CPS TECHNOLOGIES CORPDE

Operating Lease Costs and Cash Flows

Operating lease cost and cash paid was $162 thousand for thetwelve months ended** December 30, 2023and $160 thousand during the year ended December 31, 2022.**These costs are related to its long-term operating lease. All other short-term leases were immaterial.

Estimated monthly payments under the terms of the Norton facility lease, escalate from $13 thousand to $14 thousand over the lease term.

(5) Share-Based Compensation Plans

The Company adopted the2020 Equity Incentive Plan ("2020 Plan") on** March 3, 2020.Under the terms of the2020** Plan all of the Company’s employees, officers, directors, consultants and advisors are eligible to be granted options, restricted stock awards, or other stock-based awards. Some outstanding options are non-statutory stock options; some are incentive stock options. All options granted are exercisable at the fair market value of the stock on the date of grant and expireten years from the date of grant. The options granted to employees generally vest in equal annual installments over afive-year period. The options granted to directors generally vest immediately on date of grant. Certain options also remain issued and outstanding under the2009 Stock Incentive Plan.

Under the2020 Plan a total of 1,500,000 shares of common stock are available for issuance, of which 832,700 shares remain available for grant as of** December 30, 2023.**

A summary of stock option activity as of** December 30, 2023**and changes during the year then ended is presented below:

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following table presents the annualized weighted average values of the significant assumptions used to estimate the fair values of the options granted during2023 and2022:

All options are granted with an exercise price equal to the fair market value of the underlying common stock on the date of grant.

The Company recognized $204,797 and $250,359 as stock based compensation expense in2023 and2022, respectively. As of** December 30, 2023,**there was $560,815 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plan; that cost is expected to be recognized over a weighted average period of 2.55 years.

(6) Accrued Expenses

Accrued expenses at** December 30, 2023and December 31, 2022**consist of the following:

Included in Accrued other is $288,000 as a reserve for potential credits to be issued as part of the quality issue described above. In addition to this reserve, the Company increased its sales returns in the amount of $104,126 for parts for which a credit was issued in* January 2024.*

(7) Revolving Line of Credit

In** May 2023,the Company terminated its $3.0 million revolving line of credit (LOC) with Massachusetts Business Development Corporation (BDC). A new LOC in the amount of $3.0 million was entered into with Rockland Trust Company. The LOC is secured by the accounts receivable and other assets of the Company and has an interest rate of the National Prime Rate as published by the Wall Street Journal (8.5% at December 30, 2023).On December 30, 2023,the Company had $0 of borrowings under this LOC and its borrowing base at the time would have permitted an additional $3.0 million to have been borrowed. The LOC remains in effect until terminated per mutual agreement by both parties. Total Interest Expense for2023** was $0 and was $0 thousand for2022.

(8) Notes 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 athird 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%.

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

Total interest expense on notes payable during2023 was $5,096 and during2022 was $7,954.

(9) Income Taxes

Components of income tax expense (benefit) for each year are as follows:

Deferred tax assets as of** December 30, 2023and December 31, 2022**are as follows:

A summary of the change in the deferred tax asset is as follows:

Income tax expense is different from the amounts computed by applying the U.S. federal statutory income tax rate of 21 percent to pretax income as a result of the following:

The Company’s income tax filings are subject to review and examination by federal and state taxing authorities. The Company is currently open to audit under the applicable statutes of limitations for the years2020 through2023.

(10) Retirement Savings Plan

The Company sponsors a Retirement Savings Plan (the ‘Plan’) under the provisions of Section401 of the Internal Revenue Code. Employees, as defined in the Plan, are eligible to participate in the Plan after30 days of employment. Under the terms of the Plan, the Company** maymatch employee contributions under such method as described in the Plan. During2023** the Company elected to match1% of each of thefirst 4% of employee contributions paid proportionally each pay period amounting to $232 thousand. In2022 the Company elected to match ½% of each of thefirst 4% of employee contributions paid proportionally each pay period amounting to $94 thousand*.*

(11) Concentrations of Credit Risk, Significant Customers and Geographic Information

Financial instruments which subject the Company to concentrations of credit risk consist principally of cash, cash equivalents and trade accounts receivable. The Company maintains cash deposits in a sweep account, whereby funds are automatically moved in increments of*$250,000* to various FDIC insured financial institutions on a nightly basis.

The Company extends credit to customers who consist principally of microelectronics systems companies in the United States, Europe and Asia. The Company generally doesnot require collateral or other security as a condition of sale rather relying on credit approval, balance limitation and monitoring procedures to control credit risk of trade accounts receivable. The Company also maintains a credit insurance policy covering most of its non-US customers to further mitigate credit risk. Management conducts on-going credit evaluations of its customers, and historically the Company hasnot experienced any significant credit-related losses with respect to its trade accounts receivable.

Revenues from significant customers as a percentage of total revenues in2023 and2022 were as follows:

As of** December 30, 2023,**the Company had trade accounts receivable due from these three customers that accounted for 50% of total trade accounts receivable as of that date. To further mitigate the potential for credit losses the Company has acquired a credit insurance policy covering most of our sales to non-US accounts. Management believes that any credit risks have been properly provided for in the accompanying financial statements.

The Company’s revenue was derived from the following countries in2023 and2022:

Many of the Company’s customers based in the United States conduct design, purchasing and payable functions in the United States, but manufacture overseas.

All of the Company’s long-lived assets and operations are located in the United States.

(12) Net Income Per Share

The following reconciles the basic and diluted net income per share calculations.

(13) Commitments and Contingencies

We are subject to contingencies, including legal proceedings and claims arising in the normal course of business that cover a wide range of matters including, among others, contract and employment claims; workers compensation claims; product liability; warranty and modification; and adjustment or replacement of units sold.

Direct costs associated with the estimated resolution of contingencies are accrued at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, willnot have a material adverse effect on the consolidated financial position or results of operations. It is possible, however, that future results of operations for any particular future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of our control.

Notwithstanding the above, the Company has received a letter from an attorney representing a former European sales representative alleging that under European law the representative is entitled to compensation as a result of his termination. The Company completely disagrees with the claims. Should this result in litigation the Company will defend itself to the fullest extent of the law and estimates any losses incurred to be immaterial.