Title

Presentation

Operator: Good day everyone and welcome to the CPS Technologies 2022 Earnings Call. It is now my pleasure to turn the floor over to your host, Chuck Griffith. Sir, the floor is yours.

Chuck Griffith: Thank you, Matthew, and good afternoon, everybody. I’m joined today by Anthony Koski, our Corporate Development Officer, and Michael McCormack, our President and Chief Executive Officer. Michael will offer his comments on our fourth quarter and annual results. Before we begin the business portion of the 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 subject to the many uncertainties that exist in CPS’ operations and environment. These uncertainties include the impact of COVID-19, the Russian invasion of Ukraine, economic conditions, market demands and competitive factors.

Such factors could cause actual results to differ materially from those in any forward-looking statements. Now I’ll turn the call over to Michael to offer his perspectives on the year and the fourth quarter results.

Michael McCormack: Thank you, Chuck, and good afternoon, everyone. Today we are pleased to announce the fourth quarter revenues of $6.1 million and an operating profit of $309,000 for the quarter ending December 31, 2022. This compares with revenues of $6.2 million and an operating profit of $312,000 for the fourth quarter ended December 25, 2021. For the fiscal year, we are delighted to report revenues of $26.6 million as compared to revenues of $22.4 million in fiscal year ’21. The 19% annual organic growth rate over the previous fiscal year has been consistent with our strategy for growth since my arrival. Fiscal year ’22 reflects the highest year ever in terms of revenue and operating profit in the company’s 38 year history.

For the fiscal year, we are reporting $2.2 million in operating profit compared to 513,000 in fiscal year ’21. This is an over 300% improvement compared to last fiscal year. We are also delighted to report an impressive 6% improvement in gross margin over the entire fiscal year. This also marks our third consecutive year of profitability. Our book-to-bill of over 1.1 for the fiscal year ’22 continues to reaffirm our growth strategy is working over a larger sample of data coupled with growing base. We are cautiously optimistic that the increased sales orders of fiscal year ’22 will directly translate into steadily increasing revenue and operating profits in fiscal ’23. I’ll speak more later about the overall business progress moving forward on the call, but for now, Chuck will discuss the financial matters in more detail.

Chuck Griffith: Thank you, Michael. Revenues totaled $6.1 million in Q4 2022, compared with $6.2 million generated in Q4 2021, a slight decrease. For the fiscal year ’22 revenues totaled $26.6 million compared to $22.4 million for 2021. The revenue for 2022 represents the best year in company history. Gross margin in Q4 2022 totaled $1.6 million or 27% of sales. This compares with gross margin in Q4, 2021 of $1.4 million at 21% of sales. For 2022, gross margin totaled $7.3 million, compared with $4.8 million for 2021. This increase in margin was primarily due to the impact of higher sales on fixed factory costs as well as improved factory efficiencies and product yields. Selling general and administrative expenses totaled $1.3 million in Q4, 2022, an increase of 30% when compared with SG&A expenses of 1.0 million in Q4, 2021.

For fiscal ’22, SG&A totaled $5.1 million compared to $4.3 million in 2021. Several factors contributed to this increase. The company hired a corporate development officer in early 2022, which was a new position. The company incurred higher variable compensation costs in 2022 due to its strong financial performance and travel costs were significantly higher in 2022 due to the limited nature of travel in 2021 due to the COVID-19 pandemic. The company generated operating income of $309,000 in Q4, 2022, compared with operating income of $312,000 in Q4 2021. For 2022, operating income totaled $2.2 million compared with $0.5 million in 2021. This represents our highest annual operating income in CPS’s history. Turning to the balance sheet. We ended the quarter with $8.3 million of cash, increasing from $5.1 million on hand at the end of 2021.

The increase in cash was primarily due to our net profit, somewhat offset by inventory increases to support higher sales. Although it remains open and available to us, no additional cash was raised in 2022 under the ATM program. Accounts receivable at December 31, 2022 totaled $3.8 million, down from $4.9 million at December 25, 2021. This change was due to the reduction of deferred revenue occurring in the fourth quarter. Prepayments received in 2021 were used to pay for shipments shipped in the fourth quarter, thus immediately reducing accounts receivable rather than having to wait for the customer to pay their bill typically 30 to 45 days later. As such, our days accounts receivable, our date sales outstanding improved to 52 days compared to 72 days at the end of 2021.

We also have other receivable of $686,000, primarily due to the employee retention tax credit. Inventories totaled $4.9 million at the end of December 31, ’22, compared to $3.9 million at December 25, ’21. This increase in inventory is due to increased work in process and raw materials needed to support our sales growth. In addition in 2022, we had several large orders in inventory that were not scheduled to ship until early 2023. The inventory turnover in the most recent four quarters was 4.2 times, an increase compared to the 4.7 times for the period ended December 25, 2021 for the reasons stated above. Turning to the liability side. Payables and accruals totaled $2.7 million at December 31, ’22, down from $3.2 million at December 25, 2021.

This change is due to the final payments in 2022 of accruals for our 2021 restructuring costs. Deferred revenue increased from $1.7 million at the end of 2021 to $2.5 million on December 31, 2022. Deferred revenue predominantly represents prepayments for large orders to help defray the impact on cash of large inventory purchases for these large sales orders. So for further discussion, I’d like to turn the call back over to Michael.

Michael McCormack: Thank you, Chuck. What a fantastic year! We established new records for the company in terms of revenue and operating profits. First, I would like to thank our investors for their patience. Your vision over the past two years to continuously support a small material science company as we competed against companies significantly larger than CPS was truly appreciated. We are beginning to realize there is an incredible pent up demand for the products we have engineered and investors giving us the resource to compete and win is essential to our success. I must thank the incredibly increasing number of customers for their continued confidence in our engineering and manufacturing capabilities. Lastly, all the employees did an outstanding job over the course of the year and redefined what creating shareholder value looks like moving forward at CPS.

As I look back over the year, I’m very proud of the team we have assembled and the accomplishments of the team. Not only did we execute commerce at the highest and most profitable levels in history, but we transitioned from an outdated ERP to an integrated MRP-ERP system that is already beginning to help us achieve even greater results. We return to our technical cutting edge routes, authoring numerous Small Business Innovative Research, SBIR and Small Business Technology Transfer, STTR proposals for various federal agencies within the government. We won four awards and are hopeful to begin to convert some of these to phase two awards that are multimillion multi-year awards. So the obvious question is what’s next? We are continuing to invest in people, processes and tools to build an even greater company.

We are not content with results and know we can do even more. I’m quite pleased with progress we are making all aspects of the business; sales, product development, operation, finance and support activities. Our business development efforts are now being run by Anthony Kosky. We are sad to see the imminent retirement of our Vice President of Sales, Cheryl Oliveira, and with her and her husband Rick. The best in the next chapter. Anthony and his team have built upon a base of clients that Cheryl has established and now have numerous growth opportunities, including some breakout prospects that could alter our future significantly in all three of our product lines; metal matrix composites, hermetic packaging and armor. As a part of the transition, the Business Development Group has restructured our growing technical product development team to jointly focus on building new customer relations and identifying new opportunities and build even more robust sales pipeline.

As a result, we have several developing opportunities in defense, aerospace and alternative energy markets with significant near and long term upside. Given both application and competitive sensitivities, I cannot divulge too many details. However, I am confident that our ability to listen to our customers and effectively respond with diverse and unique advanced material solutions that solve their most challenging issues will allow us convert these opportunities and continue to identify new avenues for growth. Under the leadership of Dr. Steve Catcher and Dr. Marco Chanaro, we have reenergized the contract research and development R&D service business as evidenced by our SBIR and STTR program awards. These programs are highly competitive awards that encourage domestic small business to engage in federal research and development with the potential for commercialization.

In addition to these programs, they advance through R&D to commercialization they are afforded additional intellectual property protection and sole source manufacturing rights within the federal government. Operations led by Dan Barton have made significant strides in the past year and are positioned for even greater results moving forward. The integration of the MRP with our new ERP has enabled the business to make more informed decisions on process and yield improvements, as evidenced by the 6% improvement to gross margin during fiscal ’22. We have made a concerted effort to ensure we grew the bottom line with the top line and Dan’s organization executed the plan. As we look beyond ’22 and into fiscal year ’23 and future years, CPS is continuing to follow up on the success of the past years with improving production volumes.

We have a plethora of advancing material solutions that will enable our customers products to function even more efficiently. We are qualifying more parts every week and are in dialogue with several large aerospace and defense clients that see the value of CPS as an enabling technology. The future is quite bright at CPS. We have several large scale future opportunities in all three product lines. These opportunities are significant also within the markets we are focusing on aerospace and defense and commercial consumer electronics. The entire staff is working diligently towards growth and product offerings while improving profitability. We are pleased with the recent fiscal year ’24 performance and continued financial support of our ever growing shareholder base.

We expect that we will continually and incrementally improve as we move forward quarter-to-quarter and year-to-year. We are aware of the unpredictability of the global marketplace but have positioned the business that we have more diversification in our product offerings and customer base. We believe that this diversification will lead to more consistent and growing results in the future. We have lots of additional opportunities today, both small and large, that keep the entire staff focused on finding the ideal, innovative material solution for our customers’ needs. In closing my prepared remarks, I would just like to thank the Board of Directors for their continued faith and confidence in my leadership, for our investors, thank you for your patience and belief that CPS is truly a unique material science company with a lot more to offer to clients.

For all of our employees, teammates and agents, thank you for a tremendous year and we are looking forward to another prosperous ’23 and beyond. Thank you. Chuck and I and Anthony are prepared to answer any questions at this time.

Operator: Certainly. At this time, we’ll be conducting a question and answer session. Your first question is coming from Michael White. Your line is live.

Michael White: Hey, Mike, congratulations on the record setting 2022 and a very impressive increase in gross margins. Before I ask my question, I would like to thank you Dan Barton for your service to the country as well as acknowledge the tremendous job you guys are doing at CPS. All right. I’m a long term shareholder, and my question is the record operating income in 2022 and cash balances of $8.3 million any plan to get that cash back to shareholders in a dividend or share buyback?

Michael McCormack: Hi, Mike. This is Michael. Thank you for your comments about service. It was our privilege to serve. The cash position currently is there to help us grow Michael. We have plans to expand operations and we are using the cash that we are building up to give us more options to build greater growth in the company. A dividend or a share buyback program is not a recommendation I have made for the board of directors, and they’re obviously the deciding factor on that. But to-date, we’re in a growth mode and growth requires cash. And so we’re very pleased with our position right now on our cash.

Michael White: Very strong position. Yes.

Michael McCormack: Thank you for the question, Michael.

Operator: Thank you. Your next question is coming from .Your line is live.

Unidentified Analyst: Yes. Hi, Mike. Hi, Chuck. Congratulations on the record sale and earnings year. Can you give us some updates on your armor efforts?

Michael McCormack: Sure, Erin. It nice to talk to you again. Yes, a tremendous year. I think the entire team performed really well. Our armor efforts are continuing to go as planned. I think, announced during the year additional orders of the strike based panels to our partner KP, who in turn, provides those to the U.S. Navy. We still continue to advance our overseas partners a solution that we think by the end of ’23, may have the final decision for production award. Not only Erin, we also won a small business innovative research award to develop a new UH 60 blackhawk armor floor. And we continue to do testing and evaluation with the Southwest Research Institute down in San Antonio, Texas, to try to qualify our armor for even greater applications on larger formations in the military.

Unidentified Analyst: Fantastic. In the past, on some conference calls, you have referenced a possible armor contract for military vehicles going to South Asia. Can you update us on this program?

Michael McCormack: Yes. So that program is still alive and going well. We continue to do optimization testing. We are actually moving into a new phase now which is integration testing so where we have to make provisions for mounting onto a vehicle. And we expect that test will happen sometime in Q2 and then hopefully, like I alluded to that production decision will be made later in the year.

Unidentified Analyst: Great. Do you have competition on this system or?

Michael McCormack: Yes. Well, we always have competition. Right. And so one of the advantages of our armor system is that it’s a relatively lightweight for the threats we’re trying to defeat. So when you go with a monolithic steel or aluminum, we have significant advantage in weight, which provides the vehicle to operate as intended. I think, as you recall, there were lots of instances during the U.S. to war front where we were overburdening vehicles with so much armor that they had second and third of effects on the vehicle and drive train and chassis. So I think one of the advantages of our solution is lightweight to stop a significant threat right.

Unidentified Analyst: Great. On the armored vehicles. These are mostly new programs. Are there any chance of when they upgrade the old systems that they could use your systems?

Michael McCormack: Yes. Well, certainly there’s always opportunity to do that. Right. And so what happens right now is it’s a more deliberate contracting schedule right now in the U.S. But Anthony has been attending several meetings up in the Detroit Arsenal to talk about future years and upgrades to the U.S. fleet. And that’s obviously a significant opportunity for us, but that’s a long process with big friends that we have to work with so.

Unidentified Analyst: Great. So this carriers call lightning aircraft carriers. Wouldn’t that be an obvious area that since they are in a way many aircraft carriers that would use your system?

Michael McCormack: Yes. Well, certainly there are a lot of surface vessels in the U.S. navy and allied navies that could benefit from our hypertech armor. It has the advantage of relatively lightweight for hyper ballistic threats and also can withstand the harsh environmental conditions. So I think that bodes well for our future with surface vessels and the U.S. navy and the allies.

Unidentified Analyst: Great. Okay well thank you.

Michael McCormack: Thank you Erin for the time.

Unidentified Analyst: Keep up good work.

Operator: Thank you. Your next question is coming from Ron Richards. Your line is live.

Ron Richards : Hey guys on the last conference call you talked about being very excited about the electric vehicle market. I was wondering if there’s any updates on electric vehicles?

Michael McCormack: Well, we certainly have lots of progress to report. Anthony are you on the line? Do you want to take this one?

Anthony Koski: Yes so hi Ron. Thanks for the question. So yes we’ve certainly made a lot of progress. Certainly the commercial vehicle market is definitely competitive and certainly a cost sensitive market. So we continue to work with customers and the system integrators to try and identify where can we bring value. So we’re certainly making progress in those discussions and understanding where some of the gaps are in trying to understand this investment in U.S. infrastructure in the EV market and how we can bring value there. But again, it’s a long process. It’s a long qualification process and we’re really working on understanding what the needs and gaps are in that market so that we can identify a technology to bring value to those needs. So we’re certainly making progress. But again, it is a competitive process and it also is very cost sensitive. So we’re really focusing on what is the value proposition and how can we meet those needs.

Ron Richards: Okay, and one other question I had was you were talking about possibly hiring an investor relations firm in the fourth quarter also. Any progress on that?

Michael McCormack: Yes. Hi, Ron, this is Michael. So we have narrowed it down to a few IR firms, if you will, and we’ve decided that we are going to begin by attending two investor relations conferences in fiscal ’23, one remotely and one in person. And so we’ve targeted, I think one is in Q2 and one is in — don’t hold me to it’s either Q3 or Q4 and then we’ll measure our success with that. We certainly appreciate the opportunity to talk to investors directly and we like that approach and so we’re going to try that first, Ron. But we do have two or three IR firms we are still engaged with talking about how they can help us add value.

Ron Richards: Okay, great. Thank you.

Operator: Thank you. There are no further questions in the queue.

Michael McCormack: Okay. Well, Matthew, thank you for hosting us today. Anthony, I think Dan’s out probably in the room too with Chuck. We think the future is — go ahead.

Chuck Griffith: I just said Dan did come in here near future.

Michael McCormack: Yes. We think the future is very bright for CPS. We are continuing to make progress on just about every front. We’ve had a lot of success in ’22. We just wanted to share that with our investors in the community today. But we’re not done. We’re going to move forward in ’23. You can kind of see the blueprint of our growth plan and that continues to show very good results. So that’s kind of what we’re doing. I appreciate everybody calling in today and listening in and thank you for your continued support.

Operator: Thank you, everyone. You may disconnect at this time and have a wonderful day. Thank you for your participation.

Michael McCormack: Thank you, Matt.