CVD Equipment - Earnings Call - Q1 2021

Transcript

Speaker 0

Greetings, and welcome to CVD Equipment's twenty twenty one First Quarter Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. 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 Lakeios, President and CEO and Thomas 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 contain forward looking statements, including those related to future financial 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 12/31/2020. 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.

Speaker 1

Thank you. Welcome to CBD Equipment Corporation's quarterly conference call. My name is Manny Lachios, 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, mister Thomas McNeil, who will provide you our financial first quarter twenty twenty one summary.

Speaker 2

Thank you, Manny. As a result of the COVID-nineteen pandemic, CVD's new order bookings substantially decreased commencing in the first quarter of twenty twenty, which reduced revenues in subsequent quarters, resulting in our first quarter twenty twenty one revenue of $3,400,000 as compared to $6,000,000 which is the pre COVID-nineteen pandemic era in the first quarter of twenty twenty, a decrease of $2,600,000 or 44.3%. This reduction in sales and the resultant lower gross profit negatively affected our net income in the first quarter of twenty twenty one. Our net loss for the 2021 was $1,500,000 or $0.23 per diluted share, as compared to a net income of $1,700,000 or $0.25 per diluted share in the first quarter of twenty twenty. Let me note that during the first quarter of twenty twenty, CVD was favorably impacted by the CARES Act, which allowed for the carryback NOLs and resulted in CVD recognizing $1,500,000 of an income tax benefit.

As compared to the fourth quarter of twenty twenty, CVD's revenue in the 2021 increased $200,000 to $3,400,000 and the net loss decreased by $200,000 as compared to the net loss in the fourth quarter of $1,700,000 and that $1,700,000 is exclusive of the impairment charges of $3,600,000 related to the CVD tantaline product line. The company's backlog at 03/31/2021, improved by 300,000 to 6,000,000 as compared to 5,700,000.0 at 12/31/2020. Since the first quarter of twenty twenty, the company continues to experience significant negative effects due to COVID-nineteen pandemic, including reductions of new orders, as I mentioned before. However, the company's order activity has improved both in the quarter ended 03/31/2021, and also into Q2 twenty twenty one. 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 2023.

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 Isle Of New York. And on 03/29/2021, we entered into an agreement to sell this building for a purchase price of $24,000,003.60, 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 9,200,000 at 03/31/2021 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 05/23/2021, the buyer may advise us of any requirement to extend the closing date up to sixty days thereafter, which would also require them to put an additional escrow amount of 1,200,000.0.

In accordance with GAAP, or generally accepted accounting principles, at 03/31/2021, the carrying value of the building in the amount of $16,200,000 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 five fifty five building mortgage in the amount of approximately 9,200,000.0 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 have move has commenced and is expected to be completed by the June.

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 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 1,500,000.0 to $2,000,000 in additional costs. In addition, we have recorded an impairment charge, as we previously noted, of $3,600,000 in the fourth quarter and year ended 12/31/2020.

We are driven to achieve profits and ROI in all operating divisions in the future. Turning to liquidity. Our cash and cash equivalents were $5,900,000 at 03/31/2021, as compared to $7,700,000 at 12/31/2020. Working capital was $12,300,000 at 03/31/2021, as compared to $8,100,000 at 12/31/2020. That's an increase of $4,200,000 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 $1,500,000 In addition, this quarter, we have substantially reduced our CapEx from $422,000 in Q1 twenty twenty 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 $2,400,000 PPP loan in April 2021 and anticipate all or 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 twenty twenty, which allowed carrybacks of the NOLs. The longer term impacts from the COVID nineteen 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-nineteen on our business and the aerospace market, and improvements in our operational efficiencies, such as the consolidation of our centralized facilities, the sale of a five fifty five 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 twelve 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 covenant. I'll now like to turn the call back to Manny,

Speaker 1

our CEO. Tom, thank you for your presentation and insight. As we completed our first quarter, we are cautiously optimistic that the twenty COVID pandemic is forecasted to be contained, and the effects of it will eventually wane. We 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. CBD 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 02/2022. 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 q one three First Nano 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 q one, 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 02/2017, continues to focus on high temperature instrumentation in very challenging environments such as in gas turbine engine and satellites. During q one, we received an additional SBIR phase two 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 q two twenty twenty one. Dantaline. The product line was acquired in 2016.

Since then, the company has invested in the expansion in the market and app in operational capability in Denmark, as well as in our US facility. Our evaluation is the Denmark facility has ample capacity for the next years. Our objective is to have the Tantline product line be cash neutral and to minimize any further investment requirement. During q one, all sales and marketing activities were consolidated into the Denmark facilities, and The US operations were 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 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 are also supplier to our equipment division and further fulfill our in house facilities requirements.

With the Brink technology home to The US 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 application components. One such application is blood oxygen transfer, and more ex split 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 go up and growth.

Planning is not a one time and done event, but continues to evolve as the market conditions change. Hence, we continue to us our assessment of our plan, and we expect to be in the execution phase throughout 2021. On 05/07/2021, Martin j Tunnelbaum, 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 accept did 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 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.

Speaker 3

Thank you. You. Our first question today is from Brett Reiss of Janney Montgomery Scott. Please proceed with your question.

Speaker 4

Hi, Manny. Hi, Jim. Can you hear me?

Speaker 1

Very well so, Brad. It would not be a meeting without you asking a question. Good afternoon.

Speaker 4

There you go. Good afternoon. I I'm just wondering, have you do you sit down do you get the your salespeople with, you know, 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, you know, without having to kind of just sit back and and wait passively for, aerospace, you know, to recover?

Speaker 1

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

Speaker 3

We

Speaker 1

are presently completed our strategic planning process. We'll give the 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

Speaker 2

thoughtful

Speaker 1

outcome of our planning process. So, yes, we we we have a tremendous amount of communication within the organization today. Everybody has their hand on an oar to move the boat forward.

Speaker 4

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

Speaker 5

Yeah. We're Frank, we're we're

Speaker 2

right around a 120 employees, give give or take what it was at the end of the year. I think I think maybe about three net three down Mhmm. For the meantime.

Speaker 4

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

Speaker 1

We we 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 a and leveraging the manufacturing that is outside of of CBD 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.

Speaker 4

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 of what that means?

Speaker 1

I I can give you some insight. That's not typically something that we 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, in in orders in q one over q four. But, obviously, 2020, q two, three, four, on an average were very weak due to the the COVID. So we are seeing some level of recovery. We 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.

Speaker 4

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

Speaker 1

The the 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 three d 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 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 a it is not one of the top three applications for us right now.

Speaker 4

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

Speaker 2

Well, we're we're not bettors, but it it will close. Yeah. They're they're a strong, reputable Long Island company, and and we have every indication it will close. But

Speaker 1

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

Speaker 4

Right. Right. Alright. I'm gonna drop back. Thank you for allowing me to ask questions as you always do.

Speaker 1

Thank you, sir.

Speaker 3

Our next question is from Morton Howard, a private investor. Please proceed with your question.

Speaker 5

Yeah. My question is, there's a lot of hope for that health products that with Stony Brook Labs. You said there's nothing nothing has happened to report. Why not? I mean, you know, they're working.

Presumably, you're checking it out. Do they have some time thing that will decide whether it's a a viable product or not in the next

Speaker 2

Sure. Order or so?

Speaker 1

Hi, Martin. How are you? We we chatted last time as well. And 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 at this point, we are looking at, at options, that are available to us.

We have continued to work on the technology, and we are we're looking for some external funding through other sources, through research sources. So we we have not had a a setback, and we are 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, you know, next quarter or a year from now, that this will be a a substantial element of our business.

Speaker 5

Thank you.

Speaker 1

Thank you, sir.

Speaker 2

Mark, why don't you give it one more poll and

Speaker 3

There appears to be no questions no further questions at this time.

Speaker 1

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 and our plans in our July fifteenth Annual Shareholders' Meeting.

Speaker 3

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