Earnings Call Transcript - CVV Q3 2023

Operator, Operator

Greetings and thank you for standing by. Welcome to CVD Equipment Corporation’s Third Quarter Fiscal Year 2023 Earnings 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 Rich Catalano, Executive Vice President and Chief Financial Officer. We have posted earnings press release and call replay information to the Investor Relations section of our website at www.cvdequipment.com. Before we begin, I would 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, risk factors section of the company’s 10-K for the year ended December 31, 2022. 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 the new circumstances or revised expectations. I would now like to turn the call over to Emmanuel Lakios. Please go ahead, sir.

Emmanuel Lakios, President and CEO

Sherry, thank you, and good afternoon, everyone. Thank you all for joining us today to discuss our third quarter 2023 financial results and other important company developments and pertinent information related to our business. Your thoughts are important to us, and we look forward to your questions in our Q&A session. As previously communicated, our order and revenue levels have historically fluctuated and will continue to do so. This is typical for the highly cyclical process equipment industry. As such, while we experienced a year-over-year decline in third quarter revenue of approximately $1.9 million, we are pleased that our year-to-date revenue for the first nine months of 2023 continues to be $1.4 million or 7.6% higher than the prior year. On the order front, during the third quarter, we booked $4.1 million of new orders, principally in our aerospace and defense sector. In the high-power electronics market, there were no PVT150 system orders received in the first nine months of 2023. Our installed base of PVT150 systems is meeting our performance expectations, and we continue to support our existing PVT customers in their end product development goals. We have expanded our marketing efforts to include direct outreach to multiple potential customers for our PVT systems as well as attended key silicon carbide-related trade shows and conferences including the Ice Cream Conference this past September. The engaged customers include both silicon carbide wafer manufacturers as well as fully integrated wafer and device manufacturers. The success of our PVT150 and our recently launched PVT200 systems is dependent on the performance of our equipment in the field, overall market conditions, our customers’ ability to qualify their end product with their customer and their ability to obtain funding required to purchase our equipment. We continue to make progress in divesting and winding down non-core business entities to allow our team to focus on the equipment product lines and pipeline of potential customer opportunities in our key strategic markets of high-power electronics, battery materials, energy storage and aerospace defense. As previously announced, we sold our Tantaline subsidiary in May 2023, and in August 2023, the company entered into a purchase and license agreement with a third party to sell certain assets and to license certain intellectual property of our MesoScribe business in exchange for approximately $900,000. The purchase price is payable in several installments and contingent upon certain performance metrics and other milestones. During the third quarter, we welcomed two Board members, Ms. Debra Wasser and Dr. Ashraf Lotfi. Both Board members bring extensive experience to the company in the areas of corporate governance and financial communications for Ms. Wasser and high-power electronics for Dr. Lotfi. We remain committed to stay the course of our strategy to achieve consistent long-term profitability, growth and return on investment. Our return to profitability is subject to our ability to receive additional system orders and continue our efforts to reduce our overall operating costs. I would like to turn the call over to our CFO, Rich Catalano, who will provide an overview of our third quarter results.

Rich Catalano, CFO

Thank you, Manny, and good afternoon. Our revenue for the third quarter of 2023 was $6.2 million as compared to $8.1 million for the third quarter of 2022. This represents a decrease of $1.9 million or 23.2%. This decrease in our revenue was primarily attributable to lower revenue in our CVD Equipment segment of $1 million, primarily related to lower PVT system revenues that were partially offset by higher aerospace revenue. Our CVD Materials revenues were lower by $0.7 million due to the sale of our Tantaline subsidiary in May 2023 and the wind down of our MesoScribe operations. There were certain customer contracts where our revenue was to be recognized at the point of time when the equipment was to be transferred to our customer based on contractual terms. These contracts were modified during the three months ended September 30, 2023, such that the revenue under these contracts will now be recognized over time using the input method. Our revenue for the three months ended September 30, 2023, includes $1.8 million of revenues that were deferred at June 30, 2023, and recognized on the date of the contract modification. Our operating loss for the third quarter of 2023 was $1 million as compared to operating income of $0.1 million for the third quarter of 2022. The increase in operating loss was due to lower revenues as well as increased operating costs. Our gross profit margin percentage was 25.6% in the current third quarter as compared to 29.8% in the prior year quarter. The decline in gross profit margin from the prior year was primarily due to results and changes in our contract mix, increases in certain component costs as well as higher compensation costs and lower gross profit due to the sale of our Tantaline subsidiary and the wind down of our MesoScribe operations. The increase in third quarter operating expenses from the prior quarter is due to higher employee-related costs to support the growth of our business, additional selling expenditures as well as higher professional fees. At the non-operating income, which consisted principally of interest income, our net loss for the third quarter was $753,000 or $0.11 per share for both basic and diluted. This compares to net income of $63,000 last year or $0.01 per share for basic and diluted. Our backlog at September 30 was $16.6 million, as compared to $17.8 million as of the beginning of the year, as our orders were slightly less than revenues by approximately $100,000. Our reported backlog at September 30 was also reduced by about $0.5 million related to Tantaline and $0.6 million related to the planned wind down of MesoScribe. Our working capital at September 30 was $16.2 million, which compares to $15.5 million as of the beginning of the year. Our cash and cash equivalents were $14.3 million, very similar to the $14.4 million we started at the beginning of 2023. In July 2023, we did collect $1.6 million of employee retention credits from the IRS related to announced credits for the fiscal 2021 period. As for our future operating results, we are unable to predict what impact the current economic and geopolitical uncertainties will have on our financial position and future results of operations or our cash flows. Our return to consistent profitability is dependent, among other things, on the receipt of new equipment orders, our ability to mitigate the impact of supply chain disruptions as well as inflationary pressures as well as managing planned capital expenditures and operating expenses. After considering all these factors, we believe our cash and cash equivalents and our projected cash flows from operations will be sufficient to meet our working capital and capital expenditure requirements for the next 12 months. We will continue to assess our operations and will take actions as necessary to maintain our operating cash to support our working capital needs. I will now turn it back to Manny.

Emmanuel Lakios, President and CEO

Rich, thank you for your presentation. In summary, the financial results of 2023 reflect our efforts to continue to focus on our strategic markets and products. Overall, our focus remains on our customers, our employees, our shareholders and the pursuit of growth and return to consistent profitability. We look forward to continuing to build on our success in the years ahead and remain cautiously optimistic. Your comments and questions are important to us. With the close of the formal presentation, I would like to open the floor up to your questions.

Operator, Operator

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

Brett Reiss, Analyst

Hi, Manny, hi, Rich.

Emmanuel Lakios, President and CEO

Hi, Brett, how are you? Good afternoon.

Rich Catalano, CFO

Hi, Brett.

Brett Reiss, Analyst

Good. I’m good. The softness in the PVT orders means, I guess, your existing customer has decided not to expand. What – do you have any idea why that is?

Emmanuel Lakios, President and CEO

Well, I can’t speak for the customer themselves, but what I can say is that the tools are performing as per our expectations and specifications. They are in the normal process of installation, adoption, ramp-up and qualification of their end product. And as I always say, it’s a matter of when, not if. And we continue to be very supportive of them. So again, I can’t really say any more about their particular business.

Brett Reiss, Analyst

Okay. And I recall also with the PVTs that you were in discussions with a second potential customer. But the roadblock there had been that second potential customer needed to do some sort of capital raise, which, from my end, is a bit of a challenging market for capital raises.

Emmanuel Lakios, President and CEO

It is. And as we indicate in the script, our success in all of our products is based on our product performance, our ability to perform as a company as well as the customers’ acceptance and qualification in the marketplace and their ability to raise funding. Back in the first quarter of the year, we launched the PVT150 to the broader community of potential customers, which includes anyone who makes a wafer, either for their own consumption or to sell it as a merchant. Yes, we have had both start-up companies. Back in the March timeframe, I may also say that we hired our sales manager and stepped up our game and our presence in many of the trade shows. We’ve achieved good market awareness, and we’ve created awareness of the CVD brand at all high-power electronics and silicon carbide crystal growth companies. So that’s all a positive development. Today, we’re engaged with companies that are fully integrated, which means that they grow crystals, make wafers, and manufacture power electronics, down to the start-up companies that just grow crystals and make wafers, as well as the established large companies that focus on the same. We have a broad breadth of opportunities in our sales funnel. Even though some of our potential customers were not able to raise the capital needed, we’ve added additional accounts that fit the bill, and we’re at the level of providing quotations and discussing terms and conditions with some of them. So again, as I say, it’s a when, not an if statement. The tools perform. The market exists. Yes, the venture market is very, very soft, as you indicated, and that does trouble us. But we also have accounts that are very well-funded. So it’s a broad mix and, to answer your question, yes, we’re engaged in having in-depth conversations with other potential accounts as well.

Brett Reiss, Analyst

Right, right. In preparing for this call, I kind of perused your website, which I see has been revamped, and it looked very good. But in exploring your website, I see you guys are involved with wide bandgap semiconductors, and there seems to be a lot of military use for wide bandgap semiconductors. With the state of the world being what it is, is that potential business for you guys?

Emmanuel Lakios, President and CEO

Sure. Just a little bit about the unfortunate climate that we’re in with two major conflict zones. High-power electronics, our large bandgap semiconductors, gallium nitride is one, silicon carbide is another base material for such. We are already in that high-power electronics area. The other is obviously gallium nitride, which we sell R&D systems to. In that area, we have not seen a large uptick for military applications. However, we’ve seen interest in some of our other products, R&D products that are for aerospace and defense electronic space. In our press release, we noted that we’ve had a strong aerospace and defense market share mix this year with the CVI tools for large gas turbine engines. Also, in this past quarter, we received two orders for R&D systems from notable names in the area of ceramic matrix composite materials and materials that could be utilized in high-speed, potentially hypersonic applications. This is an area where CVD has had a history in, and we’re glad and pleased with the performance of our aerospace and defense product line because, quite frankly, it is part of our business. It’s one of the legs. It helps, of course, more than pay the bills, and it provides us with runway as we seek adoption of our high-power electronic silicon carbide crystal growth system, which again is a when, not an if statement.

Brett Reiss, Analyst

Okay. Also from your website, we’re getting out of the Tantaline business, but we’re still in the tantalum business regarding our initiatives with implants.

Emmanuel Lakios, President and CEO

Yes, that is correct. There are applications that we have, whether it’s tantalum or actual implant devices, which are more bone-related. It’s not a large portion of our business, but yes, we continue to sell the equipment related to those applications.

Brett Reiss, Analyst

Okay. One last thing. I didn’t see any employment openings at CVD. Does that mean your headcount right now for the existing level of business is kind of where you want to be? And what is the headcount these days?

Emmanuel Lakios, President and CEO

We’re north of 130 employees in our facility here in Central Islip and in Upstate New York, in our Saugerties site. We think we’re properly sized. We continue to find ways to improve our efficiencies, and we always keep an eye out for talent that may come along as we need it. We monitor our near-term and long-term order rate and adjust our headcount accordingly.

Brett Reiss, Analyst

Right, right. If interest rates are topping out and start to come down, and therefore, cap rates in real estate decrease, do you still have an appetite to sell and lease back your existing facility for added working capital?

Emmanuel Lakios, President and CEO

Yes. We have ample – we never have enough, but we have ample working capital to fund our 2024 objectives and business plan. It’s good, but you never want to raise money when you need it. We will continue to look at options as they become available, but we’re not actively looking right now.

Brett Reiss, Analyst

Great. Thank you for answering my questions, and have a good Thanksgiving to both of you.

Emmanuel Lakios, President and CEO

You bet. Thank you. I appreciate it.

Operator, Operator

There are no more questions at this time. I would like to turn the conference back over to management for closing comments.

Emmanuel Lakios, President and CEO

Thank you, Sherry, and thank you to everyone for dialing in today. We appreciate your attendance on the call. As well, we appreciate your loyalty and also the loyalty of our employees and suppliers. If you have any further questions, feel free to reach out to myself or Rich. Happy Thanksgiving to all. And this concludes our third quarter call. Thank you.

Operator, Operator

Thank you for your participation. You may now disconnect.