CVD Equipment Corporation

Greetings, and welcome to our CVD Equipment's 2021 Third 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 question and answer sessions. Presenting on the call today will be Emmanuel Lakios, President and CEO and member of the CVD Board of Directors, 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'd like to remind you that many of the comments made on today's call contain forward-looking statements, including those related to the future financial performance, market growth, total available market, demand for our products, and general business conditions and outlooks. 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, 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 would like to turn the call over to Manny.

Hello. Welcome to our CBD Equipment Corporation's quarterly conference call. My name is Manny Laccio, CEO and President. I am pleased to be presenting to you today regarding important company developments and pertinent information related to our business. As we'll be providing substantive information Your thoughts are important to us. We look forward to your questions at the end of our conference call and the question and answer session. I would like to introduce our CFO, Mr. Thomas McNeil, who will provide you with our financial third quarter 2021 summary.

Thomas McNeil Thank you, Manny, and good afternoon, everyone. CVD third quarter 2021 revenue was $4.3 million as compared to $4 million in the third quarter of 2020, an increase of 0.3 million or 8.4%. CVD's operating loss for the three months ended September 30, 2021 and 2020 was 0.9 million and 1.4 million respectively, with Q3 2021 improving in performance by 0.5 million compared to Q3 2020. Included in other income for the three months ended September 30, 2021, was the gain on the sale of the building in the amount of $6.9 million. Net income for the third quarter was $6 million, or $0.89 per diluted share, as compared to a net loss of $1.3 million, or $0.19 per diluted share, in the third quarter of 2020. With respect to our nine months results, As a result of COVID-19 pandemic, CVD's new order bookings during 2020 were substantially impacted, which reduced revenues in subsequent quarters, resulting in revenue of $11.7 million for the first nine months of 2020, I'm sorry, of 2021, as compared to $13.7 million in the first nine months of 2020, a decrease of $2 million, or 14.7%. CBD's operating loss for the nine months ended September 30, 2021 and 2020 was $3.6 million and $2.4 million, respectively. Included in other income for the nine months ended September 30, 2021 was the gain on the sale of the building in the amount of $6.9 million and 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 the subsequent forgiveness of that debt. Net income for the first nine months of 2021 was 5.9 million or 89 cents per diluted share as compared to a net loss of 0.8 million or 12 cents per diluted share for the first nine months of 2020. Included in the first quarter of 2020 CVD's net income was favorably impacted by the CARES Act, which allowed for the carryback of net operating losses and resulted in CVD recognizing an income tax benefit of $1.5 million in the nine months ended September 30, 2020. Sequentially, CVD's revenue in the third quarter of 2021 was $4.3 million as compared to $4 million in the second quarter of 2021. an increase of 0.3 million, and the operating loss decreased to 0.9 million in the third quarter of 21, as compared to an operating loss of 1.1 million in the second quarter of 2021, an improvement of 0.2 million. During Q3 2021, CVD was 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 reduce manufacturing efficiencies. CVD has commenced placing orders with increased lead times to try to help mitigate the manufacturing delays, as well as assessing other material suppliers to mitigate the potential cost impacts. In addition, CBD is utilizing its in-house flexible manufacturing to further mitigate both potential scheduled delivery delays and material cost increases. The company's backlog at September 30th, 2021 improved by 1.8 million to 9.9 million as compared to 8.1 million at June 30th, 2021. Since the first quarter of 2020, the company continued to experience significant negative effects from COVID, including reductions of new orders. And while the company's order activity has improved in the first three quarters of 2021, 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 the 2022 to 2023 timeframe. With respect to our building sale, as previously announced, we're pleased to have closed on the sale of our facility at 555 North Research in Central Isle of New York on July 26, 2021. With a sales price of $24.4 million, we satisfied our then mortgage debt of approximately $9.1 million on that facility and paid various transaction-related costs. The net proceeds of approximately $14 million, improves our current cash position, which at September 30, 2021, is $17.4 million, and provides us with a balance sheet to bolster sustainable growth strategies. As a result of the gain on the sale of the building of approximately $6.9 million, we improved CVD's overall shareholder equity and retained earnings by approximately $6 million. and our retained earnings is now a positive $3 million at September 30, 2021. With respect to our liquidity, again, primarily the result of the sale of the 555 building, our cash and cash equivalents improved to $17.4 million at September 30, 2021, as compared to $7.7 million at December 31, 2020. And our working capital was $17.7 million on September 30, 2021, as compared to $8.1 million at December 31, 2020, an increase of $9.6 million, or 118%. In addition, during the first nine months of 2021, we have substantially reduced our CapEx from $1.2 million in the first nine months of 2020 to $213,000 during the first nine months of 2021, 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 recent outbreaks of the COVID-19 Delta variant and impacts on a supply chain, as I 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 upon, among other things, the receipt of new equipment orders, the lessening of the ongoing effects of COVID-19 on our business and the aerospace market, improvement in our operating efficiencies, as well as managing planned capital expenditures and operating expenses. Based on all these factors, we believe 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 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 as well as compliance with our loan covenant. And now I'd like to turn the call back over to Manny, our CEO.

Manny Marino- Tom, thank you for your presentation. We've spent the first nine months of 2021 shoring up our balance sheet and optimizing our market focus and product offering all with the interest of maximizing our present and future profitability and viability. In Q3, we initiated our strategic planning for 2022. We also want to announce that we obtained strategic orders in our focus growth markets. During the third quarter, we closed on two electric vehicle battery nanomaterial system orders, one of which was with a production use case customer, 1D Battery Sciences, and the other to a research and pilot production customer. Our order rate has now shown incremental recovery with orders in the range of $6 million per quarter in both the second and third quarter. We received five CBD system orders in the third quarter and 14 year to date. Our SDC division continues to show incremental order growth. It is our strategy to continue to focus on production applications for nanomaterials, including battery anodes, as well as our aerospace and defense applications. We are also pleased to see a recent increase in our spare parts business within the aerospace market, and that gives us cautious optimism that our assessment that The timing of the resurgence in gas turbine engine demand will materialize in 2023. In our production group, we have seen and further have been addressing the global supply chain issue of increases in material costs and the general delay and uncertainty of material delivery. This will be a challenge for most companies. We have implemented a vigorous supplier engagement as well as expanded our network of suppliers. Our vertical integrated manufacturing is being tapped to supply capacity to improve the delivery and cost of our products. We have ample capacity in our 355 centralized facility to accommodate a shift in our manufacturing strategy to assist in addressing any long-term supply chain issues. On another front, the sale of our 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 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, our employees, our shareholders, and the pursuit of growth and return to profitability. Your comments and questions are important to us. With the close of this formal presentation, we'd like to open the floor to your questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in a question queue. You may press star 2 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 keys. One moment, please, while we poll for questions. Your first question comes from line of Brett Reese with Jannie Montgomery. Scott, please proceed with your question.

Hi, Manny. Hi, Tom. How are you guys doing?

Well, we're doing, Brett, we're doing very well knowing that you're on the call. Good evening.

Hi. I have a series of questions with respect to the device you're delivering to the 1D battery. In the first quarter. Are we still on schedule to deliver that in the first quarter after 2022?

The plan is to deliver in the first quarter, yes, and we are on schedule for that.

Great, great. Now, it's a private company, but, you know, when you go on their website, you know, they talk about this pilot plant, you know, to do the battery stuff. in Wisconsin, is that where the reactor which we're making for them, is that where it's going to be employed by them?

Well, Brett, this is a CVD equipment conference call, and Vincent is a great CEO and probably would answer your questions as well. I believe it's – I'm not confident it's Wisconsin. It may be Pacific Northwest, Washington State possibly. And just for – I think just – I'm correct. I'm not sure they stated that it was in Wisconsin.

Okay. I don't – yes, you know, I own CVD, and that's what I'm really interested in. Of course. But, you know, when you – You know, when you read what possibly they may have, you know, it reads like this could be, you know, the first plant among many. I mean, are they possibly going to need one of your devices for every location that they're going to open up?

They will need a CBD reactor, likely. They will need a CBD reactor for each and every one of their locations and sites. That's correct. As they publicize, they have a very interesting and attractive model that I would probably suggest the listeners go to their website. We are doing our utmost and feel confident that we will be their supplier of choice for each of those sites.

Okay. Okay. Now, if what they have really lifts off and clicks, they have barriers to entry because of their patents and their intellectual property. What do we bring to that equation? Are they using us solely for our know-how and experience, or do we have something, you know, propriety, proprietary that no one else could, could, uh, um, deliver on, you know, you know, should, should they go with, with somebody else?

The, Brett, the, typically the, um, the barrier to, to our competition is, is our performance. Um, We will deliver on time as per the committed specification. We will facilitate their installation, and we'll continue to partner with them. But we are pleased that we were selected. We see this as a strategic. This is not a one and done for us, and we're putting that level of effort into the development and the engagement with them and we see them as an important customer for years to come.

Right, right. Once our device is installed in their plant and being used, is there any future recurring revenue stream that would accrue to us?

There's, of course, because it's a production application or a pilot production application similar to our aerospace installed base, We will continue to support them, even for just the installed base, without additional orders, which we would hope and expect that they will be successful and adopted. And we will have, again, supply them consumable and spare parts under separate contracts.

Okay. Different line of questioning. You change the way your sales force is compensated. And, of course, you report backlog when you get a firm order. But some of the companies I follow have a metric where they'll sometimes say that there are X amounts of tenders or potential orders outstanding they're not firm orders but you know these are submissions that are are out there do you have something similar that you monitor and if so has that gone up you know because you've changed you know the way you compensate your sales force

Well, we have a competitive compensation package for all our employees, which is also partially based on the performance of the company to our objectives, and that's been communicated to the entire rack and file from executives to every level in the organization. There is also metrics associated with individual or group performance, which is specific to the department of the function. For the sales team, you can imagine it's order rate. That's the answer with your first question. The second question is we monitor our opportunities. Clearly, there are people, Jeff and his team, that monitor it on a daily and every hour of the day basis. on the opportunities, but we update our internal forecast on a weekly basis, looking at all our probabilities and all our opportunities, and we do a weighted average of total opportunities to, we compare that to the best few, and then we compare our forecast that we actually commit to ourselves, management, the team that commits to myself on what we anticipate our forecast would be, which is what we roll into our financial forecast. The ratios are strong ratios from the aspect of the best few to what we have in our forecast, and then the opportunities to real opportunities to what's actually what we call our best few. So it goes through a couple of filters or iterations. I'm pleased with the ratio of those numbers. We have ample targeted accounts in our forecast, and we have backups for those as well.

Now, since, as you said, aerospace is picking up again, the type of reactor – you successfully made for General Electric some years back. Is there any possibility of getting some more additional orders, either from General Electric or any other aerospace manufacturer, similar to those large orders we got two or three years ago?

Well, I appreciate both the question and the positioning. I think for the record, we have never specifically stated that we have received orders from General Electric, but they are a major player in the ceramic matrix composites, gas turbine engine industry. I'll say that. The customer that we have shipped product to clearly will start recovering from a standpoint of engine demand, therefore component demand, and that will trickle down to us. What we'll first see, Brett, is an increase in the spare parts business and in the consumable business, where they start now buying for their internal production of material for these gas turbine engine components. We've started to see that. We've started to see a nice uptick It's not back to where we were in 2019, though. So I anticipate that that likely will take another year to year and a half until 2023 before we start seeing that level of consumables and before their capacity is fully tapped and where they would have to buy additional equipment. Now, that doesn't mean that other players won't enter the market as well. And we continue to engage, other than the one or two customers we have, we continue to engage others as well with quotations, proposals, and discussions. But again, I don't see a recovery in demand until 2023 for the engine recovery for components. They do have to buy equipment prior to that. We're engaged with all of the component manufacturers. Will some of them buy before that? We're optimistic and believe that that's possible. Are we hanging our hat on it and saying that next year we're going to triple our business? No, I think that would be extremely unprofessional of us and unethical. We continue to be conservative, and when we see something that changes the needle for our direction, we will absolutely speak up and provide additional information. But right now, we see indication of recovery, but I think, as we all know, we need to be a little gun-shy due to the fact that we were all caught off guard with this COVID pandemic. a year ago.

Right, right. Thank you for answering my questions and have a good Thanksgiving.

You too, Brett. Thank you so much.

Okay.

As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment, please, while we pull for more questions. Your next question comes from the line of Morton Howard, private investor. Please proceed with your question.

Okay, I have two questions. One, at the last conference call, you urged us not to get too excited about what was going on at Stony Brook as a potential moneymaker for CBD. Is there any change in that? Have they made any progress in terms of getting us a little bit enthused about what's going on up there?

Hi, Morton. How are you? I'm fine. Nothing that would, again, change the needle on that. We are working on a couple of things, and I don't want to spook them right now. But we will, because we had previously issued some press releases when things looked much brighter for the ECMO device, we will, when there is a change, we will absolutely send out a note on that. At this point, we're looking at other applications for this media-to-media exchange, which is, in the case of an ECMO device, is a blood oxygenation, but there are other potential uses for that, even in the area of desalinization of water. We're looking at other opportunities. I can tell you that.

Water would be big. Water would get everybody excited.

Well, again, don't get to it, but I don't want to settle.

Ah, come on. I've been bored to death with this company for 10 years. I want to get some excitement.

We're working on it.

Let me get to my second question then. Thank you for that one. You mentioned that material costs may be going up. I would think most of your products, the part of the material is modest. the cost of the material versus the technology you have.

That's correct. We are changing the model of the company to be less hardware and more value proposition. Our orders are much more performance-based than they were just hardware specifications. That lends our company to be right in line with your comment, that it's more value-oriented. The material content is still the material content, but we're seeing some increases in material content to the extent of it affecting gross margin points. We're assessing that as we speak. I'm not ready to have that conversation at this point. But I think we all know that raw materials, especially the specialty materials, the C22 Hapsaloi materials, they've gone up 300% in price. And that's been somewhat, for some jobs, for other jobs, no effect at all. What we're seeing a bigger issue on is delivery and just the uncertainty of delivery of some key components and we'll continue to manage through that. We can't hibernate, we can't make believe it doesn't exist. We going to our own machine shop and working overtime in the machine shop and on the floor in our court shop will help alleviate that and the company has historically been very vertically integrated. So we're leaning more on that than we probably would have had it not been for the supply chain issue.

Okay, one last question. A few years ago, graphene was touted as the miracle material of the future. Well, I've heard that kind of stuff. I've been hearing that kind of stuff for 50 years, not just about graphene, but other things. So I was a little skeptical then, but is graphene, I mean, we're an expert in graphene apparently, or

Well, we're an expert. We are very knowledgeable, hence people think we're experts. We're extremely knowledgeable, and we are experts in the area of carbon. And we're very knowledgeable and experts in the area of silicon nanowires.

Well, look ahead five years. Do you think this will start to pay off in sort of bigger production products or when we can get recurring income?

Yeah, I'm leaving. I would... I'm betting my hat on the carbon nanotubes, carbon nanofibers, silicon nanowires, silicon deposition. I see markets that exist today that benefit from that. Batteries are an exceptional example. No one on this phone call can argue that electric vehicles are not going to be the future. No one can state that, we'll all state, just be positive, it's all about the battery. That's the biggest problem. It's not the motor. These cars can go zero to 60 in three seconds. So it's not the motors, it's not the braking system, it's not the upholstery, it's the battery that's the problem. So there's a lot of focus on batteries. The amount of our market research It shows that the amount of battery material required. Now, granted, today it's, for the most part, just carbon for the anode. But when you try and have an evolutionary roadmap of performance, you start looking at modifying that carbon with silicon. So that's hence what this one firm that we received the order. We received two orders in that area. Two different applications, one on carbon. on carbon-based material, the other one's on silicon-based material, depositing carbon on it. Both of them are evolutionary processes, so they don't have to change the direction of an aircraft carrier. They are in the path, and they're technology insertion points for the battery material suppliers. So we feel that that is a market that exists, We are players in that market, and we're doing our utmost as per some of the comments that Brett made is wrapping our arms around the customers in that space to be a provider.

Thank you very much. Appreciate your thoughts.

Thanks, Mark.

As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment please while we poll for more questions. Ladies and gentlemen, there are no further questions at this time. And I'd like to turn the call back to Mr. Manny Lakios for closing remarks.

Well, we appreciate your attendance and your both loyalty and to some extent your patience as we continue to clean up the shelves. We've done a lot in the last nine months. and we continue to plan for the future. As information is available, we will be pleased to send that out in our releases. We wish you all a happy and healthy Thanksgiving and holiday period. And with that, thank you very much.

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. Thank you all for your participation.