Earnings Call Transcript - CVV Q4 2020

Operator, Operator

Greetings, and welcome to CVD Equipment 2020 Fourth Quarter and Year End 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 wise expectations. Now, I would like to turn the call over to President and CEO, Emmanuel Lakios.

Emmanuel Lakios, CEO

Thank you. Welcome to CVD Equipment Corporation's annual conference call. My name is Emmanuel 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 a subset of 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.

Thomas McNeill, CFO

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 of 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 our diluted share was $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 revenue for 2020 was $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 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 three quarters of 2020 and into 2021. With respect to our backlog at the end of 2020, it was $5.7 million as compared to $8.9 million at December 31, 2019, a reduction of $3.2 million or 36%. Regarding the materials business, the projected growth of the 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 2021, we began an intensive analysis of our entire business and operations, including the materials business. Based on 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. We are forecasting continued losses and negative cash flow for our Tantaline product line. Consequently, 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. Additionally, we recorded an impairment charge of $3.6 million toward our fourth quarter of 2020, as well as 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 attributed primarily to substantially reduced revenue and the resulting operating loss for the year ending December 31, 2020. $1.6 million of capital was invested in the year ended 2020, primarily related to Tantaline equipment and installations. Debt service payments of approximately $700,000 were made. All this was partially offset by a $3.9 million benefit from two items: the first is the PTP loan of $2.4 million, which we received in April 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 obtained a tax receivable of $1.5 million, $800,000 of which was received during the 2020 year. The longer-term impacts of the COVID-19 outbreak are highly uncertain and cannot be predicted. Our return to profitability depends upon, among other factors, the receipt of new equipment orders, the lessening of the ongoing effects of COVID on our business in the aerospace market, and the improvement in our operational efficiencies, such as the consolidation of our centralized submittal facilities, which is expected to save $300,000 on an annual basis. The sale of our 555 building and the reduction of interest expense, along with managing plans for capital expenditures and operating expenses, will also play a crucial role. To increase our liquidity and provide necessary working capital to support 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, 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 will be used to satisfy existing mortgage debt on the building, which amounted to approximately $9.3 million at December 31, 2020. Various costs related to the sale closing will also be deducted, and 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, which we believe can accommodate any needs for our growth for the foreseeable future. As I mentioned earlier, with the consolidation of the two Central Islip facilities, we will reap ongoing savings of $300,000 per year. Currently, we are about 60% to 70% moved down to one facility into the 355 facility, so we are well on our way. Based on all these factors, we believe our cash and cash equivalent position, combined with cash flow from operations, will be sufficient to meet our working capital and capital expense needs in the next 12 months. Should the current environment continue longer or worsen, we will continue to assess our operations and take actions to maintain our operating cash to support working capital needs, as well as compliance with our loan covenants.

Emmanuel Lakios, 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, which in turn impacted our equipment business. Other aspects of our business were also affected, such as university projects, as universities were shut down and moved to remote learning. Even though we are making progress on the pandemic, the commercial recovery of our core market aerospace is uncertain. Industry news reports and customer input 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. We will discuss the product lines shortly. The sale of the 555 building will provide capital for our sustainability and growth. This aligns with our 2020 and three-year operating plan, which is currently in development. We will continue to evaluate our infrastructure cost model and take thoughtful measures to reduce fixed expenses wherever possible while continuing to invest in our core business and product lines, with renewed focus on our shareholders, customers, and employees. Now, for a summary overview of our business and product segments. After completing our product analysis, it was clear that our equipment systems and production spares are the core elements of our business. We are focused on two major markets: aerospace and nanowires, both carbon and silicon. Of course, we will continue to support other legacy and emerging market opportunities. Our focus will be on utilizing our 38 years of developed technology to increase production and application uses. This standardization allows us to provide more value, and the maturity of our products will bring more support and value to our customers, as well as the ability for improved gross margins. In all our business elements, our know-how and intellectual property are 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 gas turbine engines and satellites. The MesoScribe group has secured several US Air Force development contracts for next-generation instrumentation and turbine blade repair maintenance. The group is cash flow positive, and the technology is in the adoption phase. We continue to explore possible growth applications. The Tantaline product line, acquired in 2016, has seen significant investments in expanding its marketplace and our operational capability in Denmark as well as our US 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 requirements. We will continue to evaluate the viability of the Tantaline product line over the coming quarters. The US Tantaline facility and operations have 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 also serve as a supplier to our equipment division and further fulfill our in-house facility requirements, and this 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, which combines carbon nanotube growth and infiltration and is crucial for the device's functionality. One possible application is blood oxygen transfer, specifically referred to as Extracorporeal Membrane Oxygenation, ECMO. We will provide updates as developments arise. 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 throughout 2021. As we committed to you in January, we will continue to provide timely communication. We have announced that our Annual Shareholder meeting will occur in mid-July, and we will also continue to communicate regarding important developments in the meantime. Your comments and questions are important to us. With that, we would like to open the floor to your questions.

Operator, Operator

[Operator Instructions] Our first question is from Brett Reiss with Janney Montgomery Scott.

Brett Reiss, Analyst

Hi, Manny. Hi, Tom. Good luck to you, Manny. Just a couple of questions on the building. What did we pay for it? Are we booking a profit on that? And I know there are costs, but $24.3 million less than $9.3 million mortgage, are we netting $15 million less the costs on this?

Thomas McNeill, CFO

Yes. So, Brett, what I can tell you is, obviously, $24,360,000 is the gross amount for the building, and then we just followed our 10-K but it's out there. We paid about $13.8 million for the building, and there are various other closing costs, commissions, and we're obviously moving from one facility to the other, but none of them will be a substantial number. I would say it's probably over $10 million to be determined as we complete the deal, and we'll report that in our Q1. A substantial number is — when we look at our balance sheet, this is both a balance sheet and an operational review. Number one, we just didn't need both facilities for the operations. Number two, we will gain a lot of efficiencies and better utilization of individuals and departments. It has the ongoing benefit of an annual saving of $300,000, not to mention the initial cash improvement, and the reduction of our total debt will go from $9.93 million on that building down to nothing, and we'll be left with about a $2 million mortgage on our 355 facility. So on many fronts, it made a lot of good sense.

Brett Reiss, Analyst

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

Emmanuel Lakios, CEO

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

Brett Reiss, Analyst

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

Thomas McNeill, CFO

It's about $2.1 million.

Brett Reiss, Analyst

Okay. Now, regarding business, in the past, the company would wax poetic about opportunities for quoting in medical products. Is there any possibility there? Because it wasn't mentioned in your introductory comments.

Emmanuel Lakios, CEO

Yes, Brett. We are continuously looking into applications, quoting, and following up. We truly focus on sizable market opportunities, and right now, that is primarily in aerospace for us, as well as some of our carbon products. So we continue to explore potential in medical devices, solid-state electronics, and other industrial type applications, but currently, there isn't a significant emerging opportunity we can speak to.

Brett Reiss, Analyst

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 generate revenues?

Emmanuel Lakios, CEO

Sure. To answer quickly, we have a distributed sales force that is focused by product line. Our SDC product line has its own sales and marketing group. MesoScribe is led by my successor, Dr. Jeff Brogan, who has extensive experience in the thermal spray and MesoScribe areas. He is well-known, and that is a very focused marketplace of aviation and defense. For our equipment business, we have several reps and distributors who bring in leads and handle customer relationships on a global basis. In the US, we primarily sell directly. We have a team of seasoned veterans, some of whom have been with us for over a decade, and they are still with us, actively marketing and selling. Our sales reach extends globally to China, Europe, the United States, and India. As for how we maintain focus, it's all about emphasizing the top line; when you grow the top line, the bottom line follows.

Brett Reiss, Analyst

I was going to ask you something, but it escaped me; it'll come to me. Now, I just wanted to clarify that Dr. Brogan is in charge of all sales, other than the reactor equipment sales to the research departments at universities.

Emmanuel Lakios, CEO

Yes, that's correct. All of the sales and marketing funnel up to Dr. Brogan. The SDC division operates independently and does exceptionally well, and we just collaborate with them.

Brett Reiss, Analyst

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?

Emmanuel Lakios, CEO

We continue to maintain a good relationship with our aerospace customers, including our largest aerospace client. We are in constant communication regarding their demand projections. We serve them from both a system perspective and through our consumable and spare parts business, which presents a large opportunity for us in production. We are optimistic about a gradual recovery for aerospace and for travel in general, based on industry news.

Brett Reiss, Analyst

Right, now just circling back, and then I'll drop back in queue. The sale of the building for $24,360,000, on a scale of one to ten, with ten being metaphysical certainty that the deal will close and one meaning it will not close, what would you rate it?

Emmanuel Lakios, CEO

We went into it thinking we would close, and we have every expectation that it will. However, as our attorneys say, a deal isn't a deal until the money changes hands. We expected it to close, but I can't give you a specific number. During our due diligence, we evaluated the transaction's capability, timing, and pricing. We believe we selected the best option for shareholders.

Operator, Operator

[Operator Instructions] We do have a follow-up question. Our next question is from Martin Howard, a private investor.

Martin Howard, Analyst

My question is, is there still a dream of glory with the medical product that Stony Brook is working on? I know you mentioned you'll keep us updated on the progress there. But can we still hope that this could be a big deal?

Emmanuel Lakios, CEO

First, who am I speaking to?

Martin Howard, Analyst

My name is Martin Howard.

Emmanuel Lakios, CEO

Hey, Martin. Yes, we continue to develop at SUNY Stony Brook under a small grant for the evaluation of our ECMO device, which I believe you are specifically referring to. There are some technical milestones in the development process. As you know, it's not just about generating orders and raising capital; there are developmental goals to achieve. We expect to start getting some results over the next two months. Meanwhile, we are actively pursuing opportunities to capitalize on the investment we've made in this reactor core element ECMO application device. We remain very active in this field, but we do not want to overstate the opportunity at this point.

Operator, Operator

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

Brett Reiss, Analyst

Hi. Thank you for giving me the opportunity to circle back. Given the challenges the company has faced over the last year and a half, have you been able to retain your top engineering talent?

Emmanuel Lakios, CEO

Well, we've retained our top financial talent, Thomas here on the call with us, got a good start. Yes, we have. We do have some level of turnover, which is not unusual. However, the employees who have been with the company have been here for a long time. We also invest in interns in the company as we grow and cultivate new talent. I would say the team feels excited about competing in the production equipment space, so I think we are doing well in that area.

Brett Reiss, Analyst

Okay. Now, I know you're moving the residual Tantaline business into the old facility, but I thought one reason for the new facility was that certain functions and things could not mix with the old facility's mix of business with the new Tantaline business. Was that just not the case?

Emmanuel Lakios, CEO

I can't say that that wasn't the thought process and justification at that time. Our present market analysis suggests that it is cost-prohibitive to maintain multiple sites, and the capacity in Denmark is more than sufficient to meet global demand. We have improved our operations. It wasn’t that it was defunct; it's just that we've hired talent in Denmark to enhance operational efficiency. Our objective is to reach breakeven and minimize any further investment needs in Tantaline. Therefore, there is no intent to start off Tantaline in 355, at least not until we continue to increase our capacity in Denmark.

Thomas McNeill, CFO

And, Brett, just to build on what Manny said, our team has done a terrific job reorganizing and making the 355 facility more efficient, clean, and organized. Even with the operations from 555 being consolidated, we still have between 30,000 and 50,000 available square footage for expansion and growth. We also have the ability to segregate certain operations should that be necessary, so I think we are well-prepared.

Brett Reiss, Analyst

Now, when we entered the Tantaline business, we had high hopes for it. Why didn't it pan out as the company thought it would? What lessons have you learned from this experience so that future resource allocations won’t make the same mistake?

Emmanuel Lakios, CEO

This relates to planning, market analysis, and return on investment modeling. Understanding the operational costs, backbone infrastructure needed for application development, capital equipment requirements, and the reality of potential operating losses is critical. Going forward, we will conduct a complete return on investment model and market analysis on any new organic product development and any potential acquisitions or new marketplaces we enter.

Operator, Operator

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

Emmanuel Lakios, CEO

I wish all of you the best during this trying time with the COVID pandemic. First and foremost, my management team and the Board of Directors appreciate your participation today and your loyalty to the company. You have our commitment that we will continue to do our utmost to provide returns on investments and 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 for our next meeting, but we will continue to communicate as pertinent information arises. Thank you very much.

Operator, Operator

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