CVD Equipment Corp (CVV) 2021 Q1 法說會逐字稿

Greetings, and welcome to CVD Equipment's 2021 First Quarter Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. We will begin with some prepared remarks followed by a question-and-answer session. Presenting on the call today will be Emmanuel Lakios, President and CEO; and Thomas McNeill, Chief Financial Officer.

We have posted our earnings press release and call replay information to the Investor Relations section of our website at www.cvdequipment.com. Before I begin, I'd like to remind you that many of the comments made on today's call contain forward-looking statements, including those related to future financial performance, market growth, total available market, demand for our products and general business conditions and outlook.

These forward-looking statements are based on certain assumptions, expectations and projections and are subject to a number of risks and uncertainties described in our press release and in our filings with the SEC, including, but not limited to, the Risk Factors section of our 10-K for the year ended December 31, 2020. Actual results may differ materially from those described during this call. In addition, all forward-looking statements are made as of today, and we undertake no obligation to update any forward-looking statements based on new circumstances or revised expectations.

Now I would like to turn the call over to Manny.

Thank you. Welcome to CVD Equipment Corporation's quarterly conference call. My name is Manny Lakios, CEO and President, and I'm pleased to be presenting to you today regarding important company developments and pertinent information relative to our business. As we will be providing substantive information, your thoughts are important to us. We request you wait to ask questions at the end during our question-and-answer session.

I would like to introduce our CFO, Mr. Thomas McNeill, who will provide you our financial first quarter 2021 summary.

Thank you, Manny. As a result of the COVID-19 pandemic, CVD's new order bookings substantially decreased commencing in the first quarter of 2020, which reduced revenues in subsequent quarters, resulting in our first quarter 2021 revenue of $3.4 million as compared to $6 million, which is the pre COVID-19 pandemic era in the first quarter of 2020, a decrease of $2.6 million or 44.3%. This reduction in sales and the resultant lower gross profit negatively affected our net income in the first quarter of 2021. Our net loss for the first quarter of 2021 was $1.5 million or $0.23 per diluted share as compared to a net income of $1.7 million or $0.25 per diluted share in the first quarter of 2020.

Let me note that during the first quarter of 2020, CVD was favorably impacted by the CARES Act, which allowed for the carryback of NOLs and resulted in CVD recognizing $1.5 million of an income tax benefit.

As compared to the fourth quarter of 2020, CVD's revenue in the first quarter of 2021 increased $200,000 to $3.4 million, and the net loss decreased by $200,000 as compared to the net loss in the fourth quarter of $1.7 million. And that $1.7 million is exclusive of the impairment charges of $3.6 million related to the CVD Tantaline product line.

The company's backlog at March 31, 2021, improved by $300,000 to $6 million as compared to $5.7 million at December 31, 2020. Since the first quarter of 2020, the company continues to experience significant negative effects due to COVID-19 pandemic, including reductions of new orders, as I mentioned before. However, the company's order activity has improved, both in the quarter ended March 31, 2021, and also into Q2 2021. And its longer-term improvements are expected to be benefited by announced slow recovery in the aerospace markets, which industry reports indicate improvements into 2022 and '23.

With respect to the building sale, as previously discussed at our year-end conference call, in order to increase our liquidity and to provide necessary working capital to support our ongoing business and operations, we have decided to sell our facility located at 555 North Research Place in Central Islip, New York. And on March 29, 2021, we entered into an agreement to sell this building for a purchase price of $24,360,000, subject to the satisfaction of waiver of certain conditions to closing or contingencies, which have now been satisfied.

A portion of the sale proceeds would be used to satisfy the existing mortgage debt of approximately $9.2 million at March 31, 2021. And to pay various transaction-related costs in an amount to be determined. The excess proceeds will be used for general working capital purposes. On or about May 23, 2021, the buyer may advise us of any requirement to extend the closing date up to 60 days thereafter, which would also require them to put an additional escrow amount of $1.2 million.

In accordance with GAAP, or generally accepted accounting principles, at March 31, 2021, the carrying value of the building in the amount of $16.2 million is reflected in current assets as assets held for sale, which was previously reflected in property, plant and equipment or our long-term assets. Also, the 555 Building mortgage in the amount of approximately $9.2 million is classified as short-term debt, which was previously reflected in both current and long-term debt.

With respect to the consolidation of our 555 Building into 355, which we previously determined is not needed for present and future business operations. In April 2021, we completed the move of our Tantaline U.S.A. product line to our 355 building. While all functions of the Tantaline product line have been consolidated into the Denmark office, and the United States expenses related to Tantaline have ceased. Our MesoScribe operations have -- move has commenced and is expected to be completed by the end of June of 2021. Once both the sale of the building and the consolidation into 355 is completed, we anticipate achieving ongoing savings.

With the appointment of Manny, our new CEO, in January 2021, we began an intensive analysis of our entire business and operations, including the materials business. Based upon that analysis, we believe our primary focus should be on the core equipment business and that the materials business strategy should be revised, with some of its current elements potentially minimized or ceased. Based upon our analysis in January, we were forecasting continued losses and negative cash flow for our Tantaline product line, and as a consequence, we implemented plans to eliminate further investment in our Tantaline product line, which is resulting in the avoidance of approximately $1.5 million to $2 million in additional costs. In addition, we have recorded an impairment charge, as we previously noted, of $3.6 million in the fourth quarter and year ended December 31, 2020. We are driven to achieve profits and ROI in all operating divisions in the future.

Turning to liquidity. Our cash and cash equivalents were $5.9 million at March 31, 2021, as compared to $7.7 million at December 31, 2020. Working capital was $12.3 million at March 31, 2021, as compared to $8.1 million at December 31, 2020. That's an increase of $4.2 million or 52%. This is the result of our actions, resulting in classifying our long-term assets and liabilities related to selling the building as short term, and for which we expect the building will close in the near term, offset in part by the net loss for the quarter of $1.5 million.

In addition, this quarter, we have substantially reduced our CapEx from $422,000 in Q1 2020 to just $26,000 this quarter related to ceasing further U.S.A. spend on the Tantaline product line. With respect to future expected benefits, we applied for forgiveness of our $2.4 million PPP loan in April 2021 and anticipate although substantially all to be forgiven. And we are awaiting the balance of our tax receivable in the amount of $700,000 from the CARES Act approved in Q1 2020, which allowed carrybacks of the NOLs.

The longer-term impacts from the COVID-19 outbreak are highly uncertain and cannot be predicted. Our return to profitability is dependent upon, among other things, the receipt of new equipment orders, the lessening of the ongoing effects of COVID-19 on our business and the aerospace market, and improvements in our operational efficiencies, such as the consolidation of our Central Islip facilities, the sale of 555 Building and reduction of interest expense as well as managing planned CapEx and operating expenses.

Based upon all these factors, we believe that our cash and cash equivalent positions and cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next 12 months of the filing of the Form 10-Q. Should the current environment continue longer or worsen, we will continue to assess our operations and take actions anticipated to maintain our operating cash to support the working capital needs as well as compliance with our loan covenant.

I'll now like to turn the call back to Manny, our CEO.

Tom, thank you for your presentation and insight. As we completed our first quarter, we are cautiously optimistic that the 2020 COVID pandemic is forecasted to be contained and the effects of it will eventually wane. We have signs that the worst is over for our served markets. The damage done to the global economy cannot be monetized. Our business was not immune to this COVID pandemic. We have been set back in sync with our major market, aerospace, specifically in the area of advanced material gas turbine engine components.

The impact of global travel and cascading effect to aerospace is astounding, and the timing of the recovery is uncertain. But what is certain is that global air travel will come back eventually. CVD equipment will be poised and ready to respond to the demand for new equipment and services. We continue to receive customer input and industry news reports supporting a beginning of recovery to what would be our order rate in 2022. Our other markets, such as carbon-based products, and our legacy products, serving the academia and research markets, are showing signs of recovery as funding is becoming available and as university labs reopen after being shuttered during the pandemic.

Even with these signs of recovery, we remain cautious in our planning. The sale of the 555 Building is on plan for closing in the next months. We will use the provided capital wisely for the sustainability and growth of the company. Depending on the order rate, we will continue to evaluate our infrastructure cost model and take thoughtful measures to reduce fixed expenses in all areas.

I would like to spend some time on our product lines, the equipment group. We received in Q1, 3 FirstNano system legacy products orders. Our spare parts and service orders also showed some recovery even though the recovery was modest. The leading indicators for orders, which is our quotation level, was up in Q1, indicating that our systems that are in production are being started up again.

Our key markets are slowly showing signs of recovery, as previously noted. Through more effective and increased account management, we are using this post-pandemic period to reset and better position ourselves with our existing and future customers.

Our MesoScribe group, which we acquired in 2017, continues to focus on high-temperature instrumentation in very challenging environments, such as in gas turbine engine and satellites. During Q1, we received an additional SBIR Phase 2 grant for $750,000 to further develop the application technology for additive manufacturing of gas turbine engine components. The MesoScribe group is profitable and cash flow positive. Presently, we are in the process of consolidating the operation from our 555 facility into our 355 facility. We expect that, that will be completed and is on plan for the end of of 2021.

Tantaline, the product line was acquired in 2016. Since then, the company has invested in the expansion in the market and operational capability in Denmark as well as in our U.S. facility. Our evaluation is the Denmark facility has ample capacity for the next years. Our objective is to have the Tantaline product line be cash neutral and to minimize any further investment requirement.

During Q1, all sales and marketing activities were consolidated into the Denmark facilities, and the U.S. operations was ceased. These actions have reduced our operating costs, and we expect that, along with continued focus on obtaining orders, we should turn the corner and have the Tantaline product line cash flow neutral.

We are also in discussion with our landlord in Denmark to extend the lease, reducing any near-term investment requirement. The U.S.A Tantaline facility in operation was and has been determined to not be required to serve the Tantaline market.

Our SDC product line and division continues to be both a captive and merchant supplier of gas and liquid delivery systems. Our SDC products are considered to be a standard in the marketplace. They are also supplier to our equipment division and further fulfill our in-house facilities requirements. With the Bring Technology Home to the U.S. initiatives, both the quotation and order rate for SDC has increased. This is due to the build-out of additional fabs, primarily in the United States as well as overseas. The division continues to be cash flow positive.

In the ECMO products, as we reported in the past, our applications lab has developed many novel applications components. One such application is blood oxygen transfer and more specifically extracorporeal membrane oxygenation, ECMO. At this time, there is no recent notable developments to speak of. And we'll keep you informed as there are such.

In summary, we are cautiously optimistic that the worst is over, that our served markets and customers will slowly recover. We continue to apply focus in the area of our products and customers with financial scrutiny of our spending. Our employees and customers are loyal. We are focused on business and operational planning for structured profitability and growth. Planning is not a onetime and done event, but continues to evolve as the market conditions change. Hence, we continue our assessment of our plan, and we expect to be in the execution phase throughout 2021.

On May 7, 2021, Martin J. Teitelbaum, a member of the Board of Directors of CVD Equipment Corporation, notified the Board that he was resigning his position as a director effective immediately. We have accepted such resignation. We committed to you that we would continue to provide timely communication. To that matter, we have announced that our annual shareholder meeting will be held July 15th. We will continue to communicate on the important developments in the meanwhile.

With that, may I say your comments and questions are important to us. With the close of our presentation, we would like to open the floor to your questions. Brock, could you just give them a walk through?

(Operator Instructions) Our first question today is from Brett Reiss of Jenny Montgomery Scott.

Manny, Tom, can you hear me?

Very well so, Brett. It would not be a meeting without you asking a question.

I'm just wondering, have you -- do you sit down, do you get your salespeople with your engineering talent that you have to kind of brainstorm to see if you can find what the skill sets the company has, some products that you can sell without having to kind of just sit back and wait passively for aerospace to recovery?

Brett, if that's the question, let me answer that because it is part of our new philosophy. We do not wait for the phone to ring. This week, I actually was at an aero -- our leading company in aerospace, which we won't discuss the name, and not in searching, but in response to customer satisfaction and product road mapping and technology road mapping.

We have presently completed our strategic planning process. We'll give the audience an opportunity to see some of those elements to the extent we can supply those during our July shareholder meeting and give you a glimpse of our focus going forward. But we've spent the last 4 months working on planning, our strategic planning, many of the actions that we've taken, both on the cost side are not a precipitous across the board cuts, but a -- what I would say a thoughtful outcome of our planning process. So yes, we have a tremendous amount of communication within the organization today. Everybody has their hand on an oar to move the boat forward.

Right, right. What was the employee headcount at the end of the year? And what is it now at the end of this first quarter?

Yes. Brett, we're right around 120 employees, give or take, what it was at the end of the year. I think maybe it's about 3 -- net 3 down for the time.

Right. Right. And if business really snaps back with the amount and mix of employees, do you think you'll be able to manage the business, if hopefully order flow comes back?

We have the technical and engineering talent on staff. The variable labor would be primarily in our supply chain. There, we're applying quite a bit of focus on how do we position ourselves more for a variable expense and leveraging the manufacturing that is outside of CVD proper. That would be -- I may not say the challenge, but that would be the area of focus for us, if the -- as you say, the business snaps back and is very elastic.

Right. And I mean you went into it somewhat. But when you say order activity has improved, can you go into a little bit more specificity of what that means?

I can give you some insight. That's not typically something that we do. We were approximately 40% to 50%. I'm looking at the numbers here. I can't do the quick math. We're about 50% higher in orders in Q1 over Q4. But obviously, 2020, Q2, Q3, Q4 on an average were very weak due to the COVID. So we are seeing some level of recovery. We are cautious, and we're cautious in our comments and statements. We are seeing increased activity in aerospace spare parts demand for quotations and also the order rate increase. That's an indication that the equipment is starting to light up again. During that period of time, many of our sites, our production sites were turned off.

Right. One last one, and I'll drop back in queue. In the past, the company would say that there was a great market opportunity for coatings with medical products, and nothing seems to have materialized there. Why is that? And is that an area of opportunity for us?

The medical industry, whether it's tantalum for prosthetics, for implants that is, ball sockets, which was an -- it's an area for our product line, that's a very specialized area. There are secondary competitors to us, not specifically people that provide tantalum deposition. But there's titanium, there are other 3D additive manufacturing techniques for doing -- for building up these components. Some of those are entrenched technologies that -- it's a small tugboat trying to turn the Eisenhower. It is a very sizable feat, and it's not a near-term event. I cannot say to you today that, that is on my strategic road map as a large growth area. We will continue to sell tantalum deposition and other material deposition systems to the medical, but it is not one of the top 3 applications for us right now.

Right. And if you were a betting man, would you bet the buyer of the building closes May 23rd or looks for a 60-day extension?

We're not betters, but it will close. They're a strong, reputable, Long Island company, and we have every indication it will close. But...

Yes. We would've not ventured into the deal, Brett, if we thought that there was an indication that we would not close. And I think Tom's comment is accurate that we -- I clearly am not a better, quite frankly, and I definitely don't bet with other people's money, which is our shareholders' money. So we have confidence, and there is no indication that it won't close in the next few months.

Our next question is from Martin Howard, a private investor.

Yes, my question is, there's a lot of hope for that health products, the Stony Brook Labs. You said there's nothing has happened to report. Why not? I mean, they're working, presumably, checking it out. Do they have some timing thing that will decide whether it's a viable product or not in the next quarter or so?

Martin, we chatted last time as well. And let me give you -- and when I say there's nothing notable, it doesn't mean that we don't have some ongoing activities in that area. At this point, we are looking at options that are available to us. We have continued to work on the technology, and we're looking for some external funding through other sources, through research sources.

So we have not had a setback. And we are in a -- probably what I would term in the product development terminology, we're in a gate review of the technology, and that may take us a quarter or 2. But again, what we don't want to do is give you any misconceptions that next quarter or 1 year from now that this will be a substantial element of our business.

(Operator Instructions) There appears to be no further questions at this time.

Okay. Brock, if there are no additional questions, we'd like to adjourn today's meeting, and we look forward to speaking to everybody, giving you some more insight on our company and our plans in our July 15 Annual Shareholders Meeting.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.