CVD Equipment Corporation
Q4 2020 Earnings Call Transcript

Published: 31 Mar 2021

[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. 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.

[Emmanuel Lakios:]

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:]

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 of $0.80, as compared to a net 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 each of 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 the year 2020 it was $5.7 million as compared to $8.9 million at December 31, 2019, a reduction of $3.2 million or 36%. With respect to the materials business, the projected growth of 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 upon 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 minimize or seized. Based upon this analysis, we are forecasting continued losses and negative cash flow for our Tantaline product line. And as a consequence, 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.

[Emmanuel Lakios:]

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 travels caused a decline in demand for aircraft engines, and in turn impacted our equipment business. Other end use aspects of our business were also impacted such as University projects, as universities were shuttered and moved to remote learning. Even though that we're making progress on the pandemic, the commercial recovery of our core market aerospace is uncertain. Industry, news reports and consumer input, customer input appear to 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 speak to the product lines in a few moments. The sale of the 555 buildings will provide capital for our sustainability and growth. This goes hand in hand with our 2020 and three year operating plan which is in development. We will continue to evaluate our infrastructure cost model and take thoughtful measures to reduce fixed expenses in the areas possible while continuing to invest in our core business and product lines. All with a renewed focus on our shareholders, our customers and our employees. Now for a summary sketch of our business and our product segments. After completing our product analysis, it was clear that our equipment systems and production spares are the core elements of our business. There are two major market focuses aerospace and nanowires, both carbon and silicon. Of course, there are other legacy and emerging market opportunities, which we will continue to support. Our focus will be on utilizing our 38 years of develop technology for increasing product as production and use applications. This standardization allows us to provide more value and maturities of our products bring more support and value to our customers and the ability for improved gross margins. In all our business elements, our know-how and intellectual property is essential for both defense and offensive market positions, we will increase our activity to develop our IP and safeguard it.

[Operator:]

Our first question is from Brett Reiss with Janney Montgomery Scott.

[BrettReiss:]

Hi, Manny. Hi, Tom. Good luck to you Manny. Just a couple of questions on the building. I mean 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?

[ThomasMcNeill:]

Yes. So, Brett, what I can tell you is obviously $24,360,000 is the gross amount in the building which and then we just followed our 10-K but it's out there we pay about 13.8 for the building and there's various other closing costs, commissions and we're obviously moving from one facility to the other but none of the a substantial number I would say it's probably in the north of $10 million to be determined as we complete and we'll report that in our Q1. We'll have a much better update on that. The substantial number is -- when we look at our -- looked at our balance sheet this is both a balance sheet and an operational review number one is we just didn't need both facilities for the operations number one. And number two; we would garner a lot of efficiencies, better use of individuals and through department. It has the ongoing benefit of, an ongoing $300,000 a year save year in year out, not to mention the initial cash improvement and the reduction of our total debt will go from 993 on that building down to nothing, and we'll be left with about a $2 million mortgage on our 355 facility. So on a lot of fronts; it made a lot of really good sense.

[BrettReiss:]

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

[EmmanuelLakios:]

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

[BrettReiss:]

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

[ThomasMcNeill:]

It's about $2.1 million.

[BrettReiss:]

Okay. Now, with respect to business, in the past, the company would wax poetic that there were a lot of opportunities for quoting in medical products. Is there any possibility there? Because it wasn't mentioned in your introductory comments.

[EmmanuelLakios:]

Yes, Brett, allow me to take that one. We, there are a lot of applications that we looked into, and we quote, and we follow up on, we really speak to the ones that have sizable market opportunity, and that really is in the aerospace for us at this point in some of our carbon products. So we continue to explore whether it's in medical devices and in solid state electronics or in more industrial type applications, but there's really nothing that I would say that would be an emerging diamond in the rough right now that we could speak to.

[BrettReiss:]

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 salesforce to do what's necessary to go out there and get revenues?

[EmmanuelLakios:]

Sure. Well, we know to answer quickly, we have a distributed salesforce, where we focused by product line, our SDC product line has its own sales and marketing group. The MesoScribe is headed off by my successor, who was Jeff Brogan, Dr. Brogan who's now the Vice President of Sales and Marketing. And he's a veteran in the thermal spray and MesoScribe area. So he is well known. And that is a very focused marketplace of aviation and defense. On the area of our equipment business there, we have a series of reps and distributors that bring in leads and handle the customer relationship, and that's on a global basis. In the United States; we are primarily direct and we have seasoned veterans, I can't give the headcount out. Seasoned veterans in that space, some of them who came through acquisitions over a decade ago and they are still with us, and still market and sell that product. We do sell the product globally, whether China, Europe, United States, India, those are all been overlaid in the last several quarters. How do we do it? We -- where it's all about, for me, it's all about the top line, and you grow the top line and the bottom line follows in ensue.

[BrettReiss:]

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

[EmmanuelLakios:]

All of just as with my prior position, all of the sales and marketing funnel off to Dr. Brogan. The SDC is for the most part, a standalone division, and they do just brilliantly on their own. And we just collaborate with SDC and that team.

[BrettReiss:]

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?

[EmmanuelLakios:]

Well, whatever customers we do have we, unless we are in affirmative language allowed to speak to their names, they will continue to remain unnamed. We continue to have a good relationship with our aerospace customers, including our largest aerospace customer. We are in constant communication with their projections for demand. We serve them both from a system perspective, and also our consumable and spare parts business is a large opportunity for us in the area of production, hence why we're focused more so today on production level systems. There is a recurring razor blade business that's associated with that. And we're expecting based on I would say industry news that in 2021, there is a belief, not just a hope of a beginning of a recovery for aerospace and for travel in general.

[BrettReiss:]

Right, now just circling back, and then I'll drop back in queue, the sale of the building into $24,360,000, on a scale of one to 10, 10 being metaphysical certainty the things going to close and one it's not going to close. What would you say it is?

[EmmanuelLakios:]

We went into it thinking we're going to close. We have every expectation that it will and as our attorneys tell us the deal isn't a deal until the money changes hands. We expected but I can't give you a number. And doing our due diligence, we looked at capability to close certainty, price on the deal. So there were several aspects of the transaction we evaluated and weighed, and we believe we selected the best for the shareholder.

[Operator:]

We do have a follow up question. Our first question is from Martin Howard, a private investor.

[UnidentifiedAnalyst:]

My question is, is there still a dream of glory with -- for this medical product that Stony Brook working on? I know you said earlier that you'll keep us updated on the progress there. But can we hang our hopes that this could be possibly a big deal?

[EmmanuelLakios:]

First, who am I speaking to?

[UnidentifiedAnalyst:]

My name is Martin Howard.

[EmmanuelLakios:]

Hey, Martin. So let me -- I'll answer that question. Yes, we continue to do development that at SUNY Stony Brook, under a small grant, and that's for the evaluation on our ECMO device, which is I believe what you're specifically inquiring about? With there are some technical milestones in the development. It's not, as you very well know, it's not just generating orders and raising capital. It's also we have some development to do. There are some technical milestones that need to be achieved in this program. And we are over the next two months. So I'm expecting that we'll start getting some of those results. In the meanwhile, we continue to look at opportunities to capitalize on the investment that we've made on this reactor core element ECMO application device. So we're very active in that still, but we don't want to overplay the opportunity at this point.

[Operator:]

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

[BrettReiss:]

Hi. Thank you for the opportunity to allow me to circle back. With the travails the company has been going through the last year and 18 months, have you been able to retain your top engineering talent?

[EmmanuelLakios:]

Well, we've retained our top financial talent. Thomas here on the call with us, he got a good start. Yes, we have. We have and yes, we -- every company has some level of turnover. Our turnover rate is not unusual. The employees that have been -- there with the company have been with the company for a long period of time. We do invest also in interns in the company as well, as we start growing and cultivating new talent. So I'm pretty excited about it. I would say that the team tells me that they're pretty, quote unquote jazzed about the opportunity to compete on the production equipment space. So I think that the answer to your question, we're doing very well in that area.

[BrettReiss:]

Okay. Now, I know you're moving the residual Tantaline business into the old facility. But I thought that one of the reasons for the new facility was that there were certain functions and things that you could not mix and do with the old facilities mix of business with the new Tantaline business. That just was not the case.

[EmmanuelLakios:]

Well, I can't say that that wasn't the thought process and the justification at that time, our present analysis of the market and under our metrics, and our yardstick is that both the cost is prohibitive to have multiple sites, the capacity in Denmark is more than adequate to satisfy the requirements for the global demand. We have improved our operations. It wasn't that it was defunct, it was that over a period of time we've hired some talent in Denmark and they have brought the operational efficiency up and our objective there is breakeven and minimize any further investment requirement in Tantaline. So bringing it back here, we -- there is not yet an end, there's no intent to start off Tantaline in 355 until, and it may not occur as we continue to increase our capacity in Denmark. We may not see it in 355. And there are -- so therefore there is no issue about commingling of products in 355.

[ThomasMcNeill:]

And, Brett, just to build on what Manny said, our team has really done a terrific job in. And well uses reorganizing and getting the 355 facilities in a more efficient, clean and organized fashion. And even with bringing in the operations from 555 into our operations, we still have somewhere between 30,000 and 50,000 available square footage for expansion and growth. And even with that, we have the ability to segregate out certain operations should you want to do that. So I think we're pretty well vetted on that.

[BrettReiss:]

Now, when we went into the Tantaline business, we had such high hopes for it. Why didn't it pan out the way the company thought it would? And what lessons do you learn from this experience, so that future allocation of corporate resources, we won't make the same mistake.

[EmmanuelLakios:]

It has to do with planning, market analysis, planning and return on investment modeling and understanding. When you acquire something in all best intentions, there is a cost of operation that needs to be taken into account, there is backbone infrastructure required in applications development to expand the marketplace, there is a burden of potential operating losses, which we actually incurred. And then there is a requirement for capital equipment potentially. And going forward, I can't speak to the past, but I can speak to going forward, we'll be doing a complete return on investment model and market analysis on any new product that we're developing organically and any potential acquisition or new marketplace that we go into.

[Operator:]

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

[Emmanuel Lakios:]

Well, I wish all of you in this very trying time with this COVID pandemic. I wish you the best health and safety overall. First and foremost, I the management team, the Board of Directors, appreciate your participation today and your loyalty to the company. And you have our commitment that we will continue to do our most to have return on investments and also return on 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 on our next gathering. But we've, as we committed in January we'll continue to communicate with you as we have information that's pertinent. Thank you very much.

[Operator:]

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