CVV Q1 2021 Earnings Call
Operator: Greetings, and welcome to CVD Equipment 2021 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. [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 revise expectations. Now, I would like to turn the call over to Manny.
Emmanuel Lakios: Thank you. Welcome to CVD Equipment Corporation's quarterly conference call. My name is Emmanuel Lakios, CEO and President. And I'm pleased to be presenting to you today regarding important company developments and pertinent information related to our business. As we will be providing a subset of information your thoughts are important to us. We request that you wait to ask your 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.
Thomas McNeill: Thank you, Manny. As a result of the COVID-19 pandemic CVD’s new water bookings substantially decrease commencing in the first quarter of 2020, which reduce 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 carry back of NOLs and resulted in CVD recognizing $1.5 million of an income tax benefits. 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. It's 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 water 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 sales 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 will be used to satisfy the existing mortgage debt of approximately $9.2 million at March 31, 2021. And to pay various transaction related costs and 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 and 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 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 USA 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 has commenced, and is expected to be completed by the end of June 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 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 a 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 $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 in short term, and for which we expect the building will close in the near-term, offset in part by the net loss to 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 USA 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 all or substantially all to be forgiven. And we are waiting the balance of our tax receivable in the amount of $700,000 from the CARES Act approved in Q1 2020, which allowed carry backs 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 our business and the aerospace market. And improvements in our operational efficiencies such as the consolidation of our centralized facilities. The sale of the 555 building and reduction of interest expense, as well as managing plans, 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 this 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 covenants. I'll now like to turn the call back to Manny, our CEO.
Emmanuel Lakios: 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 sign that the worst is over for a 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 demands 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 reopened after being shuttered during the pandemic. Even with the 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 March, 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 rotation 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've received an additional SBIR Phase II 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’re 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 Q2 2021. Tantaline, the product line was acquired in 2016. Since then, the company had invested in the expansion in the market in operational capability in Denmark, as well as in our U.S. facility. Our evaluation is that 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 requirements. During Q1, all sales and marketing activities will consolidate into the Denmark facilities and the U.S. operations. 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’re also in discussion with our landlord in Denmark to extend the lease, reducing any near-term investment requirements. The USA 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’re also a supplier to our equipment division and further fulfill our in-house facilities requirements. With the great 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 gene transfer and more specifically, Extracorporeal Membrane Oxygenation, ECMO. At this time, there's no recent notable developments to speak of, and we'll keep you informed as there are such. In summary, we’re cautiously optimistic that the worst is over that are served the 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’re focused on business and operational planning for structured profitability and growth. Planning is not a one-time and done event, but continues to evolve as the market conditions change. Hence, we continued 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 15. We’ll continue to communicate on 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’d like to open the floor to your questions. You can walk through.
Operator: Yes, sir. [Operator Instructions] Our first question today is from Brett Reiss of Janney Montgomery Scott. Please proceed with your question.
Brett Reiss: Hi, Manny, hi, Jim. Can you hear me?
Emmanuel Lakios: Very well. So Brett, it would not be a meeting without you asking a question. Good afternoon.
Brett Reiss: There you go, good afternoon. I'm just wondering, have you, do you sit down, do you get your sales people with your engineering talent that you have to kind of brainstorm to see, if you can find with 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 recover?
Emmanuel Lakios: Okay, 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 a leading company in aerospace, which we won't discuss the name and not in searching, but in response to customer satisfaction and product roadmapping and technology roadmapping, we’ve 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 four 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 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 hands on an oar to move the boat forward.
Brett Reiss: 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?
Thomas McNeill: Yes, we’re right around 120 employees give or take, what it was at the end of the year, I think maybe about three, net three down in that.
Brett Reiss: Right, right and if business really snaps back with the amount and mix of employees, you think you'll be able to manage the business, if hopefully order flow comes back?
Emmanuel Lakios: 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 mean, I say the challenge, but that would be the area of focus for us. If the -- as you say the business snaps back and it's very elastic.
Brett Reiss: 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?
Emmanuel Lakios: 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, but 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’re seeing some level of recovery, we’re cautious, and we're cautious in our comments and statements. We’re 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 or production sites were turned off.
Brett Reiss: 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?
Emmanuel Lakios: The medical industry, whether it’s tantalum for prosthetics, for implants, that is ball sockets, which is 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 building up these components. Some of those are entrenched technologies that it's a small tugboat trying to turn the Eisenhower, it’s a very sizeable feat, and it's not a near-term event. I cannot say to you today that that is on my strategic roadmap as a large growth area. We’ll continue to sell tantalum deposition and other material deposition systems to the medical, but it’s not, it is not one of the top three applications for us right now.
Brett Reiss: Right. And if you were a betting man, would you bet the buyer of the building closes May 23, or looks for a 60-day extension?
Thomas McNeill: Well, we're not better but it will close. They’re strong, reputable Long Island Company and we have every indication that will close.
Emmanuel Lakios: But we would not venture 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 clearly 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.
Brett Reiss: Right, right. All right. I'm going to drop back. Thank you for allowing me to ask questions as you always do.
Emmanuel Lakios: Thank you, sir.
Operator: [Operator Instructions] Our next question is from [Morton Howard], a Private Investor. Please proceed with your question.
Unidentified Analyst: Yes, my question is, there's a lot of hope. So that health product, the Stony Brook Labs, you said it's nothing, nothing has happened to report. Why not, I mean, they're working presumably checking it out. Do they have some type of thing that will decide whether it's a viable product or not in the next quarter or so?
Emmanuel Lakios: Hi, Morton, how are you? 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’re 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’re in a probably what I would term in a product development terminology, we're in a gate review of the technology, and that may take us a quarter or two. But again, what we don't want to do is give you any misconceptions that next quarter or a year from now that this will be a substantial element of our business.
Unidentified Analyst: Thank you.
Emmanuel Lakios: Thank you, sir.
Thomas McNeill: Why don’t you give it one more poll and…?
Operator: [Operator Instructions] There appears to be no questions, no further questions at this time.
Emmanuel Lakios: 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.
Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.