Good morning, everyone, and welcome to the CPS Technologies’ Second Quarter 2024 Earnings Call. [Operator Instructions] 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, Chief Financial Officer of CPS Technologies. Sir, the floor is yours..

Thank you, Matt, and good morning, everyone. Today, I’m joined by Brian Mackey, our President and CEO. We look forward to discussing our second quarter results with you. But first, Chris Witty, 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 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 second quarter highlights, after which Chuck will review the financial results in greater detail.

Brian?.

Thanks, Chris. Our second quarter revenue was $5.0 million with an operating loss of approximately $1.3 million. Revenue for the quarter declined year-over-year, primarily due to the fulfillment of our U.S.

Navy Armor contract with Kinetic Protection as expected, along with some shipment delays related to labor shortages and other issues which I’ll review further in a moment.

Bottom line results for the quarter were also lower year-over-year due to the reduced revenue and production challenges that impacted both ongoing shipment volume and a new product introduction in hermetic packaging.

While near-term performance will continue to be negatively impacted by such issues, we are optimistic about the trends later this year and heading into fiscal 2025 as well as a number of growth drivers that are lining up for 2025 and beyond.

I’ll now turn the call over to Chuck to provide more details about our financial results, after which I will provide some additional detail.

Chuck?.

Thanks, Brian. As was just mentioned, the company’s revenue totaled $5.0 million in the second quarter compared with $7.4 million last year. We previously announced that the fulfillment of Armor orders for the U.S. Navy’s fleet of aircraft carriers would negatively impact results by approximately $2 million per quarter.

Kinetic Protection with our full support continues to pursue additional work for other naval ship classes, and we’re cautiously optimistic about additional orders. In parallel, our trailing 12-month book-to-bill ratio excluding Armor remains on a growth trajectory running at 1.10 at the end of Q2 and has continued to tick upward early in Q3.

However, our ability to fulfill open orders for non-Armor products has experienced challenges related to filling open manufacturing positions. We had an unusually high number of manufacturing personnel out of work on non-work-related disability, which created short-term challenges for our production.

Our local job market remains tight in Q2, which negatively impacted our ability to convert orders to shipments. Anecdotally, the local labor market seems to be loosening at this time. We have added and are now training a number of new hires, and we expect to have a third shift up and running next month for certain core manufacturing tasks.

This is expected to significantly boost our top line growth, particularly in the fourth quarter and beyond. We have the orders. The difficulty has been in fulfilling them.

We reported a gross loss in the second quarter of $0.2 million or approximately negative 4.6% of sales compared with gross profit of $2.2 million or approximately 29.6% of sales last year. This decrease was due to the impact of fixed cost on the lower revenue totals as well as other issues.

One new hermetic packaging product in particular created significant losses as the ramp up to volume was more challenging than expected. We anticipate that gross margins will improve in the second half of 2024.

Selling, general and administrative expenses, or SG&A, totaled $1.1 million in the second quarter versus $1.5 million in the prior year period as we remain focused on controlling costs, even while investing in new product development efforts and business development initiatives to accelerate long-term growth.

The company posted an operating loss of $1.3 million in the second quarter compared with operating income of approximately $0.7 million last year. And we reported a net loss of $1.0 million or $0.07 per share versus net income of $0.6 million or $0.04 per diluted share in Q2 of 2023. Turning to the balance sheet.

We ended the quarter with $6.3 million of cash versus $8.8 million at the start of 2024. This cash balance does not include the fact that for the first time we had $0.75 million invested in T-bills at the end of the quarter to take advantage of higher interest rates over the longer term.

Trade accounts receivable as of June 29 totaled $4.1 million versus $4.4 million as of December 31, 2023. Inventories also totaled $4.1 million at the end of the second quarter compared with $4.6 million at the start of the fiscal year.

Turning to the liability side, payables and accruals totaled $3.3 million at the end of the second quarter versus $3.6 million as of December 31, 2023. The balance sheet does remain very strong with a current ratio of 4.5. Now Brian will provide a more in-depth discussion of the second quarter..

first production of FRA material, first $1 million Phase 2 SBIR award in over 25 years, first commissioning of 5-axis CNC capabilities, first patent filing in many years by the company. While near-term headwinds remain, we are upbeat about the future as we enter the second half of fiscal 2024. We can now open the call up for questions.

Operator?.

[Operator Instructions] Your first question is coming from Greg Weaver from Invicta Capital. Your line is live..

Hi, good morning, Brian and Chuck. Thanks for taking questions here. You can guess where I’m going to go here.

The gross profit, could you give a little more detail, Chuck, maybe in terms of quantification of how much the manufacturing issues paid into the result? I mean, you had basically 100% flow-through of the revenue drop in the gross profit drop..

Yes. So we had one item in particular, which unfortunately, depending on how you look at it, was the number one selling item in hermetic packaging. It was a new item for us. And unfortunately, we had to make almost twice as many of them in order to get that high volume out to the customer.

And what particularly hurt us is – I don’t want to get too technical, but basically many of our hermetic package products are gold plated. And typically, with our customers, what happens is we will price the product based on a particular gold price. And in many cases, that gold price is artificially low.

And then we bill them for the differential when we actually produce the parts. So with the gold – if we contract with them based on the gold price of $1,000 and the gold price is $2,500, we’ll bill them for that differential – that we have to pay to our player, obviously, we’ll build them for that differential.

The problem that we had with this particular product was that the scrap did not occur until after the parts were plated. And what that meant was that we had already paid not just for the cost that we assumed for that $1,000 gold, but we actually paid for the $2,500 gold with no ability to recover it.

And so that one item in and of itself, I can’t say we would have a great gross margin without it, but we would have had a positive gross margin without it for sure. So that was particularly hurtful, I guess. And then there were certainly other things Brian mentioned. We had an item that reduced revenue towards the end of the quarter.

That’s because we couldn’t get it. And first time in literally the history of the company, I don’t know if you know Mark Occhionero, he’s been here for well over 30 years, and it’s never happened before. So just one of those kind of lowkey things, I guess, we could say.

But – so I think that’s – obviously when we’re at $5 million in revenue, that doesn’t help absorb as many fixed costs as we wanted to..

Got it. Okay. Appreciate the detail there, Chuck. So the current quarter from your comments, I’m reading through the lines here, but it sounds like it’s a similar situation..

Well, certainly, so that item that we didn’t have come in the first week of July. So the quarter is off to a slow start based on that. But we think – so talking about the hermetic packaging items, we solved the problem, right? We know what caused the issues that caused us to have to scrap all those parts. Those issues have been solved.

We’ve been manufacturing the product now with a good yield. We’re not throwing half the product away after it’s been plated. So that’s been solved. And as of today, the other issue of the ingredient not being available has been solved and it shouldn’t happen again..

Yes, I think to add to that, Greg. As Chuck described, some of these issues have come to an end. They either ended in Q2 or early Q3. The labor shortage and hiring process is one that extended more into this quarter with those people being trained and implementing that shift later this month.

Those products will then go out from there and become revenue a few weeks later. So that is certainly an impact in Q3 until we catch up on the amount of volume going out the door to fulfill these open orders, which will be more fully in place in Q4..

Yes. And just to add a little bit to that. So I think I mentioned it during the talk earlier. The issue is not getting orders, the issue is fulfilling orders. And we’re moving ahead in that process. And I would expect….

Order completed..

I would expect significant improvement in Q3, but we’ll see..

Okay.

And any rework drag from the base plate problems before in this quarter, this past quarter?.

Not specifically to that, no. I mean there are always issues that come up now and again, and we’re working through those, but not really in that second quarter or expected going forward – expected anyway going forward..

And was there any Armor tag ends of that in that $5 million?.

Yes. Yes. There was – it was about $0.25 million of Armor..

Okay.

That was related to the Kinetic Protection?.

Right. Yes. Yes, exactly..

Okay. So that’s going away, but we’re picking up on some of the other stuff that was slow. Okay. And so congrats on the SBIR award.

So the $1 million, that’s over what time frame? And it sounds like from your comment, Brian, that that’s the revenuing – starting the revenue already?.

Yes, we’ve already….

In Q3..

In Q3. So that’s a monthly invoicing by us over the 30 months..

Yes, 30 months, it’s about $100,000 a quarter, ballpark..

Okay. Good. Okay. Yes. And I’m glad to hear you’re out, trying to get more of these awards because that’s helpful to help them cover your overhead and develop new products..

Absolutely, yes. We’re pretty excited about that actually..

Yes. I mean they have to hand out money and helping you develop new products makes sense..

And really the future of those products, I think is – there’s a lot of potential maybe in terms of making them – getting them ready for market and then actually making them into a production line..

And just to follow-on. Have you got a specific person or persons on staff now that are chasing these? I know it’s a lot of paperwork to do these grants or awards to qualify.

Someone just kind of focused on that now?.

Yes. Our VP of R&D who’s been with the company for 3 years now has that depth of experience, and I’m very familiar with SBIR as well. But that’s where you see the renewed effort into SBIR at CPS starting a few years ago where we’ve gotten the 5 or 6 Phase 1 wins and now the first Phase 2, and we’re going to continue in that direction.

We – it fluctuates, but we see opportunities where the offerings that we can put together may or may not address the DoD, DoE, maybe NASA opportunity. So that’s certainly going to continue from us because we now have that system in place led by Dr. Kachur, who leads our R&D team..

Great. Thank you. Well, good luck. And getting the productions moved up. Thank you..

Thanks, Greg..

Thank you. [Operator Instructions] Thank you. If there are no further questions in the queue, I’ll now hand the conference back to Brian Mackey, President and CEO, for closing remarks. Please go ahead..

Great. Thank you for joining us today and for your ongoing interest in CPS Technologies. We look forward to speaking with you again after the end of the third quarter. If you have any questions in the interim, please reach out to our Investment Relations Advisor. Thanks..

Thanks, everybody..

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