to $165 thousand through maturity.

The following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s capitalized operating leases as of September 25, 2021

(Dollars in Thousands)	September 25, 2021
Maturity of capitalized lease liabilities	Lease payments

2021		38
2022		160
2023		162
2024		165
2025		165
2026		28
Total undiscounted operating lease payments	$	718
Less: Imputed interest		(105	)
Present value of operating lease liability	$	613

Balance Sheet Classification
Current lease liability	$	153
Long-term lease liability		460
Total operating lease liability	$	613

Other Information
Weighted-average remaining lease term for capitalized operating leases (in months)		53
Weighted-average discount rate for capitalized operating leases		6.6	%

Operating Lease Costs and Cash Flows

Operating lease cost and cash paid was $38 thousand during the third quarter of 2021 and $114 thousand for the nine months ended September 25, 2021. These costs are 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 quarter ended September 25, 2021 there were 5,000 stock options granted under the Plan. There were no stock options granted under the Plan during quarter ended September 26, 2020.

During the quarter ended September 25, 2021, 500 options were exercised at a weighted average price of $1.49. During the quarter ended September 25,2021, 32,200 options were forfeited and none expired. During the quarter ended September 26, 2020, 288,250 options were exercised at a weighted average price of $1.53, and 261,355 options expired at a weighted average price of $1.53. Also during the quarter ended September 26, 2020, 500 shares were gifted to an employee for completing 20 years of service to the company.

During the quarter ended September 25, 2021, the Company repurchased 112 shares for employees to facilitate their exercise of stock options. During the quarter ended September 26, 2020 the Company repurchased 200,018 shares for employees to facilitate their exercise of stock options.

There were also 841,900 shares outstanding at a weighted average price of $2.19 with a weighted average remaining term of 6.4 years as of September 25, 2021, and there were 471,700 shares exercisable at a weighted average price of $1.89 with a weighted average remaining term of 4.7 years as of September 25, 2021. The Plan, as amended, is authorized to issue 1,500,000 shares of common stock. As of September 25, 2021, there were 1,147,000 shares available for future grants.

During the three and nine months ended September 25, 2021 the Company recognized approximately $28 thousand and $148 thousand, respectively as share-based compensation expense related to share and option grants. These amounts are included as a component of selling, general and administrative expenses in the statement of operations.

During the three and nine months ended September 26, 2020 the Company recognized approximately $17 thousand and $100 thousand, respectively as share-based compensation expense related to share and option grants. These amounts are included as a component of selling, general and administrative expenses in the statement of operations.

(6) 2021 At-the-Market Offering

On April 26, 2021, the Company entered into a sales agreement (the “Sales Agreement”) with Craig-Hallum Capital Group LLC (“C-H”) pursuant to which the Company may issue and sell, from time to time, shares of the Company’s common stock having an aggregate offering price of up to $25.0 million in at-the-market offerings (“ATM”) sales. On the same day, the Company filed a prospectus supplement under a shelf registration relating to the Sales Agreement. C-H will act as sales agent and will be paid a 3% commission on each sale under the Sales Agreement. The Company’s common stock will be sold at prevailing market prices at the time of the sale, and, as a result, prices will vary. For the quarter ended September 25, 2021, the Company sold approximately 48 thousand shares of common stock under the Sales Agreement, for gross proceeds of approximately $295 thousand. From date of inception until September 25, 2021, the Company sold approximately 527 thousand shares of common stock under the Sales Agreement, for gross proceeds of approximately $3.7 million. Subsequent to September 25, 2021, the Company has not sold any additional shares.

(7) Inventories

Inventories consist of the following:

	September 25,		December 26,
	2021		2020
Raw materials	$	1,312,313	$	752,760
Work in process		2,068,812		2,800,226
Finished goods		775,129		592,640
Total inventory		4,156,254		4,145,626

Reserve for obsolescence		(383,026)		(436,155)
Inventories, net	$	3,773,228	$	3,709,471

(8) Accrued Expenses

Accrued expenses consist of the following:

	September 25,		December 26,
	2021		2020

Accrued legal and accounting	$	69,719	$	71,671
Accrued payroll		728,389		626,063
Accrued other		104,091		106,357
	$	902,199	$	804,091

(9) 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 had an interest rate of LIBOR plus 650 basis points. In May of 2021 the interest rate was reduced to LIBOR plus 550 basis points. On September 25, 2021, the Company had $0 of borrowings under this LOC and its borrowing base at the time would have permitted an additional $2.6 million to have been borrowed.

The line of credit is subject to certain financial covenants, all of which have been met or waived.

(10) Note Payable

In March 2020, the company acquired a Sonoscan ultrasound microscope for a price of $208 thousand. The full amount was financed through a 5 year note payable with Crest Capital Corporation. The note is collateralized by the microscope and is being paid in monthly installments of $4 thousand, consisting of principal plus interest at a rate of 6.47%.

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

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

Remaining in:	Payments due by period
FY 2021	$	14,798
FY 2022	$	55,906
FY 2023	$	43,837
FY 2024	$	46,757
FY 2025	$	8,090
Total		169,388

Total interest expense on notes payable during 2021 was $8,434.

(11) 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 was 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 from 2016 - 2018 as compared to its forecasts.

In September 2021 the Company evaluated the valuation allowance against deferred tax assets. As a result of the Company’s profitability in recent years and its forecasts for future profitability. The Company believes that it is “more likely than not” that the Company will be able to fully utilize the deferred tax asset before the assets begin to expire. This reversal of the valuation allowance was made net of the expected tax liability for 2021.

ITEM 2 MANAGEMENTS 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 26, 2020.

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. 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 26, 2020, 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 26, 2020.

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 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. 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.

The manufacturing process for MMCs (infusing ceramic materials with molten metals) is complicated and results in varying yields, which poses challenges to profitability for less developed manufacturers.

As a manufacturer of highly technical and custom products, the Company incurs fixed costs needed to support the business, but which do not vary significantly with changes in sales volume. These costs include the fixed costs of applications engineering, tooling design and fabrication, process engineering, etc. Accordingly, particularly given our current size, changes in sales volume generally result in even greater changes in financial performance on a percentage basis as fixed costs are spread over a larger or smaller base. Sales volume is therefore a key financial metric used by management.

The Company believes the underlying demand for metal matrix composites is growing as the electronics and other industries seek higher performance, higher reliability, and reduced costs. CPS believes that the Company is well positioned to offer our solutions to current and new customers as these demands grow.

Our products are manufactured by proprietary processes we have developed including the QuicksetTM Injection Molding Process (‘Quickset Process’) and the QuickCastTM Pressure Infiltration Process (‘QuickCast Process’).

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 Corp.

Results of Operations for the Third Fiscal Quarter of 2021 (Q3 2021) Compared to the Third Fiscal Quarter of 2020 (Q3 2020); (all $ in 000s)

Total revenue was $5,515 in Q3 2021, a 24% increase compared with total revenue of $4,452 in Q3 2020. This increase was due primarily to the Company’s first armor production order which did not start until Q2 2021 as well as increases in sales to other customers in the aerospace and defense markets.

Gross margin in Q3 2021 totaled $1,139 or 21% of sales. In Q3 2019, gross margin was $938 or 21% of sales. This increase in margin directly correlates to the increased revenue.

Selling, general and administrative expenses (SG&A) were $1,227 in Q3 2021, up 79% when compared with SG&A expenses of $684 in Q3 2020. This increase was primarily due to non-recurring restructuring costs of $327. The Company executed a plan to streamline its operations in Q3 2021 and incurred one time severance and other costs under the plan. In addition to the restructuring costs commission expense was increased from Q3 2020 to Q3 2021 due to higher revenue.

In Q3, 2021, the Company incurred interest expense of $3 due to equipment financing. This compares with interest expense of $21 in Q3 of 2020 which was primarily due to bank borrowings.

The Company incurred an operating loss of $88 compared with operating income of $254 in the same quarter last year. This decrease in operating income is due almost entirely to the non-recurring restructuring costs, discussed above. The net income for Q3 2021 totaled $2,728 versus net profit of $231 in Q3 2020.

This differential in net income is due to the reversal of the deferred tax asset valuation allowance discussed in footnote 10, above. The pre-tax net loss was $72.

Results of Operations for the First Nine Months of 2021 Compared to the First Nine Months of 2020 (all $ in 000s)

Total revenue was $16,243 in the first nine months of 2021, a 3% decrease compared with total revenue of $16,722 in the first nine months of 2020. This decrease was due primarily to the impact of the non-Covid quarter of Q1 2020, compared to the impact of Covid on Q1 2021.

Gross margin in the first nine months of 2021 totaled $3,435 or 21% of sales. In the first nine months of 2020 gross margin totaled $3,671 or 22% of sales. This small decrease was due to differences in product mix.

Selling, general and administrative (SG&A) expenses were $3,234 during the first nine months of 2021, up 31% compared with SG&A expenses of $2,466 in the first nine months of 2020. This increase was due to the non-recurring restructuring costs discussed above, 6 months of concurrent compensation costs for both the former CEO and his replacement, as well as recruiting, option grants and other up front costs of bringing him on board.

During the first nine months of 2021, the Company incurred interest expense of $33 due primarily to bank borrowings in Q1 and Q2. This compares with interest expense of $87 incurred during the first nine months of 2020.

In the first nine months of 2021 the Company generated operating income of $201 compared with operating income of $1,205 in the same period last year. Similar to revenue, the difference between the first quarter of 2020, pre-Covid, compared to the first quarter of 2021, plus the non-recurring restructuring costs account for this difference. The net income for the first nine months of 2021 totaled $2,998 versus net income of $1,132 in the first nine months of 2020.

In December 2018 the Company set up a valuation reserve against its deferred tax asset. At the time, following a period of sustained losses, management determined that it was more likely than not that this tax asset would not be used. Management has reevaluated this decision in light of recent profitability and expected future profitability and has determined that it is more likely than not that the Company will be able to fully utilize this tax asset. As a result of releasing the valuation allowance against the deferred tax asset, a tax benefit of $2.8 million has been recorded on the income statement as of September 25, 2021.

Liquidity and Capital Resources (all $ in 000s unless noted)

The Company’s cash and cash equivalents at September 25, 2021 totaled $3,838. This compares to cash and cash equivalents at December 26, 2020 of $195. The improvement in cash was primarily due to equity raised through the At the Market offering (“ATM”) discussed below.

Accounts receivable at September 25, 2021 totaled $5,032 compared with $2,915 at December 26, 2020.

Days Sales Outstanding (DSO) increased from 62 days at the end of 2020 to 82 days at the end of Q3 2021. The increase in DSO was due to advance billings to customers whose orders require CPS to purchase special raw materials in order to fulfill those orders. These billings are currently in accounts receivable, but not yet reflected in revenue. The accounts receivable balances at December 26, 2020, and September 25, 2021 were both net of an allowance for doubtful accounts of $10.

Inventories totaled $3,773 at September 25, 2021 compared with inventory totaling $3,709 at December 26, 2020. The inventory turnover in the most recent four quarters ending Q3 2021 was 4.3 times, down from 4.5 times averaged during the four quarters of 2020 (based on a 5 point average).

On April 26, 2021, the Company entered into a sales agreement (the “Sales Agreement”) with Craig-Hallum Capital Group LLC (“C-H”) pursuant to which the Company may issue and sell, from time to time, shares of the Company’s common stock having an aggregate offering price of up to $25.0 million in at-the-market offerings (“ATM”) sales. On the same day, the Company filed a prospectus supplement under a shelf registration relating to the Sales Agreement. C-H will act as sales agent and will be paid a 3% commission on each sale under the Sales Agreement. The Company’s common stock will be sold at prevailing market prices at the time of the sale, and, as a result, prices will vary. For the quarter ended September 25, 2021, the Company sold approximately 48 thousand shares of common stock under the Sales Agreement, for gross proceeds of approximately $295 thousand. From date of inception until September 25, 2021, the Company sold approximately 527 thousand shares of common stock under the Sales Agreement, for gross proceeds of approximately $3.7 million. Subsequent to September 25, 2021, the Company has not sold any additional shares.

The Company financed its working capital during the first nine months of 2021 from a combination of its net profit during the period and proceeds from its ATM offering. The Company expects it will continue to be able to fund its working capital requirements for the remainder of 2021 from existing cash balances.

Although the Company’s customer base is expanding, 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.

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. 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 650 basis points. At September 25, 2021 the Company had $0 of borrowings under this LOC and its borrowing base at the time would have permitted $2.621 million to have been borrowed.

In March 2020, the company acquired an ultrasound microscope for a price of $208. 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, consisting of principal plus interest at a rate of 6.47%

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

As of September 25, 2021, the Company had $249 of construction in progress and no outstanding commitments to purchase production equipment.

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)

Management believes that a combination of existing cash balances and borrowings, if necessary, 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.

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.

ITEM 4 CONTROLS AND PROCEDURES

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

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

PART II OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS
None.

ITEM 1A RISK FACTORS
There have been no material changes to the risk factors as discussed in our 2020 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
(a) Exhibits:

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

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

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

101.INS Inline XBRL Instance Document

101.SCH Inline XBRL Taxonomy Extension Schema Document

101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document

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

(b) Reports on Form 8-K

None

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 CORP.
(Registrant)

Date:

November 8, 2021

/s/	Michael E. McCormack

Michael E. McCormack
Chief Executive Officer

Date:

November 8, 2021

/s/	Charles K. Griffith Jr.

Charles K. Griffith Jr.

Chief Financial Officer