CVD Equipment Corporation (NASDAQ:CVV) Q4 2021 Results Conference Call March 31, 2022 5:30 PM ET
Company Participants
Emmanuel Lakios – CEO
Thomas McNeill – CFO
Conference Call Participants
Brett Reiss – Janney Montgomery Scott
Operator
Greetings, and welcome to the CVD Equipment 2021 Fourth Quarter and Year-End Results Conference Call. [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 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 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 our filings with the SEC including, but not limited to, the Risk Factors section of our 10-K for the year ended December 31, 2021.
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
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 and 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 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 of 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 the 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 of — 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 have yielded improved performance in 2021 over 2020. The division had its first profitable year and was cash flow positive. The micro — 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 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 is 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 for 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 the 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 is — 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
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, 2020 and — sorry, December 31, 2021 and 2020 was $1.2 million and $5.4 million, respectively. 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 and 2020 was $4.8 million and $7.8 million, respectively. 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. Included in the operating loss for the year ended December 31, 2020, is an impairment charge of $3.6 million related to the company’s Tantaline product line.
Net income for the year ended December 31, 2021, was $4.7 million or $0.71 per diluted share as compared to a net loss of $6.1 million or $0.91 per diluted share for the year ended December 31, 2020.
In the first quarter of 2020, CVD’s net income was favorably impacted by the CARES Act, which allows for the carryback of net operating losses and resulted in CVD recognizing an income tax benefit of $1.5 million in 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. And the operating loss increased to $1.2 million in the fourth quarter of 2021 as compared to 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 reduced 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, and this compares 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, as previously announced, 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, is $16.7 million, and provides 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. And 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, as compared to $7.7 million in the prior year period. Our working capital was $16.7 million at December 31, 2021, as 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 have 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.
And 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, 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. So 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 the working capital needs.
At this point, I’d like to turn the call back over to Manny, our CEO.
Emmanuel Lakios
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 to pursue 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.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question is from Martin Howard, a private investor.
Unidentified Speaker
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 thing [indiscernible], is there’s 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 give us a reason to love the stock instead of tolerate it?
Emmanuel Lakios
Okay. So Martin, thank you very much, and thank you for at least up to now tolerating the stock, and it’s our job to work at having you love the stock.
Unidentified Speaker
Stockholder various amounts for over 15 years.
Emmanuel Lakios
Yes. And let me speak to some of the things that we’ve actually had public releases on. 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 — for devices in charging and transmission of electric power for electric vehicles is 1 great application for us. And we received 6 from 1 customer. And as you — 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 that — and we actually announced that it was in 1 of our releases, where they are there are evolutionary improving the carbon nanomaterial used in electric vehicle batteries.
So those are 2 areas that are large growth opportunities for us, and that’s substantiated by obviously, we read the news, we can see that, and also by market research. In addition to that, Martin, we still have a large foothold. I mean the company did a great job over the last several years in fiber telco for the aerospace industry. As we know that, that industry was impacted by the COVID pandemic and long haul or travel to Europe, travel to Asia. And the Airbus, the Boeings were impacted, therefore, then the manufacturers were as well. So again, our market research and the news indicate that, that marketplace will come back at some point in time.
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. So we’re pleased with those. As far as we are not a medical device company, I think we’ve mentioned that earlier that, that’s not our big play. We look at those type 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 think I gave you a couple of examples of areas that we do focus on.
Unidentified Speaker
One last question, and I don’t mean to take too much time. Graphene was sort of a [powered] material, like it’s going to be the material over the next 50 years. Well, is there some truth to that? Or what is your opinion on graphene for the company?
Emmanuel Lakios
We see larger demands on CNT 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. I really can’t speak more than that. It’s — I think it’s still a technology looking for a solution.
Operator
[Operator Instructions] Our next question is from Brett Reiss with Janney Montgomery Scott.
Brett Reiss
Hi, Manny. Hi, Tom, can you hear me?
Emmanuel Lakios
Yes, we can.
Brett Reiss
Great, great. Good show on the increase in the backlog and the trends in orders and line of sight of profitability by year-end. So I appreciate that. Can I ask you, like, last quarter, you sold a nanomaterial system to 1 battery sciences, which you mentioned. And then you did it — you sold another system to a research and pilot production customer. And then you had the March 29th news release that you’re selling an atomic layer deposition system to — for the Georgia Institute. Could you, to this non-engineer — just explain to me the differences between these systems and you can talk to me like 6 years old.
Emmanuel Lakios
As if you’re 60 or 6.
Brett Reiss
6 years old.
Emmanuel Lakios
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 real R&D applications. Georgia Tech, the ALD tool is just another deposition technology that is very similar to a CVD process. And it’s really just — as a 6-year-old, you really don’t need to know difference is. The equipment looks very much the same. But it’s to one of the best universities do research in this field and we’re very pleased to have been selected.
Brett Reiss
When I’m probing is the add-on and total addressable market in these areas. I mean because — I mean everybody knows electronic vehicles are just going to increase market share. So take, for example, the 1-day 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
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 customers adoption of their technology in the marketplace. And that’s probably all I can really say on that. We would — 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
Okay. Now another area that’s just seems to be a growth prospect is this migration of the world to 5G, this plasma-enhanced chemical vapor deposition system. Is that a one-off? Or are there other — since the world’s going to 5G, what is the potential for repeat orders and business in that area?
Emmanuel Lakios
Well, again, that’s emerging technology on 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 than our standard platform that we’ve shifted to a cluster tool platform. And that platform would 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. But we plan on marketing that technology to other applications as well.
Brett Reiss
Right. Is anything — first is plasma-enhanced chemical vapor deposition, kind of — I mean, you guys were the go-to firm for chemical vapor deposition. Is this different? Is this almost like a new business that you’re embarking on? Or is it just very similar?
Emmanuel Lakios
No, we have — the company has a history of providing plasma-enhanced CVD systems. This tool is a specific tool designed for low temperature [pre-CVD] processing. But it’s on a cluster — it is a true production system — wafer-level production system.
Brett Reiss
The new cluster to production platform, which you described, is there anything proprietary to the company with respect to that new product?
Emmanuel Lakios
Yes, there is, and therefore, I can’t tell you about it.
Brett Reiss
Okay. Well, that’s good because if it works, we’ve got a protective moat. Yes?
Emmanuel Lakios
Yes.
Brett Reiss
Okay. Great. Great. Manny, you mentioned you’ve gotten some orders for consumer materials in aerospace, which is a kind of green shoot. Could you just go into that a little bit more, give us some more color on that?
Emmanuel Lakios
There is a lot of capacity that because of the pandemic and then the impact of the long-haul travel, therefore, the gas turbine engine reduction, order reduction and then, therefore, obviously, then they don’t need — there’s excess capacity as you start now getting consumables and spare parts orders, you start — that is a projection that they’re using the tools.
So that is a good thing. 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 also the battery material.
Brett Reiss
Okay. And this is probably for Tom. What was your cash burn just from operations this quarter?
Thomas McNeill
This quarter on the cash burn, I’m going to get back on that one, Brett. I can take that offline.
Brett Reiss
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
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’d be hard-pressed to do that.
Brett Reiss
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
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
Okay. But that’s 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
That’s — that goes through our minds as well, and everything is up for consideration.
Brett Reiss
Yes. Just 1 last one. The morale of your sales force, what — can you describe it?
Emmanuel Lakios
They were 100% year-on-year. I think that, that having been in sales organizations, I think that’s a morale booster for the entire organization, not just the sales force.
Brett Reiss
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
Thank you, Brett. Appreciate that.
Thomas McNeill
And Brett, just to your question, cash burn Q3 to Q4, cash decreased about $800,000.
Brett Reiss
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
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 what our focus on the operating efficiencies and expenses.
Emmanuel Lakios
And Brett, we appreciate you bringing that up. I think the clarification. Thank you, Tom. Thank you. We’re going to take 1 more question. Kyle?
Operator
Our next question is from Dan Jones, a private investor.
Unidentified Speaker
This is Dan, not Dan Jones. Anyway, I’d be interested if you could provide a little bit more color on the silicon carbide materials opportunity, where your equipment plays in terms of the supply chain there. And what you’re seeing in terms of capacity build out, whether that — where that — how that looks in the United States and also abroad?
Emmanuel Lakios
Well, I mean, clearly, I think we all read the news — thank you, again. We all read the news, and there’s a big shift to bring the [IT] back to the United States, China initiatives, et cetera. Part of that is high power electronics, battery material, semiconductor integrated circuits. But let’s focus, as you said, for a moment on the silicon carbide. We build physical vapor transport systems essentially used to grow the — the silicon carbide material itself. So that is really our product offering today on the — on this particular silicon carbide application. This is not a coating. This is the actual growth of those pools that are then then cut and polished and made into actual silicon carbide wafers. And as you may know, silicon carbide wafers are higher current — have a higher current capacity and temperature capacity than silicon.
Unidentified Speaker
Okay. Great. Are there many other merchant equipment suppliers for the silicon carbide crystal, the [goal]?
Emmanuel Lakios
There are other merchant suppliers. There aren’t a lot of merchant suppliers of silicon carbide wafers. A lot of them have been gobbled up by the device manufacturers.
Unidentified Speaker
And in terms of the interest in your product, is it those vertically integrated device manufacturers or is it —
A –Emmanuel Lakios
You can imagine that they are the ones that are going to – no, you can imagine that the up-and-coming merchants have some open space to run in, and those have been our primary focus.
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
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. And I wish you all the best. Stay safe, and thank you.
Operator
This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.
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