CPS Technologies - Earnings Call - Q4 2024

Executive Summary

• Revenue rose 40% sequentially to $5.93M, though down year-over-year due to the completed U.S. Navy HybridTech Armor® contract; gross margin was -4.6% and EPS was $(0.07), with margin pressures from third-shift ramp and training costs.
• Capacity expansion (added third shift) and the finalized ~$13.3M power module components contract position CPS for stronger 2025 shipments; management highlighted higher backlog and improving operations as catalysts for a return to profitability.
• Product portfolio expansion advanced: first commercial radiation shielding sale and three new Army Phase I SBIR awards (each $250k, 6 months), bringing externally funded programs to six (five SBIRs).
• Near-term investment narrative: margin recovery as nonrecurring ramp costs subside, continued strong demand in MMC and hermetic packaging, and potential additional armor orders over time supporting upside optionality.

What Went Well and What Went Wrong

What Went Well

• “Revenue rose 40% sequentially from the third quarter, due in large measure to an added third shift and increased production capacity,” demonstrating execution on throughput and shipment cadence.
• Ongoing power module engagement finalized to ~$13.3M for Oct–Sep delivery; “the increased demand for our core products… including our ongoing $13.3 million power module contract, bolsters our outlook for 2025” and management confirmed the 12‑month period and ramp underway.
• Portfolio expansion momentum: first commercial order for radiation shielding and three new Army Phase I SBIRs support new markets (vehicles, aircraft, munitions) and validate CPS’ external funding strategy.

What Went Wrong

• YoY contraction from armor completion: Q4 revenue $5.93M vs $6.75M in Q4 2023; gross margin fell to -4.6% vs 17.0% last year, as lower volumes reduced scale and third‑shift startup/training weighed on efficiency.
• Profitability headwinds: Q4 operating loss $(1.32)M and net loss $(1.00)M; management cited nearly ~$600k of nonrecurring ramp costs in Q4 and ~$200k unexpected labor costs, plus yield issues impacting scrap and cost absorption.
• Armor program visibility: while Kinetic Protection remains cautiously optimistic, budget uncertainties mean timing for additional naval ship classes is not assured, keeping near-term revenue mix more reliant on core MMC and hermetic packaging.

Transcript

Operator (participant)

Good day and welcome to CPS Technologies' Q4 and year-end 2024 earnings call. At this time, all participants have been placed 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, Charles Griffith, Chief Financial Officer at CPS Technologies. Chuck, the floor is yours.

Charles Griffith (CFO)

Thank you, Paul. Good morning, everyone. Today I'm joined by Brian Mackey, our President and CEO. We look forward to discussing our Q4 results with you. First, Chris Witty, our Investor Relations Advisor, will provide a brief safe harbor statement. Chris?

Chris Witty (Investor Relations Advisor)

Thanks, Chuck, and good morning, everyone. Before I 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 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 statement. Additional information can be found in our filings with the SEC. Now I will turn the call over to Chris Witty, our Investor Relations Advisor to offer his perspective on the Q4, after which Chuck will review the financial results in greater detail. Brian?

Brian Mackey (President and CEO)

Thank you, Chris. Q4 revenue for CPS was $5.9 million, with an operating loss of approximately $1.3 million. Health declined year over year primarily due to the fulfillment of our US Navy armor contract with Kinetic Protection, as previously discussed. In the Q4, our top line rose significantly relative to the Q3 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, 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?

Charles Griffith (CFO)

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, PKF O'Connor 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 Q4, 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 gap. 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 US Navy. In the meantime, we're 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 Q4 of $0.3 million and approximately negative 4.6% of sales, compared with a gross profit of $1.1 million, or 17% of sales last year. This decrease was due to lower overall revenue and reduced manufacturing efficiencies, along with costs associated with hiring and training the third shift, as we've discussed in the past. Specifically, various non-recurring costs were incurred in the quarter, totaling nearly $600,000. These expenses were incurred as part of the ramp-up of production volumes, including excess material costs, additional labor, training expense, and other inefficiencies. We expect that such one-time expenses are behind us, and we anticipate gross margin will improve as volumes climb in fiscal 2025.

Selling general and administrative expenses totaled $1.0 million in the Q4, basically the same as last year in the Q4, as we remain focused on controlling costs even while investing in new business development initiatives aimed to accelerate long-term growth. We also had some one-time costs this quarter related to retaining the new auditing firm. The company posted an operating loss of $1.3 million in the Q4, compared with operating income of approximately $0.1 million last year. We reported a net loss of $1.00007 per share versus net income of $0.200001 per diluted share in Q4 of fiscal 2023. Turning to the balance sheet, we ended the year with $3.3 million of cash and $1 million in marketable securities, as compared to $8.8 million in cash and no marketable securities at the start of 2024.

Trade accounts receivable as of December 28, 2024, totaled $4.9 million versus $4.4 million as of December 31, 2023. Inventories totaled $4.3 million at the end of the Q4, compared with $4.6 million at the start of the fiscal year. Turning to the liability side, payables and accruals totaled $4.0 million at the end of the Q4 versus $3.6 million as of December 30, 2023. As I mentioned earlier, PKF O'Connor Davies is now in place as our new audit firm effective for the 2024 audit. We had used Wolf & Company for many years and would like to publicly thank them for their service on our behalf. We felt that a full review of our audit services was appropriate at this time last year. Based on their robust capabilities, pricing, and strong track record, PKF O'Connor Davies was the firm we selected following that review. Now, Brian will provide a more in-depth discussion of the period.

Brian Mackey (President and CEO)

Okay. Thank you. Good morning, everyone, again. As Chuck just described, the Q4 was difficult financially. 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 third shift of production is fully operational. With ramp-up weekly output, we saw our Q4 top line grow 40% sequentially from Q3. In addition, our margins are set to expand, given that we had sizable non-recurring expenses in the Q4, as Chuck discussed. At the same time, we continue to rack up several wins that, with ongoing strong customer demand, align with our vision for fiscal 2025 and beyond. Our core businesses of metal matrix composites and hermetic packaging are on solid footing.

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 proficiency. Early this summer, we expect to achieve the milestone of our first such customer shipment. Our new 5-axis machining resource for hermetic packaging is a prime example of how we are expanding the sales opportunities that we can effectively pursue for our existing product lines. More broadly, we intend to add new product lines to our portfolio over time with new products that leverage our proprietary know-how, including the design, manufacturing, and testing of aluminum-infiltrated products to deliver unique material properties. Notably, 2025 has started off with our first commercial order for radiation shielding, which is CPS's first new commercial product in many years.

The accelerated timeline to market of our radiation shielding is quite unusual and provides a strong endorsement for our technology and the approach of our technical team. Normally, SBIR programs seek to achieve proof of concept during a short Phase I program, followed ideally by developing a workable product prototype during a longer Phase II. When federal funding ends, a small business like ours faces the challenge of achieving commercialization. In our case, our Phase II effort funded by the DOE started only six months ago.

Even though we have 18 months of funded development work remaining, we are, in parallel, now executing on a radiation shielding product order. While this order includes the potential for follow-on orders, we are most encouraged by the market's endorsement of our value proposition. This market includes several potential applications that are of interest, with each potentially benefiting from the lightweight and customizable solution we've developed. Similarly, on our fiber-reinforced aluminum, or FRA, under our license agreement with Triton, we are also working toward commercialization.

We have established FRA manufacturing capabilities in our facility and replicated the material performance results, including with third-party testing, that were originally achieved by Triton. This enables us to progress our discussions with potential customers. Based on FRA's relatively lightweight and higher strength at elevated operating temperatures, aerospace applications are one area of focus for us. We expect to have product samples in the hands of potential customers later this year. Internal efforts like these are augmented by the great success that we have had winning new externally funded development contracts, which build on our pursuit of SBIR funding, which we initiated in 2021. Aside from the two active Phase II contracts, which began in 2024, we've been awarded three Phase I contracts since the beginning of 2025.

This is simply spectacular and speaks volumes to our innovative technologies as well as our researchers advancing these new applications in response to the defined needs of our customers, particularly the Department of Defense. All three awards are with the US Army and are worth $250,000 each over a six-month period. Of these, two support next-generation artillery requirements, with one targeting the development of lightweight, ultra-low-temperature sintered ceramic materials that provide electromagnetic protection for artillery shells, while the other is focused on additively manufacturing highly dense refractory tungsten alloys meant to replicate the performance attributes of depleted uranium. The third new SBIR is CPS's first funded effort to further develop FRA, or fiber-reinforced aluminum, just one year after we became the exclusive global licensor.

The US Army is committed to reducing the weight of military vehicles, and as I mentioned earlier, FRA is an ideal candidate given its lightweight and high strength at elevated operating temperatures. This is part of the Army's Hybrid Electric Powertrain, Power, and Propulsion Systems initiative, which aims to enhance fuel efficiency and extend the operational range of military vehicles. It's a great new way to showcase our technology, and all three SBIRs offer the promise of further development and funding in the quarters and years to come. In addition, we have other recent submissions, including SBIRs, that are awaiting government response. We continue to identify specific customer challenges where we believe we can bring value with novel solutions based on our core competencies and material science. We're also continuing our work on a development effort funded by the US Naval Air Systems Command, or NAVAIR.

With this funding, CPS is developing composites for rocket motor cases and other related uses. With work that runs through Q3 of 2025, this program highlights additional applications where, once again, CPS's unique capabilities bring value in the face of demanding operating environments. As we enter 2025, we are pleased with the beginnings of a turnaround from our Q3 results. Production is now stable and growing with three operating shifts, and we expect continued high shipment volumes for the quarters to come. We expect that as our new production operators gain experience, they will continue to improve over the next few quarters and allow us to generate improving bottom-line results. In addition, as certain one-time expenses are behind us and with new research contracts to be fulfilled, we anticipate improving gross margins and bottom-line results as the year plays out and efficiencies improve.

We're experiencing continued strong demand for our metal matrix composite solutions as well as our hermetic packaging applications. At the same time, as I mentioned, we are actively seeking new customers in the aerospace industry that can benefit from FRA. We expect further development of this market this year. We are still optimistic given the product's excellent track record that Kinetic Protection could win armor orders for additional classes of Navy vessels in fiscal 2025, even given current budget challenges in Washington. Our ballistic solutions address a large market across various types of ships as well as other military applications, and we believe they have gained significant support both within the Navy as well as on Capitol Hill. In closing, we're upbeat about the opportunities ahead of us and the outlook for CPS in 2025 and beyond.

With continued strong market demand, expanded manufacturing capabilities, and promising advances that will further expand our product portfolio, we're well-positioned for growth and improved performance in fiscal 2025 and beyond. Once again, let me thank our investors for their passion and their patience as we navigated through several challenges last year. We're focused on winning new business, improving our operational execution, and expanding our addressable markets. In total, this should lead to greater overall performance and better financial returns, leaving us a stronger, more capable, and nimble company that is a reliable and critical partner to our customers in each vertical market that we serve. We can now open up the call for questions. Paul?

Operator (participant)

Thank you. At this time, we will be conducting a question-and-answer session. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Once again, please press star one on your phone at this time if you wish to ask a question. Please hold while we pull for questions. Once again, that is star one on your phone at this time if you wish to ask a question. We did have a few questions in queue at this time. The first question is coming from Ron Richards. Ron is a private investor.

Ron Richards (Private Investor)

Hey, guys. Congrats on that order for the radiation shielding. I was wondering if you knew how big the market is for radiation shielding for the trucking business.

Brian Mackey (President and CEO)

Yeah. Hi, Ron. Good morning. Thanks for your question.

Charles Griffith (CFO)

Good morning.

Brian Mackey (President and CEO)

It's big development because the funding from the DOE, 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. Some of that is, I think, realistically speaking, further out on the timeline. We are funded to develop the product with that application in mind. 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 can 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." 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. In the more near term, we're seeing opportunities that are, frankly, unrelated to the trucking aspect. 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. We're also having some discussions there. There are a number of markets that are actively being discussed here at CPS.

Ron Richards (Private Investor)

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

Brian Mackey (President and CEO)

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 own qualification path and those sort of things. Getting introduced into certain products will take some time. It's hard to quantify. We also see in this order that the customer saw what they needed and were, frankly, quick to act because they know what they need. 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. We think these opportunities will continue to come forward.

Ron Richards (Private Investor)

Okay. Thank you.

Operator (participant)

Thank you. The next question will be from Francis Goldwyn. Francis is a private investor. Francis, you're live at five.

Francis Goldwyn (Private Investor)

Hopefully, you can hear me.

Brian Mackey (President and CEO)

Yes.

Francis Goldwyn (Private Investor)

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

Brian Mackey (President and CEO)

What it means is, in this case, the two munitions SBIRs 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. 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. We're writing up a question, and we're looking for someone with the right answer." CPS proposed an answer based on our technical capabilities. What would come about after that is if we can satisfy, again, Phase I being concept, "Hey, you claimed you could do it.

Can you prove it in the lab?" If we're funded by Phase II, "Okay, let's make a prototype that the army can actually test one." If they can validate that it satisfies their need, the question would become, "Do we become a commercial provider of product to the army?" It is 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. The real power of the SBIR funding is that it comes with the potential to be the sole source provider down the road. In the past, there were some contract officers that say, "Well, I need multiple bids.

You need to share your technology with another manufacturer." 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." You can be a sole source provider. It is a powerful tool for an SBIR program. We will be working on these munitions problems over the next six months. Hopefully, that transitions into a Phase II. That would then be an offering to the Army that they would need to decide to engage for a particular application or program.

Francis Goldwyn (Private Investor)

What do you think the timeline for that process would be? Just an approximate timeline. Is it months? Is it years?

Brian Mackey (President and CEO)

This SBIR is a six-month Phase I. Again, that would be pursuing proof of concept. Those two programs have now started very recently. We have from now on into Q3. What we'd be doing at that point is proposing Phase II to the Army based on the progress that we demonstrated in Phase I. If they engage the Phase II, 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. It is that sort of typical timeframe before you really get to a demonstrable solution. Again, that's where the radiation shielding definitely moved quicker than typical. It can happen. That six months plus about two years is the standard SBIR framework.

Francis Goldwyn (Private Investor)

On the radiation shielding, coming back to the prior question, I understand that you don't have specific customers. 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, medium, low?

Brian Mackey (President and CEO)

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

Francis Goldwyn (Private Investor)

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

Brian Mackey (President and CEO)

The cost of goods, the margins on our traditional products, the metal matrix composites and the hermetic packages, are not as good as they were on armor. The bigger part of that, I think, though, was the fact that we spent most of the second half, pretty much the entire second half of 2024, ramping up for these increased production demands. There are a lot of expenses involved in that that presumably will go away. We had to hire people for the third shift. Those folks have to be trained up so that they would work on first shift for two or three weeks before they actually went to third shift. In fact, we had people coming in in July, at the beginning of July, to be trained initially. We did not actually move to the third shift until the last week of August.

We had a number of these expenses that were, I'll say, non-productive or at best minimally productive expenses. Once we got the third shift going, we still had to deal with a lot of initial turnover. Folks, "Hey, yeah, I can work third shift." When the reality of it hits and two weeks later, they leave. Then you've got to start that process all over again. We did it. That was a major impact on the Q4. We had approximately $200,000 of additional labor costs than we anticipated having just in that Q4. 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.

In fact, for our customers, just a little nick or a little scratch makes the part no good. During the production process, there are times when you have to kind of handle these things with kid gloves, so to speak. If somebody's new and they're not sure exactly how to do something and they scratch the base plate, it's gone. We had some significantly lower yields. We expect that as Q1 has progressed and as we get further into 2025, a lot of these problems are going to diminish and then go away. I think that that's really what we're looking forward to as we move along. I'll also make a comment. I think that making AlSiC base plates is a two-headed coin or two sides of the same coin.

On the one hand, it's difficult to make, which means that when we're bringing in new people to learn to make this product, the timeframe of getting them up to speed can be long. However, on the other hand, it's difficult to make, which means it's really hard for competitors to get into this market. You're not going to get a couple of pieces of equipment and put it in your garage and start making AlSiC base plates. It's really a difficult product to make. I think having the name CPS Technologies, it is a technological product. There is that aspect of it as well, which can be good for us. Anyway, does that answer your question?

Operator (participant)

Thank you. Just as a reminder, it is star one if you wish to ask a question today. The next question is coming from Greg Weaver. Greg is a private investor. Greg, your line is live.

Greg Weaver (Private Investor)

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

Brian Mackey (President and CEO)

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

Greg Weaver (Private Investor)

The funding shows up on the revenue line item, though, and then you submit.

Brian Mackey (President and CEO)

Yes.

Greg Weaver (Private Investor)

Okay.

Brian Mackey (President and CEO)

Yes.

Greg Weaver (Private Investor)

All right. Thanks.

Brian Mackey (President and CEO)

That's it.

Reading your PR, so I'm to believe then 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.

Greg Weaver (Private Investor)

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

Brian Mackey (President and CEO)

We don't. We don't.

Greg Weaver (Private Investor)

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

Brian Mackey (President and CEO)

Yeah. What happened there, Greg, was that's a customer who buys typically on a one-year commitment. That's from October 1 to September 30. We had an earlier agreement with them, which kept product flowing but was not fully resolved on quantity and pricing. That kept us going in Q4 of 2024. Subsequently, we finalized pricing and quantities, which resolved at that $13.3 million. That was resolved, I don't know, a couple of months ago, but well into that 12-month period. That agreement is for that 12-month period. We're actively fulfilling that through the end of September under that $13.3 million contract.

Greg Weaver (Private Investor)

Do you get any—I’ll assume hopefully a price went up some. Do you get any credits for the stuff you already shipped in?

Brian Mackey (President and CEO)

Yeah, that was retro. The pricing was retroactive to 10/01.

Greg Weaver (Private Investor)

10/01. We saw that already in Q4.

Brian Mackey (President and CEO)

Correct. Yes.

Greg Weaver (Private Investor)

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

Brian Mackey (President and CEO)

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—yeah. So yeah, basically, that's the main piece. We also have a number of items that go through as expenses. As we ramped up and we 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 did not run out so that we did not have to shut down operations for two days while we waited for something to come in.

There was kind of a growth in those expense categories as we ramped up more than we would expect on an ongoing day-to-day or week-to-week basis. 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.

Greg Weaver (Private Investor)

We're 80% of the way through Q1 here. I guess how's manufacturing these days?

Brian Mackey (President and CEO)

Much better. Can I say that?

Greg Weaver (Private Investor)

Because before I was pressing you, you said, "Well, if I could do $6 million rev, I could hopefully get 15%-20% positive gross margins," right? I mean, is that realistic or?

Brian Mackey (President and CEO)

I think we're still shooting for that 15%-20% margin for sure. 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. Yeah. I think that's very—I think that's very realistic. I think that—I don't think—I know that's what we're shooting, actually, even to go higher than that, but.

Yeah. I would add, I mean, Chuck described some of the harsh realities of Q4 in a couple of different buckets. I mean, one is employee number one, training number two. Employee number one is not as efficient, even though they're experienced. Then you've got the poor efficiency of the new employee once they're in the job. You have a yield/defect impact. Those three different challenges improved on different paces over time. I think we're going to see that play forward in Q1, Q2, etc. Obviously, the distraction of the first employee goes away once that other person's in the job, and the other things give more time for a new person to be as capable as somebody who's been here 5 or 10 years. Gotcha.

Greg Weaver (Private Investor)

Okay. Okay. Thanks, Brian. Good luck on that.

Brian Mackey (President and CEO)

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 four months. It's a definite noticeable difference. We have that data, and we know it to be true.

Greg Weaver (Private Investor)

Right. Sure. Good luck, I guess, getting the kinks out. We'll tune in here for Q1 shortly. Thank you.

Brian Mackey (President and CEO)

Thanks, Greg.

Operator (participant)

Thank you. We did have time for one quick follow-up from Ron Richards. Ron, your line is live.

Ron Richards (Private Investor)

Hi. I've been a shareholder for years. On previous Conference Calls, they've asked us about the Southeast Asian armor contract. You had scheduled a shoot, and the shoot didn't go as well as planned. I was wondering if that armor would have been reworked for that project, and how's that going?

Brian Mackey (President and CEO)

Yeah. 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. 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. That was a challenge from a while ago that we're still working to resolve. 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. All those factors are what our team is looking at to get back to that test cycle.

Ron Richards (Private Investor)

No prediction on the kind of timeline when that might have another test.

Brian Mackey (President and CEO)

That would be further out. There's nothing on the schedule right now.

Ron Richards (Private Investor)

Okay. All right.

Brian Mackey (President and CEO)

We do have some testing going on, but it's preliminary to actual shooting.

Charles Griffith (CFO)

It's CPS testing. I think the question, I was taking the question as sort of a customer-orchestrated test. We are doing CPS testing, but a customer test would be further out.

Brian Mackey (President and CEO)

Yeah. Yeah.

Ron Richards (Private Investor)

I see. Okay. All right, guys. Thanks.

Brian Mackey (President and CEO)

Thanks, Ron.

Operator (participant)

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

Brian Mackey (President and CEO)

Okay. Thanks, everyone, for joining our call. As Greg mentioned, it won't be that long to our Q1 call, but thank you for joining us today. If you have any separate questions, please follow up with Chris Witty, our investor relations advisor. Thank you.

Operator (participant)

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.

Brian Mackey (President and CEO)

Thank you, everyone.