Earnings Call Transcript - CVV Q4 2021

Operator, Operator

Greetings, and welcome to the CVD Equipment 2021 Fourth Quarter and Year-End 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 Emmanuel Lakios, President and CEO and member of the CVD Board of Directors; and Thomas McNeill, Executive Vice President and Chief Financial Officer. We have posted our earnings press release and call replay information to the Investor Relations section of our website. 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 our filings with the SEC. Actual results may differ materially from those described during the 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'd like to turn the call over to Manny.

Emmanuel Lakios, CEO

Thank you, Kyle. Welcome to our CVD Equipment Corporation quarterly conference call. My name is Manny Lakios, CEO and President, and I’m pleased to be presenting to you today regarding our 2021 performance, important company developments and pertinent information related to our business. As we will be providing substantive information, your thoughts are important to us. We look forward to your questions at the end of our conference call in the question-and-answer session. 2021 was a year of transition, reorganization and focus on providing a path to profitability and growth. We are pleased with the improvements in performance of the company and increased demand for our products during this difficult period. We spent the first half of 2021 shoring up our balance sheet and optimizing our market focus and product offerings, all in the interest of maximizing the future profitability and viability of the company. In 2021, orders for the company as a whole were $21 million, up 75% from prior year 2020. The Equipment group had an increase of 100% over 2020. 23 systems were booked in 2021 compared to 9 systems in 2020. We obtained multiple strategic orders in our focused growth markets serving electric vehicles, the first being battery anode material and the second silicon systems for high-power electronics. According to market research, both of these markets are expected to grow in the coming quarters and years. The systems I mentioned are planned for delivery mid-2022. Recently, we announced 2 additional strategic orders in Q1 of 2022, one for battery nanomaterial research and development and the other for carbon-based discrete devices for 5G cellular phone technology. Both systems will be completed in the second half of 2022. During the first quarter of 2022, we also received orders for consumables that serve our installed base in the aerospace market. This is a sign of continued recovery of the aerospace market, which we do not expect to recover fully until 2023. The recent orders over the last 3 quarters further validate our strategy of focus on growth end-use markets, such as battery nanomaterials, silicon carbide growth systems and advanced composite materials for aerospace and other markets. Our consolidation of the Tantaline product line operations into Denmark has yielded improved performance in 2021 over 2020. The division had its first profitable year and was cash flow positive. The MesoScribe product line, which was moved and consolidated from our 555 building into our 355 building, was also operational in Q3 and was cash flow positive as was the SDC division. In 2021, we rightsized our employee headcount, and there was a reduction in certain operating expenses associated with the consolidation of the 555 building into our 355 building, all located in Central Islip, New York, and into the Tantaline facility in Denmark. The sale of the 555 building was completed in July, with the outcome of providing approximately $14 million of additional cash on hand. The sale of the building provides both working capital as well as future growth opportunities. Our revenue in 2021 was down from 2020 due to the lower equipment orders in 2020 attributed to the COVID pandemic. The impact of the reduction in revenue was partially mitigated by our rightsizing of our employee headcount and the consolidation of our facilities. We have experienced 4 quarters of sequential revenue increase in 2021 and we expect the trend to continue through 2022, yielding a breakeven and profitability run rate by the end of 2022, hence achieving our profitability initiative. The COVID pandemic and now more recently the geopolitical instability in Russia and Ukraine have caused global issues in supply chains. The negative effect has been felt by all companies with increases in commodity and product material costs as well as in product delivery uncertainty. In our production group, we have seen and further have been addressing these global supply chain issues. This will be a challenge for most companies, including CVD. We have implemented rigorous supplier engagement as well as expanding our network of suppliers. We also, in 2022, have initiated a program to expand our internal manufacturing capability with the objective to be self-reliant. We have ample capacity on our 355 Central Islip facility to accommodate a shift in our manufacturing strategy to assist in addressing any longer-term supply chain issues. With that, I would like to now introduce our CFO, Mr. Thomas McNeill, who will provide you our fourth quarter and year-end 2021 financial summary.

Thomas McNeill, CFO

Thank you, Manny, and good afternoon, all. CVD fourth quarter 2021 revenue was $4.7 million as compared to $3.2 million in the fourth quarter of 2020, an increase of $1.5 million or 48.8%. CVD's operating loss for the quarter ended December 31, 2021, was $1.2 million as compared to an operating loss of $5.4 million in the fourth quarter of 2020. Included in the operating loss for the quarter ended December 31, 2020, is an impairment charge of $3.6 million related to the company's Tantaline product line. Net loss for the fourth quarter of 2021 was $1.2 million or $0.18 per diluted share as compared to a net loss of $5.3 million or $0.80 per diluted share in the fourth quarter of 2020. With respect to our year-end results, as a result of the COVID-19 pandemic, CVD's new orders substantially decreased commencing in the first quarter of 2020, which reduced revenues in subsequent quarters resulting in revenue of $16.5 million for the year ended December 31, 2021, as compared to $16.9 million in the year ended December 31, 2020, a decrease of $400,000 or 2.8%. CVD's operating loss for the year ended December 31, 2021, was $4.8 million, compared to $7.8 million for 2020. Included in other income for the year ended December 31, 2021, was a gain on the sale of the 555 building in the amount of $6.9 million and a gain on debt extinguishment in the amount of $2.4 million, which was related to the PPP loan received due to the effects of the COVID-19 pandemic. Net income for the year ended December 31, 2021, was $4.7 million or $0.71 per diluted share, compared to a net loss of $6.1 million or $0.91 per diluted share for the year ended December 31, 2020. Sequentially, CVD's revenue in the fourth quarter of 2021 was $4.7 million as compared to $4.3 million in the third quarter of 2021, an increase of $400,000. The operating loss increased to $1.2 million in the fourth quarter of 2021, as compared to an operating loss of $900,000 in the third quarter of 2021. During Q3 2021 and continuing to date, CVD has been impacted by increased costs on certain manufacturing material components as well as delays in supply chain deliveries. This may also impact CVD's ability to recognize revenue and reduce gross profit margins in future quarters as well as extend its manufacturing lead times and reduce manufacturing efficiencies. CVD has commenced placing orders with increased lead times to try and help mitigate the manufacturing delays as well as assessing other material suppliers to mitigate the potential cost impacts. In addition, CVD is utilizing its in-house flexible manufacturing to mitigate both potential delivery schedule delivery delays and material increases. The company's backlog at December 31, 2021, improved by $4.7 million or 82% to $10.4 million, compared to $5.7 million at December 31, 2020. While the negative effect of the COVID-19 crisis continues to impact the aerospace industry due to reduced travel and reduction of industry gas turbine engine sales, we have achieved new orders during the quarters ended June, September and December 2021 in the amount of $6 million, $6.1 million, and $5.2 million. This compares favorably to $3.8 million in the quarter ended March 31, 2021. With respect to the 555 building sale debt and our cash position, we are pleased to have closed on the sale of our facility located at 555 North Research Place, and we did this in July of 2021. With the sales price of $24.4 million, we satisfied our then mortgage debt of approximately $9.1 million and paid various transaction-related costs. The net proceeds of approximately $14 million improved our cash position, which at December 31, 2021, stood at $16.7 million, providing us with the balance sheet to bolster sustainable growth strategies. As a result of the gain on the sale of the 555 building, we improved CVD's overall shareholder equity and retained earnings by approximately $5.1 million, and our retained earnings is now a positive $1.8 million at December 31, 2021. Finally, on March 1, 2022, we paid off our remaining mortgage debt on the 355 building in the amount of $1.7 million. As such, we have no debt outstanding. With respect to our liquidity, primarily the result of the sale of the 555 building, cash, as I mentioned, increased to $16.7 million at December 31, 2021, compared to $7.7 million in the prior year period. Our working capital was $16.7 million at December 31, 2021, compared to $8.1 million in the prior year period. This is an increase of $8.6 million or 106%. In addition, during the year ended December 31, 2021, we substantially reduced our CapEx from $1.6 million in the year ended December 31, 2020, to $236,000 during the year ended December 31, 2021. This related to ceasing further USA spend on the Tantaline product line. The longer-term impacts from the COVID-19 outbreak are highly uncertain and cannot be predicted, especially now with the impacts on our supply chain as we previously discussed. While we have initiated actions to mitigate the potential negative impacts to our revenue and profitability, there can be no assurance of the ultimate impact and the length of time that the supply chain factors may impact our revenues and profitability. Our return to profitability is dependent, among other things, on the continued receipt of new orders, the lessening of ongoing effects of COVID-19 on our business and the aerospace market, managing through the supply chain issues discussed and improvement in our operational efficiencies, as well as managing planned CapEx and operating expenses. Based upon all these factors, we believe that our cash and cash equivalent positions, and projected cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next 12 to 18 months of the filing of our Form 10-K that was filed today. 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 working capital needs.

Emmanuel Lakios, CEO

Tom, thank you for the presentation. In summary, 2021 was as we expected, a year of transition, reorganization and focus on everything we do and those who we serve. Our focus remains consistent on our customers, employees, shareholders and the pursuit of growth and return to profitability. We are looking forward to 2022 and are cautiously optimistic. Your comments and questions are important to us. With the close of our presentation, we'd like to open up the floor to your questions.

Operator, Operator

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

Unidentified Speaker, Investor

My question is this. I'm glad you have enough money and better conditions to stay alive, but I would love to have a reason to be excited. Is there anything happening on the health issue, is there some great interest in some new product where you can see maybe in a year is $5 million or $10 million, $20 million worth of sales, something that gives us a reason to love the stock instead of tolerate it?

Emmanuel Lakios, CEO

Okay. So Martin, thank you very much, and thank you for at least tolerating the stock thus far. It’s our job to work at having you love the stock. Yes. And let me speak to some of the things that we've actually publicly released. Last year, we received 6 orders for silicon carbide growth systems that are used, as you may know, in high-power electronics. Those high-power electronics are used in the charging and transmission of devices for electric vehicles, which is one great application for us. And we received 6 from 1 customer. As I stated earlier in my presentation, that is one of our growth focus areas and markets. The other is in the anode battery material itself. We announced last year that we had received an order from a customer, and we actually announced that it was in one of our releases, where they are evolving the carbon nanomaterial used in electric vehicle batteries. These are 2 areas that are large growth opportunities for us, substantiated not only by our readings of the news but also by market research. In addition to that, Martin, we still maintain a large foothold, meaning the company did a great job over the last several years in fiber telco for the aerospace industry. As we know, that industry was impacted by the COVID pandemic; long-haul travel to Europe and Asia, along with major manufacturers like Airbus and Boeing. Our market research and the news indicate that the aerospace marketplace will recover at some point. So with that said, we're excited. We received those orders last year for products that will be used in electric vehicle battery and energy transmission and charging, and we're pleased with those. As far as we are not a medical device company, which we mentioned earlier, that's not our primary focus. We look at those types of products as applications for our carbon and our carbon CVI, both our carbon nanotubes and our carbon CVI processes, and primarily for the sale of tools. So with that said, I hope I provided some clarity on areas that we focus on.

Unidentified Speaker, Investor

One last question, and I don't mean to take too much time. Graphene was sort of a touted material, like it's going to be the material over the next 50 years. Is there some truth to that? What is your opinion on graphene for the company?

Emmanuel Lakios, CEO

We see larger demands on carbon nanotubes than we do for graphene. And without spending a lot of time on that, there are a lot of different ways to harvest graphene. It's a good technology. We sell systems in that area. I really can't speak more than that. I think it's still a technology looking for a solution.

Operator, Operator

Our next question is from Brett Reiss with Janney Montgomery Scott. We see larger demands on carbon nanotubes than we do for graphene. Without spending a lot of time on that, there are many different ways to produce graphene. It's a good technology, and we sell systems in that area. I really can't elaborate further. I think it's still a technology searching for an application.

Brett Reiss, Analyst

Hi, Manny. Hi, Tom, can you hear me?

Emmanuel Lakios, CEO

Yes, we can.

Brett Reiss, Analyst

Great job on the increase in the backlog and the positive trends in orders and the outlook for profitability by year-end. I appreciate that. I have a question about the nanomaterial systems you've sold. Last quarter, you sold one to a battery sciences company and another to a research and pilot production customer. Also, there was a news release on March 29th about selling an atomic layer deposition system to the Georgia Institute. Could you explain the differences between these systems in a simple way?

Emmanuel Lakios, CEO

As if you're 60 or 6.

Brett Reiss, Analyst

6 years old.

Emmanuel Lakios, CEO

Okay. The 1 tool was for a production application, and it's a higher volume system, much higher volume system. The tool that we spoke about in the fourth quarter and then the Georgia Tech announcement are for actual R&D applications. Georgia Tech, the ALD tool is just another deposition technology that is very similar to a CVD process. The equipment looks very much the same. But it's for one of the best universities doing research in this field, and we're very pleased to have been selected.

Brett Reiss, Analyst

When I'm probing is the add-on and total addressable market in these areas. I mean, because everybody knows electronic vehicles are just going to increase market share. So take, for example, the 1 battery customer. Has there been greater acceptance of that Cynanode process that they're pushing, so that we could look forward to perhaps repeat additional orders from that customer? Can you give us any color there?

Emmanuel Lakios, CEO

I can tell you that we're on schedule as we had committed to deliver it mid this year. I can't speak to my customer's adoption of their technology in the marketplace. That's probably all I can really say on that. We're doing our best to provide them the best technology. And with that technology, it's really up to them to be able to get adoption and traction in the marketplace.

Brett Reiss, Analyst

Okay. Another area that appears to be a growth opportunity is the shift towards 5G and the plasma-enhanced chemical vapor deposition system. Is this a one-time situation, or considering the global transition to 5G, what is the potential for repeat orders and business in that field?

Emmanuel Lakios, CEO

Well, again, that's an emerging technology using carbon-based products, which I can't really speak to beyond that. In discrete devices that would be used in a 5G application. The platform that we're developing, though, is different from our standard platform. We've shifted to a cluster tool platform. And that platform could be available to us to sell into other applications. So it has both capability within this specific use case of these discrete devices potentially for multiple orders, and we plan on marketing that technology to other applications.

Brett Reiss, Analyst

Is plasma-enhanced chemical vapor deposition something new for you? You have been the leading company in chemical vapor deposition. Is this a different approach or is it quite similar to what you've been doing?

Emmanuel Lakios, CEO

No, the company has a history of providing plasma-enhanced CVD systems. This tool is a specific tool designed for low-temperature processing, but it's on a cluster. It is a true production system, a wafer-level production system.

Brett Reiss, Analyst

The new cluster to production platform, which you described, is there anything proprietary to the company with respect to that new product?

Emmanuel Lakios, CEO

Yes, there is, and therefore, I can't tell you about it.

Brett Reiss, Analyst

Okay. Well, that's good because if it works, we've got a protective moat. Yes?

Emmanuel Lakios, CEO

Yes.

Brett Reiss, Analyst

Okay. Great. Great. Manny, you mentioned you've gotten some orders for consumer materials in aerospace, which is kind of a green shoot. Could you just go into that a little bit more and give us some more color on that?

Emmanuel Lakios, CEO

There is a lot of capacity that has been underutilized because of the pandemic and then the impact of long-haul travel and the reduction of gas turbine engine orders. When you start seeing consumables and spare parts orders, it indicates that they are utilizing the tools again. That is a good indicator. There will be some period of time that we would anticipate and hope that they get those fully. They use all their free capacity. Beyond that, they would have to add some additional capacity. When that happens, we're not quite sure. But we've offset the aviation portion of our business at this point with some of these other emerging technology and business segments, which are electric vehicle applications, both the silicon carbide and the battery material.

Brett Reiss, Analyst

Okay. And this is probably for Tom. What was your cash burn just from operations this quarter?

Thomas McNeill, CFO

This quarter on the cash burn, I'm going to get back to you on that one, Brett. I can take that offline.

Brett Reiss, Analyst

Okay. Okay. And just the building you're in now, which you're now debt-free and clear, I'm not saying you're going to do it. But if you had to sell it tomorrow morning, what could you get for it? What's it worth? What's the market value right now?

Emmanuel Lakios, CEO

We would have to get an independent assessment of that. We think it's worth a lot. But to give you a number, I think we would be hard-pressed to do that.

Brett Reiss, Analyst

Well, you just sold the other one right down the block for $24 million. And I think the one you're in is arguably maybe not worth as much, but pretty close in a pretty hot market, yes?

Emmanuel Lakios, CEO

Yes, I heard you. And yes, that sounds like a fair assessment. But again, I can't give you a number on what the value is.

Brett Reiss, Analyst

Okay. But that's a margin of safety for people in terms of monetizing that if you needed working capital for your business or if an acquisition comes along that intrigues you.

Emmanuel Lakios, CEO

That's something we have considered as well, and everything is up for consideration.

Brett Reiss, Analyst

Can you describe the morale of your sales force?

Emmanuel Lakios, CEO

They were 100% year-on-year. I think that having been in sales organizations, I believe that's a morale booster for the entire organization, not just the sales force.

Brett Reiss, Analyst

Right, right. It's possible aerospace could eventually come back, and then you seem to be right in the thick of things with the EV batteries and 5G. Things seem to be humming along very nicely. So thank you and keep it up.

Emmanuel Lakios, CEO

Thank you, Brett. Appreciate that.

Thomas McNeill, CFO

And Brett, just to your question, cash burn Q3 to Q4, cash decreased by about $800,000.

Brett Reiss, Analyst

Okay. So your assertion that you've got enough cash to last for the next year to 18 months, I mean, you got a lot more runway than that. Yes?

Thomas McNeill, CFO

Yes. And that's a good point, Brett. The 12 to 18 months is more of an SEC requirement that we are compelled to say that you have enough for that period of time. We don't run out in 12 to 18 months based on our anticipated forecast. We're well positioned with the order flow and focused on the operating efficiencies and expenses.

Emmanuel Lakios, CEO

And Brett, we appreciate you bringing that up. I think the clarification is important. Thank you, Tom. Thank you. We're going to take one more question.

Operator, Operator

Our next question is from Dan Jones, a private investor.

Unidentified Speaker, Investor

This is Dan, not Dan Jones. I would like to know more about the opportunity with silicon carbide materials and how your equipment fits into the supply chain. Can you share what you're observing regarding capacity expansion, both in the United States and internationally?

Emmanuel Lakios, CEO

Clearly, I think we all read the news. Thank you again. There's a significant shift to bring the IT back to the United States and initiatives concerning China, etc. Part of that involves high-power electronics, battery material, and semiconductor integrated circuits. But let's focus, as you asked, for a moment on the silicon carbide. We build physical vapor transport systems, essentially used to grow the silicon carbide material itself. That is our product offering today on this particular silicon carbide application. This is not a coating; this is the actual growth of those pools that are then cut, polished, and made into actual silicon carbide wafers. As you may know, silicon carbide wafers have a higher current and temperature capacity than silicon.

Unidentified Speaker, Investor

Okay. Great. Are there many other merchant equipment suppliers for the silicon carbide crystal, the goal?

Emmanuel Lakios, CEO

There are other merchant suppliers. There aren't a lot of merchant suppliers of silicon carbide wafers; many have been acquired by the device manufacturers.

Unidentified Speaker, Investor

And in terms of the interest in your product, is it those vertically integrated device manufacturers?

Emmanuel Lakios, CEO

You can imagine that the up-and-coming merchants have some open space to run in, and those have been our primary focus.

Operator, Operator

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

Emmanuel Lakios, CEO

Okay. Well, thank you all for being on the call today. CVD Equipment, I speak for all the employees and the Board of Directors, and we appreciate the shareholder loyalty. We look forward to 2022, as we said earlier. I wish you all the best. Stay safe, and thank you.

Operator, Operator

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