Good day, and welcome to the CPS Technologies Fourth Quarter and Year-End 2023 Earnings Conference Call. It is now my pleasure to turn the floor over to your host, Chuck Griffith, CFO at CPS Technologies. Sir, the floor is yours.

Thank you, operator, and good morning, everyone. Today, I'm joined by Brian Mackey, our President and CEO. We look forward to discussing our fourth quarter 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 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 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 fourth quarter results, after which Chuck will review the financial results in greater detail. Brian?

Thanks, Chris. Today, we're pleased to announce fourth quarter revenue of $6.7 million and an operating profit of approximately $144,000. While revenue rose significantly year-over-year, operating profit continued to be negatively impacted by a quality problem with a major customer that we discussed previously. We ended the year with our best top line ever, $27.6 million, and are pleased with the backlog of $20 million as we begin fiscal 2024. Chuck will provide more detail in a minute. In addition, we recently announced two new developments that reflect our strategy for growth and bode well for our long-term outlook. First, CPS signed a manufacturing license agreement for fiber reinforced aluminum, or FRA composites, with Triton Systems, which gives us the exclusive global rights to make and sell products using this technology. FRA composites are comprised of high-strength aluminum alloys discontinuously reinforced with short ceramic fibers. Given its superior performance characteristics, this technology will facilitate the introduction of many new products for our military, commercial, and industrial end markets, which makes it a great fit for the company. CPS is already known as the world leader in advanced metal matrix composites, but adding FRA capabilities will complement our core competencies, broaden the company's target markets, and strengthen our mission to accelerate growth going forward. Over the coming weeks and months, we will be working to initiate manufacturing trials of FRA composites here at CPS and begin to engage customers in relevant markets. We think this will be an excellent addition to our product portfolio. Second, and also announced earlier this week, we received an award for the Massachusetts Manufacturing Accelerate Program, known as MMAP, in response to a proposal submitted by the company in the fourth quarter of 2023. This award, valued at $20,000, will support the purchase of a 5-axis CNC machine and expand the company's manufacturing capabilities to better serve our clients. This 5-axis machine, our first, will pave the way for sales opportunities in hermetic packaging and other products with new and existing customers for which we would otherwise not be cost-competitive. These two recent developments, the licensing agreement for FRA and the purchase of a new 5-axis machine, enable us to continue to broaden our revenue base and expand avenues of growth with clients in markets that are very familiar to us. In terms of the business today, among other things, we will continue to fulfill long-term supply agreements announced last year, providing power model components and systems for a variety of rail and other applications to a multinational semiconductor manufacturer. We're on track for the shipment of product under this contract over the course of 2024. At the same time, we are working on our most recent Phase 1 SBIR grant from the Department of Energy and we'll soon be submitting a Phase 2 proposal to extend this program. We continue to invest in innovative next-generation technologies, advancing the company's long-term growth profile and have several other government R&D opportunities in the pipeline. For example, a Phase 2 SBIR proposal for thermal energy storage is under review by the Navy. We're preparing a Phase 2 STTR proposal for tungsten material for the Army and we're submitting several additional new Phase 1 SBIR proposals with various federal agencies. Overall, we find these externally funded R&D opportunities very productive and rewarding, so we will continue pursuing them even as we invest internally to broaden our range of products, expand the company's client base and rapidly respond to changes in industry demand. Our unique metal matrix composite technology brings innovative cost-effective solutions to durability and efficiency problems faced by a host of customers and markets across the globe. For fiscal 2024, however, I want to remind our audience that shipments of our HybridTech Armor panels for the Kinetic Protection Navy contract are expected to be complete as of the middle of the second quarter. For the last year or so, these sales have generated, on average, quarterly revenue of just over $2 million. So the completion of our subcontract will have a material effect on near-term revenue. However, we see growth in other product lines mitigating some of this impact, which we estimate will cover roughly half the revenue shortfall. Further out, we expect our other products as well as the potential for additional armor orders that we are pursuing to enable us to resume and exceed our recent revenue run rate. We're actively pursuing other opportunities for armor products across several military programs. We are hopeful of future contracts to support other ship classes but remain uncertain as to contract timing, particularly given the protracted continuing resolution. In addition, as previously explained, we're pursuing business on potential ground vehicle applications, but these efforts have been hampered due to testing that did not go as well as anticipated. We continue to work to address the relevant deficiencies but cannot determine when such initiatives will move forward. Overall, based on current developments and a solid backlog, we remain well positioned for the future. We're pursuing a number of new opportunities and taking steps to expand both the breadth and depth of our product portfolio, which should lay the groundwork for growth acceleration. While headwinds related to armor exist in the near term, we're committed to improving our top line profile, strengthening operating results, and, in turn, improving total return for our shareholders. I'll now turn the call over to Chuck to provide more details about our financial results, after which we will open it up for questions. Chuck?

Thanks, Brian. As mentioned earlier, the company's revenue totaled $6.7 million in the fourth quarter. That's compared with $6.1 million last year, which represents substantial growth year-over-year. We expect to continue posting solid results in the quarters to come. However, as Brian indicated, the negative impact from the completion of our armor contract outfitting the U.S. carrier fleet will cause a different revenue near term. While our partner Kinetic Protection is cautiously optimistic about additional work for other Navy ships, the length of the impact remains to be seen. Gross profit in the fourth quarter totaled $1.1 million or approximately 17% of sales and that compares with $1.6 million or 27% of sales last year. The decrease in both profit and gross margin year-over-year was predominantly due to the quality issue with a major customer that we've discussed in the past. Not only did this result in $0.5 million of write-offs and returns, but we've also devoted significant internal engineering hours to investigate and solve this problem. While we're not ready to claim victory yet, we have seen signs of significant improvement and are optimistic that any impact on 2024 will be minimal. Selling, general, and administrative expenses totaled $1 million in the fourth quarter versus $1.3 million in the prior year period. We maintained our cost discipline in terms of overhead, and we're happy to do so. The company generated operating income of $144,000 in the fourth quarter compared with approximately $309,000 last year. Turning to the balance sheet. We ended the year with $8.8 million of cash, up from $8.3 million at the end of 2022. And this increase was in spite of the reduction in deferred revenue by almost $2.5 million during 2023. Trade accounts receivable as of December 31, 2023, totaled $4.4 million versus $3.8 million as of December 31, 2022. Inventories totaled $4.6 million at the end of 2023 versus $4.9 million at the start of the fiscal year. Turning to the liability side. Payroll and accruals totaled $3.6 million at the end of the fourth quarter versus $2.7 million as of December 31, 2022. Deferred revenue decreased, as I mentioned earlier, $2.3 million from $2.8 million at the end of 2022. As a reminder, deferred revenue predominantly represents prepayments for large orders to help defray the impact on cash of large inventory purchased for those orders. A number of these shipments in 2023 resulted in recognition of revenue and thus decreased deferred revenue. So thank you. This concludes my discussion of the financials. So now we will open the call up for questions. Operator?

The first question is coming from James McIlree from Dawson James.

I was hoping you could give a little bit more detail on the Triton license. Is it limited to certain end markets, the time frame of the license? And then where are you going to manufacture this product?

Yes. Thank you, Jim. The FLRAA license grants us an exclusive global right to utilize that technology for any application, making it quite extensive. Essentially, I see the timeline as perpetual unless we fail in our commitments and Triton Systems chooses to revoke it, but there's a high threshold for that to occur. Both companies share significant mutual interests, so success for either party contributes to the success of the other. We're thrilled about this opportunity, as the material has been well-tested, and its advantages are established. To answer your inquiry, we will manufacture that material at our Norton facility. It is a metal matrix composite material, similar to the MMCs we've been producing for 39 years, with a preform that is infiltrated with aluminum. Our armor products use a similar preform and aluminum infiltration, where the initial product focuses on thermal conductivity, while the latter is geared towards ballistic protection. This new material will be both lightweight and strong, with applications in areas like aircraft components, such as bearing liners for helicopters, where weight reduction is highly valued. We can create net shape products as well as ingots or blocks that can be machined, allowing us to incorporate features like through holes. This aligns perfectly with our core expertise. We will be on a learning curve to adapt to the finer details of our collaboration with Triton Systems. However, once we complete that transition, manufacturing and selling the product will be under our control, with their assistance.

I have a couple more questions about the Triton license. First, do you have any minimum commitments to meet? Also, it seems that this could contribute to revenue in about 12 to 18 months. Is that an optimistic or pessimistic timeframe?

Yes. It's certainly not this quarter. I mean we'll be on the learning curve and making trial pieces and things like that. The intriguing part of it is also that there are interested customers who have dialogued with Triton Systems in the past, who are looking for a reliable supply chain before they can turn this on. Having said that, obviously, you don't get into a helicopter without sufficient testing given set of specifications given the OEM or whoever the case may be. So there will be a time frame to it that will play out. If anything, this year, it's going to be small revenue of early pieces and that kind of thing, and it will go from there. And the other question about minimums, it's more just about making material efforts to succeed in this market. So there's not a high bar for success as long as we're continuing to work on it, which we certainly intend to do.

Okay. I have three other questions, I'll just throw them all out at you. You talked about the revenue impact of the Navy completion. I was hoping that you could talk a little bit about the margin impact. And then on the quality issue, it sounds like there's still going to be some although small impact on Q1. And then you opened up indicating that backlog was $20 million. I was hoping you could tell me what it was a year ago.

Okay. Well, this is Chuck. Let me answer that. So in terms of the armor, that does tend to be higher margin than our other products. So there will be somewhat of an impact on the bottom line from that standpoint as well. Although, again, I think that when it comes to that bottom line margin, more than half of our overhead is fixed. So it's really a function of getting the throughput through the factory in order to increase the margin in the bottom line. So we're certainly working to do that. As Brian mentioned, we do have other items that are going to increase this year that are going to somewhat mitigate the loss of the armor revenue. What was the second question again?

The quality issue, if there is some impact, although small in Q1.

Yes. From what we've seen so far, it is probably not significant to Q1, unlike the last three quarters of last year. It hasn't disappeared, but it seems to have decreased considerably to the point where we are not declaring victory. We are still working to reduce it to nearly zero, but it is more of a nuisance now.

I mean part of the trick, which makes it thorny technically is that the defect doesn't show itself until it's been shipped and processed downstream. So connecting cause and effect has been challenging. But what we're now receiving from the customer are reports with a dramatically reduced defect rate based on product that we shipped to them let's say, December time frame that they processed in January.

Okay. All right. And your backlog a year ago?

Yes. I believe it was around $27 million, with a significant portion of that being armor. It's important to note that, aside from armor, the orders we're receiving now are likely to ship in late Q2 or early Q3. Therefore, there is still considerable business to be realized from that backlog before we...

Yes. And on the armor side, we don't enter the year with significant backlog, but I mean there are very real opportunities that we're actively pursuing. We don't control Navy decision-making and things like that, but that remains an active area going forward.

The next question is coming from Michael Weitz, a Private Investor.

Just a question on the interest income. And I know it's down significantly from '22 to '23 and your cash balances were up significantly, and I just want to have an answer about your cash management strategy?

Yes. Let me address that. So that's actually other income. And last year, that other income included $600,000 for the ERTC, the tax credit, the employer tax credit...

Employee retention.

Yes. Interest income has increased significantly this year. It was approximately $10,000 in 2022, and this year it's closer to $240,000 to $250,000. So, interest income is up considerably compared to the previous year. Regarding cash management, one positive aspect from a risk perspective is that our bank has a sweep product. Every night, $250,000 of cash is transferred to various FDIC-insured banks across the country. This ensures we are protected in case of any banking issues similar to those experienced by Silicon Valley Bank. We don't have significant concerns in that area since the funds are automatically distributed every night. Are there any other questions about cash or anything else?

Yes. What type of rates are you getting on that sweep?

We're in the high 3s, close to 4%.

Any thought of laddering treasury bills gaining over 5%, which is a very liquid market. If you ever needed the cash, you can always sell them, but the latter not 3 months, 6 months, 9 months?

We have talked about it, but we haven't fully committed to moving forward with it yet. It's a good idea, and while it's on our radar, we haven't decided to act on it.

Yes, 8.8 million. That's a nice cash flow you're sitting on. And the stock, if you take that away from the market cap, seems very undervalued. Have you considered using some of your future free cash flow? I know you have historically wanted to maintain a large cash reserve, but could you use some of your future free cash flow to buy back stock?

We have not discussed that. I don't believe we have talked about doing something like that at this point. We are looking at a number of opportunities. The fiber reinforced aluminum is one opportunity, and the $200,000 grant from the State or from MMAP is another potential where we aim to invest cash to grow the company better. We are looking to use the cash for that purpose rather than buying back stock, for example.

All right. Like I say, I'm not saying use all the $8.8 million, but if you had 25% to 30% of future cash being a message to the market that, hey, we believe the stock is undervalued. And if you did even 25% or 30% of future free cash flow, that's a significant number of shares you'd be buying back.

Yes. I'm glad you brought it up, and it's something that we can put on the radar screen.

All right. I look at the premarket and the stock price going down to $2.01, so it looks pretty appetizing.

The next question is coming from Greg Weaver.

All right, Chuck, going to beat you up a little bit here because this gross margin situation, I mean, the reserve didn't cover what you needed, obviously, from Q3 for Q4 issue. So you cited $500,000 hit. So I think that's both periods or ever since the problem started.

Yes, that would cover the year, but most of it was probably in the fourth — more than half of it was in the fourth quarter, let's say, yes.

Got you. So the production issue, is that precipitated by changes made by CPSH or the customer or supply inputs? Any sense there?

What we believe is there's a confluence of issues that individually from a few years ago did not seem to indicate any concern. But over time, culminating in 2023 resulted in the downstream appearance of this defect because it's kind of a multifactor cause; it has been a thorny issue to get to the bottom of. And as I mentioned earlier, it doesn't show itself until later. So tying back a single product with a defect back to its origin, et cetera, has been challenging, but it's at the root of it seems to be a number of factors that literally go back a few years but didn't show themselves until 2023.

Got you. Okay. Helpful. So these are field failures and not something you mentioned at some point.

They are not in the field. They're at the customer.

Yes. So basically, just to be more clear, the customer, when they get our product, they bake it and the product — and the issue shows up when they bake it. So they haven't put it into any of their production at that point. They just — it's more or less their own process because if it goes beyond that, and then it has a problem and they not obviously costs the customer.

They see it before it would leave their facility.

Good. Okay. So they're not adding any value other than baking it, so they're not it's not in the field and they're not adding parts to it and then having to throw it all away.

Correct. It's not in the field. And it's limited to a certain small family of products that are processed in a certain way. We're certain of that. It's limited to this handful of things, but they have shown this defect that we've been working through.

All right. That's helpful. That sounds a lot more manageable. And is this related to that $7.7 million customer? Or this is something else?

It's something else.

Regarding the reserve, Chuck, you mentioned that you don't anticipate a significant impact in Q1, which is dependent on the reserve. However, it's uncertain because the results tend to fluctuate.

Yes. Yes. Yes.

Okay. So I think Jim asked a question about the gross margins. But so post armor, what should we think about as a target corporate gross margin, assuming we've got through this production issue?

I would target like in the mid-20s. I think that I'm kind of hesitant to predict the future, but that would be — that would certainly be what we would be shooting for. And certainly, I think it's achievable.

Okay. So then if we get some more armor business, then it will actually back to this 30% neighborhood hopefully.

Hopefully, from your list.

Back up.

Well, it's nice when the company makes more money operating the company as opposed to interest income, right?

Right.

So we'll focus on trying to get the operations going. So good. And — and I guess, it sounds like, Brian, your focus is obviously, for good reasons, kind of more on this armor from a growth perspective going forward with this new deal with the Triton here?

Yes. The FRA is a very interesting avenue of growth. I mean, really, as of a week ago, I would say we have R&D plus 3 product lines, which are MMC, hermetic packaging, and armor. The FRA is kind of, you could call it, number 4. So you have MMC, hermetic packaging, armor, and fiber reinforced aluminum. But it suits all of our capabilities well. It suits our customer relationships very well. I mean, it's a lot of the same trade shows and same dialogue just with a different benefit from the properties of the material that we produce. And the other point is that even though where we are with armor in the near term gives us some challenges — the other — the hermetic packaging and the MMCs are growing. Those are growing numbers. They're just not at the moment growing fast enough to take up that entire near-term dip from armor. So we see continued growth in those. And then we'll be adding FRA to the product portfolio here over the coming months and are excited about what that does for us as well as we continue to work very real opportunities on the armor side.

Okay. All right. That's my fault. So this FRA, you mentioned about using like bearing liners and things. So this is never meant to be like sheet form, just smaller little parts that are light and strong.

Yes, exactly. I mean, a helicopter might have these components, they might have — one helicopter might have 60 to 80 of these components that are of different diameters, and that's what we'll be looking to make. When we make our, for example, a base plate from MMC, we make the net shape product that the customer is going to use so we can readily take our knowledge in how to make a net shape component and apply it to fiber reinforced aluminum. So instead of making a block of FRA and then needing to machine that down to a component — as soon as our team looks at this technology, they say, well, we can make a net shape. And when you produce it, you might have to do a little cleanup but you basically will have a bearing liner and ready to sell. So then it's making different diameters and confirming that they meet the product requirements for customer testing and things like that. And there are customers that are interested that Triton has worked with in the past who are eager for a reliable supply chain. So there's a lot of things that are very interesting about it for us.

Got you. Okay. So historically, it hasn't got taken off that much because maybe cost and having to machine it down, but you guys think you can reduce the cost by near net to molding it?

Yes. And I think some of the hesitation was, well, what's the supply base; as an OEM, you're not going to adopt a family of products and incorporate them and go all the way to introduction unless you know that 5, 10 years down the road, your supply base is going to be there. So when we say, well, we've been doing this for 39 years, we're a Metal Matrix Composite company, et cetera, et cetera, we're domestically located, no foreign entanglements, all that kind of good stuff, currently working on different things with the DoD. It satisfies a lot of those questions. So then you're talking about product capabilities and product introduction, and we're excited about it.

At this point, there are no other callers in the queue, so I will turn the call back to management for any closing remarks.