CPS TECHNOLOGIES CORPDE

Balance Sheets (Unaudited)

(continued)

Balance Sheets (Unaudited)

(concluded)

Statements of Operations and Other Comprehensive Income (Unaudited)

CPS TECHNOLOGIES CORP.

STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 28, 2024 AND SEPTEMBER 30, 2023

Statements of Cash Flows (Unaudited)

Notes to Financial Statements

(Unaudited)

(1) Nature of Business

CPS Technologies Corporation (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 which are a combination of metal and ceramic.

CPS also assembles housings and packages for hybrid circuits. These housings and packagesmayinclude components made of metal-matrix composites or theymayinclude 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 also engages in research and development, in some cases government funded and in others internally funded, focused on developing new products in response to customer requirements. These products expand our offerings in existing markets and enable penetration into new markets.

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

(2) Summary of Significant Accounting Policies

As permitted by the rules of the Securities and Exchange Commission applicable to quarterly reports on Form10-Q, these notes are condensed and donot 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 atDecember 30, 2023has been derived from the audited financial statements at that date, but doesnot 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 Form10-K for the year endedDecember 30, 2023and 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.

The results of operations for interim periods arenot necessarily indicative of the results to be expected for the full year.

(3) Cash, Cash Equivalents and Restricted Cash

Our cash and cash equivalents are carried at fair value and consist primarily of cash, money market funds, cash deposits with commercial banks, U.S. government bonds and notes, and highly rated direct short-term instruments with an original maturity of 90 days or less. The Company has a restricted cash account in the amount of $84,715, as of September 28, 2024 to cover an open letter of credit for overseas purchases. Upon presentation of documents evidencing shipment of these goods, the issuing bank will draw on this account and make payment to the vendor. There wasno restricted cash as of December 30, 2023.

(4) Marketable Securities

Investments consist of U.S. Treasury Bills with maturities up to one year. Since it is not currently managements intention to hold these debt securities until the maturity dates, these have been classified as available-for-sale (“AFS”) and are recorded on the balance sheet at fair value, with changes in fair value recorded as a component of other comprehensive income.

(5) Fair value ofMarketable Securities

ASC 820,Fair Value Measurements (“ASC 820”) states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The three-tiered fair value hierarchy, which prioritizes which inputs should be used in measuring fair value, is comprised of: (Level I) observable inputs such as quoted prices in active markets; (Level II) inputs other than quoted prices in active markets that are observable either directly or indirectly and (Level III) unobservable inputs for which there is little or no market data. The fair value hierarchy requires the use of observable market data when available in determining fair value. CPS’ marketable securities consist solely of US Government bonds with a maturity of 12 months or less and which fall under Level II of the fair value hierarchy. The fair value of these bonds as of September 28, 2024 was $1,020,952. CPS heldno investments in marketable securities as of December 30, 2023.

(6) 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. Had there been a profit in Q3 2024, the dilutive effect would have been 1,471 shares.

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

(7) Commitments & Contingencies

Commitments

Operating Leases

The Company hasone real estate lease expiring inFebruary 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 of12 months or fewer.

The real estate lease expiring in2026 (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 donot contain any material residual value guarantees or material restrictive covenants.

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 inMarch 2026through*February 2032.*Annual rental payments range from $160 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 lease as ofSeptember 28, 2024:

Operating Lease Costs and Cash Flows

Operating lease cost and cash paid was $41 thousand during thethird quarter of2024 and $123 thousand for thenine months ended*September 28, 2024.*These costs are related to its long-term operating lease. All other short-term leases were immaterial.

Finance Leases

The company doesnot have any finance leases.

(8) 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 endedSeptember 28, 2024,no stock options were granted to employees under the Company’s2020 Equity Incentive Plan Stock Incentive Plan (the “Plan”) andno stock options were granted to outside directors during the quarter endedSeptember 28, 2024. During the quarter endedSeptember 30, 2023,a total of 229,500 stock options were granted to employees under the Company’s2020 Equity Incentive Plan Stock Incentive Plan (the “Plan”) andno stock options were granted to outside directors during the quarter endedSeptember 30, 2023.

During thethree andnine months endedSeptember 28, 2024,there were 60,000 options exercised and corresponding shares issued at a weighted average price of $1.50. During thethree andnine months endedSeptember 28, 2024,53,100 and 69,200 options were forfeited, respectively, andnone expired. During thethree andnine months endedSeptember 30, 2023, there were 55,000 and 141,001 options exercised and corresponding shares issued at a weighted average price of $2.65 and $1.78, respectively. During thethree andnine months ended*September 30, 2023,*27,400 and 233,000 options were forfeited andnone and 25,000 expired, respectively.

During thethree andnine months endedSeptember 28, 2024,the Company repurchased 53,255 shares for employees to facilitate their exercise of stock options. During thethree andnine months ended*September 30, 2023,*the Company repurchased 47,329 and 72,256 shares, respectively, for employees to facilitate their exercise of stock options.

There were also 984,800 options outstanding at a weighted average price of $2.68 with a weighted average remaining term of 6.73 years as of*September 28, 2024,and there were 543,800 options exercisable at a weighted average price of $2.58 with a weighted average remaining term of 5.13 years as ofSeptember 28, 2024.The Plan, as amended, is authorized to issue 1,500,000 shares of common stock. As ofSeptember 28, 2024,*there were 626,400 shares available for future grants under the 2020 Plan and 248,400 shares outstanding under the 2009 Plan.

As of*September 28, 2024,*there was $604 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 3.15 years.

During thethree andnine months ended*September 28, 2024,*the Company recognized $44,480 and $249,922, respectively, as shared-based compensation expense related to previously granted shares under the Plan. These amounts are included as a component of selling, general and administrative expenses in the statement of operations.

During thethree andnine months endedSeptember 30, 2023, the Company recognized $27,941 and $175,698, respectively, as shared-based compensation expense related to previously granted shares under the Plan. These amounts are included as a component of selling, general and administrative expenses in the statement of operations.

(9) Inventories

Inventories consist of the following:

(10) Accrued Expenses

Accrued expenses consist of the following:

(11) Line of Credit

InMay 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 (8.0% atSeptember 28, 2024). On*September 28, 2024,*the Company had $0 of borrowings under this LOC and its borrowing base at the time, consisting of eligible accounts receivable, would have permitted an additional $2.9 million to have been borrowed. The line of credit remains in effect and has been extended to August 5, 2025.

(12) Note Payable

InMarch 2020,the Company acquired inspection equipment 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 equipment 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 during2024 was $1,917.

(13) Income Taxes

A valuation allowance against deferred tax assets is required to be established or maintained when it is "more likely thannot" that all or a portion of deferred tax assets willnot be realized. Management has determined that a valuation allowance is not needed as it expects that the deferred tax asset will be fully utilized.

For thethree and nine months ended September 28, 2024 the deferred tax asset was increased $372,683 and $680,259 for the estimated tax benefit on Q3 and year to date net losses, respectively.