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 25, 2021 and in CPS's other SEC reports, which are accessible on the SEC's website at www.sec.gov and the Company's website at www.cpstechnologysolutions.com.


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Forward-Looking Statements

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

Critical Accounting Policies

The critical accounting policies utilized by the Company in preparation of the accompanying financial statements are set forth in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 25, 2021, 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 25, 2021.





Overview

Products we provide include baseplates for motor controllers used in high-speed electric trains, subway cars, wind turbines, and hybrid and electric vehicles. We provide baseplates and housings used in radar, satellite and avionics applications. We provide lids and heat spreaders used with high performance integrated circuits for use in internet switches and routers. We provide baseplates and housings used in modules built with Wide Band Gap Semiconductors like Silicon Carbide ("SiC") and Gallium Nitride ("GaN"), collectively Metal Matrix Composites ("MMC"). CPS also assembles housings and packages for hybrid circuits. These housings and packages may include MMC components; they may include components made of more traditional materials such as aluminum, cold rolled steel and Kovar. Using its proprietary MMC technology, the Company also produces light-weight vehicle armor, particularly for extreme environments and heavy threat levels.

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

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

The Company believes the underlying demand for MMC, housings for hybrid circuits and our proprietary armor solution is growing as the electronics and other industries seek higher performance, higher reliability, and reduced costs. CPS believes that the Company is well positioned to offer our solutions to current and new customers as these demands grow.


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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 2022 (Q1 2022) Compared to the First Fiscal Quarter of 2021 (Q1 2021); (all $ in 000's)

Revenues totaled $6,653 in Q1 2022 compared with $4,866 generated in Q1 2021, an increase of 37%. Two factors in particular contributed to this growth. In Q1 of 2021 we were just beginning to see a turnaround in reduced sales due to the COVID-19 pandemic. We saw significant sales growth from each of our top 5 customers from Q1 2021 to Q1 2022. Our shipments of armor for the US Navy did not begin until Q2 of 2021, also giving rise to a portion of the increase from Q1 2021 to Q1 2022.

Gross margin in Q1 2022 totaled $1,963 or 30% of sales. This compares with gross margin in Q1 2021 of $944 or 19% of sales. Both increased manufacturing efficiencies and the impact of increased sales volumes on fixed costs, which do not vary with increased sales volumes, were the predominate reason for this increase.

Selling, general and administrative (SG&A) expenses totaled $1,416 in Q1 2022 compared with SG&A expenses of $908 in Q1 2021. Compensation costs made up a little over half of this increase. In particular, increased accruals for variable compensation due to the better results in Q1 2022 as compared to Q1 2021 and 3 additional members of our sales team hired subsequent to Q1 2021, made up part of the compensation differential. In addition, issuance of immediately vested stock options to directors was delayed in Q1 2021 due to market uncertainty. The Company reverted back to its standard practice of issuing these immediately vested options in Q1 2022 as the market stabilized. The other significant portion of this increase was due to commission expenses incurred as a result of the increased sales.

The Company experienced an operating profit of $547 in Q1 2022 compared with an operating profit of $36 in Q1 2021 as a result of the increased gross margin, partially offset by the increase in SG&A expenses.

The Company is part of the Defense Industrial Base and thus has been open and operating throughout the COVID-19 pandemic. The Company believes the worst of the pandemic is now behind us and expects to show continued improvement in upcoming quarters.

The Company has had extremely minimal sales to both Russia and Ukraine over the last several years, the loss of which would likely not even be noticeable to a reader of these financial statements. Neither does CPS rely on raw materials from that part of the world. As a result, we do not believe that the Russian invasion of Ukraine will have a direct impact on our results. Nevertheless, there could be an indirect impact regarding supply chain and inflationary issues as a result of this war.

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

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

The Company's cash and cash equivalents at April 2, 2022 totaled $4,700. This compares to cash and cash equivalents at December 25, 2021 of $5,050. The decrease in cash was due primarily to increases in inventory and reductions in accrued expenses offset by net profit.

Accounts receivable at April 2, 2022 totaled $4,903 compared with $4,870 at December 25, 2021. Days Sales Outstanding (DSO) decreased from 72 days at the end of 2021 to 66 days at the end of Q1 2022. The decrease in DSO was due to the inclusion of deferred revenue of $0.6M in the year end accounts receivable balance, which was collected during Q1 2022. The accounts receivable balances at December 25, 2021, and April 2, 2022 were both net of an allowance for doubtful accounts of $10.


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Inventories totaled $4,706 at April 2, 2022 compared with inventory totaling $3,912 at December 25, 2021. The inventory turnover in the most recent four quarters ending Q1 2022 was 4.6 times (based on a 5 point average) compared with 4.7 times averaged during the four quarters of 2021.

The Company financed its increase in working capital in Q1 2022 from its profit and usage of cash on hand. The Company expects it will continue to be able to fund its operations for the remainder of 2022 from operations and existing cash balances.

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

Management believes that existing cash balances will be sufficient to fund our cash requirements for the foreseeable future. However, there is no assurance that we will be able to generate sufficient revenues or reduce certain discretionary spending in the event that planned operational goals are not met such that we will be able to meet our obligations as they become due.

Contractual Obligations (all $ in 000's unless otherwise noted)

In September 2019, the Company entered into revolving line of credit (LOC) with Massachusetts Business Development Corporation (BDC) in the amount of $2.5 million. This agreement was amended in May 2020 to increase the line to $3.0 million. The agreement includes a demand note allowing the Lender to call the loan at any time. The Company may terminate the agreement without a termination fee after 3 years. The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of LIBOR plus 550 basis points. The Company was in compliance with all debt covenants as of April 2, 2022, had $0 borrowings under this LOC and its borrowing base at the time would have permitted $3.0 to have been borrowed.

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

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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