CVD Equipment - Earnings Call - Q1 2019

Transcript

Speaker 0

Greetings, and welcome to CVD Equipment's twenty nineteen First Quarter Results Conference Call. 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 Len Rosenbaum, President and CEO and Tom McNeil, 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 are 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 ks for the year ended December 3138. 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 our new circumstances or revised expectations. Now I would like to turn the call over to Len.

Speaker 1

Good afternoon, everyone, and thank you for joining our earnings call. As previously mentioned, 2018 was a difficult year for CBD. And in the first quarter of twenty nineteen, we reported decreased revenue and a net loss of $2,200,000 as a result of the 2018 low order levels. The first quarter of twenty nineteen, however, has started off with receipt of new orders amounting to approximately $6,500,000 and we anticipate improvement in order flow during the remainder of the year as compared to 2018. Further, the company has accelerated its focus business now that the opening of the materials facility is in sight.

In 2017, the company purchased the building for $14,000,000 to house CVD Materials. During 2018, the company invested $2,500,000 in building improvements and machinery and an additional $400,000 in the 2019 as well as other materials related expenses. With the operations at our new materials facility coming online during the 2019 and our continued investment in CVD Materials, we are enhancing our marketing efforts and have started to showcase the Materials operations to new and existing customers. Additionally, we are underway and expect to complete the move of our MesoScribe operations from California to the new materials facility in New York with integration to be completed in July 2019. The consolidating of MesoScribe operations into our materials facility enhances our ability to execute on operational improvements and reduce costs.

During the first quarter, MesoScribe received two Phase one Small Business Innovation Research Awards from the U. S. Air Force. The first award is related to the development of advanced temperature and heat flux sensors to support hypersonic flight system testing. The second award is for development of a material direct write printing system utilizing MesoScribe's proprietary aperture system to deposit metallic and ceramic coatings for aero engine applications and eliminate the need for part masking during deposition.

The materials operations enhance our abilities to provide: one, corrosion resistant coatings through our Tantaline subsidiary for medical, pharma, oil and gas applications two, sensors through our MesoScribe subsidiary for defense, aerospace and turbine applications and three, through our CVD Materials subsidiary for carbon composite materials, medical coatings, electronic substrate materials and further expansion into other coatings for defense, aerospace, medical and industrial applications. The strategy CBD embarked on over two years ago to develop a materials business using CBD's technology and equipment manufacturing capability expands our product offerings, grows our revenue and diversifies our customer base. We are tapping into high margin growth markets in corrosion resistant, medical, aerospace and defense coatings to reduce risk and flatten the uneven levels of our results. We are committed to returning to profitable quarterly results by Q1 twenty twenty. With that, I would like to turn the call over to our CFO, Tom McNeil.

Speaker 2

Thank you, Lynn. In the first quarter, our revenue was $3,500,000 as compared to $9,200,000 in 2018, a decrease of $5,700,000 or 62%. And our net loss was $2,200,000 or $0.33 per share diluted as compared to net income of $600,000 or $09 per diluted share in 2018. Our revenue decrease during the quarter was primarily attributable to the completion of large aerospace equipment orders received, which now represented $800,000 or approximately 22% of our revenue this quarter as compared to $4,400,000 or approximately 47.5 percent of our revenue in 2018. During the first quarter, we received new orders of approximately 6,500,000 and our order backlog at March 3139 is approximately $6,000,000 The level of new orders received from customers in the second half of twenty eighteen, however, will continue to affect our revenue levels in the next one to two quarters.

Our return to profitability depends upon, among other things, the continued receipt of higher levels of new equipment orders, the ramp up of the materials business and managing our planned expenditures and operating expenses. With respect to our liquidity, cash and cash equivalents were $11,300,000 at March 3139 as compared to $11,400,000 at December 3138, essentially unchanged. Working capital was $12,600,000 at March 3139, as compared to working capital of $15,400,000 at December 3138, a decrease of $2,800,000 This decrease was primarily attributable to overall reduced sales and the resultant operating loss, 400,000 of capital invested in the quarter in March 3139, primarily related to building improvements and machinery for the CVD Materials operation and debt service payments of approximately $300,000 which includes payments on our investment in the CVD Materials building. With respect to our accounts receivable, the decrease of approximately $2,000,000 from $4,100,000 at December 3138 to $2,100,000 at March 3139 was a result of normal collections and decreased revenue during the quarter. While our cash is expected to decrease during the next quarter, we believe our continued cost containment measures to align expenses to order rates will reduce our operating losses and net cash usage while positioning the company to a return to profitability by Q1 twenty twenty.

As such, we believe our cash and cash equivalent positions, cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months. I'll now turn the call back to the operator for your questions.

Speaker 0

Thank you. At this time, we will be conducting the question and answer session. Our first question comes from the line of Brett Rice with Janney Montgomery Scott. Please proceed with your question.

Speaker 3

I've got a number of questions. Can I ask a couple of them? And then, you know, will I be able to, you know, come back in the queue out of respect for other callers? Would that work for you guys?

Speaker 1

It works for us.

Speaker 3

Great. On the materials business, the key decision makers of your customers, can you give me some sense of the lead times that you expect? It's gonna take these engineering teams or key opinion leaders to look at kick the tires in what you have and then ultimately, you know, give us orders that, you know, put money in our pocket?

Speaker 1

Some have already kicked the tires. They're waiting for the new facility to get online. Okay? And we do have some orders.

Speaker 3

Are you are we still you you said the new facility is in sight. You've said prior, you know, you're shooting for the third quarter of two thousand nineteen. What what you know, when are we in there and up and running?

Speaker 1

We're moving equipment in as we speak. The gases were brought in, I think, the past week. We expect to be testing equipment in there during the latter part of this quarter and start operations sometime in the third quarter.

Speaker 3

The lease up of the new space, what's can you give us a progress report on that?

Speaker 1

We have the proper permits for that, and we've been showing it. And hopefully, we'll report something positive shortly.

Speaker 3

If if you accomplish what you want to accomplish with the lease up of the new space, Can you give us some sense of what the economics are going to look like? Will the rent from the lease up more than cover your mortgage payments? What does that look like when things are up and running?

Speaker 1

Well, the rents are at market rate, okay, that we're looking at. And we expect it to be accretive to, you know, our needs of the new building. Beyond that, I really rather not comment.

Speaker 3

Okay. The 400,000 in the first quarter that you spent on CapEx for the for the new building on top of the 2.5 from 02/2018, Is is have we reached is that the end of what you need to spend on the new building?

Speaker 1

Hopefully not. Okay. I hope to be spending a lot more over the next three, four, five years as the building gets further expanded for the needs of the sales by tantaline, mesa scribe, and CBD materials.

Speaker 3

Okay. Now the large aerospace customer, is that absolutely any recurring business for them? Is is that dead, dead, dead in the water?

Speaker 1

I've always used the words cautiously optimistic.

Speaker 3

Well, can I probe that a little bit more? The equipment that you've sold them, you know, to handle the aircraft composite engine flow. To your knowledge, was that enough to cover the volumes that, know, that are coming out of the facilities for this large aircraft manufacturer?

Speaker 1

Long term, I don't believe it is for them, but that's something that they would have to answer.

Speaker 3

Right. The the machines you did sold them sell them, do they have a you know, what what's the useful or shelf life of these machines?

Speaker 1

With proper maintenance and repair and etcetera, you know, they'll be twenty, thirty years.

Speaker 3

Okay. Okay. To your knowledge, have they ordered comparable equipment from any other vendor?

Speaker 1

Not to my direct knowledge. No.

Speaker 3

Okay. I have other questions. But out of respect for other callers, I'm gonna drop back. But thank you so far.

Speaker 0

Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question at this time, please press star one on your telephone keypad. Thank you. We do have a follow-up question coming from the line of Brett Reiss with Janney Montgomery Scott. Please proceed with your question.

Speaker 3

Yeah. It looks like you're stuck with me here. Okay.

Speaker 1

Yep.

Speaker 3

The on April 16, this order of First Nano Systems to tag Heuer or Hower, Can you give us some sense of the size, scope and potential business that could flow from that relationship?

Speaker 1

Well, it's not an order. It was an announcement of actual operation of the equipment at the customer's site.

Speaker 3

Okay. With respect to the MesoScribe order with the Air Force, Can you give us some color on on what that is and and what the potential magnitude of business of that might be?

Speaker 1

Yes, sweetheart. You repeat the question, Brett, please?

Speaker 3

Yeah. The the April 30 announcement of the, order, that MesoScribe got from the from the air force. Was SBIR contracts? Yes.

Speaker 1

Actually, we got three. There was a third one, I believe, the fourth quarter of last year that we announced also. And what you're seeing is the technology that MesoScribe is capable of starting to work its way through some of the beginnings of what may become production contracts later on. Right now, it's proving feasibility, capability, but they're already producing certain materials for the aerospace and defense market. This is just a further continuation of new capabilities.

Speaker 3

Okay. Could you give us an update on the you filed for a patent for the novel fluid reactors. Yeah. How we how's that going?

Speaker 1

It's going very well in the lab. We expect that over the next year, two years, to move further forward with it. It's very new technology. We're looking for a potential partner with somebody in the medical industry to help move it for you know, further forward.

Speaker 3

Okay. And and and that ties I was gonna ask you any update on your intentions for the membrane oxygenator cartridge. So that

Speaker 1

Well, is the fluid reactor.

Speaker 2

Okay.

Speaker 3

Okay. Alright. Now a number of the board members in January made some nonopen market purchases of of CBD stock at $3.99. Are you at liberty to say who who was the seller?

Speaker 1

I'm not cognizant of this, Brett. I mean, I can look into it further.

Speaker 3

Okay.

Speaker 2

Think you may you might be referring to a a a grant of restricted stock as part of board compensation.

Speaker 3

Okay. So the the the alright. So it was not okay.

Speaker 2

Accurate that, I think that's what you'll find.

Speaker 3

Okay. Okay. It would be nice to see, you know, the stock down here, you know, some ins you know, insider buying, you know, to kind of give shareholders comfort that we all have confidence in what's going on here. That's not a question, just a gratuitous comment. Now what was the cash burn this quarter?

And what do you think it'll be for the coming year, Tom?

Speaker 2

Brett, for the quarter compared to December, cash for Q1 was down about $100,000 And basically the operating loss, the cash operating loss was offset by the collections of receivables. So about $2,000,000 and change cash operating loss and that's about what our receivables were reduced by. So for the quarter cash was flat. With the continued impacts of our cost containment measures with improvement in order flow, we are working towards positioning the company to be profitable by Q1 twenty twenty. So there's obviously a variety of factors in play, but we're working towards that.

Speaker 3

Will you reach cash flow breakeven prior to Q1 twenty twenty when you look at your internal budgets?

Speaker 2

I think what we could say is based on continued progression of the order flows, we'll see progression towards that. And when the results come out, we'll let those stand for themselves. I think the key is just the focus on driving the company towards profitability in 2020.

Speaker 3

Right. Right. Now on on order flows, when you announced the year end figures on April 1, you would said at that time you had $6,000,000 $6,000,000 of new orders. You know? Now you have 6,500,000.0.

So so in basically April and the first week in May, we've gotten another half million dollars in in order?

Speaker 2

No. No. What I think the the end of the year, we had talked to orders of approximately $6,000,000 in Q1 when we completed the execution of those orders, again, within the quarter, January to March 31, the final number came in at just just about 6,500,000.0.

Speaker 3

Right. Right.

Speaker 2

It's just an adjustment to that approximate number.

Speaker 3

Okay. Now be before we got involved with this large industrial an aerospace, you know, customer. You know, the the old legacy businesses, the run rate was, like, around $6,000,000 a quarter, you know, 24,000,000 for the year. You know, that legacy business seems to have just, you know, fallen off a cliff. And I I I know, Glenn, you you say it's always been lumpy.

But is it lumpy, or it's it's just not what it used to be? You know, can you talk to that a little bit?

Speaker 1

Well, basically, it is lumpy. It's not, where it fell off a cliff. It takes a little bit of time to get back, to where we were. I think the first quarter sort of helps show that it's capable of being done. And we suspect that the rest of the year will be in that magnitude.

Speaker 3

Right, right. All right, gentlemen, thank you for answering all my questions. I appreciate it.

Speaker 1

You're welcome.

Speaker 0

Thank you. Our next question comes from the line of Howard Morton, a private investor. Please proceed with your question.

Speaker 4

Hi. Can you hear me?

Speaker 1

Yes, we can.

Speaker 4

Okay. Several years ago, you had hopes that you would outgrow the building that you bought, not for a tantaline, but just for the regular business. What I'm trying to figure out is sort of what Brett was talking about. Why the old business, which we thought would had a lot of growth potential in different areas, not just the aerospace. What happened?

Did is it also cyclical? Or we were hoping to do a 100,000,000 by this time without even knowing about tantaline. So that that that's the mystery to me. Where where did the dream fade? Thank you.

Speaker 1

Well, it's still there. The issue was that we got sidetracked significantly by the large aerospace company, which ordered a lot of equipment, which took a while to eat through it. It was more than we expected at one time. And it's had its own issues now with the drop off. But we will get the equipment business back up over a period of time.

Speaker 4

Well, my follow on comment is that for years you didn't have to sell. People came to you because you were so expert at this or that. So as the aerospace company came to you because you were good at something. Now, apparently, it seems you have to sell. Do you have that capability?

Speaker 1

Well, we always sold. It's just that we sold in a different fashion than just going out and knocking on doors. Okay? And we still do that. They still come to us.

It's every day.

Speaker 4

Okay. Well, let's hope your future is a lot brighter than your current. And needless to say, you wish yourself less luck, and I do too. So carry on.

Speaker 1

Thank you.

Speaker 0

Ladies and gentlemen, we have reached the end of our question and answer session. I would like to turn the floor back over to Mr. Rosenbaum for any additional concluding comments.

Speaker 1

Thank you for joining our conference call, and I look forward to speaking with you at the next call. Thank you.

Speaker 0

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.