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spk00: Good day, ladies and gentlemen, and welcome to your OmniLight Industries Incorporated investor conference call. All lines have been placed in a listen-only mode, and the floor will be open for your questions and comments following the presentation. As a reminder, today's call is being recorded. If you should require assistance throughout the conference, please press star, then zero. At this time, it is my pleasure to turn the floor over to your host, Chief Financial Officer, Mr. Carl Leder. Sir, the floor is yours.
spk04: Thank you very much. Good afternoon and thank you for joining us. With me today is our Chief Executive Officer, Dave Robbins. Our call is being recorded and will be available for playback with details of which are contained in our press release issued on Wednesday, November 25th. The purpose of this call is to provide an update on OmniLight's financial performance and operations as we filed our third quarter fiscal 2020 results last Wednesday. After remarks, we'll open up the line for Q&A. If you've not received or seen a copy of our press release we issued last Wednesday, you can find it on our website, www.omni-light.com, or email us at d.robbins at omni-light.com or c.leaders at omni-light.com to request a copy. Before we get started, I'd like to remind you that today's discussion will or may include forward-looking statements, including information regarding OmniLight's performance based on our views of the company's business and the environments in which they operate, our future plans, objectives, business prospects, and anticipated financial performance. These forward-looking statements are subject to future risks and uncertainties that could cause our actual results or performance to differ materially. We are also mindful of the risks and impact of changes in the health of the general economy, including the effects from the current COVID-19 pandemic, U.S. and global commercial aerospace markets, and the U.S. Department of Defense budgets. All forward-looking statements should be considered in conjunction with the cautionary statements contained in our press release and the risk factors included in OmniLight's CDAR filings. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call. I'd also like to mention that in addition to reporting financial results in accordance with the International Financial Reporting Standards, or IFRS, during our call, we may also discuss or reference non-FIRS financial measures, including adjusted EBITDA, both former adjusted EBITDA, and pre-cash flow. A reconciliation of these non-IFRS metrics, if applicable, is included in our applicable CDAR filings and press releases. Lastly, unless noted, any reference or discussion of our financial results or metrics are in U.S. dollars. I'd now like to turn the call over to Dave. Dave? Thanks, Carl. Good afternoon, everyone, and thank you for joining us on today's third fiscal quarter investor call. Our agenda for today's call is as follows. First, I will make a few comments about our third quarter fiscal 2020 results, followed by some remarks about our current business and strategy, and an overview of our efforts in response to the COVID-19 pandemic. And then Carl will conclude our portion of the call with a review of our recently reported financial results. First, I want to comment on how we have repositioned and right-sized the company to operate more efficiently to respond to current market conditions especially to the disruption in commercial aerospace marketplace and the level of commercial transport traffic, both domestically and internationally. Heading into 2020, OmniLight was poised to grow at 25% plus in response to then expected increases in demand for precision components for defense and commercial aerospace applications, supported by industry record backlog levels and aircraft production rates. Such visibility was dramatically altered by the COVID-19 pandemic, and such an exogenous shock to the commercial air transport industry has been profound on so many levels, one that impacted a strategic growth driver for OmniLite. At its core, OmniLite's value proposition is in its ability to efficiently design and manufacture precision components in high volumes. Specifically, in our metal forming operation, the ability to form aerospace metals to complex shapes is amongst the best anywhere in the marketplace. Precision metal manufacturing on scale requires disciplines in engineering, tooling, materials, and process controls. We streamlined those functions by giving direct access to data and interface between these functions. Frontline decision-making was engaged by availability of actionable data. The result is a leaner but fully capable workforce in the metal forming operation that can sustain high level of productivity and engage and capture new business opportunities. New opportunities fall into new products for existing customers slash platform, new product for new customers slash platform, and current product for new customers. New opportunities will almost certainly demonstrate OmniLight's value proposition of reducing costs and lead times to its customers. Our results in the quarter and the year-to-date period reflected the impact of COVID-19 pandemic on our commercial aerospace revenue, which contributed to a decline in our fiscal third quarter revenue of approximately 23% on a year-over-year basis, and a fiscal third quarter adjusted EBITDA loss of approximately $271,000. Against the backdrop of our realigned lower operational cost profile and commercial aerospace market recovery in 2021, we look to cash generation, margin expansion, and new engineering orders as key indicators. An early positive sign is evidence for over $750K of funded backlog for 2021. OmniLite is a diversified manufacturer of precision components serving a broad range of applications and industries utilizing high-value assets and longevity of service and performance. Irrespective of the product type, OmniLite's business proposition entails offering engineering solutions, a wide range of those solutions, and available in low to high volumes. and ultimately deliver cost-competitive with a performance premium. Our metal-formed products offer engineering solutions and cover a wide range that are only found at the largest OEMs. Our engineered electronic solutions serve the growing need for small, high-speed, long-wave sensors using wide-bandwidth technology, RF to millimeter-wave spectrum. Our electronic components are found in notable military aircraft, commercial aircraft, missile systems, diesel engines, air traffic surveillance systems, and satellite mobile communications and military self-protection systems. We will continue to invest and allocate capital towards the fulfillment and execution of our current bookings pipeline and growth opportunities, both in defense aerospace fasteners and our electronic RF components, as we believe we are strategically situated to exploit the cost reduction capability enhancements required in aerospace and defense. New opportunities in our defense electronics product line has been strong, notably with the Patriot, Navy's Electronic Warfare Improvement Program, Joint Strike Fighter, and our short range Missile Defense Program. Demand for highly integrated electronics that meet the power consumption requirements for airborne applications dominate the activity. Additionally, there's development for new fasteners for automotive engine components and advanced high-strength military aerospace fasteners. With that, I'd like to turn the call back over to Carl. Carl? Thanks, Dave. Third quarter revenue was $1.6 million as compared to $1.6 million in the second quarter of 2020 and $2.2 million in the third quarter of 2019. The decrease in revenue versus the third quarter of 2019 was due in large part to the COVID-19 pandemic. Revenue was flat versus the fiscal second quarter of 2020. Adjusted EBITDA, defined as earnings before interest taxes, depreciation, amortization, stock compensation, and non-recurring items, was a loss of $272,000. That's compared to a loss of $143,000 in the second quarter of 2020. and a loss of $29,000 in the third quarter of 2019. The third quarter 2020 EBITDA was adversely impacted by a $55,000 severance charge related to our workforce reduction plan, implemented halfway through the quarter, and a $225,000 adverse impact on adjusted EBITDA associated with the two-week COVID-19 related shutdown of our California facility. Factoring this supplemental information in would have indicated a near break-even performance on adjusted EBITDA in the third quarter. Free cash flow, defined as cash flow from operations minus capital expenditures, was the use of approximately $217,000 in the third quarter of 2020. This brings our year to date, September 2020, free cash flow to a use of $242,000. I would note that despite the impact of the COVID-19 pandemic, which contributed to a year-to-date revenue decline of approximately 24% compared to the year-ago period, we have been able to mitigate the impact on our free cash flow. In this regard, we've taken strong measures to manage cash and the elements of our costs that we can control. We've implemented a restructuring of the business, including a workforce reduction program and other related cost actions. We've vacated a sublet facility and subleased it, that collectively will yield annualized savings of approximately $1 million. In connection with these changes, we've realigned and streamlined our operating processes, which will enable us to operate in a more efficient manner. We believe these changes will allow us to support higher levels of revenue post-COVID-19 in a cost-effective manner. Also worth noting, In the nine months into September 30th, we have reduced inventory by approximately 200,000 and held capital expenditures to 26,000. In addition, we applied for and received 820,000 in Paycheck Protection Program loans and have submitted our application for loan forgiveness under the CARES program. As a result, our liquidity at the end of the third fiscal quarter was approximately 2.9 million, comprised of 1.4 million in cash and 1.5 million available under our revolving line of credit facility. Lastly, it is worth noting that we possess a substantial asset base, including our company-owned facility, manufacturing facility in California, and our state-of-the-art cold and hot forging systems, which together we believe are worth well in excess of book value. This completes our prepared remarks. We would now like to open the call for questions.
spk00: Thank you. The floor is now open for questions. If you do have a question, please press star then 1 on your telephone keypad to join the queue. If you're using a speakerphone, please pick up your handset to provide the best sound quality. Again, ladies and gentlemen, if you do have a question or comment at this time, please press star 1. And our first question comes from private investor Frank Wisniewski. Sir, please go ahead.
spk01: Hi, thanks. Hi, Dave. Certainly been a challenging year for you guys. How much of your third quarter sales actually went to the commercial aerospace business or the market?
spk04: Well, it's hard to pinpoint exactly because we support the large OEMs in the product mix, but it's Approximately, it's a smaller disproportionate towards commercial versus military aerospace. So I don't have an exact number for you.
spk01: All right. Yeah, I'm just wondering because, you know, according to your MD&A, that business was down 55% during the third quarter. And I'm assuming the munitions business hasn't improved. You've still got that issue there, which implies to me that you've got some parts of the business that are growing very, very rapidly. They'll only be down, what, 23% in total. Could you flesh that out for me a little bit? What businesses are doing very well?
spk04: The aerospace – it was the aerospace – fastener business that was down 55% in total, right? I just want to clarify.
spk01: It wasn't just... Oh, that's not just a commercial?
spk05: No. It was aerospace fasteners. Aerospace fasteners. Commercial aeros. Aerospace fasteners total. Total were down 55%? Yes. And so what
spk01: What was up? Because your total sales were only down, what, 23% or so.
spk04: In the quarter, we had a munitions blip.
spk05: A munition what? Munitions short-term increase. Oh, okay. So it's a munitions business. Munitions business.
spk04: Business, one-off, yeah.
spk01: Oh, one-off ship, okay. What is your, you know, you've restructured the business, obviously, or resized it, say. What is your expectation for next year? Are you assuming a recovery in the commercial aerospace business?
spk04: We're seeing signs that there is some slow recovery in the commercial air transport side of the business. but we're also looking to there are holes that have that have um cropped up in manufacturing on the large oems on their ability to manufacture so there's there is opportunity uh for more fastener business from new products you know on existing platforms due to disruptions in some of the large oems ability to manufacture their own parts so that's an opportunity as well as more The defense, there was some sluggishness on the defense fastener side of things. The overall demand has still remained strong, and there's new opportunity for, you know, defense-related components, too. So those two areas, but the recovery as we're seeing it and our customers are seeing it is, you know, starting in 2021 and a slow recovery.
spk01: Okay. You mentioned your facilities out in California. What kind of volume could you get through those facilities without significant capital expenditures? I know it depends a little bit on product mix and everything, but just a rough idea. Are we running, you know, a half a capacity now, or...?
spk04: Well, we tried, you know, what the intent of the reorganization was to not impact materially the ability to produce parts. Of course, it had some impact, but it really was a way to be more efficient and to still have capacity. So we believe we have significant capacity in our operation in California to support you know, the kinds of faster business and other high-performance precision components. So there still is significant capacity remains.
spk01: Yeah, I would suspect. One final thing. You called out Cal Nano in the press release. saying that, you know, I mean, it had been mentioned before, but you've been usually writing things off there rather than giving any optimism. Are you more optimistic on that investment now?
spk04: Well, I think we felt it was appropriate to at least comment on it, and things have been a little more recently. You know, they've had their ability to pay bills and to, you know, they're take care of their current obligations, so we decided that it was, you know, worthwhile to say something about that. But that's the reason is to give a little bit more, you know, color there.
spk01: Okay. Good. Thank you very much.
spk04: You got it, Frank.
spk00: Next, we go to the line of Daniel Marks with Stonehouse Capital. Please go ahead.
spk03: Thank you for taking my questions, gentlemen. Just a clarification, if I could, on the paycheck protection amount. Given that it's still on the balance sheet, am I correct in assuming it hasn't hit the income statement yet? And if so, assuming it is forgiven, would that result in a boost to income in the quarter?
spk04: You are correct. It is still on the balance sheet. It has not hit the income statement. And when it is forgiven, if and when it is forgiven, then at that time, that's when it would hit the balance sheet as a other income credit.
spk03: Okay. So if I'm looking at year-to-date net loss of $760,000, theoretically, if we assume that it was forgiven, you're pretty close to break even with the benefit of that forgiveness. Yep. Okay.
spk05: Yep.
spk03: Good job. It's him managing to get to that kind of break even level in this environment. Well done. And just on the savings side, you i didn't quite catch it you you said with with cost savings and and a sublet that you've gotten out of that yeah you're looking at an annualized million in savings can you just give me a little more flavor on that i'm not sure which uh what facility that is yeah so that that sublet it's just an example of some of the things that we've done but basically it was a leased facility which we were using to store uh
spk04: inventory and other items in, and we felt that we could consolidate out of it and make it available and sublet. Our lease runs there through the end of June, at which time we would not have re-dued it, but we decided to get out in front of it and see if we could generate a little savings by not having to pay the lease expense for the remaining six months or so. So that's really the essence of that. The rest of it is, in essence, payroll-related costs that we've taken out. As Dave mentioned earlier, we had been gearing up for substantial growth, and this was just retrenching to the current condition.
spk05: Got it.
spk03: Perfect. Thank you. Just two more questions. First one's a quick one. You talk about the electronics business and the fastener business. What's the split between those two businesses? And is there one or the other that as you look forward to 2021 that you're perhaps more optimistic about?
spk05: We don't
spk04: uh, break out disaggregated financials between the two groups, but, but certainly the electronics group, um, has been, uh, well, certainly wasn't, uh, directly impacted by the COVID-19 pandemic. Uh, majority of its business is on very high value asset, electronic systems for, you know, defense, which, um, you know, did, you know, it's still, still very strong and continues to, uh, continues to be strong in the outlook of 2021. So it's growing. Right now, the forecast for 2020 would be more weighted towards the electronics. But having said that, there really are some very significant opportunities on the fastener side, too. So I wouldn't want to count that out. But that can give you a little bit of an idea
spk05: about the difference between the two product lines. Got it.
spk03: But typically the same customers in both segments, just one perhaps higher-end componentry? Is that what I should take that as?
spk04: Yeah. So in electronics, you're selling thousands or hundreds of parts for – you know, tens of dollars, and on the fastener side of things, you're selling millions of parts for pennies, or in some case, you know, cents, 20 cents, 15 cents. So, yeah, it is the same customer, but, you know, on the electronic side of things, there is a little bit more higher value add, although, you know, part of our strategic roadmap on the fastener side is to move up that value add that value proposition and be selling a little more higher value components. So that's part of our growth strategy there.
spk03: Would that be some sort of assembled component or just higher-end fasteners?
spk04: Just I would say more of a finished product, you know, so there's some more value-added components. steps to it. It's not necessarily a higher value component, but more manufacturing steps to it.
spk03: Okay. Got it. Last question, and your earlier shareholder asked something similar. In your press release, you did talk about how you got the company-owned manufacturing facility, which Given how long you've owned it, I think it's safe to assume it's worth at least two or three times what it's on your books for. You've got Cal Nano, which you previously said isn't a strategic fit. And when I add those two things together, I almost get the market value, market cap of the company is contained in real estate and an investment. And the business itself is for free. Is there any plan or is the board and management considering how to get cash and monetize those two assets? So they might be either returned to shareholders or used for the aerospace and defense business. That is the reason people I think are typically shareholders of Omniknight. Any thoughts on that?
spk04: Well, we have and we continue to look at that strategic, you know, at the board level, you know, as an ongoing, you know, as an ongoing action. Sure.
spk03: Okay. It just seems, you know, typically you don't expect a manufacturing business to own its own facility and You know, if you've got something that's worth $5, $6, $7 million, that's a big chunk of the asset base of the business tied up in its real estate as opposed to, you know, having it in operations and leasing a facility. So I just need to see whether there's growth potential there.
spk04: Right. You know, it's tied up capital. It's not really working. You know, we are not, you know, we're not meant to be in the real estate business. So, you know, that's the reason we have looked at it and continue to look. and how to best do that with that capital work.
spk03: And any thoughts as to when that might or how that would play out? Is that the type of thing you're holding in your back pocket until there's an acquisition type thing or something of that nature?
spk04: Well, that's something we've commented in the past about, that we are active in the acquisition process, area and it is something that is ongoing. We're taking that all into consideration in terms of timing and how.
spk05: Got it. Perfect. Gentlemen, thanks very much for your time. You got it.
spk00: There are no further questions. This does conclude today's teleconference. Oh, I apologize. We do have a couple more signals. Would you like me to entertain those additional questions?
spk04: Sure.
spk00: Okay. It looks like we go back to Frank Wisniewski, a private investor. Please go ahead.
spk01: Hi. Following up on that last issue, and it's something that occurred to me too, your stock is currently selling at below tangible book. And Tangible Book is probably understated because of the value of the facilities and maybe the at least better prospects for Cal Nano. And you've done a commendable job on keeping your balance sheet together. Under those circumstances, why wouldn't you entertain or why wouldn't the board entertain a share buyback?
spk04: Well, again, we'd have to take a look at that and what's in the best shareholder's interest. But typically buybacks, I mean, they can, but, you know, there's hopefully a better usage of that capital than a shared buyback. But it's something that OmniLite has done in the past and will continue to look at, you know, what is in the best shareholder's interest.
spk01: Yeah, I just – Question that comment. If your own stock at below tangible book value isn't one of the best investments you could make, you must have some really good other ones.
spk05: I do like your thinking. All right. Thanks, guys. Okay.
spk00: Next, we go to the line of William Powell with Zach Investment. Please go ahead.
spk02: Hi, guys. I guess I got my name wrong, but I just had a few questions, a little bit more detail concerning the income statements. In the current three-month period, you have cost of goods sold, which is less than revenue. Is there one or two items that make up that? I mean, your margins are negative, so.
spk04: Oh, the margins are negative. Our cost of goods sold less than revenue.
spk02: At the three-month end of September 30th, you've got cost of goods sold $1.7 million and revenue $1.6 million.
spk04: Yeah. Yep. Yeah, that's right. So, but look at our cost of sales historically.
spk02: No, I know that. I'm just wondering if there's one, you know, this seems to be an anomaly, and obviously you've adjusted the way you allocate costs to the sales over time, so one would think that this either represents a loss of a sale or a write-off or something like that, that, you know, otherwise you're selling at lower prices than what it's costing.
spk04: Well, remember, Bill, it's really complicated. a COVID-driven condition. Our sales are quite a bit more than they have been historically.
spk02: So... Oh, yeah, that's true. But I mean, you would allocate the cost normally to what was sold. So I guess maybe you're reducing prices to get rid of some inventory? Is that what's happening?
spk04: No, no. So we... Well, we have a... We have a costing system which puts the cost associated with manufacturing parts into inventory.
spk02: Yep.
spk04: And so when we sell those parts, they, they're, they're expensed out to inventory and there are some costs that don't get, you know, over capacity costs put on the back. Yes. Correct.
spk02: Yeah. Yeah. Okay. So they're a bunch of fixed costs and that's what's happening.
spk04: Yeah. Yeah. If you think about our business, it's, it's a, it's a very high fixed cost business.
spk02: Okay. I mean, but, yes, historically, the margins have been a lot better. I mean, you have, like, you know, 25% margin in the past. It's just now you have a negative margin. And you've got, like, a lot of money in finished goods inventory. So it has been moving from raw materials to finished goods, but it seems at the current time you've got a fair amount of inventory all in finished goods that hasn't been sold. So I just wanted to get an idea whether there was something to knock or, you know, how good is the inventory at the current levels? And maybe because of COVID, it's a lot harder to sell. And those fixed costs are, you know, either sitting in inventory or when they get costed out when you sell, you're actually losing money on the sale.
spk04: Yeah, you're suggesting that we have an NRV problem?
spk02: Well, I'm hoping you don't, but, I mean, obviously, you know, maybe that's why you're not selling because you don't want to be selling at lower prices, so you have to take them out. And you say, well, okay, you know.
spk04: So if you look at our costs, our costs are a reflection of a high fixed cost company. So those costs just, if you don't have sales to support them, then you end up with, you know, with an upside down margin condition, which is what we have. If our sales go up, you know, not very much. So the incremental sale drives a lot of margin to the bottom line without much additional cost. If you look at the first quarter as an example, you know, the cost structure is maybe a little bit higher, but you have a lot more revenue to support it.
spk02: Yeah, but is it the revenue allocated directly to the product, or do you just allocate a certain amount per quarter? Normally, you would think that the costing program would say, okay, look, I sold X number of widgets, and then I, you know, the cost of those widgets should be similar, you know, unless you have reduced prices.
spk04: Well, we don't have reduced prices. We just have lower units.
spk02: High-tech costs in the inventory. Okay. Okay. And so, but you, you know, the fact that you do have a lot of goods and finished goods inventory right now, you still feel that those are pretty good value and they're current?
spk04: We do.
spk02: Yes. Okay. Yeah, we do.
spk04: And we have an experience where our customers have been pushing sales out. They've been extremely careful with providing, you know, Many times they order, you know, they don't order very far in advance. So that's really slowed the process down and left us with, you know, a higher inventory position than, you know, maybe we would like to have. But it's not really a question of will it sell. It's more a question of when will it sell.
spk02: Okay. Yeah. Okay. And just a couple of other quick questions. The loan forgiveness program, how likely is that to be accepted? Is it a 50-50 chance or is it a 90-10 or do you have any clue?
spk04: Well, we think it's very high. I mean, we think when we look at the requirements, have the loans forgiven, that we meet those requirements. Obviously, nothing certain until they, you know, until they approve it. But, you know, we feel that we meet the requirements. that it will be forgiven.
spk02: Okay, great, thanks.
spk04: Just one last question before the FBEA gets around to reviewing and approving.
spk02: I know, and they're already backed up, I understand. Yeah. Yeah, just one last thing on the AR, Councillor Siu, it looks like you've got a lot moved out beyond the 30 days compared to past history. I'm just wondering, is that one or two orders or Is it just because COVID makes it harder to collect?
spk04: It's making it a little harder to collect. We have, you know, our customer base is a very solid customer base. They do pay, but they're, you know, they're paying a little slower because they're dealing with their own cash flow issues too.
spk02: No, I understand. We really don't.
spk04: We really don't experience significant write-offs at all, very minimal.
spk02: Okay. Well, thanks very much, guys. You know, keep safe. Hopefully this thing's going to turn around in the air. You know, the air market is going to come back, and you'll be able to sell to the Boeing MAX if it comes back as well. Have a good one.
spk04: Right. Okay, Bill. Thank you, Bill.
spk02: Okay, thanks. Yep, okay. Take care.
spk00: And we have no further signals. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.
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