Good day, and welcome to CPS Technologies Fourth Quarter and Year-End 2024 Earnings Call. [Operator Instructions]. It is now my pleasure to turn the floor over to your host, Chuck Griffith, Chief Financial Officer at CPS Technologies. Chuck, the floor is yours.

Thank you, Paul. 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' operations and environment. These uncertainties include, but are not limited to, the ongoing conflicts in Ukraine and Israel, other geopolitical events, economic conditions, market demands and competitive forces. 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, after which Chuck will review the financial results in greater detail. Brian?

Thank you, Chris. Fourth quarter revenue for CPS was $5.9 million with an operating loss of approximately $1.3 million. Sales declined year-over-year primarily due to the fulfillment of our U.S. Navy armor contract with Kinetic Protection, as previously discussed. But in the fourth quarter, our top-line rose significantly relative to third quarter of 2024. Due to increased customer shipments as our expanded production capacity came online. With strong customer demand this trend of increasing growth is expected to continue through fiscal 2025. And with improving margins and other growth aspects of our business also taking hold. I'll now turn the call over to Chuck to provide further details about our financial results, after which I will provide some additional perspective. Chuck?

Thanks, Brian. First of all, I'd like to thank everyone for their flexibility as we rescheduled this call from last week to this week. Effective for our 2024 audit, we have new auditors on board, PK Echo Conor Davies. We made the change to be sure to allow them to become sufficiently familiar with our company. We're impressed with their capabilities and are glad to have them in place as our auditors. As was just mentioned, the company's revenue totaled $5.9 million in the fourth quarter compared with $6.7 million last year. In the year-over-year comparison, most of the change was due to the fulfillment of our armor contract with Kinetic Protection earlier this year. We're pleased that most of the recent quarter provided revenue that equaled our best quarter from earlier in 2024, which was Q1, even though there were significant armor shipments in Q1 and none in Q4. The recent growth in sales of our other product lines filled this sizable GAAP. While revenue growth is accelerating due to other program wins Kinetic protection remains cautiously optimistic about landing additional armor orders for other naval ship classes in the coming year. We believe our armor offering has support in Congress and at key levels within the U.S. Navy. In the meantime, we are benefiting from continued strong demand for power module components and related solutions from both new and existing customers. Our product development efforts are also progressing according to plan. For example, we've received several SBIR awards, which are expected to expand our product portfolio in response to customer demand. Brian will discuss this more in a moment. We reported a gross loss in the fourth quarter of $0.3 million or approximately negative 4.6% of sales compared with a gross profit of $1.1 million or 17% of…

Okay. Thank you, and good morning, everyone, again. As Chuck just described, fourth quarter was difficult financially, but we also believe the company demonstrated concretely the promising path that we are on. As expected, it was a transitional period, and we're on track for improved financial performance going forward. We're very pleased that our first of production is fully operational with ramp-up weekly output, we saw our Q4 top line growth of 40% sequentially from Q3. In addition, our margins are set to expand given that we had sizable nonrecurring expenses in the fourth quarter, as Chuck discussed. At the same time, we continue to rack up several wins that with ongoing strong customer demand aligned with our vision for fiscal 2025 and beyond. Our core businesses of metal matrix composites and hermetic packaging are on solid feet. We are actively fulfilling the $13.3 million contract that we recently finalized with a long-standing semiconductor manufacturer to provide power module components through September of this year. We have been fulfilling this contract since October, and our increased production capacity for various metal matrix composite products has materialized into greater shipping volumes to this and other key customers. As a reminder, our components are utilized primarily in high-speed rail, wind turbines and electric vehicle applications. We anticipate continued strong demand. The course we've charted for CPS continues to build on these core product lines, while also expanding our offerings. We are targeting new applications in key markets that have demanding technical requirements, which we believe our technologies and capabilities are uniquely suited to address. In the past, I've talked about how we added internal 5-axis machining capability and leveraged $200,000 of funding from the Commonwealth of Massachusetts to do so. We are now actively fulfilling orders that rely on this newly added…

[Operator Instructions]. We did have a few questions in queue at this time. The first question is coming from Ron Richards. Ron is a private investor.

Congrats on that order for the radiation shielding. I was wondering if you know how big the market is for radiation shielding for trucking business?

Yes. Ron, thanks for your question. It's in development because the funding from the DOE was, as you mentioned, was related to trucking primarily focused on secondary containment for micro reactors. Obviously, the less weight that's put onto the truck as barrier material, the more capacity the truck can have for its cargo. But some of that is, I think, realistically speaking, is further out on the time line. So we're funded to develop the product with that application in mind. But what we have found is as we've talked to people in the industry with what we have, we're getting early interest for other applications. For example, facility managers are saying, I could build a concrete wall, that's heavy, but then I got to have a thicker concrete pad underneath it, which is a problem, and it's costly. And I also have smaller needs locally inside a room, inside a work area, maybe an elevated space up above where there's piping or other hazards. So in the more near term, we're seeing opportunities that are, frankly, unrelated to the trucking aspect and there's even some applications that are a lot of our hermetic packaging solutions are going into aircraft or satellites and there's radiation risk for all these components that are in space. So we're also having some discussions there. So there's a number of markets that are are actively being discussed here at CPS.

Okay. Do you have any idea of what kind of revenues you might look at in the next year or two for those applications?

It's hard to put numbers on it. Because number one, the markets are diverse and sizable, but we have to be certified as a potential supplier. We have to have customers doing their application path and those sort of things. So getting introduced into certain products will take some time. It's hard to quantify, but we also see in this order that the customers saw what they needed, and we're frankly, quick to act because they know what they need. So that's probably something of an outlier in an application that you can imagine is fairly conservative as far as what you're going to do for containment but we think these opportunities will continue to come forward.

The next question will be from Francis Goldwind, Francis is a private investor.

I wanted to ask about the munitions round. Once you develop this, if it's accepted by the army, does that mean that you will be manufacturing those those warheads.

Well, what it means is, in this case, the two munitions SBIR we've been funded for are a little different than the third one related to FRA. In these two related to the munitions, the technical team at the army wrote up a very specific topic. And they said, we have a very specific challenge that we need someone to solve if we knew how to solve it, we wouldn't be writing this up, but we're writing up a question, and we're looking for someone with the right answer. So CPS proposed an answer based on our technical capabilities and what would come about after that is if we can satisfy again, Phase-1 being concept, you claim you could do it, can you prove it in the lab. And potentially, if we're funded by Phase I okay, let's make a prototype that the army can actually test on. And then if they can validate that it satisfies their need, the question would become, do we become a commercial provider of product to the Army. So it's not necessarily a given, but the fact that they're spending R&D money to find a solution tells you that they have a very real need. And the real power of the SBIR funding is that it comes with the potential to be the sole source provider down the road. We -- in the past, there are some contract officers that say, well, I need multiple bids, you need to share your technology with another manufacturer. And the appropriate answer to that is we do satisfy your competitive requirement as a federal agency because we competed on the SBIR way back at the beginning of Phase I. So you can be a sole source provider. It's a powerful tool for an SBIR program, and we will be working on these munitions problems over the next six months. And then hopefully, that transitions into a Phase-2 and that would then be an offering to the Army that they would need to decide to engage for a particular application or program.

And what do you think the time line for that process would be? Nothing -- just an approximate time line. Is it months? Is it years?

Well, this SBIR is a 6-month Phase-1, again, and that would be pursuing proof of concept. That program has now -- those two programs have now started very recently. So we have from now into Q3. What we'd be doing at that point is proposing Phase-2 to the Army based on the progress that we demonstrated in Phase I. If they engage the Phase-2, that could be something like $1 million or $1.1 million over 24 months, where we would then be trying to deliver a prototype to them in that period, at which point that federal program could again be extended or could conclude. So it's that sort of typical time frame before you really get to a demonstrable solution, and again, that's where the radiation shielding, definitely moved quicker than typical. It can happen. But that 6-months plus about two years is the standard SBIR framework.

And on the radiation shielding, coming back to the prior question, I understand that you don't have specific customers. But have you sat down with a sort of a back of an envelope and said what's the size of the addressable market here, potentially high and medium, low?

That's -- our work on that is early, and I'm not prepared to share numbers on that because we are considering different applications and markets that are that we're becoming aware of as these customers raise their hands and express interest and that leads to another conversation and that leads to another conversation. So these different applications are not fully quantified by us.

Okay. Can -- maybe you could talk a little bit about your I guess I would say the fixed element -- your fixed cost element in your cost of goods. I -- the loss of the armor, the end of the armor program as it was, was a result -- was the cause of a reduction in revenues, but the cost of goods didn't change materially. Why is that?

The cost -- the margins on the -- our traditional products, the metal matrix composites and the hermetic packages are not as good as they were on Armor. And the other part, the bigger part of that, I think, though, was the fact that we spent most of the second half -- well pretty much the entire second half of 2024, ramping up for these increased production demands. And there are a lot of expenses involved in that, that presumably will go away. So we had to hire people for the third shift those folks have to be trained up. So they would work on first ship for two or three weeks before they actually went to the third shift. In fact, we had people coming in, in July at the beginning of July to be trained initially, and we didn't actually move to the third shift until the last week of August. So we had a number of these expenses that were I'll say, nonproductive or minimally productive expenses. And then once we got the third ship going, we still have to deal with a lot of initial turnover folks, hey, yes, I can work third shift and then the reality of it hits and two weeks later, they leave, and then you've got to start that process all over again. So we did -- that was a major impact on the fourth quarter. We had approximately $200,000 of additional labor costs than we anticipated having just in that fourth quarter. And it doesn't just impact the labor itself, but also the quality and the yields that we get out of the product we're making. These base plates are while they're a fairly simple concept, they're not easy to make at all. And in fact, for our customers, just…

[Operator Instructions]. The next question is coming from Greg Weaver, Greg is a private investor.

Nice to see all the SBIR. I mean it's great to get paid to develop your own tech. I might ask this before, but remind me again, is this a revenue item or a cost offset?

Both, both. We -- when we submit the budget to make the product we're -- we do get a piece for profit and overhead absorption included in that. And I'll also say, I think because we're working on these SBIR, we've got folks here, scientists here that are here because of these projects. So to a degree, it's sort of a cost offset, but it's also sort of a -- it does provide some additional flow-through to the bottom line.

So the funding shows up on the revenue line item, though, and then

Yes.

So reading your PR. So I'm to believe that the bookings in the quarter then were greater than $5.9 million because you mentioned about your backlog being up.

That would be fair to say, yes. definitely.

Okay. I can't remember. Do you disclose the backlog at year-end or quarterly in the Q? I can't remember.

We don't. We don't.

And Brian, maybe I missed it. You said something I heard you say when you're talking about the big contract with your European power guy for the plates. You said something about September of this year? And did you reference did you -- the pricing change at all there?

Yes. So what happened here, Greg, was that's a customer who buys typically out of one year commitment, and that's from October one to September 30. And we had an earlier agreement with them, which kept product flowing, but was not fully resolved on quantity and pricing and that kept us going in Q4 of 2024. And then subsequently, we finalized pricing and quantities, which resolved at that $13.3 million. So that was resolved, couple of months ago, but well into that 12-month period, but that agreement is for that 12-month period. So we're actively fulfilling that through the end of September under that $13.3 million contract.

Do you get any -- I assume, hopefully, a price one up some, do you get any credit for the stuff you already shipped in?

Yes, that was retro. The pricing was retroactive to 10.1 million.

10.1. So we saw that already in Q4.

Correct. Yes.

Right. Yes. Your gross margins did go up, but obviously, they're still negative. So -- you went through it already Chuck, with the prior questioner or to a degree. But I mean, help me understand here because in one minute, you say, "hey, I offset the Armor loss -- but then in the next breath, you're like, well, I'm underutilized and lacking volume. That's why my gross margins are the way they are. So I guess, help me rectify that. I mean it sounds like scrap and rework is the issue here.

That is a major factor without getting into specific numbers. Our yields went down fairly significantly from the first six months of 2024 to the last six months of 2024, as we added these folks. And we've also -- yes, so yes, basically that's the main piece. We also have a number of items that go through as expenses. And as we ramped up and we've built up purchases, so that we could handle the additional manufacturing capacity or needs, we bought more of some of these supplies, not inventory items, but supplies to make sure that we didn't run out so that we didn't have to shut down operations for two days while we waited for something to come in. So there were a number of -- there was kind of a growth in that -- in those expense categories as we ramped up more than we would expect on an ongoing day-to-day or week-to-week basis. So there was some of that involved there, too. There were a number of factors that we expect -- that impacted Q4, but we expect to either go away completely or certainly diminish as time goes by during 2025.

Well, we're 80% of the way through Q1 here, I guess, how is manufacturing these days?

Much better. Okay.

Before I was pressing you, you said, well, if I could do six million rev, I hopefully get 15% to 20% positive gross margins, right? I mean is that realistic?

I think -- well, we're still shooting for that 15% to 20% margin for sure. And I think that's where we expect to be once we're fully once we have a good team here and that kind of thing, yes, I think that's very realistic. And I think -- I don't think I know that's what we're we're shooting actually even to go higher than that. But.

Yes, I would add, Chuck. -- some of the harsh realities of Q4 in a couple of different buckets. I mean one is employee #1 training, #2, so employee number one is not as efficient even know their experience. And then you've got the poor efficiency of the new employee once they're in the job and then you have a yield defect impact. And those three different challenges improve on different paces over time. And I think we're going to see that play forward in Q1, Q2, et cetera. Obviously, the distraction of the first employee goes away once that other person is in the job and the other things take more time for a new person to be as capable as somebody who's been here five or 10 years.

Got you, Brian.

I was just going to add a little bit to that. We know, I mean, for a fact that if you take one of our employees that have been here for five years or 10 years or whatever, that person is significantly more productive than somebody that's been here for three or 4 months. There's -- it's a definite noticeable difference. We have that data, and we know it to be true.

Right. Sure. Well, good luck, I guess, getting the kinks out and we'll tune in here for Q1 shortly. Thank you.

And we did have time for one quick follow-up from Ron Richards.

I've been a shareholder for years and on previous conference calls, I've asked about this Southeast Asian Armor contract. -- you had scheduled a shoot and the shoot didn't go as well as planned. And I was wondering if that Armor would have been reworked for that project? And how is that going?

Yes. There's existing development work going on to restore that potential. That's an active program that's worked on by our technical team in parallel to all the other things that we have going on. But that remains an opportunity for the future as we work to get back towards the ballistic performance and certainty of a shoot and that kind of thing. So yes, that was a challenge from a while ago that we're still working to resolve and it's part of what our team is working on as we understand the fundamentals of that particular design for that particular specification, each Armor customer has its own qualification tests, the velocity of what projectile at what angle to the panel and that sort of thing. So -- all those factors are what our team is looking at to get back to that test cycle.

There's no projection on any kind of time line when that might have another test that would be further out.

That would be further out. There's nothing on the schedule right now. We do have some testing going on, but it's preliminary to actual shoot.

We are testing it I think the question -- I was taking the question is sort of a customer orchestrated test. We are doing CPS testing but a customer test would be further out.

There were no other questions at this time. I would now like to hand the call back to Brian Mackey for closing remarks.

Okay. Thanks, everyone, for joining our call. As Ron -- Greg mentioned won't be that long to our Q1 call. But thank you for joining us today. And if you have any separate questions, please follow up with Chris Witty, our Investment Relations adviser. Thank you.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.

Thank you, everyone.