CVD Equipment Corporation

Greetings and welcome to our CVD Equipment's 2021 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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 McNeil, 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 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, the risk factor section of our 10-K for the year ended December 31st, 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 revised expectations. Now, I'd like to turn the call over to Manny. Manny?

Thank you. Welcome to our CBD Equipment Corporation quarterly conference call. My name is Manuel Accio, CEO and President, and I am pleased to be presenting today regarding important company developments and pertinent information related to our business. As we will be providing substantive information, your thoughts are important to us. We request that you wait with your questions and at the end of the Q&A session. I would like to introduce our CFO, Mr. Thomas McNeil, who will provide you our financial second quarter 2021 summary.

Thank you, Manny, and good afternoon, everyone. CVD's second quarter 2021 revenue was $4 million, as compared to $3.7 million in the second quarter of 2020, an increase of $300,000, or 8.5%. Net income for the second quarter was $1.5 million, or $0.22 per diluted share, as compared to a net loss of $1.1 million, or $0.17 per diluted share, in the second quarter of 2020. With respect to our first half results, as a result of the COVID-19 pandemic, CVD's new order booking substantially decreased commencing in the first quarter of 2020, which reduced revenues in subsequent quarters, resulting in revenue of $7.4 million in the first half of 2021, as compared to $9.8 million in the first half of 2020, a decrease of $2.4 million, or 24.1%. Net loss for the first half of 2021 was $35,125, or one penny per diluted share, as compared to net income of $500,000, or eight cents per diluted share, for the first half of 2020. Let me note that during the first quarter of 2020, CBD benefited from the CARES Act, which allowed for the carryback of net operating losses and resulted in CBD recognizing an income tax benefit of $1.5 million in the second quarter and first half of 2020. With respect to CVD's second quarter and first half results for 2021, we were positively impacted by the gain on debt extinguishment in the amount of $2.4 million, which was related to our PPP loan received due to the effects of COVID-19 pandemic and subsequently forgiven in June 2021. In our second quarter of 2021, sequential improvement was achieved as CVD's revenue in the second quarter was $4 million as compared to $3.4 million in the first quarter of 2021, an increase of $600,000, and the operating loss decreased to $1.1 million in the second quarter of 2021. as compared to an operating loss of $1.6 million in the first quarter of 2021, an improvement of $500,000. This is a result of increased revenue and the improvement in product margins. The company's backlog at June 30, 2021 improved by $2 million to $8 million at June 30, as compared to $6 million at March 31, 2021. Since the first quarter of 2020, the company continued to experience significant negative effects from the COVID-19 pandemic, including reductions of new orders. However, the company's order activity has improved in both the first and second quarters of 2021, and we believe its longer-term improvements will be benefited by the anticipated slow recovery in the aerospace markets which industry reports indicate will begin to occur in 2022 to 23 timeframe. With respect to our 555 building sale, as previously announced, we are pleased to have closed on the sale of our facility located at 555 North Research Place in Central Islip on July 26, 2021. With a sales price of $24.4 million, We've satisfied our mortgage debt of approximately $9.1 million outstanding at June 30th and paid various transaction-related costs. The net proceeds of approximately $14 million dramatically improves our current cash position, which now exceeds $18 million, and provides us with the balance sheet for sustainable growth strategies. Our cash and cash equivalents were $5.4 $4 million at June 30, 2021 as compared to $7.7 million at December 31, 2020. However, as I just mentioned, with the closing of the 555 sale that occurred in July, our cash balance now exceeds $18 million. Working capital was $11.5 million at June 30, 2021 as compared to $8.1 million at December 31, 2020. an increase of 3.4 million, or 42%. This is primarily the result of our actions taken to sell the 555 building, which we closed in July, and thus resulted in classifying our long-term assets and liabilities related to this sale as short-term at June 30th, 2021. In addition, during the first half, we have substantially reduced our capex from 862,000 in the first half of 2020 to 118,000 during the first half of 2021, this relating to ceasing further U.S. spend on the tantalum product line. The longer-term impacts from COVID-19 outbreak are highly uncertain and cannot be predicted, especially now with the recent outbreaks of the COVID-19 Delta variant. Our return to profitability is dependent upon, among other things, the receipt of new equipment orders, the lessening of the ongoing effects of COVID-19 and the Delta variant on our business and the aerospace market, and improvement in operational efficiencies, as well as managing planned CapEx and operating expenses. Based on all these factors, we believe our cash and cash equivalent positions and cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next 12 months of the filing of this Form 10-Q. Should 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 Matty, our CEO. Tom, thank you for your presentation.

As we completed our second quarter on our entering into the second half of 2021, we are pleased to state that we are seeing a modest, but nonetheless recovery in demand for our products. We continue to be cautiously optimistic that the COVID pandemic impact to our business and product demand is decreasing. We do see negative effects of COVID on our supply chain with increase in costs and lead times for our materials. Our operating team is working through these issues daily, and we do not expect a major impact to our revenue timing nor our gross margins. Over the last several quarters, we have noted the substantial impact to one of our focused and largest served markets, aerospace. We believe, based on industry reports, that the timing of increased gas Turbine engine demand will begin to recover in late 2022 to beginning of 2023. Assuming this materializes, we should start seeing an increased demand for our products and services in 2022. We recently announced that our company orders were approximately $6 million in the second quarter of 2021. The first nano systems business contributed with eight system orders in the first half of the year. Furthermore, we announced that we received a $1.7 million order in July from a production customer. The customer is 1D Battery Sciences based in Palo Alto, California. The system will be used to produce electric vehicle battery material using 1D's center node manufacturing process. The system is scheduled to be completed in Q1 2022. The order supports our plan and is fully aligned with our strategy to mitigate the company into growth production applications of nanotechnology materials. This order rate indicates a very favorable trend with an increase from Q1 2021 and very much so from the same period 2020. Our SDC, Tantoline, Mesoscribe businesses also soar strong product demand. The sale of the 555 building was completed in July with the outcome of providing $14 million of additional cash on hand. The sale of the building provides both short-term working capital as well as for future growth opportunities. In summary, even with these positive indicators, the year is far from over, and we expect to face many challenges. However, our focus remains consistent on our customers, employees, and shareholders, and the pursuit of growth and return to profitability. Your comments and questions are important to us. With the close of our presentation, we would like to open the floor to your questions. Operator?

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Brett Reese with Jannie Montgomery Scott. Please proceed with your question.

Thank you, operator. Hi, Manny. Hi, Tom. Hello, Brad. The ID systems order that you just booked, do you have any idea what the total addressable market for that kind of niche product might be domestically and abroad?

That's actually an excellent question, Brett. That's an area where we're trying to and the marketing team is working on quantifying the size of the marketplace. It's an emerging market both for us and in the field. It's a bit early to be able to give you that information. We hope to have more so during our strategic planning in the third and fourth quarter of this year, so we'll give you an update as we have more information.

Okay. Now, in this market, do you have other company competitors, or is your competitor your customer themselves that might decide to do what you just did in-house?

Yes. We provide first as far as in-house customer competitors building their own equipment. Many of them already do build their own equipment and they turn to us for production level equipment and scale up. That's where we provide value both from areas of safety throughput, and also being able to produce these systems in a more timely manner than they ever could. So we see our customers not as our competitors. We are not producing the material. We produce the equipment. Many of them come to us with their own process. We respect their proprietary nature of that process. As far as other competitors in the field, again, CVD has a very unique presence in that we, for 37 years, have provided application-specific custom equipment. And at this point in time, most of the battery material customers that we would serve have a different process. Many of those are based on both carbon and other nanowire-type materials, where we have a library of processes. So we have quite a bit of experience. I think we are very well positioned in this space against both equipment companies and add enough value to the customer base for us to be able to garnish additional orders.

Okay, I appreciate that. Now, CVD materials. did $1.7 million the first six months. If you annualize it, you know, that's $3.4 million, which is twice what that segment did in 2018, twice what it did in 2019, and one and a half times what you did in 2020. Are these two businesses finally, you know, Tantaline and Mesoscribe, you know, finally gaining momentum and traction so that these kind of revenue numbers are sustainable looking forward?

Yes. So let me just speak to that. Thank you for that. Again, the numbers are – they're smaller in size and, you know, the – The materials portion of the business, the tantaline and mesoscribe, typically they account for anywhere from 10 to 20% of total revenue in a depressed equipment market. The demand side for tantaline is stronger than it was in the past, but again, we are properly sized to account for that. On the mesoscribe, We issued a few press releases that we had closed two contracts that are multi-year contracts, and that also supports the revenue from those contracts. So to answer your question, it's technically a yes, but they still are smaller pieces of our business relative to the equipment.

I know you don't give quarterly guidance, but looking out into the future three years from now, where do you think the tantaline and mesoscribe or CVD materials, where would you like to see the annualized revenue run rate of those two businesses that are under the CVD umbrella?

Yeah, it would be, Brett, it would be irresponsible, I think, for me to really comment too much on that. Where I would like to see them and where we would cautiously project them to be would be two different matters. You know, I hope over the next couple of quarters to be able to present more information on some of the smaller businesses and where we think the served markets are growing and where we think that, you know, the future could hold for us. At this time, I'm not prepared to do that on this call.

Okay. One last one, and I'll drop back in queue. If you could just update us on the oxygenator cartridge, you know, that you're developing with Stony Brook.

Okay. Any updates on that? Well, just to provide a bit of technical alteration to the question posed, we're not developing it in collaboration or with Stony Brook. We are using Stony Brook as a testing facility for certain aspects of the device. There we are working with potential partners to help us further pioneer this. It is not in the top three activities of the company, may I say. And we don't have really any substantive information to provide on this particular call.

Okay. I will drop back. Thank you for taking my questions.

Thanks, Brad. Very good.

Our next question comes from the line of Robert Sussman with Bentley Capital. Please proceed with your question.

Thank you. Can you give us an idea, is this first order for the batteries for EVs, are you talking to or have you seen interest from any other EV battery manufacturers? Are you seeing interest, and is the interest just domestic or is it international as well where most of these batteries are made?

Yes. First, there is a driver for bringing it home to the United States. I think we're all aware of that. Also, it is a global market. We are seeing interest in our carbon and our nanotechnology materials segment, specifically for energy storage, electric vehicles being the largest opportunity. There are competing technologies and techniques for some of this material. The order that we did receive is for one very clever technology that's been pioneered. Again, I stated earlier it was with 1D Battery Sciences, and I welcome you to visit their website. And that is one technique. There are other techniques that we're also exploring with other battery or energy storage manufacturers. So to answer your question, it's a global. We are having conversations with multiples. And we're pleased that we were selected by 1D for their production requirements.

Is there something unique about 1D, there obviously is, that makes your equipment optimal where it would be just another piece of equipment for other technologies different than 1D systems?

I would be trespassing on our non-disclosure and confidentiality agreements with our customers. if I was to elaborate any further on that. But again, we were selected and we're very pleased of that.

Okay, one last one on that you may not want to answer. Would this satisfy 1D for at least the next 12 months, one system, or is this the beginning of a larger order that could take place over the next 12 months?

Well, I think you are right. I really can't answer that, cannot. But I obviously, you know, I have my own hopes and desires. Okay. Thank you. Thank you, Rob.

There are no other questions in the queue. I'd like to hand the call back to management for closing remarks.

We appreciate everyone's attendance. We hope all and everyone stays safe in these, again, difficult times. And we look forward to communicating with you in the near and midterm. Thank you very much.

Ladies and gentlemen, this does include today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.