CPS Technologies Corporation Price & Performance (CPSH)

Thank you, Paul. Good morning, everyone. Today, I'm joined by Brian Mackey, our President and CEO. We We look forward to discussing our fourth quarter results with you. But first, Chris Witte, 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 Reform Act 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 ongoing conflicts in Ukraine and Israel, other geopolitical events, economic conditions, market demands and competitive forces. Such factors could cause actual results to differ materially from those in any forward looking statement. Additional information can be found in our filings with the SEC. Now, I will turn the call over to Brian to offer his perspective on the fourth quarter, after which Chuck will review the financial results in greater detail. Brian?

Thank you, Chris. Fourth quarter revenue for CPS was $5,900,000 with an operating loss of approximately $1,300,000 Sales declined year over year primarily due to the fulfillment of our U. S. Navy armor contract with Kinetic Protection as previously discussed. But in the fourth quarter, our top line rose significantly relative to third quarter of twenty twenty four due to increased customer shipments as our expanded production capacity came online. With strong customer demand, this trend of increasing growth is expected to continue through fiscal twenty twenty five with improving margins and other growth aspects of our business also taking hold. I'll now turn the call over to Chuck to provide further details about our financial results, after which I will provide some additional perspective. Chuck? Thanks, Brian. First of all, I'd like to thank everyone for their flexibility as we rescheduled this call from last week to this week. Effective for our 2024 audit, we have new auditors on board, PKF O'Connor Davies. We made the change to be sure to allow them to become sufficiently familiar with our company. We're impressed with their capabilities and are glad to have them in place as our auditors. As was just mentioned, the company's revenue totaled $5,900,000 in the fourth quarter compared with $6,700,000 last year.

In the year over year comparison, most of the change was due to the fulfillment of our armor contract with Kinetic Protection earlier this year. We're pleased that most of the recent quarter provided revenue that equaled our best quarter from earlier in 2024, which was Q1, even though there were significant armor shipments in Q1 and none in Q4. The recent growth in sales of our other product lines filled this sizable gap. While revenue growth is accelerating due to other program wins, Kinetic Protection remains cautiously optimistic about landing additional armor orders for other naval ship classes in the coming year. We believe our armor offering has support in Congress and at key levels within the U. S. Navy. In the meantime, we're benefiting from continued strong demand for power module components and related solutions from both new and existing customers. Our product development efforts are also progressing according to plan. For example, we've received several SBIR awards, which are expected to expand our product portfolio in response to customer demand. Brian will discuss this more in a moment. We reported a gross loss in the fourth quarter of $300,000 or approximately negative 4.6% of sales compared with a gross profit of $1,100,000 or 17% of sales last year.

This decrease was due to lower overall revenue and reduced manufacturing efficiencies along with costs associated with hiring and training the third shift as we've discussed in the past. Specifically, various non recurring costs were incurred in the quarter totaling nearly $600,000 These expenses were incurred as part of the ramp up of production volumes, including excess material costs, additional labor, training expense and other inefficiencies. We expect that such onetime expenses are behind us, and we anticipate gross margin will improve as volumes climb in fiscal twenty twenty five. Selling, general and administrative expenses totaled $1,000,000 in the fourth quarter, basically the same as last year in the fourth quarter, as we remain focused on controlling costs even while investing in new business development initiatives aimed to accelerate long term growth. We also had some one time costs this quarter related to retaining the new auditing firm. The company posted an operating loss of $1,300,000 in the fourth quarter compared with operating income of approximately $100,000 last year, and we reported a net loss of $1,000,000 or $0.07 per share versus net income of $200,000 or $0.01 per diluted share in Q4 of fiscal twenty twenty three. Turning to the balance sheet, we ended the year with $3,300,000 of cash and $1,000,000 in marketable securities as compared to $8,800,000 in cash and no marketable securities at the start of 2024.

Trade accounts receivable as of 12/28/2024, totaled $4,900,000 versus $4,400,000 as of 12/31/2023. Inventories totaled $4,300,000 at the end of the fourth quarter compared with $4,600,000 at the start of the fiscal year. Turning to the liability side, payables and accruals totaled $4,000,000 at the end of the fourth quarter versus $3,600,000 as of 12/30/2023. As I mentioned earlier, TKF O'Connor Davies is now in place as our new audit firm effective for the 2024 audit. We had used Wolfskin Company Wolf Ant Company for many years and would like to publicly thank them for their service on our behalf. We felt that a full review of our audit services was appropriate at this time last year. And based on their robust capabilities, pricing and strong track record, PKFO Connor Davies was the the firm we selected following that review. Now, Brian will provide a more in-depth discussion of the period. Okay. Thank you, and good morning, everyone, again. As Chuck just described, fourth quarter was difficult financially. But we also believe the company demonstrated concretely the promising path that we are on. As expected, it was a transitional period and we're on track for improved financial performance going forward.

We're very pleased that our third shift of production is fully operational. With ramped up weekly output, we saw our Q4 top line grow 40% sequentially from Q3. In addition, our margins are set to expand given that we had sizable non recurring expenses in fourth quarter as Chuck discussed. At the same time, we continue to rack up several wins that with ongoing strong customer demand align with our vision for fiscal twenty twenty five and beyond. Our core businesses of metal matrix composites and hermetic packaging are on solid footing. We are actively fulfilling the $13,300,000 contract that we recently finalized with a long standing semiconductor manufacturer to provide power module components through September of this year. We have been fulfilling this contract since October and our increased production capacity for various metal matrix composite products has materialized into greater shipping volumes to this and other key customers. As a reminder, our components are utilized primarily in high speed rail, wind turbines and electric vehicle applications. We anticipate continued strong demand. The course we've charted for CPS continues to build on these core product lines while also expanding our offerings. We are targeting new applications in key markets that have demanding technical requirements, which we believe our technologies and capabilities are uniquely suited to address.

In the past, I've talked about how we added internal five axis machining capability and leveraged $200,000 funding from the Commonwealth of Massachusetts to do so. We are now actively fulfilling orders that rely on this newly added proficiency. Early this summer, we expect to achieve the milestone of our first such customer shipment. Our new five axis machining resource for hermetic packaging is a prime example of how we are expanding the sales opportunities that we can effectively pursue for our existing product lines. More broadly, we intend to add new product lines to our portfolio over time with new products that leverage our proprietary know how, including the design, manufacture and testing of aluminum infiltrated products to deliver unique material properties. Notably, 2025 has started off with our first commercial order for radiation shielding, which is CPS' first new commercial product in many years. The accelerated timelines market of our radiation shielding is quite unusual and provides a strong endorsement for our technology and the approach of our technical team. Normally SBIR programs seek to achieve proof of concepts during a short Phase one program followed ideally by developing a workable product prototype during a longer Phase two.

When federal funding ends, a small business like ours faces the challenge of achieving commercialization. But in our case, our Phase II effort funded by the DOE started only six months ago. Even though we have eighteen months of funded development work remaining, we are in parallel now executing on a radiation shielding product order. While this order includes the potential for follow on orders, we are most encouraged by the market's endorsement of our value proposition. This market includes several potential applications that are of interest with each potentially benefiting from the lightweight and customizable solution we've developed. Similarly, on our fiber reinforced aluminum or FRA, under our license agreement with Triton, we are also working toward commercialization. We have established FRA manufacturing capabilities in facility and replicated the material performance results, including with third party testing that were originally achieved by Triton. This enables us to progress our discussions with potential customers. Based on FRA's relatively lightweight and higher strength at elevated operating temperatures, aerospace applications are one area of focus for us. We expect to have product samples in the hands of potential customers later this year. Internal efforts like these are augmented by the great success that we have had winning new externally funded development contracts, which build on our pursuit of SBIR funding, which we initiated in 2021.

Aside from the two active Phase II contracts which began in 'twenty four, we've been awarded three Phase I contracts since the beginning of 2025. This is simply spectacular and speaks volumes to our innovative technologies as well as our researchers advancing these new applications in response to the defined needs of our customers, particularly the Department of Defense. All three awards are with The U. S. Army and are worth $250,000 each over a six month period. Of these, two support next generation artillery requirements with one targeting the development of lightweight, ultra low temperature, sintered ceramic materials that provide electromagnetic protection for artillery shells, while the other is focused on additively manufacturing highly dense refractory tungsten alloys meant to replicate the performance attributes of depleted uranium. The third new SBIR is CPS's first funded effort to further develop FRA or fiber reinforced aluminum just one year after we became the exclusive global licensor. The U. S. Army is committed to reducing the weight of military vehicles. And as I mentioned earlier, FRA is an ideal candidate given its light weight and high strength at elevated operating temperatures. This is part of the Army's hybrid electric powertrain, power and propulsion systems initiative, which aims to enhance fuel efficiency and extend the operational range of military vehicles.

It's a great new way to showcase our technology and all three SBIRs offer the promise of further development and funding in the quarters and years to come. In addition, we have other recent submissions including SBIRs that are awaiting government response. We continue to identify specific customer challenges where we believe we can bring value with novel solutions based on our core competencies and material science. We're also continuing our work on a development effort funded by the U. S. Naval Air Systems Command or NAVAIR. With this funding, CPS is developing composites for rocket motor cases and other related uses. With work that runs through Q3 of twenty twenty five, this program highlights additional applications where once again, DPS's unique capabilities bring value in the face of demanding operating environments. As we enter 2025, we are pleased with the beginnings of a turnaround from our Q3 results. Production is now stable and growing with three operating shifts and we expect continued high shipment volumes for the quarters to come. We expect that as our new production operators gain experience, they will continue to improve over the next few quarters and allow us to generate improving bottom line results.

In addition, as certain one time expenses are behind us and with new research contracts to be fulfilled, we anticipate improving gross margins and bottom line results as the year plays out and efficiencies improve. We're experiencing continued strong demand for our metal matrix composite solutions as well as our hermetic packaging applications. At the same time, as I mentioned, we are actively seeking new customers in the aerospace industry that can benefit from FRA. We expect further development of this market this year. We are still optimistic given the product's excellent track record that Kinetic Protection could win armor orders for additional classes of Navy vessels in fiscal twenty twenty five even given current budget challenges in Washington. Our ballistic solutions address a large market across various types of ships as well as other military applications and we believe they have gained significant support both within the Navy as well as on Capitol Hill. In closing, we're upbeat about the opportunities ahead of us and the outlook for CPS in 2025 and beyond. With continued strong market demand, expanded manufacturing capabilities and promising advances that will further expand our product portfolio, we're well positioned for growth and improved performance in fiscal twenty twenty five and beyond.

Once again, let me thank our investors for their passion and their patience as we navigated through several challenges last year. We're focused on winning new business, improving our operational execution and expanding our addressable markets. In total, this should lead to greater overall performance and better financial returns, leaving us a stronger, more capable and nimble company that is a reliable and critical partner to our customers in each vertical market that we serve. We can now open up the call for questions. Paul?

Thank We did have a few questions in queue at this time. The first question is coming from Ron Richards. Ron is a Private Investor.

Hey, guys. Congrats on that order for the radiation shielding. I was wondering if you knew how big the market is for radiation shielding for the trucking business?

It's a big development because the funding from the DOE was, as you mentioned, was related to trucking primarily focused at secondary containment for microreactors. Obviously, the less weight that's put onto the truck as barrier material, the more capacity the truck can have for its cargo. But some of that is, I think realistically speaking, is further out on the timeline. So we're funded to develop the product with that application in mind. But what we have found is as we've talked to people in the industry with what we have, we're getting early interest for other applications. For example, facility managers are saying, I can build a concrete wall that's heavy, but then I got to have a thicker concrete pad underneath it, which is a problem and it's costly. And I also have smaller needs locally inside a room, inside a work area, maybe an elevated space up above where there's piping or other hazards. So in the more near term, we're seeing opportunities that are frankly unrelated to the trucking aspect. And there's even some applications that are a lot of our hermetic packaging solutions are going into aircraft or satellites and there's radiation risk for all these components that are in space.

So we're also having some discussions there. So there's a number of markets that are actively being discussed here at CPS.

Okay. Do you have any idea what kind of revenues you might look at in the next year or two for those applications?

It's hard to put numbers on it. We because number one, the markets are diverse and sizable, but we have to be certified as potential supplier. We have to have customers doing their own qualification path and those sort of things. So getting introduced into certain products will take some time. It's hard to quantify, but we also see in this order that the customer saw what they needed and were frankly quick to act because they know what they need. So that's probably something of an outlier in an application that you can imagine is fairly conservative as far as what you're going to do for containment. But we think these opportunities will continue to come forward.

The next question will be from Francis Goldwyn. Francis is a private investor. Francis, your line is 5.

Hopefully, you can hear me. I wanted to ask about the munitions rounds. Once you develop this, if it's accepted by the Army, does that mean that you will be manufacturing those warheads?

Well, what it means is, in this case, the two munitions SBIRs we've been funded for are a little different than the third one related to FRA. In these two related to the munitions, the technical team at the Army wrote up a very specific topic and they said we have a very specific challenge that we need someone to solve. If we knew how to solve it, we wouldn't be writing this up, but we're writing up a question and we're looking for someone with the right answer. So CPS proposed an answer based on our technical capabilities and what would come about after that is if we can satisfy again Phase one being concept that you claimed you could do it, can you prove it in the lab? And potentially if we're funded by Phase two, okay, let's make a prototype that the Army can actually test one. And then if they can validate that it satisfies their need, the question would become, do we become a commercial provider of product to the Army? So it's not necessarily a given, but the fact that they're spending R and D money to find a solution tells you that they have a very real need.

And the real power of the SBIR funding is that it comes with the potential to be the sole source provider down the road. We've said in the past there's some contract officers that say, well, I need multiple bids, you need to share your technology with another manufacturer. And the appropriate answer to that is we do satisfy your competitive requirement as a federal agency because we competed on the SBIR way back at the beginning of Phase one. So you can be a sole source provider. It's a powerful tool for an SBIR program and we will be working on these munitions problems over the next six months and then hopefully that transitions into a Phase II and that would then be an offering to the Army that they would need to decide to engage for a particular application or program.

And what do you think the timeline for that process would be? Nothing just an approximate timeline. Is it months? Is it years?

Well, this SBIR is a six month Phase one, again, and that would be pursuing proof of concept. That program has now those two programs have now started very recently. So we have from now into Q3. What we'd be doing at that point is proposing Phase II to the Army based on the progress that we demonstrated in Phase I. If they engage the Phase II, that could be something like $1,000,000 or $1,100,000 over twenty four months, where we would then be trying to deliver a prototype to them in that period, at which point that federal program could again be extended or could conclude. So is that sort of typical timeframe before you really get to a demonstrable solution? And again, that's where the radiation shielding definitely moved quicker than typical. It can happen. But that six months plus about two years is the standard SBIR framework.

And on the radiation shielding coming back to the prior question. I understand that you don't have specific customers, but have you sat down with a sort of a back of an envelope and said what's the size of the addressable market here, potentially high, medium, low?

Our work on that is early and I'm not prepared to share numbers on that because we are considering different applications and markets that we're becoming aware of as these customers raise their hands and express interest and that leads to another conversation and that leads to another conversation. So these different applications are not fully quantified by us. Okay.

Maybe you could talk a little bit about your I guess, I would say the fixed element your fixed cost element, your cost of goods, the loss of the armor the end of the armor program as it was, was the result it was the cause of a reduction in revenues. But the cost of goods didn't change materially. Why is that?

So the cost of goods the margins on our traditional products, the matrix composites and the hermetic packages are not as good as they were on armor. And the other part the bigger part of that, I think, though, was the fact that we spent most of the second half, well, pretty much the entire second half of twenty twenty four, ramping up for these increased production demands. And there are a lot of expenses involved in that, that presumably will go away. So we have to hire people for the third shift. Those folks have to be trained up. So they would work on first shift for two or three weeks before they actually went to third shift. In fact, we had people coming in, in July, at the July to be trained initially, and we didn't actually move to the third shift until the August. So we had a number of these expenses that were, I'll say, non productive or at best minimally productive expenses. And then once we got the third shift going, we still had to deal with a lot of initial turnover, folks, hey, yes, I can work third shift and then when the reality of it hits and two weeks later, they leave, and then you've got to start that process all over again.

So we did it that was a major impact on the fourth quarter. We had approximately $200,000 of additional labor costs than we anticipated having just in that fourth quarter. And it doesn't just impact the labor itself, but also the quality and the yields that we get out of the product we're making. These baseplates are, while they're a fairly simple concept, they're not easy to make at all. And in fact, for our customers, just a little nick or a little scratch makes the part no good. So during the production process, there are times when you have to kind of handle these things with kid gloves, so to speak. And if somebody is new and they're not sure exactly how to do something and they scratch the baseplate, it's gone. So we had some significantly lower yields. We expect that as the Q1 has progressed and as we get into further into 2025 that a lot of these problems are going to diminish and then go away. So I think that that's really what we're looking forward to as we move along. I'll also make a comment, I think that making Al Sig baseplates is a two headed coin or two sides of the same coin.

On the one hand, it's difficult to make, which means that when we're bringing in new people to learn to make this product, the timeframe of getting them up to speed can be long. But on the other hand, it's difficult to make, which means it's really hard for competitors to get into this market. You're not going to get a couple of pieces of equipment and put it in your garage and start making LASIK baseplates. It's really a difficult product to make. I think having the name CPS Technologies, it is a technological product. So there's that aspect of it as well, which can be good for us. So anyway, does that answer your question?

The next question is coming from Greg Weaver. Greg is a private investor. Greg, your line is live. Nice to see all the SBIRs. I mean, it's great to get paid to develop your own tech. I might ask this before, but remind me again, is this a revenue item or a cost offset?

Both. When we submit the budget to make the product, we do get a piece for profit and overhead absorption included in that. And I'll also say, I think, because we're working on these SBIRs, we've got folks here, scientists here that are here because of these projects. So to a degree, it's sort of a cost offset, but it's also sort of a you know, it does provide some additional flow through to the bottom line.

So the funding shows up on revenue line item? Oh, and then you should Yes. Okay.

Yes. All right. Thanks for that.

So reading your PR, so I'm to believe then the bookings in the quarter then were greater than 5,900,000 because you mentioned about your backlog being up?

That would be fair to say, yes, definitely.

Okay. I can't remember. Do you disclose the backlog at year end or quarterly in the Q? I can't remember.

We don't. We don't. Okay.

And Brian, maybe I missed it. You said something I heard you say when you're talking about the big contract with your European power guy for the plates. You said something about September of this year. And did you reference that the pricing changed at all there?

Yes. So what happened there, Greg, was that's a customer who buys typically on a one year commitment and that's from October 1 to September 30. And we had an earlier agreement with them, which kept product flowing but was not fully resolved on quantity and pricing, and that kept us going in Q4 of twenty twenty four. And then subsequently, we finalized pricing and quantities, which resolved at that $13,300,000 So that was resolved a couple of months ago, but well into that twelve month period. But that agreement is for that twelve month period. So we're actively fulfilling that through the September under that $13,300,000 contract.

Do you get any I assume that hopefully a price went up some, do you get any credits for the stuff you already shipped in?

Yes, that was retro. The pricing was retroactive to ten point one.

Ten point one, so we saw that already in Q4?

Correct, yes.

Right. Yes, your gross margins did go up, but obviously they're still negative. So you went through it already, Chuck, with the prior questioner to a degree, But I mean, help me understand here because at one minute you say, hey, I offset the armor loss, but then in the next breath, you're like, well, I'm underutilized and I'm lacking volume. That's why my gross margins are the way they are. So I guess help me rectify that. I mean it sounds like scrap and rework is the issue here.

That is a major factor without getting into specific numbers. Our yields went down fairly significantly from the first six months of twenty twenty four to the last six months of 2024 as we added these folks. And we've also yes, so basically that's the main piece. We also have a number of items that go through as expenses. And as we ramped up and we've built up purchases to so that we could handle the additional manufacturing capacity or needs, we bought more of some of these supplies, not inventory items, but supplies to make sure that we didn't run out so that we didn't have to shut down operations for two days while we waited for something to come in. So there were a number of there was kind of a growth in that in those expense categories as we ramped up more than we would expect on an ongoing day to day or week to week basis. So there was some of that involved there too. There were a number of factors that we expect that impacted Q4, but we expect to either go away completely or certainly diminish as time goes by during 2025.

Well, we're 80% of the way through Q1 here. I guess how is manufacturing these days?

Much better. Okay.

Because before that was Preston, you said, well, if I could do $6,000,000 rev, I could hopefully get 15% to 20% positive gross margins, right? I mean, is that realistic or?

I think we're still shooting for that $15,000,000 to $20,000,000 margin for sure. And I think that's where we expect to be once we're fully once we have a good team here and that kind of thing, yes, I think that's very realistic and I think that and I don't think I know that's what we're shooting actually even to go higher than that. But yes, I would add, I mean, Chuck described some of the harsh realities of Q4 in a couple of different buckets. I mean, one is employee number one, training number two, employee number one is not sufficient even though they're experienced. And then you've got the poor efficiency of the new employee once they're in the job and then you have a yield defect impact. And those three different challenges improved on different paces over time. And I think we're going to see that play forward in Q1, Q2, etcetera. Obviously, the distraction of the first employee goes away once that other person is in the job and the other things take more time for a new person to be as capable as somebody who's been here five or ten years. Got you. Okay. I keep that, Brent.

I was just going to add a little bit to that. We know, I mean, for a fact that if you take one of our employees that have been here for five years or ten years or whatever, that person is significantly more productive than somebody that's been here for three or four months. There's it's a definite noticeable difference. We have that data and we know it to be true.

Right. Sure. Well, good luck, I guess, getting the kinks out and we'll tune in here for Q1 shortly. Thank you.

Thanks, Chris.

Thank you. And we did have time for one quick follow-up from Ron Richards. Ron, your line is live.

Hi. I've been a shareholder for years and on previous conference calls, I've asked about this Southeast Asian armor contract. That you had scheduled with a shoot and the shoot didn't go as well as planned. And I was wondering if that armor would have been reworked for that project and how is that going?

Yes. There is existing development work going on to restore that potential. That's an active program that's worked on by our technical team in parallel to all the other things that we have going on. But that remains an opportunity for the future as we work to get back towards the ballistic performance and certainty of a shoot and that kind of thing. So yes, that was a challenge from a while ago that we're still working to resolve and it's part of what our team is working on as we understand the fundamentals of that particular design for that particular specification. Each armor customer has its own qualification tests, the velocity of what projectile at what angle to the panel and that sort of thing. So all those factors are what our team is looking at to get back to that test cycle.

So no prediction on any kind of timeline when that might have another test?

That would be further out. There's nothing on the schedule right now. Okay. All right. We do have some testing going on, but it's preliminary to actual shooting. It's CFS testing. I think the question, I was taking the question sort of a customer orchestrated test. We are doing CPS testing, but a customer test would be further out. Yes.

Thank you. There are no other questions at this time. I would now like to hand the call back to Brian Mackey for closing remarks.

Okay. Thanks, everyone, for joining our call. As Greg mentioned, it won't be that long for our Q1 call, but thank you for joining us today. And if you have any separate questions, please follow-up with Chris Witte, our Investor Relations Advisor. Thank you.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.

Thank you, everyone.