CPS TECHNOLOGIES CORP/DE/ Revenue Disclosure

(2)(f) Revenue Recognition

 

Revenue is recognized in accordance with the five-step method under Accounting Standards Codification (ASC) 606, “Revenue from Contracts with Customers.”

 

Identifying the Contract with the Customer

The Company identifies contracts with customers as agreements that create enforceable rights and obligations.  In the case of a few large customers the Company has executed long-term Master Sales Agreements (“MSA”).  These are umbrella agreements which typically define the terms and conditions under which a customer can order goods from CPS.  These in themselves do not constitute a contract as no products are committed to be transferred and the customer has no obligation to make payments. In the case of SBIRs an enforceable contract is signed by both the customer and CPS.

 

The Company contract is only enforceable once both parties have approved it and is usually in the form of a written purchase order from a customer combined with acknowledgement from the Company.

 

In cases without an MSA, the customer submits a print for a product, the Company provides a quote, and the customer responds with a purchase order.   In these cases, the Company’s acceptance of the purchase order constitutes an enforceable contract.

 

Identifying the Performance Obligations in the Contract

For each contract, the Company considers the promise to transfer products, each of which are distinct, to be the identified performance obligations. For SBIRs the Company is obligated to provide certain services over the life of the agreement and the customer is obligated to pay for those services, generally monthly, as they are performed.

 

Shipping and handling activities for which the Company is responsible are not a separate promised service but instead are activities to fulfill the entity’s promise to transfer goods. Shipping and handling fees will be recognized at the same time as the related performance obligations are satisfied.

 

The Company provides an assurance-type warranty.  This guarantees that the product functions as promised and meets specifications.  Under its terms and conditions, the Company offers a 30 day warranty and replaces defective or non-conforming products.  The expense of replacement is recorded at the time the Company agrees to replace a defective or non-conforming product.  This assurance type warranty is not considered to be a distinct performance obligation.

 

Determining the Transaction Price

The Company determines the transaction price as the amount of consideration specified in the contract that it expects to receive in exchange for transferring promised goods or services to the customer. Amounts collected from customers for sales value added and other taxes are excluded from the transaction prices. Product sales are recorded net of trade discounts and sales returns.  The Company will establish a reserve for product returns when necessary based on returns history and specific circumstances in which the Company anticipates returns to occur. Such product return reserves are recorded as a reduction to revenue. 

 

If a contract includes a variable amount, such as a rebate, then the Company estimates the transaction price using either the expected value or the most likely amount of consideration to be received, depending upon the specific facts and circumstances. The Company includes estimated variable consideration in the transaction price only to the extent it is probable that a significant reversal of revenue will not occur when the uncertainty is resolved. The Company updates its estimate of variable consideration at the end of each reporting period to reflect changes in facts and circumstances. As of December 28, 2024 there are no contracts with variable consideration.

 

When credit is granted to customers, payment is typically due 30 to 90 days from billing and accordingly our contracts with customers do not include a significant financing component.

 

Allocating the Transaction Price to the Performance Obligations

In virtually all cases the transaction price is tied to a specific product or service in the contract obviating the need for any allocation.

 

Recognizing Revenue When (or as) the Performance Obligations are Satisfied

The Company recognizes revenue at the point in time when it transfers control of the promised goods or services to the customer, which typically occurs once the product has shipped or has been delivered to the customer or the service has been performed. Occasionally, for the purpose of ensuring a steady flow of products, the Company ships products on consignment. In these instances, delivery is deemed to have occurred when the customer pulls inventory out of the warehouse for use in their production, or upon a specified period as agreed upon by both parties.  As of December 28, 2024 there are no products on consignment.

 

The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. The costs are recorded within, selling, general and administrative expenses.

 

The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.