Good day, everyone, and welcome to the CPS Technologies Third Quarter 2023 Earnings Call. It is now my pleasure to introduce your host, Chuck Griffith, Chief Financial Officer of CPS Technologies.

Thank you, operator, and good morning, everyone. Today, I’m joined by Brian Mackey, our President and CEO, and we look forward to discussing our quarterly results with you. But first, Chris Witty, our Investor Relations adviser, 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 terms should 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 forward-looking statements. 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 third quarter results. Afterwards, Chuck will review the financial results in greater detail. Brian?

Thanks, Chris. Today, we’re pleased to announce third quarter revenue of $6.3 million and an operating profit of approximately $131,000 for the period ending September 30, 2023. As discussed on our previous earnings call, the quarter was negatively impacted by shipment timing, with certain deliveries being pushed into the last 3 months of 2023. Our original expectations for 2023 as a year are unchanged. The company remains on track for 2023 to be its best year ever in terms of revenue as well as underlying results. Chuck will review this further in a moment. During the third quarter, we announced 2 noteworthy wins for the company. First, we received an award valued at approximately $7.7 million from a major long-standing customer for power module components and solutions. This contract represents a 50% increase for that customer over the prior 4 quarters, with the systems to be employed primarily in high-speed rail, wind turbines, and other green energy applications. This client is a multinational semiconductor manufacturer based overseas which has come to rely on our unique capabilities for its cutting-edge requirements, and we’re pleased to once again provide modules for the many important markets they serve. Also, we recently announced that the company had received a Phase 1 SBIR award valued at approximately $200,000 from the United States Department of Energy, our first such grant from the DOE. This study, entitled Modular Radiation Shielding for Transportation and Use of Microreactors, will be led by Matthew Karnick, a talented material scientist at our company, opening further potential customer penetration avenues for CPS. Notably, this is our fifth SBIR/STTR award in the past 2 years. It’s the first of these 5 from the Department of Energy and the third different member of our team to win an SBIR award within the last couple of years. Our renewed focus on R&D continues to provide external funds to help bolster our intellectual property portfolio, validate our long-term strategic vision and support our goal of accelerating the growth trajectory of our top line. Aside from these wins, the company is actively pursuing opportunities across all 10 markets, from military armor to transportation products, electronics and industrial applications. The overall outlook for the company remains bright. HybridTech Armor panels from Kinetic Protection, the U.S. Navy’s prime contractor, continue to provide best-in-class protection for the country’s aircraft carriers. The panels are an integrated component of advanced ballistic shields and protection system upgrades by the Navy, and we’re pursuing opportunities across the rest of the fleet. We had previously discussed that we will be testing other iterations of our armor as it related to a potential ground vehicle armor opportunity. Unfortunately, that testing did not go as well as anticipated. We’re working to address the issues uncovered during those tests, but this will further delay any new order for our armor with this potential customer. The continued growth of hermetic packaging for use in aerospace, defense, and power electronics also positions CPS for further growth going forward, as well increasing demand for our Metal Matrix Composites industrial solutions. We believe our unique technology and innovative approach to solving complex design problems, along with our expanding array of customers in the government and commercial space, place us at the beginning of our next phase of growth. Whether it’s electric vehicles, trains, aerospace and defense, or electronic applications, CPS can provide the best approach to advancing our clients’ new product development initiatives. Our strong balance sheet can and will provide us with the financial flexibility to continue to invest in increasing our product development capabilities and pursuing opportunities that will accelerate top line growth and improve operating results. In the near term, we anticipate a very strong finish to the current fiscal year and remain on track for it to be our best performance ever. I continue to be upbeat about the company’s ability to convert bids into backlog and backlog into revenue as we leverage our innovative solutions across a growing set of markets and new industry applications. I’ll now temporarily turn the call over to Chuck to provide more details about our financial results, after which I’ll provide some additional comments.

Thanks, Brian. As was mentioned earlier, the company’s revenue totaled $6.3 million in the third quarter compared to $6.7 million last year, with a slight decline year-over-year due to shipment timing and the delay of certain deliveries into the fourth quarter. Given our solid overall backlog, we anticipate posting a very strong finish to fiscal 2023. At this time, we fully expect to significantly exceed the 2022 revenue total of $26.6 million. Gross profit in the third quarter totaled $1.2 million or approximately 20% of sales compared with $1.9 million or roughly 28% of sales last year. The decrease in both profit and gross margin year-over-year reflects the lower level of sales as well as some inventory write-offs due to higher scrap than usual during the quarter. We anticipate fourth quarter gross margins to be more in line with the second quarter. Selling, general, and administrative expenses totaled $1.1 million in the third quarter versus $1.2 million in the prior year period. This SG&A amount represents a notable decrease from our SG&A numbers in the first half of this year. The company generated operating income of $131,000 in the third quarter compared with approximately $709,000 last year, and posted net earnings of $0.01 per diluted share versus $0.07 per diluted share in fiscal 2022. Turning to the balance sheet. We ended the quarter with $8.8 million of cash, up from $8.3 million at the end of 2022, reflecting working capital changes and the impact of the decline in deferred revenue. Trade accounts receivable as of September 30, 2023, totaled $5 million versus $3.8 million as of December 31, 2022. Our other receivable account balance was $17,000 compared to $686,000 at the end of last year, primarily reflecting the receipt of the employee retention tax credit in April. Inventories totaled $4.8 million as of September 30 compared to $4.9 million at the start of the fiscal year. Turning to the liability side, payables and accruals totaled $3.2 million at the end of the third quarter versus $2.7 million at the end of December 31, 2022. Deferred revenue decreased from $2.8 million at the end of 2022 to $1.7 million as of September 30, 2023. As a reminder, deferred revenue predominantly represents prepayments for large orders to help appraise the impact on cash of large inventory purchases for those orders. A number of these were shipped in 2023, resulting in the recognition of revenue and thus, a decrease in deferred revenue. So thank you. And now, Brian will discuss his first 90 days in CPS and what he sees for the future.

Thanks, Chuck. As everyone may recall, I joined CPS at the beginning of August, about 3 months ago. As I expected when I accepted the opportunity to come to CPS, my background is highly relevant to what we’re doing here. I’ve spent many years in leadership positions of technically-oriented companies, including a focus on material science to achieve growth, with the goal of providing advanced solutions to our customers’ greatest challenges. I’m excited by a number of things that we have in place today at CPS and by the opportunities that we have before us. We have a long history of close relationships with a number of large, stable customers both domestically and abroad, particularly in metal matrix composites and hermetic packaging. We’ll continue to support our customers’ growth objectives by providing high-quality products that meet their needs. We have a highly capable and motivated team here at CPS as well. 2023 looks to be a record year, and we’re motivated to build on our own momentum. I’d like to take a moment to focus on just one aspect of our growth strategy, which is externally funded product development. As we’ve mentioned, we’ve seen a number of recent successes in this area to help build our product portfolio for the future. As a quick review, we pursued a Phase 1 SBIR regarding thermal management for the Navy. They then asked us to continue with an option phase and asked us to submit a Phase 2 proposal, which is currently under evaluation. We completed a Phase 1 STTR regarding the use of tungsten materials for the Army. Again, we will be submitting a Phase 2 proposal to build on what we accomplished in Phase 1. We also completed a Phase 1 SBIR regarding Army helicopter flooring for the United States Army. While the Army has elected not to designate any funds for a potential Phase 2 study, our flooring passed its testing in Phase 1 with flying colors. We know that this is of interest to helicopter OEMs, and we’re pursuing this opportunity. As previously discussed this morning, we’re currently working with new funding from the DOE on another Phase 1 SBIR. You can expect to see us continue development efforts to build our product portfolio for the future. These externally funded efforts, in conjunction with our internally funded work, are a key part of our plan to add relevant growth path within the advanced materials space. These opportunities leverage our know-how related to our current products and also take advantage of the technical expertise within our talented team. I’m excited about the future here at CPS. Operator, if you could please open up the line for Q&A.

Your first question is from an analyst at Dawson James.

Can you share with us the bookings and the backlog for the quarter?

We don’t typically disclose that information, but our backlog is quite strong for the upcoming quarters. I’m not inclined to share any specific numbers right now.

Okay. Can you tell us if bookings were greater than revenue?

In the trailing 12 months, it’s actually exactly even. It’s 100% or 1:1.

Okay. Great. I’m sorry. Brian, you mentioned external development as a source of funding for research. I understand the philosophy and the benefits behind it, but I would like to know what portion of revenue that currently represents. Additionally, if you achieve your goals with those projects, what percentage of revenue would that generate in 12 to 24 months?

The revenue from Phase 1 is relatively small, typically around $200,000, which can vary between $150,000 and $250,000. In contrast, a Phase 2 funding amount for an SBIR would usually range from $1.1 million to $1.2 million to support research over 24 months. While the revenue generated from Phase 1 is positive, its primary value lies in facilitating future growth. The transition to Phase 3 or commercial efforts involving customer purchases will depend on the success of Phase 2 and the interest it generates. The Department of Defense generally funds this research due to actual needs, and if we complete the project successfully, the ideal scenario is that they are ready to buy, requiring us to increase production to satisfy those demands. However, revenue projections are challenging, but an advantage of the SBIR with the DoD is that it addresses their needs and allows us to retain the intellectual property developed during the program, which eliminates future competition. Typically, DoD contracts require competitive bids to ensure fair pricing, but the original SBIR proposal already goes through a competitive bidding process during Phase 1. The reward for small businesses succeeding in their technical development is exclusive ownership of that intellectual property for many years afterward.

Understood. It seems that Q4 is going to show a significant improvement compared to Q3.

That’s right.

Because of that, will you be requiring additional working capital? You mentioned in your commentary that working capital was a source of cash in Q3, so can we expect a reversal of that in Q4?

Probably. But it certainly won’t be an issue for us. We have almost $9 million as of the end of the quarter, which is sufficient cash to fund our working capital. As you know, we also have our $3 million line of credit with our banks, which is available if needed. There is nothing due on it at this point and hasn’t been for a while, so we have that extra source if necessary. However, I don’t anticipate that we will need it. Even with the potential increase in working capital required to support higher sales in the quarter, we will still be in very good shape from a cash standpoint.

But we do expect Q4 to be more in line with Q1 and Q2 from this year in a variety of respects versus what we have experienced currently in Q3.

Your next question is coming from Ron Richards.

In the November 2022 conference call, it was mentioned that hermetic packaging revenues will be about $10 million, and those revenues could double by 2024. I was wondering if you’re still in that projection for $20 million in revenues in hermetic packaging for 2024?

I would say not. We’ve seen some reductions from one of our major hermetic package customers. If we were to exclude that, the hermetic packaging business for other customers is growing significantly. We have one customer in particular that was very small about a year ago, and they are now well over $1 million this year. We expect that this segment will at least double in the coming year as well in 2024. However, I don't believe the total hermetic packaging revenue will double. Nevertheless, it is continuing to grow despite the decline from the major customer.

Yes. It’s continuing to grow, and it’s certainly an area of focus for us. We see opportunities there for us to continue to drive those numbers up, and I think you’ll see that going forward.

Okay, and then one other question. On the Navy ships, you were talking about expanding into other ships besides the aircraft carriers. Do you have any guess on a timeline when you might get some orders for those ships?

It’s an area where we’re actively pursuing translating that technology from the aircraft carriers to other vessels. The timing of that is hard to predict, but we know we’ve got a good solution there with our partner and we’re actively working that, but it’s difficult to predict timing.

Your next question is coming from Greg Weaver from Invicta Capital.

We’re going to look forward, Brian. So I guess what would you consider the best unexploited opportunities now that you’ve been at the company for a while? And kind of maybe any changes or improvements you want to focus on?

I believe we have several opportunities ahead of us. As I mentioned, we have significant growth potential with hermetic packaging. Additionally, we are exploring some promising avenues within metal matrix composites. We are also excited about the ongoing installation of armor solutions on the aircraft carriers, especially since the Army is interested in our lightweight ballistic protection solution. Furthermore, we are actively working on new projects that I believe will yield results. As I noted earlier, the Department of Defense has specific needs and sometimes it takes time for their validation process and the right program timing to align. However, I see interesting opportunities there. As a company, we are continually improving. We have a strong team and have implemented a number of changes over the past few years to drive our growth, which I believe our customers will notice in terms of product quality and other factors. I am genuinely excited about our progress.

Okay. Regarding AlSiC, specifically heat sinks and similar products, is that not a primary focus?

There are ongoing discussions there with the interest of our customers and how we can make those products better and move those to both improvements in what we’re providing on a day-to-day basis as well as what the next generation of product would be and how we can address that. So that’s what the advantage of these long-term relationships where we can have these collaborative discussions. I think that is another area that we’re pursuing that can yield results in the future.

Okay. That’s helpful. And Chuck, on the gross margin, you helped a little bit saying there was inventory write-offs in, like, due to scrap in the quarter. But I mean, the incremental flow-through is over 100%, right? I mean your revenue drop versus the gross profit dollar drop sequentially? And you didn’t burn inventory either, so.

No. The main factor was the decline in revenue and how it affected our fixed costs. Additionally, we experienced a quality issue with one of our major customers. We established significant reserves for potential returns and examined our inventory for these quality problems, leading to scrapping several parts. We believe we are close to identifying the root cause of the issue, and it should be resolved soon. This is why we maintain a substantial reserve, which has impacted our revenue and increased our liabilities.

Reserves. So that was top line and insensitive?

Yes.

Yes. That makes sense. Okay. And what product area was this quality control issue in?

It’s in the MMC analysis. It’s just kind of an oddity. Yes. I don’t want to get into the science of it because it’s not my area.

Yes, several events came together. As Chuck mentioned, we’ve made significant progress on identifying the root cause, and we will complete that and move towards implementation. We will use the reserve you see reflected, which has addressed our concerns, but we are not at the final stage yet to ensure we have thoroughly resolved the issue.

All right. So for the current quarter we’re in, there’s still some yield issues, but the reserve is going to cover that, and you’ve absorbed that in Q3?

We believe so, yes.

Right. Okay. So we’re back to the point that you had great margins over the last few quarters. This is one of the things I’m most excited about, as it shows your ability to maintain earnings. So this margin around 30% is not unrealistic then? That wasn’t just a fluke?

Correct.

Yes. We think as this gets cleaned up, we think we’ll return to that, certainly strongly in that direction what we saw in the first half. We think that’s more representative of what you see going forward, including this quarter, Q4.

Thank you. That concludes our Q&A session. I will now hand the conference back to President and Chief Executive Officer, Brian Mackey, for closing remarks. Please go ahead.

Okay. Thank you for joining us today, for your ongoing interest in what we’re doing here at CPS Technologies. We look forward to speaking with you again after the end of our fiscal year. If you have any questions in the interim, please reach out to Investor Relations adviser. There’s no further questions. I think that concludes the call. Thank you.

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