CVD Equipment Corporation
Q3 2018 Earnings Call Transcript

Published:

  • Operator:
    Greeting and welcome to the CVD Equipment's Third Quarter 2018 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ivan Pill [ph]. Thank you, sir. You may begin.
  • Unidentified Company Representative:
    Thank you, Latania [ph]. Good afternoon, everyone and thank you for joining CVD's third quarter 2018 results conference call. The call will begin with some prepared remarks followed by a question-and-answer session. Presenting on the call today will be Len Rosenbaum, President and CEO of CVD Equipment; and Glen Charles, our Chief Financial Officer. The third quarter earnings press release and call reply information have been posted to the Investor Relations section of CVD's website at www.cvdequipment.com. Before the call begins, please be reminded that many of the comments made on today's call are forward-looking statements, including those related to future financial performance, market growth, total available market, demand for CVD's 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 the third quarter press release and in CVD's filings with the SEC including, but not limited to, the risk factors section of our 10-K for the year ended December 31, 2017. Actual results may differ materially from those described during this call. In addition, all forward-looking statements are made as of today and CVD undertakes 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 Len.
  • Len Rosenbaum:
    Good afternoon, everyone, and thank you for joining our earnings call. The third quarter was a challenging one for CVD as a number of events caused our results to fall short of expectations. The substantial completion of our large aerospace orders in the second quarter and delays in placing orders by a number of key customers for a variety of reasons impacted our results. Also impacting our results this quarter were the additional expenses in carrying costs associated with delays in the permitting process for the construction of our new 180,000 square foot materials production. On that front, we just received our Phase I site approval, and expect building permits shortly. One of the main reasons for developing the materials business is to diversify CVD's customer base and reduce the lumpiness of our equipment business. The other reason of course, is to tap into new growth markets of supplying material codings for aerospace, biomedical and corrosion resistant applications. As noted in our press release today, we recently filed a number of key provisional patents for corrosion resistant coatings, and a family of novel fluid reactors that allow the efficient transfer of gases towards out of liquids. One potential application of fluid reactors is in oxygenation cartridges used during cardiopulmonary bypass surgery to add oxygen and remove carbon dioxide from the blood. Our MesoScribe business was notified that they were selected to receive three government-sponsored awards for the development of the Direct Write technology for new uses in aerospace and [indiscernible] applications. Before turning the call over to Glen, we'll provide the details on our results. I'd like to conclude my remarks by sharing something that I think exemplifies CVD's stature as a technology company. Last month we were among select number of companies to present at the U.S. Air Force CMC Technology Interchange Meeting. This invitation reinforces our confidence in being recognized for our ability to provide innovative solutions to new and existing markets. This is one of the many reasons CVD will continue to make significant investments in our next-generation solutions and materials. These investments will position CVD for long-term success. With that I turn the call over to Glen.
  • Glen Charles:
    Thank you, Len. As Len mentioned, our performance in the third quarter fell below expectations. This was due to fewer customer orders than expected, and the associated costs of maintaining related production and engineering personnel, as well as the ongoing costs related to the buildout of CVD materials production facility. These include additional expenses in carrying cost coming from the delay in constructing and eventually ramping up the production facility for this business. We expect to begin ramp up somewhere near the end of the second quarter of 2019. From a resource perspective, we continue to closely monitor both situations and calibrate our business as necessary, as we did at the end of the previous quarter. CVD's third quarter revenue decreased 37% sequential to $4 million, compared to the third quarter of 2017 revenue declined 63%. Our gross margin decreased to negative 1.4% from 17.3% in the previous quarter and 42% from last year's comparable period, primarily due to the associated course of maintaining engineering and production personnel. Lower margins and increased operating expenses resulted in an operating loss of $2.9 million. The higher operating expenses were due in part to continued investments in research and development with R&D costs increasing 88% from the prior period and 52% from last year's comparable period. We finished the quarter with a net loss of $0.39 per share, compared to a net loss of $0.21 per share in the previous quarter and to net income of $0.22 per share in the third quarter of last year. At the end of the quarter, CVD's order backlog stood at $6.5 million compared to $6.4 million at the end of the previous quarter. As we announced couple of weeks ago, we anticipate fourth quarter 2018 revenue will be similar to this quarters level resulting in a net loss as well. The timing of CVD's return-to-profitability will mostly depend on the receipt of new orders receiving a necessary building permits with the new CVD materials facility, and the ramp up of the materials business following it's completion. As we noted in our press releases, we have maintained a new architect and had that local government officials with the objective of expediting the permitting process in order for construction of the materials facility to proceed at being completed. Our working capital for the third quarter decreased $17.7 million. As of September 30, 2018, CVD had cash and cash equivalents of $14.2 million which is sufficient to meet our working capital needs and to fund our capital expenditures over the next 12 months including bringing the material that's online for the expanded facilities enabling us to commercialize our new technologies. We had elected not to renew the line of credit that expired in September because the renewal terms were not acceptable to us and we had not borrowed from the line of credit in the previous 10 years. I'll now turn the call back over to the operator for your questions.
  • Operator:
    [Operator Instructions] Our first question comes from Brett Reiss with Janney Montgomery Scott.
  • Brett Reiss:
    Can you give two or three examples of the delay in orders you're experiencing? What kind of delays and in what sectors of the business are we talking about?
  • Len Rosenbaum:
    One customer was recently acquired by another company and was put off their orders until first quarter hopefully of next year. Another customer delayed their funding until first quarter of next year, third customer, we expected but they've also been delayed due to funding.
  • Brett Reiss:
    So it's not a secular thing, it's just lumpy bad timing and we should see business from these folks.
  • Len Rosenbaum:
    We anticipate seeing business from these people.
  • Brett Reiss:
    Some building question; are your people -- do they have access to the building or are they preparing it so that once you get the permit you can hit the ground running?
  • Len Rosenbaum:
    We're doing everything in the building that we can without requiring building permits. For example; all the floors have been redone, all the lighting has been redone, it's been a few other things that they've done. We've planned out the whole building, what we cannot do is actually write-down a construction and that's what we're waiting for.
  • Brett Reiss:
    Now the portion of the building you intend to sub-let-out, is it going to be to groups that are going to be doing materials handling business so you need the permit or are they going to be doing non-material handling business so that you don't need the permit for them?
  • Len Rosenbaum:
    Our permits are for our use, what we're intending to use the building for. If we sublease any space, any permits for them will be determined by their needs.
  • Brett Reiss:
    Are you actively looking for these sub-lease tenants so that once the permits come in and you really have access to the building, that leases for the sub-let tenant can expeditiously be executed so that it's less of a cash drain on us?
  • Len Rosenbaum:
    Yes, we are actively looking, we have engaged broker to look but until we get our Phase I approvals and building permits, there is nothing more we can do at this point with the exceptions of building.
  • Brett Reiss:
    Now the backlog in orders that you can't do until you're in the building, can…
  • Len Rosenbaum:
    They are not substantial. So we haven't taken orders for what we need to do in the new building.
  • Brett Reiss:
    And just Glen, what was the cash burn this quarter?
  • Glen Charles:
    Actually it was about $17,000 but we ended up the quarter with pretty much the same thing we had the previous quarter.
  • Brett Reiss:
    Which is music to my ears. Why wasn't the cash burn greater?
  • Glen Charles:
    We had a good quarter worth of collections. So we collected some funds and that's pretty much the reason.
  • Brett Reiss:
    I have respect for other people that may want to ask questions, I'm going to drop back in queue but will I be able to come back?
  • Len Rosenbaum:
    I do think so.
  • Operator:
    Our next question comes from [indiscernible].
  • Unidentified Analyst:
    I see these as on TV, New York wants business; can't you appeal to some politician to say we have jobs potentially here? Is there luckily some damn bureaucrat who won't let you permit? I mean, you [indiscernible] but nothing dangerous happened in your old belly, why would they be so difficult in the new building?
  • Len Rosenbaum:
    You would really want the true answers to that?
  • Unidentified Analyst:
    Yes.
  • Len Rosenbaum:
    Take it offline and I'll speak to you privately.
  • Operator:
    We have a follow-up from Brett Reiss from Janney Montgomery Scott.
  • Brett Reiss:
    Just on the real estate values because I do get some margin safety questions from clients, you paid $7 million for your existing facility and I think your financials indicate you put $3 million in, so the building is $10 million and then you paid $13.850 million or so for the new facility; so between the two it's $25 million. I've had some real estate people run comparable; I mean, it looks like you own them at good prices per square foot. If you wanted to sell them, I'm not saying you're going to do that -- could you get at least what you paid for them if not more?
  • Len Rosenbaum:
    Since I'm not going to sell them, I have not considered that but I would think that we would get at least what we paid for.
  • Brett Reiss:
    And the [indiscernible] property which you own out right, I got comparables up there, $1.5 million, $1.6 million; if you were going to sell it could you get $1 million for it?
  • Len Rosenbaum:
    I would hope so.
  • Brett Reiss:
    So between the real estate it's $25 million less the $12 million mortgages, you add that number to the cash, your business right now is being valued at nothing by the market?
  • Len Rosenbaum:
    It's a great opportunity to buy the stock.
  • Brett Reiss:
    Can we see board members, management give the market confidence and see some insider buying when the blackout period is over?
  • Len Rosenbaum:
    That will have to be upto the directors and the management. I do not control anybody but myself.
  • Brett Reiss:
    Lean on them.
  • Len Rosenbaum:
    I'll use the same hitman.
  • Operator:
    There are no further questions in queue at this time. I would like to turn the call to Mr. Len Rosenbaum for closing comments.
  • Len Rosenbaum:
    I thank everyone for participating in our third quarter earnings call. And I look forward to speaking to you for our year-end call. Thank you very much.
  • Operator:
    This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

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