CVD Equipment Corporation (NASDAQ:CVV) Q2 2023 Earnings Call Transcript

CVD Equipment Corporation (NASDAQ:CVV) Q2 2023 Earnings Call Transcript August 14, 2023

Operator: 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 Lakios, 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 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, risk factors 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 statements based on the new circumstances or revised expectations. I would now like to turn the call over to Emmanuel Lakios. Please go ahead, sir.

Emmanuel Lakios: 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 noncore business entities. This follow – 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 Tantaline 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 MesoScribe 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 OneD Battery Sciences, as we previously had announced. In the high-power electronics market, while we have not received PVT150 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 PVT150 and PVT200 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 the 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.

Richard Catalano: 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%. The decrease in our revenue was primarily attributable to lower revenue in our CVD Equipment segment of approximately $0.7 million related in part to lower PVT150 revenues. Lower revenue in our CVD Materials segment of approximately $500,000 as an outcome of the sale of our Tantaline 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. The increase in the operating loss was due to the two nonrecurring charges, one related to Tantaline 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% 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.

At the non-operating other income and that consists principally of interest income, our net loss for the second quarter was $1.1 million or $0.16 per share for both basic and diluted. This compares to a net loss in the second quarter of 2022 of $0.8 million or $0.12 loss per share for both basic and diluted. Now turning to our backlog, our backlog at June 30, 2023, was $18.8 million as compared to $17.8 million as of December 31, 2022. Our orders during the six-month period ended June 30, 2023, exceeded our revenues by approximately $2 million. However, our reported backlog at June 30 has been reduced by $0.5 million related to the sale of Tantaline on May 26, 2023, and also $0.6 million related to our decision to wind down the operations of MesoScribe.

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 31, 2022. In early July 2023, right after our June 30 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’ll take actions as necessary to maintain our operating cash to support our working capital needs. I will now turn it back to Manny.

Emmanuel Lakios: Rich, thank you for the presentation. In summary, the second quarter results of 2023 reflect our efforts and 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.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Brett Reiss with Janney Montgomery Scott. Please proceed.

Brett Reiss: Hi Manny. Hi Rich.

Emmanuel Lakios: Hey Brett. How are you?

Richard Catalano: Hi. Good afternoon.

Brett Reiss: I’m good. I’m good. Could you give the people on the call just some flavor on the sales process for like the PVT150 and the next generation 200?

Emmanuel Lakios: Yes. Of course. Well, I appreciate the question. I think that’s a great lead in. In typically when we develop and again, we had 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 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 PVT150 product with other customers – potential customers.

And since then, I’ve continued to state that, it’s my personal objective to close on two more 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 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 boule or silicon carbide device-level 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 so over 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 where really where we are today. We’re, 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.

Brett Reiss: 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?

Emmanuel Lakios: No, not per se; it’s unlike the historic developer product and they’ll come and they’ll buy your product. I mean, we obviously don’t operate that. 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 blast; it’s a bit more active than a word of mouth.

Brett Reiss: Okay. I appreciate that. Now in your opening comments, the price of the device is an impediment to some customers purchasing it. Would you explore some sort of financing or lease arrangement for – to make it more available for your customer?

Emmanuel Lakios: Yes. So look a couple of 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, other are established companies that need to raise working cap – that need to raise working capital. Others are very well-funded companies that require capital budgets for the year. So there’s a different level of financing required, depending on the character of the company itself. As far as us leasing and becoming a – we really have not entertained that that we don’t think that that would be helpful. They’re not looking to buy; initially they can buy one, two, five, 10 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.

Brett Reiss: 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 CVD is concerned about?

Emmanuel Lakios: No. No. That’s not something that’s going to affect us. The supply of raw materials continues on. We’ve seen and we – 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, the supply – 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 [indiscernible].

Brett Reiss: Great. Thank you for taking my questions. I’ll drop back in queue. Thank you.

Operator: We are all good to proceed.

Emmanuel Lakios: Yes. Hello. This is Manny Lakios and 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. If it doesn’t seem like there are any more questions, so operator, again, thank you, and thank you all for dialing in today. We appreciate the attendance on the call and your support, and 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.

Operator: Thank you. This will conclude today’s conference. You may disconnect at this time and thank you again for your participation.