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Edited Transcript of RVS.AX earnings conference call or presentation 3-Mar-20 11:00pm GMT

Full Year 2019 Revasum Inc Earnings Call

Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Revasum Inc earnings conference call or presentation Tuesday, March 3, 2020 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jerauld J. Cutini

Revasum, Inc. - Executive Chairman, President & CEO

* Ryan A. Benton

Revasum, Inc. - Senior VP, CFO, Company Secretary & Executive Director

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Conference Call Participants

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* Huiyi Wang;CTHD Investment;Founder/Director

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Revasum Full Year Results Presentation for FY '19. (Operator Instructions) As a reminder, this conference call is being recorded.

I will now turn the conference over to Revasum's CFO, Ryan Benton. Please go ahead.

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Ryan A. Benton, Revasum, Inc. - Senior VP, CFO, Company Secretary & Executive Director [2]

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Thank you, operator. Good morning, everyone. Before we begin, I remind everyone that during the course of this conference call, we will be making forward-looking statements that involve a number of risks and uncertainties that are not guarantees of future performance or results. You are encouraged to review the safe harbor and disclaimer statements contained in today's materials as well as the other risks detailed from time to time in the company's regulatory filings with the ASX.

Also, note that the company reports financial results in accordance with International Financial Reporting Standards or IFRS. However, for the periods presented today, we are disclosing various non-IFRS measures. Company believes that these measures are useful in the performance of financial analysis. These measures should be considered as supplements to the financial statements lodged in accordance with IFRS. I would also like to highlight that our full year financial statement for FY '19 are through the date of January 5, 2020, as the company recently adopted a 5-4-4 manufacturing calendar. We will utilize today's time with the presentation hosted by Jerry Cutini, our Chairman and CEO; and myself, followed by a question-and-answer session.

And with that, I would like to turn the call over to Jerry. Jerry?

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [3]

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Good morning, everyone, and thank you for joining us on the call today. It is a pleasure to speak with everyone again and provide some commentary around our full year financial results. Before we get to those details, I would like to provide some general updates on the business and market as well.

As a company, we hit some important milestones during the year that are worth drawing your attention to. We have invested heavily in the fast-growing silicon carbide market, notably launching our new 6EZ silicon carbide polisher to the market during the fourth quarter of 2019. Since the release of the 6EZ polisher, our internal development team has not only met all advertised expectations, but exceeded this bar in multiple regards. The 6EZ is delivering leading process technology developed specifically to take advantage of the rapidly growing silicon carbide market. On the back of the impressive demonstration results, the company is also in advanced discussions with key strategic customers.

We are on track to book an order and ship our first 6EZ system during the first half of 2020. We also achieved preferred supplier status and signed a multiyear volume purchase agreement with one of our key customers, Cree, with the deliveries of tools starting in Q4 of 2019 and continuing throughout their expansion period. Cree has previously announced the multiyear expansion of silicon carbide capacity that will see a 30x output in the supply of silicon carbide substrates. Cree is the unquestioned leader in the silicon carbide wafer market, and Revasum is excited to be a preferred partner with Cree and our plan is to fully support their expansion with the best possible products.

As we see the semiconductor capital equipment market recover, we head into the first half of 2020 with a strong system backlog of $6 million. This represents systems for which we have a confirmed purchase order, but not yet shipped along with some systems which have already shipped this year. This includes the backlog of $3.9 million related to the 7AF-HMG silicon carbide grinder, but does not include our typical revenue of approximately $3 million for spares, service and royalties. We expect this figure to grow significantly as we book additional orders which are in the pipeline, including our first 6EZ.

In addition to the above, during 2019, we invested in our internal infrastructure, successfully deploying our new ERP system which the team has worked hard to implement over the past year. Our industry trade organization, SEMI, shows that the semiconductor capital equipment market as a whole contracted during 2019 by about 11%. This is in line with what we have seen during the fiscal year and was a significant factor in driving our 25% year-on-year decline in revenue compared to 2018.

On a more positive note, during 2020, the market is forecasted to return to growth with a spend in excess of $60 billion forecasted for the year. The expected growth is supported by announcements from key market players with regards to the significant planned investments throughout the year. We've been telling investors that our silicon carbide business was growing -- going to grow and we're now seeing -- starting to see that growth materialize. We have headed into the first half of 2020 with a strong system backlog. The chart on Slide 5 shows the ramp in sales of our silicon carbide grinders, reaffirming that we have chosen the right space to tap into.

Silicon carbide producers continue to announce massive capacity expansions, where we feel great about the position we are in to take advantage of what will be a booming silicon carbide market. Based on our assessment of the market through 2024, we see the overall TAM for silicon carbide capital equipment ramping significantly with demand increasing for both silicon carbide grinders and polishers. We estimate a 300% increase in the overall TAM over the next 4 years. We are well placed to take advantage of this market with our 6EZ silicon carbide polisher and the 7AF-HMG silicon carbide grinder. The increase in overall TAM is driven by the demand for 6-inch silicon carbide wafers. Across the next 4 years, we see this growing exponentially with the increase in popularity of electric vehicles and the development of 5G networks.

Over the next few slides, we have provided some more detailed data on what is driving the growth in the market and why silicon carbide is so important. We have told you all many times before, electric vehicles and 5G represent the key end markets for silicon carbide devices. While I could spend a lot of time on this slide, I won't, there is no question that silicon carbide provides far superior properties compared to that of traditional silicon wafers, making it the obvious choice for these end markets.

You've seen me talking about this in the past, and most recently, during the launch of the 6EZ, we've spent 2019 investing significantly in our new 6EZ polisher and we've made improvements to our market-leading 7AF-HMG grinder. Combined, they deliver significant yield improvements compared to traditional batch processing methods. Higher yield means a lower cost per wafer for our customers resulting in a shorter payback for our tools.

I'll close with this. We have delivered an unparalleled machine. Our latest process results provide a removal rate that is over 50% faster than our closest competitor and improving the removal rate means faster wafer-processing and increased productivity per hour for our customers, again resulting in a shorter payback time.

In conclusion, looking ahead, I have great confidence in the future of Revasum. Our target markets remain strong and we expect to gain benefits from the actions taken in 2019 to focus on the exciting growth taking place in the silicon carbide market.

Now I'll hand it over to Ryan for our financial year-end review. Ryan?

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Ryan A. Benton, Revasum, Inc. - Senior VP, CFO, Company Secretary & Executive Director [4]

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Thank you, Jerry. We've highlighted some of our key financial metrics for the financial year on this slide. First, I would like to give you a little more color on the pro forma gross profit margin. As the company moved its focus to our new silicon carbide tools, we took a material onetime noncash charge related to legacy inventory in the amount of $2.2 million. The charge had an 11% detrimental impact on our gross margin percentage. The company continues to review ways in which this legacy inventory can be monetized and is confident that this will be achieved. But based on our current forecasted demand, it was appropriate and prudent to take this charge.

With regards to OpEx, included in the current year research and development number, also is a onetime impairment charge of $1.9 million. This charge is in relation to our CMP tool development project. Given the working capital constraints in the company, a strategic decision was made to postpone this project, resulting in this noncash charge. Although we invested heavily in 2019 in the company's future revenue streams, as management, we understand that this level of OpEx is not appropriate for the current revenue levels. As such, with the support of the full Board of Directors, the company has completed a reorganization following the fiscal year-end in order to best position the company to achieve its 2020 goals, both improving financial performance. The reorganization involves significant streamlining in all areas of the company in order to improve efficiency and preserve cash. As a management team, we will continue to work to further reduce our cash burn and ensure we are on the pathway to profitable, sustainable growth.

On Slide 13, here, we have some financial highlights from our financial statements for the period ended 5 January 2020. We saw a decrease in revenue largely driven by the contraction in the wider semiconductor capital equipment market, which impacted our legacy products. As also mentioned on the prior slide, the 2019 results also include a $2.2 million noncash inventory reserve charge. Pro forma gross margin with this charge was -- without this charge was 22%.

On the bottom of the chart, you can see the reconciliation to adjusted EBITDA, which excludes depreciation, amortization, the previously discussed noncash impairment charge and noncash stock-based compensation. Adjusted EBITDA for 2019 was also impacted by the same noncash inventory charge of $2.2 million.

And a final technical note, that during the year, as a result of the adoption of AASB 16, the new leasing standard, there is an additional $0.7 million of depreciation in OpEx as a result of the depreciation of the right-of-use asset.

Now turning to Slide 14. Cash at the year-end date was $6.8 million, with $2 million drawn down on the Bridge Bank facility. Subsequent to the year-end date, we have drawn down a further $500,000 on the $8 million Bridge Bank working capital facility. We have seen a significant reduction in trade and other receivables to $1.8 million as a result of improved collections and timing of shipments. Intangible assets increased to $6.8 million as development of the 6EZ ramps during the fiscal year and the new ERP was implemented on the first day of the new financial year. PP&E also saw a year-over-year increase of $2.7 million as a result of the build of the first 2 6EZ tools, which will remain in our process and engineering labs.

And finally, turning to Slide 15. The company saw record cash receipts from customers of $26.4 million during the fiscal year. Notably, the company also achieved operating cash flows for the fourth quarter of inflow -- of an inflow of $1.2 million, reflecting the efforts to improve the sustainability of the company by management. Investing cash outflows represent payment of capitalized development costs of $7.3 million were incurred as investment in the new 6EZ silicon carbide tool ramped along with the implementation of the new ERP system. The company expects minimal amounts of capitalized development costs in 2020 as both of these development efforts are largely finished.

Financing cash flows are as a result of the arrangement of the Bridge Bank financing facility. As at the year-end date, the company had $2.0 million drawn down on the term loan facility and nothing drawn on the revolving working capital credit line. As previously mentioned, subsequent to year-end, we have drawn $500,000 down on the $8 million working capital line. The amount of additional liquidity available under the Bridge Bank line is dependent upon balances and composition of receivables and inventory. In 2020, we will continue to work to find ways to increase our working capital liquidity through nondilutive needs.

I will now turn the call back over to Jerry. Jerry?

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [5]

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Thanks, Ryan. And now, operator, I think we are ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from [Michel Jena], a private investor.

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Unidentified Participant, [2]

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Now I have to thank you both on giving a pretty comprehensive presentation. So thank you for that.

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [3]

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You're welcome.

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Unidentified Participant, [4]

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I've got 5 questions, and I had to write them down in case I forgot them. But hopefully, we'll go through them pretty quickly. The first question is it's pretty obvious on the outbreak of the coronavirus, are you seeing any impact on your business at all?

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [5]

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Good question. The answer is not really. The -- and we talked about this, obviously. And the answer is we will have no impact from a supply chain standpoint. We don't buy enough or any significant materials from Asia that it would bother us. Orders are the other side of the equation and the more important side. I think that we have a number of orders that are planned. We've been in contact with a lot of customers and I think what we're going to see is some order delays. We have people that are -- we've given final quotes to. We've negotiated terms and specifications. And the factories in China are simply not fully operational yet.

So I think it's going to slow some orders down, but I don't think it's going to impact and it's not going to impact anything in the first half, I don't think, because these are orders that would have been shipped in the second half anyway. So things are a little bit slower, but I don't think it's going to hurt us right now.

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Unidentified Participant, [6]

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Yes. That makes sense. Obviously, a concern around shipping and demo trial delays and the supply and logistics, but yes, that makes a lot of sense.

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [7]

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Yes.

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Unidentified Participant, [8]

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So the second question is the last quarter, the company was operational cash flow positive, are you anticipating this quarter to be similar or close to that?

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Ryan A. Benton, Revasum, Inc. - Senior VP, CFO, Company Secretary & Executive Director [9]

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Yes, this is Ryan. Let me chime in. I do not believe we'll be cash flow positive for this -- for the first quarter. It really has to do with the timing of payments and kind of the flow of orders. We tend to be -- if you look at our history over the last 1.5 years, we tend to be, quarter 2 of each half, to be pretty strong in terms of cash flow.

As we look forward to the second quarter and beyond and certainly, we put some of that information in the presentation, we have really tried to make some important decisions, strategic decisions kind of streamlining the company so that we can get to kind of cash flow positive kind of the second -- for this full second half. And I think we've done some of those things. We've got -- if I'll just kind of list off a couple of those things. Obviously, from a working capital standpoint, we're doing everything we can to be efficient. In terms of -- I'll kind of amend Jerry's coronavirus question. I think we're all really evaluating what business travel is necessary and to some extent, forcing people to be more efficient. And rather than getting on an expensive international flight, we're having conference calls and video conference calls and that type of thing. We have kind of fallen on our sword appropriately. So whereby we kind of didn't turn quick enough in terms of our accumulation of inventory, in terms of the legacy -- the legacy systems, we kind of build up some inventory. We do believe that will sell-through. And that will be a benefit in the second half of this year and some of the second quarter.

And when I talk about streamlining the organization, the entire management team has taken significant pay cuts. And it's not something that we really advertise, but it's something that we did voluntarily to realize that we've got to do better.

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Unidentified Participant, [10]

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Yes. I'm guessing it's the nature of, yes, the business that you're in. Of course, you're not necessarily working on a quarter-by-quarter basis, it will be by a half-by-half basis. So yes, maybe a little bit of an unfair question, but I had to ask it.

The third question is maybe one for you, Jerry. I note that the recent acquisition of U.S. DuPont's SiC Wafer division by SK Siltron, a Korean company, as well as the Cree and STMicro announced the multiyear SiC wafer supply agreement, are you seeing further consolidation and supply agreements in the SiC industry?

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [11]

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That's a really good question and I know you're paying attention. The Siltron-Dow acquisition is really important and because Siltron is an existing large customer of ours. So Siltron makes a lot of 200-millimeter wafers and has a pretty significant installed base of our 6DZ polisher. Dow is a customer of ours. They have one of our older grinders and have been using it. And so we're actually pretty happy about that acquisition.

We have seen some other activity in the silicon carbide industry. One of the smaller silicon carbide slurry producers was recently acquired by Entegris, a publicly traded U.S. company. So there's a lot of interest and a lot of activity in this space.

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Unidentified Participant, [12]

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Yes. I note a lot of supply agreements, particularly for wafers and it will be interesting to see when that demand flows through to the equipment to, obviously, the cleaning and grinding and support equipment for that -- for those wafers. It will be really interesting when that comes through.

All right. So the fourth one, you may have already answered it, but there was an article in the Semiconductor Engineering website about the increased demand or the increased number of 200 millimeters fabrication capacity where the article mentioned 193 fabs to 220 fabs by 2022. And considering that Revasum is in that 200-millimeter space, what are the marketing efforts that the company is doing to tap into that growing demand?

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [13]

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Again, a very astute observation. The answer is, in the near term, nothing is going to change much, but remember that we had a lot of machines for 200-millimeter silicon -- prime silicon production moved out in 2019 and we are now seeing customers start to install some of those machines. So I don't think it's going to have any near-term impact. But I do think we'll see some business come back in 2021 for some of these machines. It highlights the cyclicality, which is never great, but 200-millimeter is still here. We will sell this inventory that we have through over time. We are confident that these customers will come back. So we're working on some of the legacy systems, but as we keep saying, and you know this, we're pretty focused on the silicon carbide. Think of the 200-millimeter legacy as the opportunistic. And when we can move inventory, we will.

The good thing is we have inventory to sell. So goodwill. Ryan said it in a subtle way, but I think we're going to really plan on getting some working capital coming through from our inventory during the next 12 to 18 months.

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Unidentified Participant, [14]

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Yes. And you've taken the charge on your balance sheet anyway. So yes, in a lot of ways, it's free money. It makes sense. But my last question, which is obviously putting my investor hat back on, on the share price, I'm sure everyone is sort of disappointed in the decline in the share price since the Revasum and Cree supply agreement and the launch of the 6EZ. Do you have any thoughts on why it has been declining?

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [15]

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Look, I wish I had an answer for that. I think, partially, we have to prove that we can ship these machines. I think we told everybody to wait and see how great it's going to be and they're waiting to see how great it's going to be. We are going to ship the 6EZ this half. People want to see proof that the customers will take the machine we designed and pay the price that we forecasted. So I think we have to -- look, I think we've missed every forecast so I think we got what we earned. And we have to do a better job and we'll -- we're going to strive to do that. Ryan?

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Ryan A. Benton, Revasum, Inc. - Senior VP, CFO, Company Secretary & Executive Director [16]

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Yes. And this is Ryan. I'll kind of tack on that. So I wholeheartedly agree that, and I think all the investors agree, until we ship the first 6EZ, although we're seeing fantastic results here, process results, people want to see that commercial validation until the last is met. That's a reasonable expectation. I think there's also -- investors, I'm sure, believe there's some overhang in terms of the financing of the company. And in my kind of prepared remarks, I tried to be subtle, but transparent in terms of we're trying to manage as best we can and try to increase the liquidity of the company in nondilutive manners. Although we have lots of our good friends and associates from some of the investment banking firms that would love to help us out in the near future, that's not what we want to do.

Again, I'll just enumerate that Jerry said we probably have $4 million or $5 million of inventory that can come back into the fold and we help finance the company. And we've got a good partner in Bridge Bank who has been really supportive of the company. And I think we can find some other ways to help support the company as we kind of get through this rough patch.

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [17]

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Right. And in closing, I think, look, we showed the proof on the 6EZ and that we're not going to need to dilute the company, and I think the stock price will react accordingly. So that's what we're working on.

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Unidentified Participant, [18]

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No. Thank you very much, Ryan and Jerry, for answering my questions and for the presentation. I'm a strong supporter of the company, I believe in what you guys are doing and in the products. So yes, I'm sure the company will do well in -- over the next couple of years.

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Ryan A. Benton, Revasum, Inc. - Senior VP, CFO, Company Secretary & Executive Director [19]

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Thanks, Mich. We appreciate it.

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Operator [20]

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(Operator Instructions) Your next question comes from Stella Wang, a private investor.

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Huiyi Wang;CTHD Investment;Founder/Director, [21]

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One of the questions is a follow-up to the gentleman's question just now on the legacy inventory. You mostly answered, but I just want to get a bit of outlook of one -- or whether do you -- whether you think the volume on the legacy line will go back to midpoint between calendar year '19 and calendar '18? Yes.

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [22]

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Stella. I think if I understand your question, I think you're trying to understand where -- when we think we might get back to those numbers. And I think it's 2021 before we see the legacy volume come back to those kinds of levels. So it's not going to happen -- I don't believe it's going to happen this year. I would be pleasantly surprised if it did, but we think that will probably come around in 2021.

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Huiyi Wang;CTHD Investment;Founder/Director, [23]

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Yes. That's a fair estimate. Second question, now in the U.S., there are some further proposed restrictions on foreign companies' use of U.S. machines to produce end products for Chinese companies. Do you see that influencing your customers' buying, purchasing decisions?

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [24]

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So largely, the trade issues are centered around Huawei, which is pretty leading-edge stuff. It's pretty out there. We have not seen the activity as it relates to -- most of our companies are related to electric vehicles and power. And so that's not considered as the part of the technology curve where the trade issues are. We have been increasing our export compliance activities because we're trying to make sure we do things the right way. And we definitely have had customers call that are on the denied entity list, but that's okay. We have a lot of other customers that are not on the denied entity list.

So I think as it relates to power, electric vehicle, silicon carbide chips, I do not think we're going to have any problems. There are some in the 5G arena that -- and that's the smaller part of the market right now that we probably would have a little delay. So overall, it doesn't appear that it's going to hurt us, but we're paying really close attention to it.

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Huiyi Wang;CTHD Investment;Founder/Director, [25]

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Okay. All right. Last question is on the 6EZ. Are they mostly for greenfield factories? Or are they replacing existing less productive processes? And I could sense that there's a bit of a delay of the first unit shipping. Is it? Because you used to talk about the first quarter and now it's the first half.

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [26]

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Yes. So the answer to your question, is it greenfield, there is -- you hear me talk about batch processing systems versus single wafer. Largely, when the customers are talking to us, the first phase of customers are going to buy machines to evaluate the throughput, the quality, the cost of ownership relative to its batch system that are installed. And they usually do all that work upfront, but they just want to validate it. So I would consider, from a substrate manufacturer, this is going to be an addition to the batch supply. They will have a certain percentage of their output that's going to go over single wafer, that's going to be higher-quality.

In the case of the customers talking to us about device CMP, those will be essentially new installations because this is a new application that they had not foreseen. So that you could consider that a type of a greenfield application.

So for the substrate people, it will be incremental capacity, would be added on our machines. And for the device people, this is an open opportunity to win a position that we didn't have or nobody has.

And lastly, we said the machine was -- we originally thought it was going to ship in the latter half of the year, in Q4. That's not happening. We do think we're going to ship it in March, April time frame is with what we're being talked about right now. The customer that's going to get the first one, although they haven't placed the order, they still have to fix a facility, they got to add a room, so we're unsure of the final shipping day. But we expect to be able to announce something fairly soon when we do.

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Operator [27]

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There are no further questions at this time. I will now hand back to Mr. Cutini for closing remarks.

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [28]

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Thank you, operator. I'll conclude again by saying we appreciate the support of our shareholders, and everybody here is working hard to get the new machines out and show you that we can perform. Thank you all.