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Operator: Good day, and welcome to the CPS Technologies Second Quarter 2023 Earnings Call. At this time all participants have been on a listen-only mode. The floor will be open for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Chuck Griffith, CFO at CPS Technologies. Sir, the floor is yours.

Charles Griffith: Thank you, Paul, and good morning, everyone. Today, I’m joined by Brian Mackey, our incoming President and CEO; and Anthony Koski, our Corporate Development Officer. But first, Chris Witty, our Investor Relations adviser, will provide a brief safe harbor statement. Chris?

Chris Witty: Thanks, Chuck, and good morning, everyone. 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 as subject to the many uncertainties that exist in CPS’ operations and environment. These uncertainties include, but are not limited to, the war in Ukraine, economic conditions, market demands and competitive factors. 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’ll turn the call over to Chuck to offer his perspectives on the second quarter results. Chuck?

Charles Griffith: Thank you, Chris. First, let me just take a moment to introduce Brian Mackey, our next President and CEO. The company led an exhaustive search to find an experienced leader for our next phase of growth and Brian’s background makes him perfect to fill this role. We look forward to him being fully on board in very near future as well as on our next earnings call. Would you like to say a few words, Brian?

Brian Mackey: Thanks, Chuck, and good morning, everyone. While I don’t expect to be answering any questions this morning, I just want to let our investors know I’m excited in joining CPS at this critical point or growth trajectory. I’m familiar with our products and target markets. I firmly believe the company is poised for a substantial acceleration in its topline profile due to innovative technology and unique applications. My background does include helping organizations meet their full potential by responding to demanding dynamics and bringing on new customers, which I look forward to doing in the near future. I’d like to thank the Board of Directors of CPS for this great opportunity. With that, I’ll turn the call back over to Chuck.

Charles Griffith: Thank you, Brian, and welcome aboard. Today, we’re pleased to announce second quarter revenue of $7.4 million and an operating profit of $731,000 for the period ending July 1, 2023. Both of those are records for the company. As I’ll discuss more in a moment, we continue to execute in a way that puts us squarely on track for our best year ever, setting the stage for even further improvement in 2024. I’ll speak more later about the overall business progress moving forward. But for now, let me discuss the financial results in more detail. As I just mentioned, revenue totaled $7.4 million in the second quarter compared to $7.1 million last year for the second quarter, an increase of 4%. The revenue for the second quarter of 2023 represents the best quarter in our company history.

Sales growth was driven by demand from one of our major customers as well as increased armor shipments. Gross profit in the second quarter totaled $2.2 million or 30% of sales. This compares with gross profit of $1.8 million or 26% of sales last year. The increase year-over-year reflects the impact of higher sales on fixed factory costs as well as improved factory efficiencies and product yields. Selling, general and administrative expenses totaled $1.5 million in the second quarter, an increase of 25% when compared to $1.2 million in the prior year period. There were three major reasons for the higher expense. First, there was a significant increase in travel costs since last year. We were just beginning to come out of the COVID-19 pandemic.

And at that time, many conferences continue to be virtual and numerous customers continue to prohibit outside visitors. In contrast, this year, our business development team has been doing significantly more travel to meet with customers and bid on new opportunities. In addition, the company increased its 401(k) matching formula in 2023, resulting in increased payroll costs. And lastly, the company accrued severance to a long-time employee who’s service with the company was terminated. The company generated operating income of $731,000 in the second quarter compared with $669,000 last year. This increase of 9% was a result of the higher gross profit, partially offset by the increase in SG&A expenses. Turning to the balance sheet. We ended the quarter with $8.7 million of cash, up from $8.3 million at the end of 2022.

The increase was due primarily to higher net profit, partially offset by an increase in accounts receivable and a reduction in deferred revenue. Trade accounts receivable at July 1, 2023, totaled $5.1 million versus $3.8 million as of December 31, 2022. This change was due to an increased – due to increased sales in the quarter and the impact of deferred revenue. Our other receivable account balance of $75,000 was reduced from December 2022 balance of $686,000 due to the receipt of the employee retention tax credit in April. Inventories totaled $4.8 million as of July 1 compared with $4.9 million at the start of the fiscal year. Turning to the liability side. Payables and accruals totaled $3.2 million as of July 1, 2023, an increase from $2.7 million as of December 31.

This primarily reflects a timing issue in that, a number of bills came late in the quarter, which were not due to be paid until Q3. Deferred revenue increased from $2.8 million at the end of 2022 to $1.8 million on July 1, 2023. As a reminder, deferred revenue predominantly represents prepayments for large orders to help defray 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. During the second quarter, we announced one major contract win and additional follow-on purchase order valued at $1.4 million for hybrid tech armor panels from Kinetic Protection, the U.S. Navy’s prime subcontractor. The panels are an integrated component of advanced ballistic shields developed in support of protection system upgrades by the Navy.

The purchase order will equip more ships with enhanced ballistic protection for crew-served weapon stations. In addition, the company continues to see an active bid environment across all its end markets, including SBIRs and new contract opportunities within the Department of Defense. Anthony will speak more about the outlook in a moment which remains very positive. While the overall business activity level gives us confidence in the company’s growth trajectory, we want to let investors know that as was the case last year, contract and shipping timing will likely lead to Q3 revenue being lower than the second quarter’s record pace. Conversely, since some of the revenue for the third quarter has been pushed into the fourth quarter, we anticipate a very robust end to the fiscal year with 2023 performance being our best ever.

I’d now like to turn the call over to Anthony, so that he can get into a little more detail on some of the numerous growth opportunities across the business development front. But before I do so, let me just mention that this will be Anthony’s last time joining us on our earnings call as he will be leaving CPS to pursue a new opportunity at the end of this week. It has truly been a pleasure and honor to work with Anthony these past few years, and we all wish him the best going forward. Anthony?

Anthony Koski: Thank you, Chuck. I am pleased to see CPS pull together in post record results this quarter as the business development and marketing teams look for new opportunities to drive growth and position the company for the future. As Chuck mentioned, the outlook for CPS remains bright given recent wins, the many items in our pipeline and an overall active bid environment. Demand from key customers for AISiC remains strong, and this continues trending upward. The previously announced hybrid tech armor panel installation on naval aircraft carriers has begun and we successfully ramped up to two kinetic protection shipments per week during the quarter without any disruptions or significant head count additions required. At the same time, we’re working to expand our reach across other military platforms and applications, and we’re currently negotiating a new long-term agreement with a Tier 1 aerospace OEM to supply a wide range of hermetic packaging products.

We should have more details about this and several SBIR opportunities later this year. During the quarter, we attended PCIM Europe, the Thermal Management Expo and exhibited at the Electronic Components and Technology Conference in Orlando. The outlook for 2023 remains strong, and our team is delivering on all their growth objectives. 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 in new industry applications. Lastly, as Chuck mentioned, my last day at CPS Technologies will be tomorrow, August 4. This was a difficult decision. The team here has made great progress over the past two years, but in many ways, we’re only at the tip of the iceberg for what’s to come.

Ultimately, I made a choice based on an opportunity closer to family. I would like to thank the senior management team, Dan Barton, our VP of Operations; Dr. Kachur, VP of Technology; and of course, Chuck, you for all of your support these past years. I am confident that the company under Brian’s leadership will continue our growth trajectory building a truly great organization. Thank you also to the Board of Directors as well as our shareholders for your support and trust. In closing, it has been my honor to be a part of such a fantastic enterprise, and I look forward to following your bright future. Thank you. This concludes our prepared remarks. Chuck and I are now able to take any questions.

Operator: Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] We do have a question coming in from [Steve Fossi]. Steve, your line is live.

Unidentified Analyst: Thank you. Good morning.

Charles Griffith: Good morning.

Unidentified Analyst: I was a couple of minutes late, so I apologize if this is – has already been covered. Do you expect the SG&A to go back down in the next quarter?

Charles Griffith: Yes. We didn’t cover it, but yes, we do. There were definitely a couple of things in there that were unique to the second quarter, in particular, the severance payment that I mentioned.

Unidentified Analyst: Okay. Good. And the other thing is, if I might, could you provide maybe a little bit of color on the – like the mix of business that you have at the moment?

Charles Griffith: Sure. Yes. So I would say it’s fairly close to one-third, one-third, one-third in terms of armor hermetic packages and AISiC. Not exactly, but maybe 35 for one and 30 for another, that type of thing. So it is pretty well spaced out amongst the three product lines and that sort of has been our goal right along, although – and obviously, there’s also a small amount that goes for R&D with the SBIR projects. But that’s just a few percent. So for the most part, basically one-third, one-third, one-third.

Unidentified Analyst: Great. Thanks.

Operator: Thank you. [Operator Instructions] And we did have another couple of questions come in from [Wolf Scheck].

Charles Griffith: Hi, Wolf.

Unidentified Analyst: Can you hear me?

Charles Griffith: Yes.

Unidentified Analyst: Good morning, everybody. Congratulations on a very good quarter. Maybe you could update us in terms of the role, the investor relations firm is planning to how they’ve helped you [indiscernible] be getting one and you have – finally have one?

Charles Griffith: Yes. I know that’s something you’ve been asking us about for many years. Yes. So we certainly – Chris and his firm came on board with us on May 1. And I think so far, the relationship has been excellent. We’ve had a number of calls with outside investors that Chris has been instrumental in setting up. In addition, he’s made what I would consider some very insightful comments about some of the ways we did our presentations in the past versus suggestions for ways to improve them as well. So I think so far, so good. It’s been, I guess, August 1 would be three months if I’m doing my math correctly. And yes, we’re very pleased with the relationship so far.

Unidentified Analyst: Thank you.

Operator: Thank you. [Operator Instructions] In the meantime, we do have [Steve Fossi] with another question. Steve, your line is live.

Unidentified Analyst: I just wanted to thank you, Chuck, for filling in during the break there.

Charles Griffith: Thanks.

Operator: Thank you. And we did have another question coming from [Ron Richards]. Ron, your line is live.

Unidentified Analyst: Hi guys. On previous conference calls, you mentioned possible armor contract with Southeast Asia customer, it was supposed to be done by the end of last year and it was delayed. Is there any update on that particular contract?

Charles Griffith: Sure. Yes, Anthony, you can take that one. You know – go for it.

Anthony Koski: Yes. Hey, Ron. How are you? So yes, it’s still very much active. We’ve continued to see delays, and I think we briefed on the last quarterly call that we were awaiting one final shoot to get us to the next round of qualification for what they call production qualification. That shoot unfortunately has continued to be pushed. We have been expecting over the year that it will happen by the year, and that’s still the expectation. Right now, we’re tentatively looking at mid-September for that shoot to happen. It is happening overseas. And the majority of the delays on the shoot has been related to identifying a facility and a range that allows us to shoot the level of threat that this test requires. Obviously, I can’t get into specifics on that piece. But yes, it is still very much active. We’re still planning to do the shoot by the end of the year. At the moment, it’s tentatively scheduled for mid-September.

Unidentified Analyst: Okay. Thank you.

Operator: Thank you. And [Wolf Scheck], if you did have a follow-up, your line is live, please if you wish to proceed with a follow-up.

Unidentified Analyst: Thank you. Just switching subjects. Is there a way you could comment on your defense business and maybe your electronic car involvement in any fashion? I’m not quite sure how far you can go on that, but may want to discuss that.

Charles Griffith: Well, certainly, that relates to the AlSiC and the baseplate side of our business. It’s something that’s out there. We have customers that are supplying IGBT modules to automobile manufacturers. Some of them are utilized copper baseplates, which, of course, we’re not really involved with and others are using AlSiC baseplates. There’s certainly a lot of opportunity there. The real question is how much will these [vivo] manufacturers want to spend the extra money to use AISiC. I think as you get to larger vehicles, larger trucks, maybe perhaps military vehicles, that kind of thing, it’s more likely that we’ll be involved in those kinds of things. I think a little small economical, relatively inexpensive electric car is probably not going to be where you’re going to find an AISiC baseplate.

So I guess in answer to your question, Wolf, it’s something that we see as an opportunity down the road. It’s not something that we’re counting on today, of course. But certainly, if it comes to fruition, it could be a major – have a major positive impact on our growth. Anthony, is there anything you want to add to that?

Anthony Koski: Yes. I’ll say, Wolf, on the defense side of the business, it’s certainly much more active at current than the electric vehicle side of things. We have multiple development projects ongoing – really aerospace and defense I want to clarify that. The long-term agreement that I referenced that we’re negotiating is in support of aerospace application. So the defense and aerospace side is certainly more active at the moment. In terms of EV, it’s still a very much a developing market. And as this transition from silicon to silicon carbide chips continues to advance at a rapid pace, identifying where and what those new challenges bring is where we’re currently at. So we’ve got some very new development projects, I’ll say, that are at various stages in their infancy, but are more geared toward what does a next generation, if you will, AISiC or thermal management-type baseplate look like.

And that’s really where we’re focusing our efforts. A piece of it is, we have the niche applications for luxury, high-performance, high stress applications where AISiC has always had a play. But when we’re looking at more of the mainstream EV application, it’s always been a difficult sell. So we’re looking at what are ways that we can leverage our expertise to maybe move up the value chain a bit, add some different materials embedded into the AISiC. There’s a lot of different avenues that we’re currently going down and multiple ones that are in conjunction with customers who are developing this technology. So I will say that defense and aerospace, while being much more active at the moment and where I think a lot of near-term growth is positioned, we’re certainly still very active in EV.

It’s just – it’s a slow process that we’re still continuing to work through to identify where are there areas where we can bring real value and have a differentiator compared to a copper baseplate or other monolithic type of thermal management applications. So a lot stuff going on there, but it’s very much development, low-volume building up towards that, it’s nowhere near where I think some of the aerospace and defense opportunities are.

Unidentified Analyst: Thank you very much for your update.

Operator: [Operator Instructions] And there doesn’t appear to be any other questions at this time. I would like to hand the call back to Chuck Griffith for closing remarks.

Charles Griffith: Okay. Well, thank you very much, Paul. And thank you, everyone, for joining us this morning. In summary, we’re very excited about the future here at CPS and certainly very excited about Brian coming on board to help lead us through that future to that future. And yes, so I think that, again, we’re very, very optimistic about the future. And with that, Brian, do you have any final comments or anything?

Brian Mackey: No, no. Thanks, Chuck.

Charles Griffith: Okay. Very good. So thank you, everybody, for joining us, and we’ll talk to you in about three months.

Operator: Thank you. This does conclude today’s conference. You may disconnect your lines at this time. Have a wonderful day. Thank you for your participation.