CVD Equipment Corporation

Greetings. Thank you for standing by. Welcome to CVD Equipment Corporation's second quarter fiscal year 2023 earnings call. As a reminder, this call 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 Lacchios, President and CEO, member of the CVD Board of Directors, and Richard Catalano, Executive Vice President and Chief Financial Officer. We have posted 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 product, 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 the company's 10-K for the year ended December 31, 2022. 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 statement based on the new circumstances or revised expectations. I would now like to turn the call over to Emmanuel Lacchios. Please go ahead, sir.

Thank you very much, and good afternoon, everyone. Thank you all for joining us to discuss our second quarter 2023 financial results and other important company developments and the pertinent information related to our business. Your thoughts are always important to us, and we look forward to your questions in our question and answer session. As previously communicated, our order and revenue levels have historically fluctuated, which is often typical in the highly cyclical process equipment industry. As such, while we experienced a year-over-year decline in second quarter revenue, We are pleased that our first half 2023 revenue of $13.8 million was 31% higher than the corresponding period in the prior fiscal year. In addition, we have made significant progress divesting and winding down non-core business entities. This will allow our team to focus on our equipment product lines and pipeline of potential customer opportunities in our key strategic markets of high-power electronics, battery materials, energy storage, and aerospace and defense. During the second quarter, we sold our Tantalign subsidiary, and on August 8, 2023, the company entered into a purchase and license agreement with a third party to sell certain assets and to license certain intellectual property of our mass-subscribed business in exchange for approximately $900,000. The purchase price is payable in several installments and contingent upon certain performance metrics and other milestones. Orders for the second quarter were 12.9 million, driven by demand in two of our three strategic markets, while orders for the first quarter of 2023 were 2.9 million. This continues to show the variability quarter to quarter of our business. The second quarter orders included aerospace market opportunities in the amount of $8.7 million for multiple system orders, which will ship over the next 12 months. The second quarter order bookings included a battery nanomaterials production systems of approximately $1.8 million to 1D battery sciences, as we previously had announced. In the high power electronics market, while we have not received PVT-150 orders to date, For 2023, we are continuing our marketing efforts. These marketing efforts include support of our installed base, direct outreach to multiple potential customers, product evaluations, and presence at key silicon carbide trade shows and conferences. The success of our PBT 150 and PBT 200 marketing efforts are dependent on the performance of our equipment in the field, overall market conditions, our customers' ability to qualify their end product with their customers, and their ability to obtain funding required to purchase our equipment. As stated previously, our order and revenue levels have historically fluctuated. Accordingly, we anticipate that our orders received from customers and revenue recognized as a receipt of these orders will continue to show fluctuation from quarter to quarter. We remain committed to stay the course of our strategy to achieve consistent long-term profitability, growth, and return on investment. I would like to turn the call over to our CFO, Rich Catalano, who will provide an overview of our second quarter results.

Thank you, Manny, and good afternoon. Our revenue for the second quarter of 2023 was $5.1 million as compared to $5.8 million for the second quarter of 2022. This represents a decrease of 0.7 million or 12.7 percent. The decrease in our revenue was primarily attributable to lower revenue in our CBD equipment segment of approximately 0.7 million related in part to lower PVT 150 revenues, lower revenue in our CBD materials segment of approximately 500,000 as an outcome of the sale of our CandleLine subsidiary on May 26, 2023. These declines were partially offset by an increase of approximately $400,000 in revenue from our SDC segment. It should be noted, based on the terms of the aerospace orders that Manny just mentioned, revenue under these contracts that we received in the second quarter will be recognized at the point in time when the control of the equipment is transferred to the customer, rather than the overtime method which we use for the company's other system sales. Our operating loss for the second quarter of 2023 was 1.2 million. This was higher by 0.5 million than our operating loss of 0.7 million in the second quarter of 22. The increase in the operating loss was due to the two non-recurring charges, one related to Tanalign for $162,000 on the disposal, and then we had a small impairment on certain Mesoscribe fixed assets of 111,000. In addition, our operating expenses increased by approximately 200,000. Our gross margin percentage was 27.4 percent in the current quarter as compared to 24.8 in the prior year quarter. This improvement in gross profit percentage from the prior year was primarily the result of improved product and contract mix. The increase in the second quarter operating expenses from the prior year quarter is due to higher employee-related costs to support the growth of our business additional selling expenses, and also additional professional fees. After non-operating other income, and that consists principally of interest income, our net loss for the second quarter was 1.1 million or 16 cents per share for both basic and diluted. This compares to a net loss in the second quarter of 22 of 0.8 million or 12 cents loss per share for both basic and diluted. Now turning to our backlog, Our backlog at June 30th, 2023 was 18.8 million as compared to 17.8 million as of December 31st, 2022. Our orders during the six month period ended June 30th, 2023 exceeded our revenues by approximately $2 million. However, our reported backlog at June 30th has been reduced by a half a million dollars related to the sale of Tampa Wine on May 26, 2023, and also 0.6 million related to our decision to wind down the operations of Meso Scrub. Our working capital at June 30, 2023 is 16.6 million. This compares to 15.5 million at December 31, 2022. Our cash and cash equivalents at June 30, 2023 was 13 million. as compared to $14.4 million at December 31st, 2022. In early July 2023, right after our June 30th close, we did collect $1.5 million receivable for employee retention credits from the IRS. As to our future results, we are unable to predict what impact the current economic and geopolitical uncertainties will have on our financial position and future results of our operations and cash flows. Our return to consistent profitability is dependent upon, among other things, the receipt of new equipment orders, our ability to mitigate the impact of supply chain disruptions and inflationary pressures, as well as managing capital expenditures and our operating expenses. After considering all these factors, we believe our cash and cash equivalents and our projected cash flows from operations will be sufficient to meet our working capital and capital expenditure requirements for the next 12 months. We will continue to assess our operations, and we will take actions as necessary to maintain our operating cash to support our working capital needs. I will now turn it back to Manny.

Rich, thank you for the presentation. In summary, the second quarter results of 2023 reflect our efforts to continue to focus on our strategic markets and products. Overall, our focus remains on our customers, our employees, our shareholders, and the pursuit of growth and return to consistent profitability. We look forward to continuing to build on the success in the year ahead and continue to be cautiously, again, optimistic. Your comments and questions are important to us. With the close of the formal presentation, I would like to open the floor up to your questions.

Thank you. If you would 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 would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Brett Reese with Jannie Montgomery Scott. Please proceed.

Hi, Manny. Hi, Rich. Hey, Brett. How are you? Good afternoon. I'm good. I'm good. Could you give the people on the call just some flavor on, you know, the sales process for, like, the PVT 150 and the next generation, you know, 200?

Yeah. Of course. Well, I appreciate the question. I think that's a great lead-in. Typically, when we develop – and, again, we have discussed that we – many years ago had shipped tools into that space and that activity was dormant for a period of time and we reinitiated that in 2021 mid-year by identifying silicon carbide as an opportunity and we closed an order for what we termed to be our alpha systems from our first customer and to date our only customer per se recently. And then we received the betas. So, you know, it's a formal process that we went through. We wanted to first determine the performance of the product in the field before we did a broader launch of that product. And we did that in January of 2023, in the end of December to the beginning of January. We started to discuss the PVT-150 product with other customers, potential customers. Um, and since then, you know, I, I've, I've continued to stay to that, um, you know, it's my personal objective to close on two more, um, in, in the near term, in the next six months or so. And so we go through the alphas and the betas, and then we do a broader launch to the, to the marketplace by introducing the product to a larger group of potential customers. We attended trade shows. We hired a marketing manager at the end of 2022. We hired a dedicated sales manager in March of 2023. We've attended several trade shows in that period of time, and we've engaged with the list of who's who in silicon carbide bull or silicon carbide device levels manufacturing over the last several months I would say that we're engaged at some level of a stage of engagement whether it's an introduction non-disclosure agreement discussion of technical specifications bake-off as far as a technical bake-off discussions on potential commercial contracts we're at some stage of that with several customers as we speak of today And it's a process. It's a running game. It's not a Hail Mary. When somebody buys your equipment for this process, they're not making a decision to buy a stove or an oven or some type of equipment from one supplier, and then they'll buy from somewhere else. They really are getting into bed with you, let me say, and really it's a longer-term relationship. And that just takes a bit of time to close out. So that's really where we are today. Because the next question is where are we in the process? We're engaged with many different potential customers at different stages of the process.

Can I just follow up on that? So it's really kind of, word of mouth by the engineering teams. I'm sure it's a kind of small world of people that are experts in this niche area. So it's just kind of word of mouth.

No, not per se. It's unlike the historic, you know, develop a product and they'll come and, you know, they'll buy your product. I mean, we obviously don't operate exactly We have converted to an outreach program for our sales and marketing. We've attended the major trade shows and conferences. We were at one last week. We're at another one this week. We'll be in Italy for the largest silicon carbide show in September. I'll be there. We have two days of meetings with high-level management at several different accounts. No, it is not a word of mouth. It is an active sales and marketing activity. We have had advertisement. We've had booth presence. We've had in the booths specifications. We have collateral material that we've sent out. We've done news blasts. It's a bit more active than a word of mouth.

Okay. I appreciate that. Now, in your... opening comment the price of the device uh is an impediment to some customers purchasing it would you explore you know some sort of uh financing or lease arrangement to uh to you know for to make it um were available for customers.

A couple things on that. My initial monologue of sorts in our script today was that we await our customers to be able to fund some of this equipment. Some of our customers are very early stage startups. Others are late stage startups. Others are established companies that need to raise working capital. Others are very well-funded companies that require capital budgets for the year. So, you know, there's a different level of financing required depending on the character of the company itself. As far as us leasing and becoming a, you know, we really have not entertained that. We don't think that that would be helpful. They're not looking to buy, you know, initially they can buy one, two, five, ten of these tools, to do development and characterization, but long-term, they're going to buy, they would need to buy 50s and 100s of these systems. That's not something that we would entertain being able to finance, and they would have to be pretty serious companies to be able to do that.

One, I appreciate that. One last one. There were items in the paper talking about the water levels of the Panama Canal being so low that that might complicate supply chain issues in the near to intermediate term future. Is that something that CBC is concerned about?

No, that's not something that's going to affect us. The supply of raw materials continues on. We've seen, and that's one of the reasons we don't talk about Supply chain issues from the standpoint of metals. At this point, we've seen a recovery in that space. Most of our electronics. Any supply chain issues are really associated with components used in the semiconductor industry where there's just a high demand for those components. But no, we don't see that. And by the way, I missed that news report on the canal. But no, I would not anticipate that.

Great. Thank you for taking my questions. I'll drop back in queue. Thank you.

We are all good to proceed. Yes, hello. This is Manny Lakios from Rich Catalano. Again, we're sorry about that. We somehow dropped off the call. Brett, thank you for your questions and giving me an opportunity to shed some light on the subjects. It doesn't seem like there are any more questions. Operator, again, thank you. Thank you all for dialing in today. We appreciate the attendance on the call and your support. Of course, the loyalty of our shareholders and also some of our employees who are also on the call. If you have any further questions, feel free. You can contact myself or Richard at any time. And this concludes our second quarter call. Thank you very much.

Thank you. This will conclude today's conference. You may disconnect at this time. And thank you again for your participation.