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Edited Transcript of CVV earnings conference call or presentation 12-Nov-19 9:30pm GMT

Q3 2019 CVD Equipment Corp Earnings Call

RONKONKOMA Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of CVD Equipment Corp earnings conference call or presentation Tuesday, November 12, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Leonard A. Rosenbaum

CVD Equipment Corporation - Founder, Chairman, CEO & President

* Thomas McNeill

CVD Equipment Corporation - CFO, Secretary & Treasurer

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Conference Call Participants

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* Brett Reiss

Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor

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Presentation

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Operator [1]

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Greetings, and welcome to the CVD Equipment Corporation Third Quarter 2019 Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Len Rosenbaum. Please go ahead, sir.

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Leonard A. Rosenbaum, CVD Equipment Corporation - Founder, Chairman, CEO & President [2]

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Good afternoon, everyone, and thank you for joining our earnings call. The company's focus during the third quarter was on getting our materials facility up and running; starting our MesoScribe facility back up after moving from California to New York; and three, pursuing additional equipment sales.

The company has invested $2.5 million during 2018 in building improvements, machinery and other expenses related to CVD Material and $2.1 million in the first 9 months of 2019. I'm glad to say MesoScribe is now operating and Tantaline equipment continues to be installed and tested, and that we have continued to increase our marketing efforts for equipment and material sales. We are now showcasing our material facility operations and offering material coating services to new and existing customers.

The expanded material operations will enhance our capabilities in providing corrosion-resistant coatings through Tantaline for medical, pharma, oil and gas applications; sensors through MesoScribe for defense, aerospace and turbine applications; and through our CVD Materials subsidiary for carbon composite materials, medical coatings, electronic substrate materials and further expansion into other coatings for defense, aerospace and industrial applications.

We have continued working on our fluid reactor technology and additional testing will be done this quarter with the Center of Biotechnology at Stony Brook University to further our novel patent-pending technology on an improved Extracorporeal Membrane Oxygenation device. We anticipate further collaboration for this promising technology and application.

During the fourth quarter, Tantaline U.S. manufacturing should start being operational, and we will continue working on further improvement in both equipment and material sales. We anticipate the high-margin growth markets in materials for corrosion resistance, medical, aerospace and defense coatings will help flatten the uneven levels of our equipment sales. We will continue to monitor orders and expenditures, and we remain committed to returning to profitable quarterly results.

With that, I would like to turn the call over to our CFO, Tom McNeill.

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Thomas McNeill, CVD Equipment Corporation - CFO, Secretary & Treasurer [3]

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Thank you, Len. In the third quarter, our revenue was $5.7 million as compared to $4 million in the third quarter 2018, an increase of $1.7 million or 41.6%, and our net loss was $138,000 or $0.02 per diluted share as compared to a net loss of $2.5 million or $0.39 per diluted share in the third quarter 2018. Our 9-month revenues were $14.1 million as compared to $19.6 million in 2018, a decrease of $5.5 million or 28.1%. And our net loss was $3.7 million or $0.57 per diluted share as compared to a net loss of $3.3 million or $0.51 per diluted share in the first 9 months of 2018.

Our revenue increase of $1.7 million in this third quarter as compared to the year ago period was primarily the result of increases in spare parts and equipment sales. For the 9 months of 2019, the revenue decrease of $5.5 million was primarily attributable to the completion of large equipment orders and not being able to replace them in a timely fashion. Our sequential quarterly revenue increased $800,000 in the third quarter to $5.7 million, which is an increase of 16% and was our second sequential quarterly revenue increase of $1.5 million Q2 -- or Q1 of $1.5 million or 41.8%.

With respect to new orders, during the third quarter, we received orders of approximately $7.9 million as compared to $3.3 million in Q2 and $6.5 million in Q1 of 2019. This lifted our order backlog, which at September 30 was $6.7 million as compared to $4.5 million at June 30, an increase of $2.2 million or 49%.

With respect to our gross profit margin percent, we improved to 25% this quarter as compared to 10% in the second quarter of 2019, and negative 11% in the first quarter of 2019. This is a result of: one, improving operating efficiencies; two, mix of product revenue; three, increased revenue and improved contribution margins as compared to the 2 prior quarters in 2019; and lastly, the cost containment measures we have taken.

Turning to operating expenses. Our cost containment measures this year have resulted in a sequential decrease of $388,000 in our operating expenses during the third quarter. This decrease includes the effects of a onetime $200,000 recovery of a final contingent earn-out related to our MesoScribe acquisition. With respect to other income, we recognized $207,000 in rental income in the third quarter of 2019 related to our CVD Materials facility.

Overall, we believe that the progress we made again this quarter has substantially progressed the company to a return to profitability. With respect to our liquidity, cash and cash equivalents were $6.7 million at September 30, 2019 as compared to $11.4 million at December 31, 2018. Working capital was $9.7 million at September 30, 2019, as compared to $15.4 million at December 31, 2018, a decrease of $5.7 million. This decrease for the 9 months ended September 30, 2019, was primarily attributable to: overall reduced revenue and the resultant net loss; $2.1 million of capital invested that Len talked about before, related to our -- primarily related to our building improvements machinery for the CVD Materials operation; and debt service payments of approximately $900,000, which includes payments on investment in the CVD Materials building.

While our cash is expected to decrease during the next quarter, our fourth quarter, albeit at a much slower rate than the last 2 quarters, we believe the improved order flow, cost containment measures and improved gross profit margins provide us sufficient cash to meet our working capital and capital expenditure requirements for the next 12 months.

Now I'd like to turn the call back over to the operator for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today is coming from Brett Reiss from Janney Montgomery Scott.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [2]

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The bookings of $7.9 million, is it all legacy business or is there a component of the MesoScribe and the Tantaline new material handling business embedded in that?

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Leonard A. Rosenbaum, CVD Equipment Corporation - Founder, Chairman, CEO & President [3]

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There is some of both embedded in that number.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [4]

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Can you share what that is or you don't want to break that out?

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Thomas McNeill, CVD Equipment Corporation - CFO, Secretary & Treasurer [5]

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What I could tell you is the $7.9 million is appreciably equipment sales, parts, service, et cetera, SDC. There is a component of it with materials, but primarily it's the core business as we exist today.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [6]

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Okay. Now the Tantaline new business, your potential new customers are in various sectors of the economy, oil service, medical products. Is the time for these different businesses to make a decision to use Tantalite, does it vary from industry to industry?

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Leonard A. Rosenbaum, CVD Equipment Corporation - Founder, Chairman, CEO & President [7]

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I'm sure it will vary from industry to industry and also from customer to customer. And I'm not overly concerned. The first 6 months or a year, we'll be getting out a lot of product to, let's say, existing customers that have used it, and also to new customers for them to try it.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [8]

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So when the Tantaline operations are fully operational in the new facility in the fourth quarter, order flow for Tantaline can start pretty much immediately?

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Leonard A. Rosenbaum, CVD Equipment Corporation - Founder, Chairman, CEO & President [9]

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Well, they won't be fully operational in the fourth quarter. They'll start to be operational in the fourth quarter. It will take us probably most of the first half of next year to get everything fully operational. We got more than 1 system going in.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [10]

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Right, right, right. Now Len, I dropped in and I saw your booth at the Javits Center, where you were -- you had your Tantaline offerings and I observed good traffic. The people manning the booth were -- I'm a salesman. They're very good at what they were doing and interacting with people, but do you get a sense that these were people that you reached out to at Javits, that are just kind of curious and testing the waters? Or do you get a sense there's going to be real order flow from that kind of marketing that you did?

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Leonard A. Rosenbaum, CVD Equipment Corporation - Founder, Chairman, CEO & President [11]

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We wouldn't be investing the way we are if we didn't feel there was a real business behind this. The Jacob Javits Center is only one aspect of how we're trying to get out there and market the products. There are others, trade shows we go to, there are samples that we sent to customers, there's salespeople out there that are doing the selling for us. So it's more than 1 -- just the Jacob Javits Center.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [12]

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Are you finished with all your cost containment or is there room for further reductions? And can you quantify what that might be?

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Thomas McNeill, CVD Equipment Corporation - CFO, Secretary & Treasurer [13]

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Yes, Brett. I think we're -- it never ends. I think you're always looking at everything from how can we do it better, faster, more efficiently, #1. And then #2, we're constantly looking at our resources as we build out and balance with new orders related to the materials side. So like any other company out there, it's just -- it's a never-ending process. You're always looking.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [14]

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Right, right. If volumes in business returns at a robust level, the cost-cutting that you've done, have you basically trimmed fat, but you didn't have to eat into bone that might impact you being able to service the additional revenues that might come in?

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Leonard A. Rosenbaum, CVD Equipment Corporation - Founder, Chairman, CEO & President [15]

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Well, we never look to reduce personnel that are very beneficial to the company. Hopefully, we'll announce additional hirings as the orders keep going up.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [16]

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Okay. And I think there was a release that the tenant that you have in -- gave back half the space. Are you vigorously attempting to find a replacement tenant?

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Thomas McNeill, CVD Equipment Corporation - CFO, Secretary & Treasurer [17]

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Yes. We -- the tenant's out at the end of the year, December 31, and our broker has it. He's pursuing it. And just like we -- reasonably quickly, we're able to get both spaces. You can never be quite sure when you're going to get that right tenant to fill it in, but it's a very desirable space, high ceilings. And again, Brett, this is just a component of the overall picture. It helps lower costs, but it's -- we have a broker doing it. It's not our focus.

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Operator [18]

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Our next question is coming from Martin Howard, a private investor.

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Unidentified Participant, [19]

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I feel like -- Moses was in the desert for 40 years, we've been in a sort of a quasi-desert for 2 or 3. I hope we're getting out of it. And we were hoping what, 5 years ago that we'd be doing $100 million. Obviously, we're not going to do that. But Meso thing -- that sounds so sexy when you bought it, and the guy came to the annual meeting and talked about it. Does that have the potential of being a $5 million, $10 million, $20 million division in say in 3, 4, 5 years?

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Leonard A. Rosenbaum, CVD Equipment Corporation - Founder, Chairman, CEO & President [20]

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The answer to that is outright yes, okay. We would not have pursued it otherwise.

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Unidentified Participant, [21]

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Okay. That's good. So when will we see -- if it's going to be $5 million or something like that in 3 or 4 years, when will we see a number that you can -- you don't need glasses to see?

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Leonard A. Rosenbaum, CVD Equipment Corporation - Founder, Chairman, CEO & President [22]

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Well, right now, it's merged in with the materials operations, and hopefully, you'll see the materials numbers going up.

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Operator [23]

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We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments. (Operator Instructions) I will now turn the floor back over to management for any further or closing comment.

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Leonard A. Rosenbaum, CVD Equipment Corporation - Founder, Chairman, CEO & President [24]

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Thank you, everyone, for joining the earnings call, and I look forward to speaking to you next quarter. Thank you.

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Operator [25]

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Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.