CVD Equipment Corp (CVV) 2020 Q4 法說會逐字稿

Greetings, and welcome to CVD Equipment's 2020 Fourth Quarter and Year-end 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 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 President and CEO, Emmanuel Lakios.

Thank you. Welcome to CVD Equipment Corporation's Annual Conference Call. My name is Manny Lakios. In January, I was appointed CEO and President. I am honored to be presenting to you today regarding important company developments and pertinent information related to the business. As we will be providing substantive information, your thoughts are important to us. We request that you wait to ask your questions at the end of our Q&A session.

I would like to introduce our CFO, Mr. Thomas McNeill, who will provide our financial 2020 summary.

Thank you, Manny, and good afternoon, everyone. In the fourth quarter, our revenue was $3.2 million as compared to $5.6 million in the fourth quarter 2019, a decrease of $2.4 million or 42.9%. Our net loss was $5.3 million, which includes an impairment charge of $3.6 million related to our Tantaline product line. And the diluted share was a loss of $0.80 as compared to a net loss last year of $2.6 million or $0.40 per diluted share in the fourth quarter of 2019.

Our annual revenues for 2020 were $16.9 million as compared to $19.6 million in 2019, a decrease of $2.7 million or 13.9%, and our net loss for 2020 was $6.1 million inclusive of the $3.6 million impairment charge or $0.91 per diluted share as compared to a net loss of $6.3 million or $0.96 per diluted share in 2019.

While our revenues for each of Q3, Q4 of 2019 and Q1 of 2020 were in the range of $5.5 million to $6 million, we, along with many other businesses, were substantially affected by COVID-19, which resulted in reductions of new orders starting in the middle of Q1 2020. This reduced order level negatively affected revenue in each of the last 3 quarters of 2020 and into 2021.

With respect to our backlog, at the end of the year 2020, it was $5.7 million as compared to $8.9 million at December 31, 2019, a reduction of $3.2 million or 36%. With respect to the materials business, the projected growth of materials business has not met expectations. Although we have made substantial investments in facilities, equipment and acquisitions in furtherance of our strategy, the foregoing has proven to be a significant drain on our finances and our liquidity.

Since 2018, revenues for the materials business have been approximately $1.6 million to $2.3 million in 2020 with operating losses exclusive of the $3.6 million impairment charge recorded in all years and for a total loss of $2.5 million. With the appointment of Manny, our new CEO, in January '21, 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 this analysis, we are forecasting continued losses and negative cash flow for our Tantaline product line. And as a consequence, we have implemented plans to eliminate further investment in our Tantaline product line, which will result in the avoidance of approximately $1.5 million to $2 million in additional costs.

In addition, we have recorded an impairment charge of $3.6 million through our fourth quarter of 2020 and obviously for the year-end results.

Turning to our liquidity. Cash and cash equivalents were $7.7 million at December 31, 2020, as compared to $8.7 million at December 31, 2019. Working capital was $8.1 million at December 31, 2020, as compared to $8.8 million at December 31, 2019, a decrease of $700,000. This decrease was primarily attributed to substantially reduced revenue and the resulting operating loss for the year-end December 31, 2020; $1.6 million of capital invested in the year ended 2020, primarily related to Tantaline equipment and installations; debt service payments of approximately $700,000. All this was partially offset by a $3.9 million benefit from 2 items. The first is the PPP loan of $2.4 million, which we received in April of 2020. And the second, with the CARES Act approved in the first quarter of 2020, we were able to carry back our NOLs. And as such, we were able to have a tax receivable of $1.5 million, $800,000 of which was received during the 2020 year.

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 on our business and the aerospace market, improvement in our operational efficiencies such as the consolidation of our centralized facilities, which is expected to save $300,000 on an annual basis, the sale of our 555 building and reduction of interest expense as well as managing planned capital expenditures and operating expenses.

In order to increase our liquidity and to provide necessary working capital to support the ongoing business needs and operations, we have decided to sell and have announced this afternoon that we have entered into a contract to sell the 555 Building, and that was done effective March 29. The purchase price is $24,360,000, and the closing of the sale is subject to the satisfaction or waiver of certain conditions to closing or contingencies.

A portion of the sale proceeds would be used to satisfy the existing mortgage debt on the building in the approximate amount of $9.3 million at December 31, 2020, various costs related to the sale closing in an amount to be determined, and then any excess proceeds will be used for general working capital purposes.

With respect to the 555 Building, we have determined that it is not needed for present and future business operations and that any remaining elements of the materials business can be consolidated into the 355 Building, also located in Central Islip. We believe it can accommodate any needs for our growth for the foreseeable future. As I mentioned before, with the consolidation of the 2 Central Islip facilities, we will reap ongoing savings of $300,000 per year. And I would say that at this point, we're about 60% to 70% move down of the 1 facility into the 355 facility. So it's well underway.

Based on all these factors, we believe our cash and cash equivalent positions, cash flow from operations will be sufficient to meet our working capital and capital expense for the next 12 months. 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.

And now I'd like to turn the call back over to Manny, our CEO.

Tom, thank you for your presentation. 2020 was a year of uncharted waters for the global economy. Our business was not immune to this COVID pandemic. The decline in global travel, especially long distance referred to as long-haul travel caused a decline in demand for aircraft, engines and, in turn, impacted our equipment business. Other end-use aspects of our business were also impacted, such as university projects as universities were shuttered and moved to remote learning. Even though that we're making progress on the pandemic, the commercial recovery of our core market aerospace is uncertain. Industry news reports and consumer input -- customer input appear to indicate that the market may recover in 2022.

In late January, we embarked on an evaluation of the business by market and by product segment. Tom spoke to the outcome of our analysis of the Tantaline product line. The analysis is based on market growth, cash generation and overall return on investment. I will speak to the product lines in a few moments. The sale of the 555 Building will provide capital for our sustainability and growth. This goes hand-in-hand with our 2020 and 3-year operating plan, which is in development. We will continue to evaluate our infrastructure cost model and take thoughtful measures to reduce fixed expenses in the areas possible while continuing to invest in our core business and product lines, all with a renewed focus on our shareholders, our customers and our employees.

Now for a summary sketch of our business and our product segments. After completing our product analysis, it was clear that our equipment systems and production spares are the core elements of our business. There are 2 major market focuses, aerospace and nanowires, both carbon and silicon. Of course, there are other legacy and emerging market opportunities, which we will continue to support. Our focus will be on utilizing our 38 years of developed technology for increasing production end-use applications. This standardization allows us to provide more value and maturities of our products, bring more support and value to our customers and the ability for improved gross margins.

In all our business elements, our know-how and intellectual property is essential for both defense and offensive market positions. We will increase our activity to develop our IP and safeguard it. Our MesoScribe Group, which we acquired in 2017, continues to focus on high-temperature instrumentation in very challenging environments, such as in gas turbine engines and satellites. The MesoScribe Group has secured several U.S. Air Force development contracts for next-generation instrumentation and for turbine blade repair maintenance. The group is cash flow positive. The technology is in the adoption phase. And presently, we continue to explore possible growth applications.

The Tantaline product line, which was acquired in 2016, and since then, the company has invested in the expansion in the marketplace and operational capability in Denmark as well as our U.S. facility here in Central Islip. And at this time, our evaluation is that the Denmark facility has ample capacity. Our objective is to have the Tantaline product line be cash neutral and to minimize any further investment requirement. We will continue to evaluate the viability of the Tantaline product line over the quarters to come. The U.S. Tantaline facility in operations has been determined to not be required to serve the Tantaline market. Tom spoke to the financial considerations and actions taken in his report.

Our SDC 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 a supplier to our equipment division and further fulfill our in-house facilities requirements. Division continues to be cash flow positive.

As we reported in the past, our applications lab has developed many novel application components. One such innovation is the reactor core element. The combination of carbon nanotube growth and infiltration is instrumental in the functionality of the device. One possible application is blood oxygen transfer and more specifically referred to as extracorporeal membrane oxygenation, ECMO. We will provide updates as there are developments.

In summary, we serve markets with growth potential or where we have a legacy of past sales. Our employees and customers are loyal. We are focused on business and operational planning for structured profitability and growth. Our planning process continues, and we expect to be in the execution phase of our plan throughout the year 2021. As we committed to you in January, we will continue to provide timely communication. To that, we have announced that our annual shareholder meeting will be in mid-July. And we will continue to communicate on the important developments in the meanwhile. Your comments and your questions are important to us.

With the close of this presentation, we would like to open the floor to your questions.

(Operator Instructions) Our first question is from Brett Reiss with Janney Montgomery Scott.

Good luck to you, Manny.

Thank you, Brett.

Just a couple of questions on the building. I mean what did we pay for it? Are we booking a profit on that? And I know there are costs, but $24.3 million less the $9.3 million mortgage, are we netting $15 million less the costs on this?

Yes. So Brett, what I can tell you is, obviously, $24,360,000 is the gross amount in the building, which -- and then we just filed our 10-K. But it's out there, we paid about $13.8 million for the building. And then there's various other closing cost commissions, and we're obviously moving from 1 facility to the other. But not only a substantial number, I would say it's probably in the north of $10 million. To be determined as we complete, and we'll report that in our Q1. We'll have a much better update on that. Substantial number. When we looked at our balance sheet, this is both the balance sheet and an operational review. Number one is, we just didn't need both facilities for the operations, number one. Number two, we would garner a lot of efficiencies, better use of individuals and through department. It has the ongoing benefit of an ongoing $300,000 a year save, year in, year out. Not to mention the initial cash improvement and the reduction of -- our total debt will go from $9.3 million on that building down to nothing, and we'll be left with about a $2 million mortgage on our 355 facility. So on a lot of fronts, it made a lot of really good sense.

Well, talking about 355 facility, based on a comparable, what do you think that building is worth? And monetizing that and leasing it back, is that a possibility? And what would the arithmetic look like there?

Brett, thank you very much for your best wishes. We would say at this point, we are really in the equipment business, not the real estate business. And at this point, we have no active plans to leverage the value in the 355 building. And that's probably all we can probably refer to right now. We're pleased that the debt to value is very low. So we hope never to have to, but we really can't answer that question at this point. We haven't looked into it.

Okay. But what is the remaining mortgage against the 355 facility?

That's about $2.1 million.

Okay. Okay. Now with respect to business, in the past, the company would wax poetic that there were a lot of opportunities for coatings in medical products. Is there any possibility there because it wasn't mentioned in your introductory comments?

Yes. Brett, allow me to take that one. We -- there are a lot of applications that we look into and we quote and we follow-up on. We really speak to the ones that have sizable market opportunity, and that really is in the aerospace for us at this point in some of our carbon products. But we continue to explore, whether it's in medical devices, in solid-state electronics or in more industrial type applications. But there's really nothing that I would say that would be an emerging diamond in the rough right now that we could speak to.

Okay. Now how many people constitute your sales force? And how do you as the leader, Manny, instill a kind of laser focus in the sales force to do what's necessary to go out there and get revenues?

Sure. Well, we -- to answer quickly, we have a distributed sales force where we focus by product line. Our SDC product line has its own sales and marketing group. The MesoScribe is headed up by my successor, who was Jeff Brogan, Dr. Brogan, who's now the Vice President of Sales and Marketing. And he's a veteran in the thermal spray and MesoScribe area so he's fairly well known. And that is a very focused marketplace of aviation and defense.

On the area of our equipment business, there, we have a series of reps and distributors that bring in leads and handle the customer relationship, and that's on a global basis. In the United States, we are primarily direct, and we have decent veterans, I can't give the headcount out, but decent veterans in that space, some of them who came through acquisitions over a decade ago, and they are still with us and still market and sell that product. We do sell the product globally, whether China, Europe, United States, India, those have all been over the last several quarters.

How do we do it? We're -- it's all -- for me, it's all about the top line. And you grow the top line and the bottom line follows -- ensued.

Right. I was going to ask you something, but it escaped me. It will come to me. Now I just -- Dr. Brogan is in charge of all sales other than the reactor equipment sales to the research departments at universities?

All of -- just as with my prior position, all of the sales and marketing funnel up to Dr. Brogan. The SDC is, for the most part, a stand-alone division, and they do just brilliantly on their own. And we just collaborate with SDC and that team.

All right. I remember now. The unnamed large aerospace customer that gave us those big orders some years ago, what is the status on rehabilitating that relationship?

Well, whatever customers we do have, we -- unless we are in affirmative language allowed to speak to their names, they will continue to remain unnamed. We continue to have a good relationship with our aerospace customers, including our largest aerospace customer. We are in constant communication with their projections for a demand. We serve them both from a system perspective. And also our consumable and spare parts business is a large opportunity for us in the area of production. Hence, why we're focused more so today on production level systems. There is a recurring razor blade business that's associated with that. And we're expecting, based on, I would say, industry news that in 2021, there's a belief, not just a hope, of a beginning of a recovery for aerospace and for travel in general.

Right. Right. Now just circling back and then I'll drop back in queue. The sale of the building for the $24,360,000, on a scale of 1 to 10, 10 being metaphysical certainty that thing is going to close and 1 is it's going to close.

I'm not going to answer that question.

What would you say it is?

We went into it thinking we're going to close. We have every expectation that it will. And as our attorneys tell us, the deal isn't a deal until the money changes hands. We expect it, but I can't give you a number. In doing our due diligence, we looked at capability to close, certainty, price on the deal. So there were several aspects of the transaction we evaluated and weighed, and we believe we'll select the best for the shareholders.

(Operator Instructions) We do have a follow-up question. Our first question is from [Morton Howard], a private investor.

My question is, is it still a dream with -- for this medical product that Stony Book's working on? I know you said earlier that you'll keep us updated on any progress there, but can we hang our hopes that this could be possibly a big deal?

First, who am I speaking to?

It's Mort Howard.

Mort, so let me -- I'll answer that question. Yes, we continue to do development at SUNY, Stony Brook under a small grant, and that's for the evaluation on our ECMO device, which is, I believe, what you're specifically inquiring about.

Yes.

There are some technical milestones in the development. It's not -- as you very well know, it's not just generating orders and raising capital, it's also -- we have some development to do. There are some technical milestones that need to be achieved in this program. And we are, over the next months, expecting that we'll start getting some of those results. In the meanwhile, we continue to look at opportunities to capitalize on the investment that we've made on this reactor core element, ECMO application device. So we are very active in that still, but we don't want to overplay the opportunity at this point.

We do have a follow-up question from Brett Reiss with Janney Montgomery Scott.

With the travail the company has been going through the last year to 18 months, have you been able to retain your top engineering talent?

Well, we've retained our top financial talent. Tom is here on the call with us.

There you go.

I think that's a good start. Yes, we have. We have and every company has some level of turnover. Our turnover rate is not unusual. The employees that have been -- that are with the company have been with the company for a long period of time. We do invest also in interns in the company as well as we start growing and cultivating new talent. So I'm pretty excited about it. I would say the team tells me that they're pretty "jazzed" about the opportunity to compete on the production equipment space. So I think that to answer your question, we're doing very well in that area.

Okay. Now I know you're moving the residual Tantaline business into the old facility. But I thought that one of the reasons for the new facility was that there were certain functions and things that you could not mix and do with the old facilities mix of business with the new Tantaline business, that just was not the case?

Well, the -- I can't say that, that wasn't the thought process and the justification at that time. Our present analysis of the market and under our metrics and our yardstick is that the -- both the cost is prohibitive to have multiple sites. The capacity in Denmark is more than adequate to satisfy the requirements for the global demand. We have improved our operations. It wasn't that it was defunct. It was that over a period of time, we've hired some talent in Denmark, and they have brought the operational efficiency up. And our objective there is breakeven and minimize any further investment requirement in Tantaline. So bringing it back here, there is not yet and there's no intent to start-up Tantaline in 355 until -- and it may not occur as we continue to increase our capacity in Denmark, we may not see it in 355. And there -- so therefore, there is no issue about co-mingling of products in 355.

And Brett, just to build on what Manny said, our team has really done a terrific job in what I'll use is reorganizing and getting the 355 facilities in a more efficient clean and organized fashion. And even with bringing in the operations from 555 into our operations, we still have somewhere between 30,000 and 50,000 of available square footage for expansion and growth. And even with that, we have the ability to segregate out certain operations should we want to do that. So I think we're pretty well vetted on that.

Now when we went into the Tantaline business, we had such high hopes for it. What -- why didn't it pan out the way the company thought it would? And what lessons do you learn from this experience so that future allocation of corporate resources, we won't make the same mistake?

It has to do with planning, market analysis, planning, return on investment modeling and understanding when you acquire something in all best intentions, there is a cost of operation that needs to be taken into account, there is backbone infrastructure required in applications development to expand the marketplace. There is a burden of potential operating losses, which we actually incurred. And then there is a requirement for capital equipment potentially. And going forward, I can't speak to the past, but I can speak to going forward, we'll be doing a complete return on investment model and market analysis on any new product that we're developing organically and any potential acquisition or new marketplace that we go into.

We have reached the end of the question-and-answer session, and I will now turn the call over to Manny for closing comments.

Well, I wish all of you in this very trying time with this COVID pandemic, I wish you the best health and and safety overall. First and foremost, I, the management team, the Board of Directors, I appreciate your participation today and your loyalty to the company. And you have our commitment that we will continue to do our most to have return on investments and also return on equity for you in the future. We look forward to speaking to you soon. I don't believe it's that far out. I don't have the exact date on our next gathering. But we've -- as we committed in January, we'll continue to communicate with you as we have information that's pertinent. Thank you very much.

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