CVD Equipment Corporation

Greetings and welcome to the CVD equipment 2021 fourth quarter and year end 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 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 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 factor section of our 10-K for the year ended December 31st, 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.

Thank you, Kyle. Welcome to our CBD Equipment Corporation quarterly conference call. My name is Manny Lacchio, CEO and President, and I am 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 and the questions and answers session. 2021 was a 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 nine 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 carbide growth systems for high power electronics. According to market research, both of these market segments are expected to grow in the coming quarters and years. The systems I mentioned are planned for delivery mid-2022. Recently, we announced two 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 the second half of 2022. During the first quarter of 2022, we also received orders for consumables that serve our installed base 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 three quarters further validate our strategy of focus on growth and use market, such as battery nanomaterials, silicon carbide growth systems, and advanced composite materials for aerospace and other markets. Our consolidation of the Tantalign 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 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 right-sized 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, New York, and into the Tantwine 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 right-sizing of our employee headcount and the consolidation of our facilities. We have experienced four quarters of sequential revenue increase in 2021, and we expect the trend to continue through 2022, yielding a break-even 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 will be a challenge for most companies, including CBD. We have implemented rigorous supplier engagement, as well as expanded 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 in 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 McNeil. who will provide you our fourth quarter and year-end 2021 financial summary.

Thank you, Matty, and good afternoon, all. CBD 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, 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 18 cents per diluted share as compared to a net loss of 5.3 million or 80 cents 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 due 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 31st, 2021, as compared to $16.9 million in the year ended December 31st, 2020, a decrease of $400,000 or 2.8%. CBD's operating loss for the year ended December 31st, 2021 and 2020 was 4.8 million and 7.8 million respectively. Included in other income for the year ended December 31st, 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 31st, 2020 is an impairment charge of 3.6 million related to the company's tantalum product line. Net income for the year ended December 31st, 2021 was 4.7 million or 71 cents per diluted share as compared to a net loss of 6.1 million or 91 cents 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 allowed 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 reduce manufacturing efficiencies. 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, scheduled delivery delays and material increases. The company's backlog at December 31st, 2021 improved by 4.7 million, or 82%, to 10.4 million, and this compares to 5.7 million at December 31st, 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 amounts of $6 million, $6.1 million, and $5.2 million. This compares favorably to $3.8 million in the quarter ended March 31st, 2021. With respect to the 555 building sale debt and our cash position, As previously announced, we are pleased to have closed on a sale of our facility located at 555 North Research Place. And we did this in July of 2021. With a 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 improves our cash position which at December 31st, 2021, is $16.7 million, and provides us with a 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 31st, 2021. Finally, on March 1st, 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 31st, 2021. as compared to 7.7 million in the prior year period. Our working capital was 16.7 million at December 31st, 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 31st, 2021, we have substantially reduced our CapEx from 1.6 million in the year ended December 31st, 2020 to 236,000 during the year ended December 31st, 2021. This related to ceasing further USA spend on the tantalum 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. 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. 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 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 the pursuit 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.

At this time, we will 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 the question queue. You may press star 2 if you'd 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. Our first question is from Morton Howard, a private investor. Please proceed with your question.

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, that thing with Stony Brook, or is there some great interest in some new product where you can see maybe in a few years $5 or $10, $20 million worth of sales? something to give us a reason to love the stock instead of tolerate it.

Okay. So, Morten, thank you very much. And, you know, thank you for at least up to now tolerating the stock, and it's our job to work at having you love the stock.

Stockholder of various amounts for over 15 years.

Yes. And let me speak to some of the things that we've – that we've actually had public releases on. Last year, we received six 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 one great application for us. And we received six from one customer. And 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 1D in one of our releases, where they are an evolutionary improving the carbon nanomaterial used in electric vehicle batteries. So those are two areas that are large growth opportunities for us. And that's substantiated by, obviously, you know, 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 toe coat for the aerospace industry. As we know, that that industry was impacted by COVID. 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, you know, our market research and the news indicate that that marketplace will come back at some point in time. So, you know, with that said, you know, we're excited. We received those orders last year for... for products that will be used in electric vehicle battery and energy transmission and charging. So we are pleased with those. As far as we are not a medical device company, we mentioned that earlier, that that's not our big play. We look at... you know, those type of products as applications for our carbon and our carbon CBI, both our carbon nanotubes and our carbon CBI processes, and primarily for the sale of tools. So, you know, with that said, you know, I think I gave you a couple examples of areas that we do focus on.

One last question, and I don't mean to take too much time. Graphene was sort of a touted material, like it was going to be this, the material of the next 50 years. Well, is there some truth to that? Or what is your opinion on graphene for the company?

You know, we see larger demands on CNT than we do for graphene. And, you know, without spending a lot of time on that, there are a lot of different ways to, you know, that you can harvest graphene It's a good technology. We sell systems in that. I really can't speak more than that. I think it's still a technology looking for a solution.

Thank you very much. I appreciate your answers. Thank you.

As a reminder, 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 the question queue. You may press star 2 if you'd like to remove your question from the queue. Our next question is from Brett Rice with Janie Montgomery Scott. Please proceed with your question.

Hi, Manny. Hi, Tom. Can you hear me?

Yes, we can.

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 one 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 for the Georgia Institute. Could you, to this non-engineer, just explain to me the the differences between you know these systems and you can talk to me like I'm you know six years old as if you're 60 or 60 or six six six six years old okay the one 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 six-year-old, you really don't need to know the difference. The equipment looks very much the same. But it's to one of the best universities doing research in this field, and we're very pleased to have been selected.

You know, what I'm probing is the, you know, add-on and, you know, total addressable markets. in these areas, I mean, because, I mean, everybody knows, you know, electronic vehicles are just going to increase, you know, market share. So take, for example, you know, the one-day battery customer. Has there been greater acceptance of that synonode process, you know, that they're, you know, pushing so that We could look forward to perhaps repeat additional orders from that customer. Can you give us any color there?

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. You know, 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.

Okay. Now, you know, another area that's just, you know, seems to be a growth prospect is this migration of the world to to 5G, this plasma enhanced chemical vapor deposition system, is that a one-off or are there other, you know, since the world's going to 5G, what is the potential for, you know, repeat orders in business in that area?

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.

Right. First, is plasma-enhanced chemical vapor deposition kind of a um i mean you guys were the go-to firm for chemical vapor deposition is this different you know is this almost like a new business uh that you're embarking on or is it you know just very similar no we we have the company has um has a history of providing um plasma enhanced uh cbd systems uh

This tool is a specific tool designed for low-temperature PECBD processing, but it's on a cluster. It is a true production system, wafer-level production system.

The new cluster tool production platform, which you described, is there anything proprietary to the company with respect to that new product?

Yes, there is, and therefore I can't tell you about it.

Okay. Well, that's good, because if it works, we've got a protective moat, yes? Yes. Okay, great, great. Thank you, Brad. Yes, 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, you know, give us some more color on that?

You know, there's 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 consumable 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 up 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 materials.

Okay, and this is probably for Tom. What was your cash burn just from operations, you know, this quarter?

This quarter on the cash burn? Let me get back on that one, Brett. I can take that offline.

Okay, okay. And just the building you're in now, which you now own debt-free, 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 fair market value right now?

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.

Well, you just sold the other one right down the block for $24 million. And I think the one you're in is, you know, arguably maybe not worth as much, but pretty close in a pretty hot market, yes? Yes.

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.

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.

That's You know, that goes through our minds as well, and everything is up for consideration.

Yes. Just one last one. You know, the morale of your sales force, you know, what can you describe it?

They were 100% year-on-year. I think that that having... business and run sales organizations, I think that's a morale booster for the entire organization, not just the sales force.

Right, right. You know, it's possible aerospace could, you know, eventually come back and then, you know, you seem to be, you know, right in the thick of things with the EV batteries and 5G, you know, things seem to be humming along, you know, very nicely. So thank you and keep it up.

Thank you, Brett. Appreciate that.

And, Brett, just to your question, KISH burned Q3 to Q4. KISH decreased about $800,000.

Okay. So your assertion that you've got enough cash, you know, to last you to the next year to 18 months, I mean, you got a lot more runway than that, 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 our focus on the operating efficiencies and expenses.

And, Brett, we appreciate you bringing that up. I think that's a good clarification. Thank you, Tom.

Great. I'm going to drop back. Thank you for answering all my questions, as always. Of course, Brett.

Thank you. We're going to take one more question. Kyle?

Yep. Our next question is from Dan Jones, a private investor. Please proceed with your questions.

Hey, good afternoon, guys. Thanks for the question. This is Dan, not Dan Jones. Anyway, 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, how that looks in the United States and also abroad. Sure.

Well, clearly, I think we all read the news. Thank you, Dan. We all read the news, and there's a big shift to bring the ICs 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 buoys or the silicon carbide material itself. So that is really our product offering today on this particular silicon carbide application. This is not a coating. This is the actual growth of those buoys that are then used are 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.

Okay, great. Thanks. Are there many other merchant equipment suppliers for the silicon carbide crystal, the pool?

There are other suppliers. 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.

And in terms of the interest in your product, is it those vertically integrated device manufacturers or is it...

You can imagine that they're 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.

Okay, great. Thank you.

You're welcome.

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.

Okay. Well, thank you all for being on the call today. CBD Equipment, I speak for all the employees and the board of directors, and we appreciate the shareholders' loyalty. We look forward to 2022, as we said earlier, and I wish you all the best. Stay safe, and thank you.

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