CPS Technologies Corp.

Good morning, everyone, 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 questions after the presentation. It is now my pleasure to turn the floor over to your host, Chuck Griffith of CPS Technologies. Chuck, over to you.

Thank you, Jenny, and good morning, everyone. Today I'm joined by Brian Mackey, our president and CEO of We look forward to discussing our first quarter results with you. But first, Chris Whitty, our investor relations advisor, will provide a brief safe harbor statement. Chris? Thanks, Chuck, and good morning, everyone. Before we begin the business portion of today's 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 format of 1995. and should be considered as subject to the many uncertainties that exist in CPS's operations and environment. These uncertainties include, but are not limited to, the wars in Ukraine and Israel, other geopolitical events, economic conditions, market demands, and competitive factors. Such factors could cause actual results to differ materially from those in any four of the two statements. Additional information can be found in our filings with the SEC. Now we'll turn the call over to Brian to offer his perspective on the first quarter highlights, Afterwards, Chuck will review the financial results in greater detail. Ron? Thank you, Chris. First quarter revenue was $5.9 million with an operating loss of approximately $250,000. Revenue declined year over year due to production constraints related to continued quality control testing as well as production inefficiencies due to labor shortages and turnover. Bottom line results were negatively impacted due to non-revenue-producing spend in the first quarter, which I will discuss in more detail later. We anticipate that while demand remains strong across our product portfolio, the coming quarters, as we've discussed in the past, will also face headwinds from the anticipated drop-off in near-term armor revenue. I'll now turn the call over to Chuck to provide more details about our financial results, after which I'll provide some additional detail. Chuck? Thanks, Brian. As mentioned earlier, the company's revenue totaled $5.9 million in the first quarter compared with $7.1 million last year. We've had some level of difficulty filling opening manufacturing positions. Additionally, while we are cautiously optimistic that our quality issues have been resolved, we continue to run tests which occupy machine time that would otherwise have been spent on production for customers. We do, however, believe that strong demand across our other offerings should lead to top-line growth as the year progresses. In addition, our Navy partner, Kinetic Protection, remains cautiously optimistic about additional work for other Navy ship classes with contracts possible later than 2024. Gross profit in the first quarter totaled $.9 million, or approximately 15.3% of sales, compared with $2.2 million, or 31.6% of sales last year. This decrease was due to the lower sales volumes in Q1 2024 on consistent fixed costs, as well as the aforementioned testing being done on equality issues. That said, we anticipate gross margins to improve in the second half of 2024. Selling general and administrative, or SG&A, expenses totaled $1.2 million in the first quarter versus $1.6 million in the prior year period. as we remain focused on cost controls, even while investing in new business development initiatives aimed to accelerate long-term growth. The company had an operating loss of $260,000 in the first quarter, compared with operating income of approximately $694,000 last year, and we posted a net loss of $143,000, or one cent per share, versus net income of $459,000, or three cents per diluted share, in Q1 of fiscal 2023. Turning to the balance sheet, we ended the quarter with $8.7 million of cash versus $8.8 million at the start of 2024. Trade accounts receivable as of March 30, 2024, totaled $3.8 million versus $4.4 million as of December 31, 2023. Inventories totaled $4.6 million at the end of the first quarter, essentially equivalent with the $4.6 million at the end of the fiscal year. Turning to the liability side, payables and accruals totaled $3.3 million at the end of the first quarter versus $3.6 million as of the end of December. Now Brian will provide a more in-depth discussion of the first quarter. Thank you, Chuck. First of all, I would like to discuss CPS's vision for the future. Over the last few years, we've invested significant amounts of time, energy, and dollars to the growth of CPS, and we continue to do so. Today we have three more salaried engineers and material scientists than we did in Q1 of 2023, including the addition of a lead for new product introduction in the first quarter of 2024. These additions provide more depth for our technical team, enable us to be more responsive to customer requests, and improve our ability to win orders. Having said that, the financial return from these new personnel will take time to develop. As a direct example, in the first quarter we completed and shipped eight new first articles. This eight compared to two in the same period last year. These first articles are new parts which CPS has not made in the past, but if done successfully, will lead to significant production runs in the future. Some of these would be an expansion of our portfolio with an existing customer, while others indicate a business opportunity with a new customer. Producing these first articles is engineering intensive, and this was certainly one factor in the lower margins we saw in Q1. Nevertheless, we believe that incurring costs such as these today will be a significant contributing factor to the growth of CPS in the future. Also, our manufacturing licensing agreement with Triton Systems for Fiber Reinforced Aluminum Composites, or FRA, will soon set the stage for expanded offerings to address market needs. and defense markets provide insight into the market demands for strong, durable, and lightweight materials. FRA composites address these needs. As a reminder, FRA composites are comprised of high strength aluminum alloys discontinuously reinforced with short sporadic fibers. These materials have demonstrated high strength at elevated temperatures, lightweight, and superior endurance characteristics. which will facilitate the introduction of many new products for our military, commercial, and industrial end markets. We are on track to initiate our manufacturing trials for FRA composites later this quarter, and we have already begun speaking with customers about possible relevant applications. We're very excited to have these complementary products come to market. We also previously announced the award we recently received from the Massachusetts requested and received $200,000 to support the purchase of a 5-axis CNC machine. These funds expand our manufacturing capabilities and enable us to be more responsive to customer requirements. We have ordered this CNC machine and also expect to have this up and running later this quarter. Again, this will pave the way for higher production of hermetic packaging and other products later this year. In addition, while our current armor contract is coming to completion, we are cautiously working with kinetic protection, new Navy orders may be forthcoming later in 2024. We continue to believe these ballistic solutions have a large potential market across different types of ship classes as well as other military markets. We also continue to work with another customer on providing ballistic protection against higher threat levels. At the same time, we know that further SBIR opportunities, awaiting funding decisions from the DOE, DOD, and NASA, including four phase 1s and two phase 2s. These ongoing R&D efforts are enabling us to directly address clearly defined market requirements. I'd like to share some details from our most recently completed SBIR program, which effectively demonstrates our ability to address problems identified by our customers, in this case, the Department of Energy. DPS was initially funded $200,000 by the DOE in response to our proposal entitled Modular Radiation Shielding, Transportation and Use of Micro-Reactors. The problem statement focused on the ability to produce lightweight and low-complexity radiation shielding that would be of paramount importance to deployment of advanced nuclear micro-reactors. Lower shielding density promotes higher power density during transit for powered remote or mobile applications including mining operations, disaster relief efforts, shipping, and defense. During the nine-month phase one period, which ended just last week, CPS successfully incorporated its proprietary techniques related to both injection molding and metal matrix composites, or MMCs. We designed, fabricated, and evaluated a novel MMC consisting of an aluminum matrix with both tungsten and boron carbide reinforcement particles. The resulting composite offers both neutron and gamma radiation shielding, in an elegant, compact solution, as opposed to relying on multiple layers of dissimilar materials. Although further optimization is necessary, our baseline composite material demonstrated the capacity for neutron shielding and was highly effective at shielding gamma radiation at much lower mass compared to traditional materials. In fact, as a barrier to gamma radiation, our composite demonstrated performance similar to lead or tungsten variable volumes of both gamma and neutron absorbers. Our proposed solution will greatly reduce the mass of material needed while being highly customizable in size, shape, and composition. The novel CPS process improves upon existing research to fabricate integrated radiation shields by achieving greater reinforcement loading with a robust, cost-effective, and mature processing technology. It's a great accomplishment, especially for just a Phase I program. Our technical team was invited to present its results just last week at the National Reactor Innovation Center Program Review at Idaho National Laboratory. We're now following up on several leads which developed from that event. The feedback that our presentation received also highlighted the value of our approach for stationary applications, i.e., building construction, due to the dramatically reduced weight requirements. We are also awaiting DOE's response to our Phase 2 proposal, which, if awarded, would provide an additional $1.19 million in funding over a 24-month period. As you come to note, the tribes were very pleased with the results of this debate, which has already generated meaningful dialogue related to near-term opportunities for fielding our solution. DOD initiatives like Project Pele, which is working to demonstrate a mobile nuclear reactor for U.S. military applications, again demonstrate the potential dual uses for our novel material solutions. Although we do not control the timing of when our proprietary offering will enter the market, we continue to build our portfolio in service to our customers. Within the last few years, EPS has redoubled efforts to expand its product to meet new technology-based requirements. One key element of this has been our participation in the SBIR programs of various federal agencies. Within the past three years, five of our 14 Phase 1 proposals have been selected for award. Historically, the government's rate of funding Phase 1 proposals for all applicants has been about 20%. And this has been even more competitive in recent years, perhaps down 15%. So we're very pleased with our award rate so far, which is over 35%. This speaks volumes as to the capabilities of our team and our existing intellectual property. But more importantly, We see this award as an affirmation that we are addressing the problem statements of our customers as they define them within the context of the SBIR format. We know that providing such technical solutions will provide real growth opportunities going forward, many of which have potential applications with both commercial and military customers. In the meantime, we continue to fulfill the long-term supply agreements announced last year, providing power module components and systems for a variety of rail and other applications to a multinational semiconductor manufacturer. We remain on track for the shipment of product under this contract over the course of 2024. As I said earlier, we are actively bidding on opportunities to accelerate growth in the future while mitigating the negative impact this year due to the completion of our current naval armor contract. We continue to believe that expansion across other product lines should cover roughly half of the two And now let's open the call up for questions. Operator?

Thank you very much. We are now opening the floor for questions. If you have any questions, please press star 1 on your phone keypad now. We ask that while you're posing your question, you please pick up your handset if you're listening on a speakerphone to provide optimum sound quality. Please hold a moment whilst we poll for any questions. Just a reminder there, it is star one on your phone keypad if you would like to ask a question. I'm not seeing anyone come into queue. Oh, we do have a question in. Your first question is coming from Wolf Schick. Wolf, your line is live.