CPS Technologies Corp.

Good afternoon, ladies and gentlemen, and welcome to the CPS Technologies Third Quarter Earnings Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Chuck Griffith. Sir, the floor is yours.

Thank you, Matthew, and good afternoon, everybody. I'm joined by Michael McCormick, our President and Chief Executive Officer, as well as Anthony Kosky, our Chief Development Officer. Michael will present his comments on our third quarter results. But before we begin the business portion of the call, I would like to point out that statements in this conference call that are not strictly historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be considered subject to the many uncertainties that exist in CPS's operations and environments. These uncertainties include the impact of COVID-19, the Russian invasion of Ukraine, economic conditions, market demands, and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statement. Now, I'll turn the call over to Michael to offer his perspectives on the third quarter results.

Thank you, Chuck, and good afternoon, everyone. We are pleased to once again be reporting positive and growing results to our investors. Today, we are delighted to announce revenues of $6.7 million and an operating profit of $709,000 for the quarter ending October 1, 2022. This is a 22% increase compared with the revenues of $5.5 million and a dramatic increase compared to the loss of $88,000 in operating profit for the corresponding quarter a year ago. We are pleased to report that revenues in the third quarter of 2022 were the second highest in the company's history, with Q2 being the highest. And we have now consecutively delivered the top three quarters in revenue performance in the company's 38-year history. The optimistic news with the growth in revenue is also coupled with further good news with our book-to-bill ratio. For the past quarter, our book-to-bill ratio was over two. And on the trailing four quarters, the basis by which we measure ourselves is 1.36%. This is above our organic breakthrough and most importantly calculated upon a growing revenue base. On a fiscal year to date basis, our operating profit of 1.9 million compares to 201,000 for the first nine months of 2021. This is an increase of 858%. I'm very proud of the team's efforts to continue driving new business and operational efficiencies as we gain momentum in realizing the success of our strategic initiatives. We continue to perform and exceed against our operating plan, and we are on pace for a record year in 2022. We are continuing to remain vigilant on ensuring availability of raw goods throughout our supply base. The larger concerns today involve the impacts of inflation, logistics delays, and a limited labor force. We are not immune to these challenges, but we continue to diminish the possible impacts through proactive planning. To date, none of these issues has had a significant impact on our customers. While inflation affects both wages and material costs, we have been able to mitigate these in the form of permanent increased manufacturing efficiencies coupled with incremental price increases. In an uncertain overall economic environment, we remain very pleased with our third quarter performance and confident in our outlook. I'll speak more later about the overall business progress moving forward, but for now, Chuck will discuss the financial details in more detail. Thank you.

Thank you, Michael. So revenues totaled $6.7 million in Q3 2022 compared to $5.5 million generated in Q3 2021, an increase of 22%. This increase was due primarily to increased shipments of armor panels. For the first nine months of 2022, revenues totaled $20.5 million compared with $16.2 million for the nine months of 2021. The revenue over the first nine months of 2022 represents the best nine-month period in company history. Gross margin in Q3 2022 totaled $1.9 million, or 28% of sales. This compares with gross margin in Q3 2021 of $1.1 million at 19% of sales. This increase in margin was primarily due to the impact of higher sales on fixed factory costs as well as product mix. For the first nine months of 2022, gross margin totaled $5.7 million compared to $3.4 million for the first nine months of 2021. Selling general and administrative expenses, SG&A, totaled $1.2 million in Q3 2022 and remained steady when compared with SG&A expenses of $1.2 million in Q3 2021. For the first nine months of 2022, SG&A totaled $3.8 million compared to $3.2 million for the first nine months of 2021. The company experienced operating income of $708,000 in Q3 compared with an operating loss of $88,000 in Q3 21. This increase in operating income is due primarily to the increase in revenue and gross margin previously discussed. For the first nine months of 2022, operating income totaled $1.9 million compared to $201,000 for the first nine months of 21. This represents our highest opening nine months in operating income in CPS's history. Turning to the balance sheet, we ended the quarter with $5.6 million of cash, increasing from $5.1 million on hand at the end of 2021. The increase in cash was primarily due to our net profit offset by increased accounts receivable and inventory to support our higher sales levels. Although it remains open and available to us, no additional cash was raised under the ATM program in the third quarter of 2022. Accounts receivable at October 1st, 2022 totaled $5.8 million, up from $4.9 million at December 25th, 2021. This increase includes an other receivable of $641,000 for the employee retention tax credit. Excluding the ERTC, our days sales outstanding totaled 69 days at the end of the quarter, the same as the 69 days for the year ended 2021. Inventories totaled $4.9 million at October 1st, 22, compared to $3.9 million at December 25th, 21. This increase in inventory is due to increased work in process and raw materials needed to support our expected sales growth. The inventory turnover in the most recent four quarters was 4.5 times, a small reduction to the 4.7 times for the period ended December 25th, 21. Turning to the liability side, payables and accruals totaled 2.9 million, down from 3.2 million at December 25th, 21. This change is due to final payments in 2022 of accruals for last year's restructuring costs. And for further discussion, I'd like to turn the call back over to Michael.

Thank you, Chuck. The year-to-date revenues, bookings, and operating profits of the business are the best in the company's 38-year history. We are excited by the path we are on, but we still must execute to complete this record year of performance. We are committed to creating positive outcomes for our customers, and a growing more confident and continued positive financial results will also be achieved for our shareholders. This past quarter, CPS has achieved multiple strategic wins that are a direct result of the team's ability to execute on our growth initiatives. In Q3, we received the largest single order in the company's history at $8.8 million for ballistic protection systems upgrades for the U.S. Navy aircraft carriers. utilizing cps's proprietary hybrid tech armor technology in addition i'm also glad to share with you that our team successfully qualified several new hermetic packaging parts with a key new tier one customer resulting in an initial production order valid at one million and future initial projections at two to three times that starting in fiscal year 23 and continuing for years The armor order to support the Navy will more importantly allow us to make detailed plans to present to the Navy on how we can continue to deliver armor faster and more efficiently. As you are aware, there are many surface ships in the U.S. Navy that have similar needs to provide crucial crew protection while sailors and Marines carry out their mission. In addition, the U.S. Navy, we have been in dialogues with both the Coast Guard and Allied Navies. They have similar protection requirements that we are actively pursuing. As you can see in the news about the conflict in Ukraine, ships are constantly at risk due to asymmetric threats. Swarms of drones or unmanned aerial vehicles, UAVs, have demonstrated the ability to sink surface vessels. We need more armor on naval vessels to ensure our sailors and Marines can fight back against this emerging threat, as well as be protected from legacy kinetic energy threats. The company continues to improve and deliver on our commitments to customers and shareholders. These are, pardon the pun, electrifying times here at CPS. All our existing product lines, metal matrix composite, hermetic packaging, and armor continue to perform on a slightly ahead of plan. In addition, with our multiple contract research and development, C-RAD, contracts with various U.S. government agencies, we now have a fourth product line in the business. The CRAD, as we call it, line is focused on creating, productizing, and delivering products intellectual property-based solutions directly to the government, Tier 1, and OEM customers. These new IP-based opportunities are significantly more substantial in value and similarly take a bit more time to transition from possibility to testing, to first article, to full rate protection. However, we're off to a great start with our CRAT efforts and look forward to providing updates early next year on this growing part of our business. Driving new business and increasing sales is the primary objective in continuing our positive momentum and entering CPS's next phase of growth. We recently reorganized our sales team, now operating as business development with our traditional transition and leadership. Cheryl Oliveira, our longtime vice president of sales, will be retiring soon in 2023. Cheryl is an amazing person, colleague, and friend. Her tenacity, experience, and knowledge will be difficult to replace. but we all wish her the best in her future endeavors. As of the 1st of October, the leadership of the reorganized business development team has then transitioned to Anthony Kosky, our corporate development officer. Anthony joined CPS in April of this year and has focused on executing strategic initiatives. Anthony brings over 12 years of defense acquisition and business development experience, having held leadership roles in both the Department of Defense and defense industry. As a salesperson myself, I recognize potential sales greatness when I see it, and I see it in Anthony. We are quite fortunate to have two great leaders of our business development group back-to-back with Cheryl and Anthony. I'm confident under Anthony's leadership and supported by our fantastic team, Greg Weatherman, Judy, and Kevin, we will achieve our near and long-term goals for growth and probably sooner rather than later. The business development team is focused on building the near-term pipeline of high-value opportunities that could be converted to significant production orders within 24 months. We are actively engaged in converting multiple significant opportunities across all business lines. Active near-term opportunities are primarily for thermal management and ballistic protection applications in aerospace and defense and vehicle electrification markets. These opportunities are at various stages of approval and implementation, but because these solutions are competitive, we treat them with abundance of caution prior to any public release. I will say that our recent success in passing first article tests and converting to low-rate initial production with a key aerospace customer in Q3, we are demonstrating our business development and technical team's ability to identify and convert new material solutions. This is just the beginning. CPS is focused on converting potential opportunities into products. These products will generate revenue and profits for our investors in the near and long term. This is how we are realizing shareholder value. We are equally committed to both customers and shareholders. I have already shared with you how bullish we are on AMA and our work in the aerospace and defense market. We are also very excited about the potential of CPS in the electric and hybrid electric vehicle markets, as well as in building the infrastructure to support these markets. This does have the potential to be a breakout prop for us. Perhaps not tomorrow or in 2023, but the potential is there. We are currently working with a customer who is selling to major automotive manufacturers and are seeing significant growth in our business with them. That business is not necessarily enough to move the needle today, but it's trending in the right direction. In fact, our bookings expected to convert in Q4 are greater than three times our year-to-date sales with this customer through September. So the business prospects are trending positively, but there's still a lot to do over the next few years. In general, we seek to have a stable potential breakout products in our pipeline of opportunities, but realize that to be a true breakout product, it takes time and comes with patience, diligence, and a boatload of hard work. I would like to All the shareholders to hear directly once again from me, we have three large initiatives ongoing to realize shareholder value. Number one, we have purposely decided to operate principally in two markets, infrastructure and aerospace and defense. We have chosen these markets because they are large and different markets with multiple paths to success. Success to CPS is a multi-year, multi-million dollar product opportunity that align with our core competencies as a material science firm. We provide proprietary lightweight armor that is completely aligned with the U.S. Defense modernization efforts. We provide metal mixes, composites, and hermetic packages that make electronics work more efficiently and last longer, both here on the planet Earth and in space. Lastly, we provide EV transportation infrastructure enabler products that allow the entire economy to realize it's full of potential, in addition to supporting our national goals of on or reshoring critical technology manufacturing in the USA. Number two, we have graduated from small business universities. For years, we've been sharing with customers and investors the variety of benefits of our material solutions without realizing the full results of these initiatives. With new leadership in place throughout the company, we are now demonstrating that we can credibly deliver profitability and growth quarter over quarter, half year over half year, and fiscal year to fiscal year. We are ready to take the next step in our growth plans. Lastly, number three, we were formed to be and are operating as a materials technology company that is in constant pursuit of solutions through the advanced application of materials science. We want to solve customers' most demanding challenges. We thrive on working under pressure to deliver solutions that not only solve customers' issues, but also reward our investors for staying with CPS for this long journey. Beyond fiscal year 22, we remain guidedly optimistic that our collective growth initiatives, specifically in longer, new-term product development investments, will expand the current product lines both in terms of revenues and earnings. The recent hybrid tech armor award supporting the U.S. Navy, a record order for CPS, and recent wins qualifying new products to expand the hermetic package product line will ensure we sustain this momentum in and through fiscal 23. As previously reported, the growing CPS technical team is executing several early phase contract research and development wins with promising results technically and potential for phase two awards next year. Collectively, the business and product development teams are growing our pipeline of high-value opportunities. As an organization, we continue to make measured investments to increase our capacity and ability to scale as we prepare for the next phase of growth. We at CPS all believe we are on the right path to creating inherent shareholder value, and now we'd like to explore doing this faster. Lastly, on behalf of the company, we'd like to pass on our condolences to the family and friends of Norm Wexler. We recently became aware of his passing at the last quarterly report. Norm was the largest individual shareholder in CPS. He was passionate about the long-term application of material science to create life-changing products for the betterment of mankind. He will be sorely missed. I'm always thankful to the investors in the board for entrusting me to lead this amazing company. So with that, I will complete my prepared opening remarks, and Chuck and I will take any other questions.

Matt? Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset, if you're listening on speakerphone, to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Please hold while we poll for questions. Your first question is coming from Michael Massero. Your line is live.

Hey, good afternoon, guys. Congratulations on an absolutely incredible quarter, incredible year, all the new contracts and everything. Everything seems to be heading in the right direction. Just wanted to talk about shareholder value. Just wanted to talk a little bit about the equity, um, just to kind of like, I don't know if you guys use an investor relations department or just to see what's going on to how the equity maybe can get more noticed, so to speak. Um, just kind of seems to lag, but you have everything going on. Congratulations. And I'll let you guys take the floor.

Uh, Chuck, I'll take this one. Hey, Michael, thank you for, uh, your, your positive feedback. Uh, In fact, we just had a board meeting last week that continues to be a very big topic, investment relations, and we are finalizing our selection of how we're going to proceed. I think we have a course of action. We have two or three companies, Michael and others, and we'll probably be making the decision in Q4 and moving out. The business is growing, obviously, but the value proposition remains the same at what I just described. articulated. So yes, more to follow. But yes, we agree and soon to follow.

All right. Awesome. Thank you, John. Appreciate it. Congratulations again. Thanks, Michael.

Thank you. Your next question is coming from Erwin Gomberg. Your line is live.

I think guys, congratulations on a really strong quarter. I have three questions about the dramatic package market. One, How large is the hematic package market? Two, what percent of the market has CPS captured? And three, what percent of the market do you expect CPS to capture in a few years?

Hi, Erwin. It's Michael again. Thank you for the questions. You know, the hematic packaging business is quite large. We think that there is opportunities for us to in the near term, double of play within the hermetic packaging line. I think this year, we're probably on pace for 10 plus million, we probably could within two years double that. And that's, that's kind of what our goal is in the near term. With hermetic packaging. One of the beauties about hermetic packaging We're the only ones who can offer a ALSIC hermetic package, a world-class application of two of our product lines. And we think there's nothing but positive things ahead for us with hermetic packaging, our history of glass-to-metal seals, glass-to-ceramic seals. So, again, the percentage of the overall market to be determined, what we think we can address in service, we think is twice what we're doing today in the near term, 24 months.

And longer term, even more?

I think so too, right? And obviously we have competitors in this space, but we continue to outshine and outperform them. And, you know, we'd have to collect more performance and then have more breakthrough products. We just discussed shortly, you know, we had a very nice hematic packaging dealing with class this week that we sold to a tier one. They really liked our performance. We think that's, you know, going to convert from, you know, 1 million this year to, you know, 3 million next year. And we'll see where it takes us. But, you know, we have lots of opportunities in that. And as you know, I mean, you send me maybe 50 press releases a week. So I do read them, I assure you. And we staff them internally. And so we appreciate the heads up of where to look. And we're trying to grow the business as fast and as possible, but we're also trying to recognize we want to stay over our skis, right? We've waited a long time for the success, and we don't want it to be short-term.

Right. Does any other competitor have LSIC? No. Correct.

That's our distinguishing characteristic in the medical packaging business.

Right. Okay. Thanks a lot for the update. I appreciate it.

Appreciate it, Aaron. Thank you. Thank you. Your next question is coming from Stephen Fossey. Your line is live.

Hi, good afternoon. So can you comment perhaps about the hybrid tech armor order? How much of that, how long it would take, you say, to fill that order?

Oh, yeah.

How are you?

I'll talk briefly about it, and if I can add more, I'll let you know. I mean, obviously, we're very excited about the armor order. It reflects more than five aircraft carriers' worth of armor. We continue to build, deliver. The issue with armor is that aircraft carriers a very critical asset to the U.S. Navy and the national protection, and they don't spend a lot of time in dry dock or in dock in general, Steve. So we have to have a very coordinated schedule about when we deliver, when it gets installed, et cetera, et cetera. So we know at least one ship set is on, but we've delivered two, maybe three at this point. But it's really availability of the aircraft carriers. And then obviously with the uncertainty, you know, with the South China Sea, the Ukraine thing, you know, I don't see many aircraft carriers coming in. anytime soon, but I'm not in charge of national security. It's a very difficult thing to time out. It's a critical asset. It's four sovereign acres of U.S. soil at sea around the world. It's a tough asset to get on. I'm very proud that we're on it. I wish we were on more faster, but we have to get them to come in to dock. So I think we're probably on a pace, just like the Navy has articulated to us, probably two or three carriers a year plus other aircraft, other surface vessels, as they see, and we'll keep going from there.

Okay. If I could just follow up quickly on that. I think it was a little confusing the way I first asked the question. How much of that capacity of... Do you have extra capacity to make panels versus... what the Navy is currently demanding?

Yeah, so obviously, I think you've been to the facility, right? I have, yeah. Yeah, so we're only doing one shift of armor manufacturing, right? So I can tell you that we can triple the output without tripling the footprint, right? I mean, Dan Barton, our operations guy, is probably... you know, driving a car into a tree as we talk, but we certainly have the capacity today to triple the amount of armor we're doing. And we have plans to make that, you know, six times what we're doing today with relative ease. So I think right now, you know, we continue to train, deliver, prospect for new armor opportunities, and see what happens.

Okay, good. Thank you.

Thanks, Steve. Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star then 1 on your phone at this time. Your next question is coming from Warren Silver. Your line is live.

Good afternoon, gentlemen. I'm proud to say that the company is making a transition into actual manufacturing and volume. One thing I'm concerned about is manufacturing. WorkSpeed, formerly Cree, announced that they were using our product line and all their silicon carbide production. And then the other day, Tether, the Indian conglomerate, announced that they manufacture Land Rover and Jaguar, that they're using the work speed for all their EV production. Can you elaborate on that, what the potential is? And the workforce has spent a billion dollars in a new plant in North Carolina. and I think they have one in New York State. And what is our capacity to supply them, or how many products are they using from our production?

Hey, Warren, it's Michael. How are you?

Okay, pretty good. I'm 85 years old now, and I recently retired from Wall Street after 60 years on June 30th. I'm sorry to hear that the other fellow, Norm, passed away. I always listen to his comments over the years. And if they could speed up the growth at 85, I'd appreciate it.

Well, nobody on the planet is getting younger. As to your question, I mean, I really can't speak for Wolfspeed or Cree. You would have to refer your questions to them. But as you know, they are clients of ours. And we do have a lot of products with them. We have a lot of dialogue going on with them. And we have a lot of opportunity with them, Warren. And so for me to comment specifically on what we're doing with this client in particular and match it up to their press releases, would probably be premature on my part. But I will tell you this, that we are continuing to see progress. Not all of it's positive. Some of it goes a little sideways. It's the product business. But we do continue to be their manufacturer of choice when it comes to MMCs. So we like that position. We like to keep creating that. And to your point, There are many high-end positive decisions that would have to be made similar to what they have had to make with their decisions with Arkansas and North Carolina. But if you want to know specifically from Wolf Speed and Cree, you'd have to call them. So I hope that helps, Warren. I just can't speak for them.

I understand. Well, congratulations again for a great quarter, and it seems that everyone is optimistic, and I hope the economy holds up, and good luck.

Thank you, sir. Thank you. As a final reminder, ladies and gentlemen, if you have any questions or comments, please press star then one on your phone at this time. Please hold while we poll for questions.

There are no further questions in the queue.

Okay. Matthew, this is Michael. And for those of you who are still on, thank you, everybody, for listening in today. I'm sure the transcript will be out shortly. I think a lot of positive things are going on at the firm. Chuck, myself, Anthony, Dan, C. Katcher, the leadership team. We think we're on the right path, and we appreciate the continued support by our investors and colleagues. So with that, Matt, I'll say good night.

Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.