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'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.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. There are a number of factors that could cause the Company's actual results to differ materially from those forecasted or projected in such forward-looking statements. This includes the impact of the COVID-19 pandemic, which is discussed in Item 3 of this report. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or changed circumstances after the date hereof or to reflect the occurrence of unanticipated events.





Critical Accounting Policies

The critical accounting policies utilized by the Company in preparation of the accompanying financial statements are set forth in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 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 Corporation.

Results of Operations for the First Fiscal Quarter of 2021 (Q1 2021) Compared to the First Fiscal Quarter of 2020 (Q1 2020); (all $ in 000's)

Revenues totaled $4,866 in Q1 2021 compared with $6,512 generated in Q1 2020, a decrease of 25%. Reduced demand from our largest customer accounted for more than the total decrease in revenues. In 2020, in anticipation of potential supply disruptions due to the COVID-19 pandemic, this customer accelerated Q2 2020 purchases into Q1. Mid-year 2020, this customer then experienced a significant reduction in their demand due to the COVID-19 pandemic. Reduced demand from this customer has been partially offset by increased business from our aerospace customers.

Gross margin in Q1 2021 totaled $944 or 19% of sales. This compares with gross margin in Q1 2020 of $1,550 or 24% of sales. While increased manufacturing efficiencies mitigated the reduction in gross margin, fixed costs which do not vary with decreased sales volumes were the predominate reason for this reduction.

Selling, general and administrative (SG&A) expenses totaled $908 in Q1 2021 compared with SG&A expenses of $929 in Q1 2020. The hiring of our new Chief Operating Officer and increased costs associated with printing and distributing our proxy statement were offset by reduced variable compensation amounts due to a lower operating profit.

The Company experienced an operating profit of $36 in Q1 2021 compared with an operating profit of $622 in Q1 2020 as a result of the reduced gross margin.

The Company is part of the Defense Industrial Base and thus has been open and operating throughout the COVID-19 pandemic. The COVID-19 pandemic did affect financial results for the quarter ended March 27, 2021 primarily by causing reductions in demand from certain customers. The Company believes the worst of the pandemic is now behind us and expects to show continued improvement in upcoming quarters.

Since the outbreak of the pandemic, the Company has aggressively implemented CDC guidelines in the workplace to prevent the spread of COVID-19. For example, the Company has staggered shifts to eliminate overlap at shift changes, reorganized workstations to ensure social distancing, implemented daily screening of all employees by taking employees' temperatures, etc.

These factors combine to create a higher degree of uncertainty regarding future financial performance.

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

The Company's net cash and cash equivalents at March 27, 2021 totaled ($25). (Net cash is defined as cash and cash equivalents less bank borrowings.) This compares to net cash and cash equivalents at December 26, 2020 of $195. Payment terms for customers range from payment in advance to 90 days from shipment and are based on factors such as credit worthiness, volume of business, etc. The decrease in net cash was due primarily to increased accounts receivable offset by lesser increases in accounts payable, accrued expenses and deferred revenue.

Accounts receivable at March 27, 2021 totaled $3,778 compared with $2,915 at December 26, 2020. Days Sales Outstanding (DSO) increased from 62 days at the end of 2020 to 70 days at the end of Q1 2021. The increase in DSO was due to higher sales at the end of the quarter compared to the beginning of the quarter. The accounts receivable balances at December 26, 2020, and March 27, 2021 were both net of an allowance for doubtful accounts of $10.

Inventories totaled $3,631 at March 27, 2021 compared with inventory totaling $3,709 at December 26, 2020. The inventory turnover in the most recent four quarters ending Q1 2021 was 4.1 times (based on a 5 point average) compared with 4.5 times averaged during the four quarters of 2020. The reduction in inventory turnover was due primarily to raw material purchases for the Company's armor contract scheduled to begin shipping in Q2 2021.

The Company financed its decrease in working capital in Q1 2021 from its profit and increased borrowings of $193 from its line of credit with BDC Capital. The Company expects it will continue to be able to fund its operations for the remainder of 2021 from existing cash balances and bank borrowings.

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 (all $ in 000's unless otherwise noted)

In September 2019, the Company entered into revolving line of credit (LOC) with Massachusetts Business Development Corporation (BDC) in the amount of $2.5 million. This agreement was amended in May 2020 to increase the line to $3.0 million. The agreement includes a demand note allowing the Lender to call the loan at any time. The Company may terminate the agreement without a termination fee after 3 years. The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of LIBOR plus 650 basis points . The Company was in compliance with all debt covenants as of March 27, 2021, had $193 borrowings under this LOC and its borrowing base at the time would have permitted an additional $2.6 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)

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