CVD Equipment Corporation (CVV) on Q1 2022 Results - Earnings Call Transcript
Operator: Greetings and welcome to the CVD Equipment 2022 First 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, . 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 McNeill, Executive Vice President and Chief Financial Officer. We have posted our earnings press release and call replay information to the Investor Relations sections 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 of our products and general business conditions, and outlook. These forward-looking statements are based on certain assumptions, expectations, and projections, and are subject to a number of risks and uncertainties described in our press release and in our filings with the SEC, including but not limited to the Risk Factors section of our 10-K for the year ended December 31st, 2021. Actual results may differ materially from those described during this call. In addition, all forward-looking statements are made as of today, and we undertake no obligation to update any forward-looking statements based on new circumstances or revised expectations. Now, I'd like to turn the call over to Manny. Manny?
Emmanuel Lakios: Thank you, Doug. Welcome to our CVD Equipment Corporation quarterly conference call. My name is Manny Lakios, CEO and President, and I'm pleased to be presenting to you today regarding our first quarter 2022 performance and important company developments and pertinent information related to our business. As we will be providing you substantive information, your thoughts are important to us, and we look forward to your questions at the end of our conference call in the Q&A session. The first four months of 2022 have been an exciting period for all the stakeholders of CVD Equipment. Having spent the majority of 2021 transitioning, reorganizing, refocusing, and realigning the company's resources and strategy towards a path to future profitability and growth, we're beginning to see the result in the form of improved market adoption and orders of our products. Our strategy of focus on markets that support the electrification of everything is fueling our present growth. The market segment includes electric vehicle battery technology, as well as high power electronics for electrical charging and power transmission. Our Q1 2022 orders were $4.1 million, compared to $3.7 million in Q1 of the prior-year. April, 2022 orders were $7.2 million. In the first 4 months of 2022, we have received orders exceeding 11 million for our CVD Equipment products as compared to approximately 5.5 million for the same four-month period in 2021. 100% year-on-year increase in orders for the company, these orders primarily consisted of 19 CVD first nano systems, compared to 23 system orders for all of 2021. Of the 19 system orders, 14 are for our recently announced PBT 150 system addressing silicon carbide growth and processing, while the remainder of the system's orders are for battery nanomaterials, both R&D and production, advanced carbon-based capacitors, and for our legacy advanced R&D first nano system. The systems are planned for shipment starting in the fourth quarter. According to independent market research, these market segments are expected to continue to grow in the coming quarters and years. As we noted in our earnings call for 2021 which was held at the end of March 2022, we also received orders for consumables that serve our installed base in the aerospace market. We take this as a sign that the aerospace market is beginning to recover. However, it is not expected to recover until at least 2023. We believe the orders we received during the first four months of 2022, and the order rate of the prior two quarters continue to validate our strategic focus on growth and use markets such as battery nanomaterials, silicon carbide growth systems, and advanced composite materials for aerospace and other markets. Our SDC Tantaline and MesoScribe product lines continue to show demand and orders in Q1 and the first four months of 2022, albeit not to the extent of the CVD Equipment group. The COVID pandemic and the geopolitical instability in Russia and Ukraine and Eastern Europe have caused issues in the global supply chain. The negative impacts have been felt by all our companies with increases in commodity and product materials costs as well as in product delivery uncertainties and unpredictability. Revenue for the company as a whole was negatively impacted in the first quarter by supply chain issues. Some of our countermeasures to address the lingering supply chain issue are partnering with key suppliers and expanding our in-house production capabilities. Both are essential to our goal of self-reliance and will support our commitments to our customers. Our plan is to expand our in-house manufacturing capacity in our 355, Central Islip facility in the second half of 2022. And this plan is well underway and the end objective to be self-reliant. We continue to believe that our 355 facility has ample space in all areas of operations to support our growth. In the first quarter of this year, we satisfied the mortgage of our 355 facility. In 2021, we strengthened our balance sheet and liquidity with the proceeds we received from the sale of our 555 facility. Our market focus, order rate, operational performance, and manufacturing capacity, along with our balance sheet all help position CVD Equipment along the path to continue growth and future profitability. I would like to now introduce our CFO, Thomas McNeill, who will provide the first quarter of 2022 financial summary.
Thomas McNeill: Thank you Manny, and good afternoon everyone. CVD 's first quarter of 2022 revenue was $4.7 million as compared to $3.4 million in the first quarter of 2021. An increase of $1.3 million were 38.3%. Net loss for the first quarter of 2022 was $1 million or $0.15 per diluted share, as compared to a net loss of $1.5 million or $0.23 per diluted share in the first quarter of 2021. CVD's operating loss improved by $600,000 to $1 million for the first quarter of 2022, as compared to an operating loss of $1.6 million for the first quarter of 2021. This improvement was a result of leveraging fixed costs on higher sales levels, which resulted from improved orders towards the end of 2021, as well as product mix, which more than offset certain component cost increases and compensation costs. In addition, general administrative costs decreased $400,000, which was primarily related to the reduced legal costs and lower building costs as a result of the sale of company's 555 facility in July 2021, and the consolidation of operations into the company's 355 facility. Beginning in 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 result in reduced gross profit margins in future quarters, extended manufacturing lead times, and reduced manufacturing efficiencies. CVD has placed orders with increased lead times to attempt to 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 further mitigate both potential delivery delays and material cost increases. With respect to our balance sheet, on March 1st, 2022, we satisfied our remaining mortgage of $1.7 million on our 355 South Technology Drive facility, and as such, have no debt outstanding. Turning to our backlog, at March 31st, 2022, we had $9.9 million of backlog as compared to $10.4 million at December 31st, 2021 a decrease of $500,000 or 4.8%. This decrease is due to the timing of the receipt of new orders during the quarter ended March 31st, 2022 of $4.1 million, as compared to revenue of $4.7 million. However, with the new orders achieved in April of 2022 in excess of $7 million, this has substantially increased our backlog. While the effect of COVID-19 crisis continues to negatively impact the aerospace industry, generally in the form of reduced travel and reduction of gas turbine engine sales, industry analysts believe improvement will begin to occur in the late 2022-2023 timeframe. With respect to our liquidity, our cash and cash equivalents at March 31st, 2022 was $13.3 million as compared to $16.7 million at December 31st, 2021. This decrease of $3.4 million is primarily the result of the satisfaction of our mortgage debt on our 555 -- on our 355 facility in the amount of $1.7 million, as well as our net loss adjusted for non-cash items of $650,000 and other operating activities. Our working capital was $15.9 million at March 31st, 2022 as compared to $16.7 million at December 31st, 2021, a decrease of $800,000 or 5%. 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. And while we have initiated actions to mitigate the potential negative impacts to our revenue and profitability, there could be no assurance of the ultimate impact in the length of time periods that the supply chain factors may impact our business. Our return to profitability is dependent upon, among other things, the substantial completion and delivery of existing orders, which include the significant April 22 orders in excess of 7 million. The ongoing receipt of new equipment orders, the lessening of the ongoing effects of COVID-19 on our business in the aerospace market, managing through the supply chain issues discussed, and improvement in our operational efficiencies, as well as managing planned capital expenses and operating expenses. Based upon 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 to 18 months of the filing of the form 10Q 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. And now I'd like to turn the call back to Manny.
Emmanuel Lakios: Tom, thank you for our presentation. In summary, the first quarter and four months of 2022 have built on our efforts in from 2021, which was again a year of transition, reorganization of focus on everything we do and who we serve. Our focus remains on our customers, employees, shareholders, and the pursuit of growth and return to profitability. We look 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 door to your questions. Thank you.
Operator: Thank you. Ladies and gentlemen at this time, we will be conducting a question-and-answer session. Our first question comes from the line of Orin Hirschman with AIGH Investment Partners. Please proceed with your question.
Orin Hirschman: Hi, how are you?
Emmanuel Lakios: Hi, Orin.
Orin Hirschman: In terms of some of the competition that you face for the equipment, and in terms of the magnitude of the ASP s and what that ASP depends on, can you go through some of the applications of the silicon carbide growth application or the nano battery, or some of the other applications that you're seeing renewed interest in demand for? Is it just Applied Materials? That's the competition to beat or is there other specialty guys position? And what are the ASPs like and what does that depend on?
Emmanuel Lakios: Typically, we don't -- thank you on all great questions. Let me start off with -- we don't really see applied materially in our space, and that's just the markets that we focus on. Some of the suppliers that we would see, that we would compete against, we believe we do have an advantage, and that advantage comes now from our expanding our internal manufacturing capability and leveraging the 38 years of technology that the company has developed. I typically do not speak to ASPs in that it gives out a bit too much information to potential competitors. I would say that we are competitively priced, and our value proposition, as we provide the equipment and service support, we can do that both globally and with a higher degree of focus here in the United States. Much of this opportunity, as you can imagine, is spurred from bringing technologies from overseas back here to the United States. So we clearly have benefited from that. In the silicon carbide area as you well know, or you may know, at least, that it is a marketplace that has gone through quite a bit of consolidation of the -- of vertical integration. And we're focused on serving the merchant suppliers and many of the emerging companies that I think will continue to serve the broader market. I would say that that's what I can actually say without extending too far into our marketing plans.
Orin Hirschman: Okay. Thanks so much.
Operator: Our next question comes from the line of Brett Reiss with Janney. Please proceed with your question.
Brett Reiss: Hi, Manny. Hi, Tom.
Thomas McNeill: How are you.
Brett Reiss: Good, I'm good. Congratulations on good progress on the quarter. The battery nano and carbon-based capacitor orders, you said in your opening comments that you see the growth in demand continuing for that type of business. Do you think that the order flow will be less lumpy than your past legacy businesses?
Emmanuel Lakios: I would say the revenue side could potentially be more or less lumpy. The order side, depending on the magnitude of the number of units in the order, which would be satisfied over a longer period of time than the months that we take the order in. So you may see some months with higher order rates than other months, but this is all in an effort to continue to grow the business, create a backlog where we can be efficient in our manufacturing operations.
Brett Reiss: Okay. Do you think if we go into a recession, which more people consider that there might be a possibility, the demand for the battery nano systems and carbon-based capacitors, do you think that will be impacted by a recession or not?
Emmanuel Lakios: Yeah. I think that if I had an accurate answer to give you, I would probably not have to beyond the call because I'd be independently wealthy. I would say -- I'm not a macro economist. I would say that I believe strongly in this electrification of everything. It also has proven out for us to be a very positive growth area. There are the initiatives for having the majority of vehicles manufactured in 2030 being electric vehicles requires a lot of infrastructural growth, both in the production of storage devices, batteries, transmission, and charging systems, silicon carbide. I don't see that requirement going away with the recession. So to answer your question, I really can't foretell the future, but we're going to continue to support this electrification of everything. Thought process in that, I don't think the world has much of an option.
Brett Reiss: Right? Well, look, people have to eat so those type of products is inelastic demand. What are we driving at was whether the gravitational pull since the hockey puck seems to be moving forward, electrification will be somewhat recession-resistant and I guess time will tell.
Emmanuel Lakios: We continue to be optimistic, conservative. I'm just getting over my COVID, so I apologize. Optimistic, but we still continue to be conservative in our forecasting. But with that, we are ensuring that we have all the backbone infrastructure in our facility to take advantage of any opportunities in a timely manner. So we're not going to turn away business, we're not going to push it out, we'll be positioned for it, but we have a development process for these products, for launching them to a broader market, that we have been fortunate that we've received the level of order and adoption of our technology so quickly.
Brett Reiss: Okay. Now, with respect to the partnering with suppliers to relieve supply chain dislocations, can you go into a little bit -- what is been nature of the partnering that would relieve the supply chain dislocations?
Emmanuel Lakios: We -- that's a good question. One example is electronics product that we operate in our systems. We have multiple potential sources of the product, but we've partner -- we typically will partner with one, maximum two, and will provide a longer-term visibility in orders for these products that did pan off -- pan well for us on some of our tools, and that we were able to receive the order and ship them in less time than -- or plan to ship them in less time than we would have otherwise. So it's managing the inventory, managing our suppliers’ expectation. And we've had to shy away from some suppliers that are in Eastern Europe. We've gone to a heightened level of selection process.
Brett Reiss: One last one. That the momentum of order flow for the battery nano product and carbon-based capacitor product seems to be there and will continue. Is it too much? Am I getting over my skis that -- we're at the point where we've got a $15 to $25 million annual run rate, just based on those products for the next one to two years, so that if the aerospace, God willing comes back, that that will be incremental order flow to CVD over and above, the robust product pipeline you're enjoying with battery nano and carbon-based capacitors.
Thomas McNeill: So first, I just want to make sure that there's a level of clarification and thank you, Brett. There was a lot of questions in that one question. First of all, all of our product technology, you can imagine they're at different levels of product development and launch, product adoption, and technology adoption of the silicon carbide growth systems and associated other processes. Those are further along than the nano battery materials because we are serving an existing market, granted larger substrates, but in existing market. The nano battery materials are evolutionary, not revolutionary, but evolutionary technology where they add additional capacity and capability to the existing carbon powder used in battery applications. The carbon nanofiber that would be used in capacitor that is on the -- that is still in the technology adoption phase of its marketplace, so I would not suggest that you see that as an immediate growth market.
Emmanuel Lakios: Now with that said, we continue to support our aerospace marketplace. We continue to send out some quotations, albeit not at the same level as our other markets for this period of time, but you can imagine that we're not going to turn away aerospace orders ever. We have a very strong footprint in that and also commitment to our customers and we supply them with spare parts and services presently. So we would be more than pleased to continue to supply of both equipment, and if you are accurate that would be in addition to our non-aerospace business that we've enjoyed over the last couple of quarters.
Brett Reiss: One -- last one. You have in-house the engineering talent to support all of these initiatives and growing markets, could you read about employee shortages and labor shortages. What's the status there.
Emmanuel Lakios: Well, we live in the same world. There are labor shortages. Our attrition rate is -- it's extremely low. We value and treat our employees very fairly. We are hiring additional staff, and we'll continue to do that over the next quarters as we continue to strengthen. And we believe that there will be additional products in our 2023 plan that we'll want to develop. And we still have our 2022 product development to complete. So we will continue. It is a risk factor, and it's noted in our reports. We have a - we've hired a new HR manager that started at the turn of the year, and she has done an exceptional job on coordinating the acquisition of talent and the programs to both incentivize and motivate, and communicate to our employee base.
Brett Reiss: Great.
Emmanuel Lakios: It's not easy, but there's a path to navigate these waters at this point.
Brett Reiss: Great. I'm glad you're feeling better. Thank you and Tom for answering my questions.
Emmanuel Lakios: Thank you. And thank you for the chicken soup, by the way.
Operator: Our next question comes from the line of Martin Howard, a private investor. Please proceed with your question.
Martin Howard: Hi. I'm very disappointed to hear, Manny, that you are human and cannot foresee the future, but we'll take what we get. That's the . I'm delighted the company's on its way to survival, but for a while there was a dream of glory about the product that Stony Brook saved the world from a better oxygen, there was an agreement about graphene has been a product material of the future. It sounds like you're involved with some growth stuff for the company will grow to be okay. Is there anything that gives you a dream of glory in your product line or potential product line that could take this stock from where it is now to 18, 20, 30 bucks. I'm not asking you to comment on the stock market. Is there anything would justify a significantly dreamy higher price? Thank you for this. This is my question.
Thomas McNeill: Legal counsels on my call and they can strangle me. I can't speak to that but I can tell you that we are focused on not -- let me say, bleeding edge technology. We do some, we will sell to universities in a legacy products. We'll sell people devices for carbon nanotubes infiltrated to do all sorts of different "cool technologies, " rocket science of sort, and those -- something will come out of x number of those, whether that's 7, 10, 20 of those opportunities. But where we've wanted to focus the company is on growth markets and properly positioning ourselves in that growth market. We've received an order of 20 systems for silicon carbide growth and processing. There's a lot of risks that we when the next orders and the next bunch and we're up to mitigating that risk and getting those orders. But I think as you may know, there's -- silicon carbide has been around for a while, and there are thousands of tools out there. Not saying we're going to get thousands of tools, I'm not saying we're going to get hundreds of tools,
Emmanuel Lakios: but we've already received -- before we've shipped the first one of these, we've received up to -- we've received 20 units in order. So the demand is there. We command that -- over 37 years, we've developed and we command that technology. And that truly is a validated growth segment. The battery, none of us are going to argue that batteries are the biggest challenge in an electric vehicle, in home storage, in green energy production. And the technology is not there, whether it's -- we today serve evolutionary, not revolutionary. We sell to some universities, which we've announced that we will sell them high capability, high-tech development system for developing these materials, both on the cathode and anode side of the battery. But that's not something that I would say you're going to see large order rates in 2022 to 20 -- possibly even -- not even 2023. More likely something in 2024 and beyond, by the time that technology gets adopted. Graph carbon in batteries is going to be with us for a period of time, but the evolutionary element of improving is the capability of that carbon powder that's here today, and that's what people are working on. I'll be able to tell you more about the adoption after these tools are in the field, prove themselves, and we get to next series of orders. So there is a product life cycle, there is a product development cycle where you have a launch, you have adoption, you -- and we'll continue to evaluate our position but these areas so far have proven to be multiple orders to multiple customers and we're pleased with that.
Martin Howard: Okay. Thank you very much.
Emmanuel Lakios: Thank you, sir.
Operator: There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.
Emmanuel Lakios: Well, we appreciate everybody's participation, your loyalty, and your support of the company. We are a month into the second quarter. We've given you some insight on the first quarter, some insight into the first month of the second quarter, and we look forward to our next communication. And again, we thank you and we just hope you all stay safe.
Operator: Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
