UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Amendment No. 1

(Mark One)

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

For the period ended June 26, 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
Registrant’s Telephone Number, including Area Code:

CPS Technologies Corp.

111 South Worcester Street

Norton, MA 02766-2102

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

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

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

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

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

Emerging growth company☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15U.S.C. 7262(b)) by the registered public 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 register
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 August 6, 2021: 14,322,617.

Explanatory Note

The sole purpose of this Amendment No. 1 to the Quarterly Report on Form 10-Q (the “Form 10-Q”) of CPS Technologies Corp. for the quarterly period ended June 26, 2021, filed with the Securities and Exchange Commission on August 13, 2021, is to furnish Exhibit 101 to the Form 10-Q in accordance with Rule 405 of Regulation S-T. Exhibit 101 to the Form 10-Q provides the consolidated financial statements and related notes from the Form 10-Q formatted in iXBRL (Inline eXtensible Business Reporting Language).

No other changes have been made to the Form 10-Q. This Amendment No. 1 to the Form 10-Q speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the original Form 10-Q.

Pursuant to Rule 406 of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

PART I FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS (Unaudited)

CPS TECHNOLOGIES CORP.

Balance Sheets (Unaudited)

	June 26,			December 26,
	2021			2020
ASSETS
Current assets:
Cash and cash equivalents	$	3,015,760		$	195,203
Accounts receivable-trade, net		4,432,310			2,914,800
Inventories, net		3,989,435			3,709,471
Prepaid expenses and other current assets		273,523			71,506
Total current assets		11,711,028			6,890,980
Property and equipment:
Production equipment		10,343,553			10,265,471
Furniture and office equipment		568,846			568,846
Leasehold improvements		951,384			951,384
Total cost		11,863,783			11,785,701
Accumulated depreciation and amortization		(10,831,191	)		(10,558,816	)
Construction in progress		140,270			61,062
Net property and equipment		1,172,862			1,287,947
Right-of-use lease asset		638,000			25,000
Deferred taxes, net		117,000			117,000
Total assets	$	13,638,890		$	8,320,927

See accompanying notes to financial statements.

(continued)

CPS TECHNOLOGIES CORP.

Balance Sheets (Unaudited)

(concluded)

	June 26,			December 26,
	2021			2020
LIABILITIES AND STOCKHOLDERS` EQUITY
Current liabilities:
Note payable, current portion	$	59,438		$	58,134
Accounts payable		1,522,336			909,291
Accrued expenses		997,755			804,091
Deferred revenue		400,874			12,177
Lease liability, current portion		151,000			25,000
Total current liabilities		3,131,403			1,808,693
Note payable less current portion		124,566			154,570
Long term lease liability		487,000			—
Total liabilities		3,742,969			1,963,263
Commitments and contingencies (note 4)
Stockholders` equity:
Common stock, $0.01 par value, authorized 20,000,000 shares; issued 14,300,771 and 13,746,242; outstanding 14,300,548 and 13,313,790; at June 26, 2021 and December 26, 2020;		143,007			137,462
Additional paid-in capital		38,956,952			36,688,894
Accumulated deficit		(29,202,268	)		(29,472,369	)
Less cost of 223 and 432,452 common shares repurchased at June 26, 2021 and December 26, 2020		(1,770	)		(996,323	)
Total stockholders` equity		9,895,921			6,357,664
Total liabilities and stockholders` equity	$	13,638,890		$	8,320,927

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORP.

Statements of Operations (Unaudited)

	Three Months Ended						Six Months Ended
	June 26,			June 27,			June 26,			June 27,
	2021			2020			2021			2020
Revenues:
Product sales	$	5,862,183		$	5,758,015		$	10,727,890		$	12,269,586
Total revenues		5,862,183			5,758,015			10,727,890			12,269,586
Cost of product sales		4,510,600			4,574,686			8,432,168			9,536,047
Gross Margin		1,351,583			1,183,329			2,295,722			2,733,539
Selling, general, and administrative expense		1,098,616			852,773			2,007,087			1,781,362
Income from operations		252,967			330,556			288,635			952,176
Interest income (expense), net		(13,769	)		(31,325	)		(18,079	)		(51,291	)
Net income before income tax		239,198			299,231			270,556			900,885
Income tax provision		—			—			456			—
Net income	$	239,198		$	299,231		$	270,101		$	900,885
Net income per basic common share	$	0.02		$	0.02		$	0.02		$	0.07
Weighted average number of basic common shares outstanding		13,982,177			13,207,436			13,783,276			13,207,436
Net income per diluted common share	$	0.02		$	0.02		$	0.02		$	0.07
Weighted average number of diluted common shares outstanding		14,550,918			13,259,783			14,407,904			13,253,457

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORP.
STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 26, 2021 AND JUNE 27, 2020

	Common Stock						Additional									Total
	Number of						paid-in			Accumulated			Stock			stockholders'
	shares issued			Par Value			capital			deficit			repurchased			equity
Balance at March 27, 2021		14,360,042		$	143,600		$	37,925,674			(29,441,466	)		(2,201,509	)		6,426,299
Share-based compensation expense		—			—			92,113			—			—			92,113
Issuance of common stock		479,289			4,793			3,132,599			—			—			3,137,392
Employee option exercises		16,100			161			25,272			—			(24,514	)		919
Treasury shares retired		(554,660	)		(5,547	)		(2,218,706	)		—			2,224,253			—
Net income		—			—			—			239,198			—			239,198
Balance at June 26, 2021		14,300,771			143,007			38,956,952			(29,202,268	)		(1,770	)		9,895,921

	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			(29,472,369	)		(996,323	)		6,357,664
Share-based compensation expense		—			—			119,535			—			—			119,535
Issuance of common stock		479,900			4,793			3,132,599			—			—			3,137,392
Employee options Exercised		629,900			6,299			1,234,630			—			(1,229,700	)		11,229
Treasury shares retired		(554,660	)		(5,547	)		(2,218,706	)		—			2,224,253
Net income											270,101			—			270,101
Balance at June 26, 2021		14,300,771			143,007			38,956,952			(29,202,268	)		(1,770	)		9,895,921

	Common Stock				Additional								Total
	Number of				paid-in		Accumulated			Stock			stockholders'
	shares issued		Par Value		capital		deficit			repurchased			equity
Balance at March 28, 2020		13,427,492	$	134,275	$	36,159,874		(29,778,779	)		(517,053	)		5,998,317
Share-based compensation expense		—		—		17,390		—			—			17,390
Issuance of common stock		—		—		—		—			—			—
Net income								299,231			—			299,231
Balance at June 27, 2020		13,427,492		134,275		36,177,264		(29,479,548	)		(517,053	)		6,314,938

	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		—		—		83,063		—			—			83,063
Issuance of common stock		—		—		—		—			—			—
Net Income								900,885			—			900,885
Balance at June 27, 2020		13,427,492		134,275		36,177,264		(29,479,548	)		(517,053	)		6,314,938

See accompanying notes to financial statements.

CPS TECHNOLOGIES CORP.

Statements of Cash Flows (Unaudited)

	Six Months Ended
	June 26,			June 27,
	2021			2020
Cash flows from operating activities:
Net income	$	270,101		$	900,885
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization		284,408			261,688
Share-based compensation		119,535			83,063
Gain on sale of property and equipment		—			(5,000	)
Changes in:
Accounts receivable-trade		(1,517,511	)		(888,897	)
Inventories		(279,963	)		(773,044	)
Prepaid expenses and other current assets		(202,018	)		(25,451	)
Accounts payable		613,046			333,743
Accrued expenses		193,665			93,828
Deferred revenue		388,697			461,887
Net cash provided by (used in) operating activities		(130,040	)		442,702
Cash flows from investing activities:
Purchases of property and equipment		(163,524	)		(233,270	)
Proceeds from sale of property and equipment		—			5,000
Net cash used in investing activities		(163,524	)		(228,270	)
Cash flows from financing activities:
Net borrowings on line of credit		—			(222,823	)
Proceeds from exercise of employee stock options, net of repurchases		11,229			—
Proceeds from issuance of common stock		3,137,392			—
Payments on note payable		(34,500	)		(8,962	)
Net cash provided by (used in) financing activities		3,114,121			(231,785	)
Net increase (decrease) in cash and cash equivalents		2,820,557			(17,353	)
Cash and cash equivalents at beginning of period		195,203			133,965
Cash and cash equivalents at end of period	$	3,015,760		$	116,612
Supplemental disclosures of cash flows information:
Cash paid for interest		18,079			65,741
Supplemental disclosures of non-cash activity:
Issuance of note payable to finance equipment purchase		—			208,583
Net exercise of stock options		24,514			—

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.

Using its proprietary MMC technology, the Company also produces light-weight armor, particularly for extreme environments and heavy threat levels.

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

(2) Summary of Significant Accounting Policies

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

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

The Company’s balance sheet at December 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 Per Common and Common Equivalent Share

Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share is calculated by dividing net income by the sum of the weighted average number of common shares plus additional common shares that would have been outstanding if potential dilutive common shares had been issued for granted stock options and stock purchase rights. Common stock equivalents are excluded from the diluted calculations when a net loss is incurred as they would be anti-dilutive.

 

The following table presents the calculation of both basic and diluted EPS:

	Three Months Ended				Six Months Ended
	June 26,		June 27,		June 26,		June 27,
	2021		2020		2021		2020
Basic EPS Computation:
Numerator:
Net income (loss)	$	239,198	$	299,231	$	270,101	$	900,885
Denominator:
Weighted average Common shares Outstanding		13,982,177		13,207,436		13,783,276		13,207,436
Basic EPS	$	0.02	$	0.02	$	0.02	$	0.07
Diluted EPS Computation:
Numerator:
Net income (loss)	$	239,198	$	299,231	$	270,101	$	900,885
Denominator:
Weighted average Common shares Outstanding		13,982,177		13,207,436		13,783,276		13,207,436
Dilutive effect of stock options		568,741		52,347		624,628		46,021
Total Shares		14,550,918		13,259,783		14,407,904		13,253,457
Diluted EPS	$	0.02	$	0.02	$	0.02	$	0.07

(4) Commitments & Contingencies

Commitments

Leases

The Company has one real estate lease expiring in February 2026. CPS also has a few other leases for equipment which are minor in nature and are generally short-term in duration. None of these equipment leases have been capitalized as the Company elected an accounting policy for short-term leases, which allows lessees to avoid recognizing right-of-use assets and liabilities for leases with terms of 12 months or fewer.

The real estate lease expiring in 2026 (the “Norton facility lease”) is included as a right-of-use lease asset and corresponding lease liability on the balance sheet. This asset and liability was recognized on March 1, 2021 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 June 26, 2021

(Dollars in Thousands)	June 26, 2021
Maturity of capitalized lease liabilities	Lease payments
2021		76
2022		160
2023		162
2024		165
2025		165
2026		28
Total undiscounted operating lease payments	$	756
Less: Imputed interest		(118	)
Present value of operating lease liability	$	638
Balance Sheet Classification
Current lease liability	$	151
Long-term lease liability		487
Total operating lease liability	$	638
Other Information
Weighted-average remaining lease term for capitalized operating leases (in months)	56
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 second quarter of 2021 and $76 thousand for the six months ended June 26, 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 June 26, 2021 a total of 26,000 stock options were granted to employees under the Company’s 2020 Equity Incentive Plan Stock Incentive Plan (the “Plan”) and a total of 22,000 were granted to outside directors during the quarter ended June 26, 2021 issued at a weighted average price of $5.81 per share. There were no stock options granted for the quarter ended June 27, 2020.

 

During the three and six months ended June 26, 2021 there were 16,100 and 629,900 options exercised and corresponding shares issued at a weighted average price of $1.58 and $1.97, respectively. During the three and six months ended June 27, 2020 there were no shares exercised or issued.

During the three and six months ended June 26, 2021, the Company repurchased 2,235 and 122,431 shares, respectively, for employees to facilitate their exercise of stock options. During the three and six months ended June 27, 2020 there were no shares repurchased.

There were also 869,600 shares outstanding at a weighted average price of $2.14 with a weighted average remaining term of 6.67 years as of June 26, 2021, and there were 472,200 shares exercisable at a weighted average price of $2.14 with a weighted average remaining term of 4.95 years as of June 27, 2020. The Plan, as amended, is authorized to issue 1,500,000 shares of common stock. As of June 26, 2021, there were 1,138,000 shares available for future grants.

As of June 26, 2021, there was $445 thousand of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan; that cost is expected to be recognized over a weighted average period of 2.02 years.

During the three and six months ended June 26, 2021, the Company recognized $92,113 and $119,535, respectively, as shared-based compensation expense related to previously granted shares under the Plan.

During the three and six months ended June 27, 2020, the Company recognized $17,390 and $83,063, respectively, as shared-based compensation expense related to previously granted shares under the Plan.

(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. From date of inception until June 26, 2021, the Company sold 479,289 shares of common stock under the Sales Agreement, for gross proceeds of $3,356,342, fees to C-H of $100,690, other fees of $118,140 for net proceeds of $3,137,512. Subsequent to June 26, 2021, and as of August 6, 2021, the Company has sold 25,267 additional shares for gross proceeds of $153,659.

(7) Inventories

Inventories consist of the following:

	June 26,			December , 26
	2021			2020
Raw materials	$	1,363,413		$	752,760
Work in process		2,203,222			2,800,226
Finished goods		858,955			592,640
Total inventory		4,425,590			4,145,626
Reserve for obsolescence		(436,155	)		(436,155	)
Inventories, net	$	3,989,435		$	3,709,471

(8) Accrued Expenses

Accrued expenses consist of the following:

	June 26,		December 26,
	2021		2020
Accrued legal and accounting	$	56,219	$	71,671
Accrued payroll and related expenses		762,740		626,063
Accrued other		178,796		106,357
	$	997,755	$	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 June 26, 2021 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 line of credit is subject to certain financial covenants, all of which have been met.

(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 third party equipment finance company. The note is collateralized by the microscope and is being paid in monthly installments of $4 thousand, consisting of principal plus interest at a rate of 6.47%.

In July 2020 CPS placed into service a piece of manufacturing equipment which it financed with the machine’s vendor.  The equipment cost of $40 thousand will be paid at the rate of $2 thousand per month over 2 years, 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	$	29,414
FY 2022	$	55,906
FY 2023	$	43,837
FY 2024	$	46,757
FY 2025	$	8,090
Total		184,004

Total interest expense on notes payable during 2021 was $5,800.

(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 is judged more likely than not that all or a portion of its deferred tax assets will not be utilized before they expire. This decision was reached after giving greater weight to the Company’s losses in recent years as compared to its forecasts.

The Coronavirus Aid, Relief and Economic Security Act (“Act”) became law on March 27, 2020. The Act contains two provisions that provide a tax benefit to the Company. The Act suspends the current 80% limitation on the utilization of net operating losses for taxable years beginning in 2018, 2019 and 2020. The Act also allows net operating losses arising in 2018, 2019 and 2020 to be carried back five years. The Act also accelerates the ability of the Company to recover Federal alternative minimum tax credits.

The Company recorded a reduction of the valuation allowance reserve of $8 thousand and $69, respectively during the three and six months ended June 26, 2021 to account for the utilization of deferred tax assets to reduce the current tax liability for the three and six months ended June 26, 2021. As a result of the utilization of deferred tax assets, the Company did not record a provision for income taxes for the three months ended June 26, 2021, and less than $1 thousand for the six months so ended. 

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations is based upon and should be read in conjunction with the financial statements of the Company and notes thereto included in this report and the Company’s Annual Report on Form 10-K for the year ended December 26, 2020, and in CPS’ other SEC reports, which are accessible on the SEC’s website at www.sec.gov and the Company’s website at www.alsic.com.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. There are a number of factors that could cause the Company’s actual results to differ materially from those forecasted or projected in such forward-looking statements. 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. Using its proprietary MMC technology, the Company also produces light-weight vehicle armor, particularly for extreme environments and heavy threat levels.

CPS’s products are custom rather than catalog items. They are made to customers’ designs and are used as components in systems built and sold by our customers. At any point in time our product mix will consist of some products with on-going production demand, and some products which are in the prototyping or evaluation stages at our customers. The Company seeks to have a portfolio of products which include products in every stage of the technology adoption lifecycle at our customers. CPS’ growth is dependent upon the level of demand for those products already in production, as well as its success in achieving new "design wins" for future products.

As a manufacturer of highly technical and custom products, the Company incurs fixed costs needed to support the business, but which do not vary significantly with changes in sales volume. These costs include the fixed costs of applications 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 Second Fiscal Quarter of 2021 (Q2 2021) Compared to the Second Fiscal Quarter of 2020 (Q2 2020); (all $ in 000s)

Total revenue was $5,862 in Q2 2021, a 2% increase compared with total revenue of $5,758 in Q2 2020. This increase was due primarily to the initial shipments of armor panels and increased sales of hermetic packages, offset by a decrease in the sale of baseplates to a major customer.

Gross margin in Q2 2021 totaled $1,352 or 23% of sales.  In Q2 2020, gross margin was $1,183 or 21% of sales.   This increase in margin was primarily due to moderate price increases and product mix.

Selling, general and administrative expenses (SG&A) were $1,099 in Q2 2021, up 28% when compared with SG&A expenses of $853 in Q2 2020.  This increase in SG&A expense was due to increased compensation expense as a result of the addition of our new COO and the delay in certain Director’s compensation from Q1 to Q2.

In Q2, 2021, the Company incurred interest expense of $14 due to bank borrowings. This compares with interest expense of $32 in Q2 of 2020. The decrease in interest is due to decreased borrowings as a result of the At-the-Market offering

The Company experienced operating income of $253 compared with an operating income of $331 in the same quarter last year. This decrease in operating income is due primarily to the increase in SG&A expense, discussed above. The net income for Q2 2021 totaled $239 versus $299 in Q2 2020.

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

Total revenue was $10,728 in the first half of 2021, a 13% decrease compared with total revenue of $12,270 in the first six months of 2020. This decrease was due primarily to the impact on the Covid-19 pandemic on Q1 2021 compared to the lack of impact of the pandemic on Q1 2020.

Gross margin in the first six months of 2021 totaled $2,296 or 21% of sales. In the first six months of 2020 gross margin totaled $2,734 or 22% of sales. This decrease was due to the decrease in revenue and the reduced coverage of our fixed costs.

Selling, general and administrative (SG&A) expenses were $2,007 during the first six months of 2021, up 13% compared with SG&A expenses of $1,781 in the first six months of 2020. The hiring of our new Chief Operating Officer and increased costs associated with printing and distributing our proxy statement were the primary reasons for this increase.

During the first half of 2021, the Company incurred interest expense of $18 due to bank borrowings. This compares with interest expense of $66 incurred during the first half of 2020. The decrease in interest is due to decreased borrowings as the result of our move to profitability from 2019 to 2020 and the At-the-Market offering in Q2 2021.

In the first six months of 2021 the Company had operating income of $289 compared with $952 in the same period last year. The net income for the first six months of 2021 totaled $270 versus $901 in the first six months of 2020. This decrease was due primarily to the impact on the Covid-19 pandemic on Q1 2021 compared to the lack of impact of the pandemic on Q1 2020.

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

The Company’s cash and cash equivalents at June 26, 2021 totaled $3,016 . This compares to cash and cash equivalents at December 26, 2020 of $195 . The improvement in cash and net cash was primarily due to equity raised through the At the Market offering (“ATM”) discussed below.

Accounts receivable at June 26, 2021 totaled $4,432 compared with $2,915 at December 26, 2020.

Days Sales Outstanding (DSO) increased from 62 days at the end of 2020 to 69 days at the end of Q2 2021. The increase in DSO was due to higher sales to two large customers with longer payment terms. The accounts receivable balances at December 26, 2020, and June 26, 2021 were both net of an allowance for doubtful accounts of $10.

Inventories totaled $3,989 at June 26, 2021 compared with inventory totaling $3,709 at December 26, 2020. This increase was due to the buildup of inventory for our armor order. The inventory turnover in the most recent four quarters ending Q2 2021 was 4.0 times, down from 4.5 times averaged during the four quarters of 2020 (based on a 5 point average).

On April 26, 2021, we 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”). 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. From date of inception until June 26, 2021, the Company sold approximately 479 thousand shares of common stock under the Sales Agreement, for gross proceeds of approximately $3.4 million. Subsequent to June 26, 2021, the Company has not sold any additional shares.

The Company financed its increase in working capital in Q2 2021 from its profit and the ATM offering. The Company expects it will continue to be able to fund its operations for the remainder of 2021 from existing cash balances.

The Company continues to sell to a limited number of customers and the loss of any one of these customers could cause the Company to require additional external financing. Failure to generate sufficient revenues, raise additional capital or reduce certain discretionary spending could have a material adverse effect on the Company’s ability to achieve its business objectives.

Management believes that 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.

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 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 June 26, 2021 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.

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

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

The Company has one real estate lease expiring in February 2026. CPS also has a few other leases for equipment which are minor in nature and are generally short-term in duration. None of these have been capitalized. (Note 4, Leases)

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

The COVID-19 pandemic has affected financial results for the quarter ended June 26, 2021. One of our major customers uses a significant portion of our product in the manufacture of products used in high-speed rail trains. As a result of decreased ridership due to the pandemic, demand from their customers has declined. This has resulted in this customer reducing Q2 purchases. The Company believes the worst is behind us, but COVID-19 variants, lack of vaccinations on a world-wide scale and other factors could continue to negatively affect our financial results moving forward.

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 AND REPORTS ON FORM 8-K:

(a) Exhibits:

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

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

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

101.INS Inline XBRL Instance Document

101.SCH Inline XBRL Taxonomy Extension Schema Document

101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document

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

(b) Reports on Form 8-K:

On April 23, 2020 the Company filed a report on Form 8-K which included final tabulation of votes from the Company’s Annual Meeting of Shareholders held on April 23, 2020.

On April 26, 2020 the Company filed a report on Form 8-K which included the entry into an At-the-Market Issuance Sales Agreement.

On April 30, 2021 the Company filed a report on Form 8-K which included a press release announcing the Q1 2021 financial results.

On May 13, 2021 the Company filed a report on Form 8-K which included a press release announcing the retirement of Grant Bennett as Chief Executive Officer and the appointment of Michael Bennett in his stead.

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 29, 2021

/s/ Michael E. McCormack

Michael E. McCormack

Chief Executive Officer

Date: November 29, 2021

/s/ Charles K. Griffith Jr.

Charles K. Griffith Jr.

Chief Financial Officer