CVD Equipment Corporation (CVV) CEO Leonard Rosenbaum on Q1 2019 Results - Earnings Call Transcript
CVD Equipment Corporation (NASDAQ:CVV) Q1 2019 Earnings Conference Call May 9, 2019 4:30 PM ET
Company Participants
Leonard Rosenbaum - Founder, Chairman, President and Chief Executive Officer
Thomas McNeill - Chief Financial Officer, Secretary & Treasurer
Conference Call Participants
Brett Reiss - Janney Montgomery Scott
Operator
Greetings, and welcome to CVD Equipment's 2019 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. [Operator Instructions] 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 Len Rosenbaum, President and CEO; and Tom McNeill, Chief Financial Officer. We have posted our earnings press release and call replay information to the Investor Relations section 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 are 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 the Risk Factors section of our 10-K for the year ended December 31, 2018.
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 would like to turn the call over to Len.
Leonard Rosenbaum
Good afternoon, everyone, and thank you for joining our earnings call. As previously mentioned, 2018 was a difficult year for CVD. And in the first quarter of 2019, we reported decreased revenue and a net loss of $2.2 million as a result of the second half of 2018 low order levels.
The first quarter of 2019, however, has started off with receipt of new orders amounting to approximately $6.5 million, and we anticipate improvement in order flow during the remainder of the year as compared to 2018. Further, the Company has accelerated its focus on the materials business now that the opening of the materials facility is in sight.
In 2017, the Company purchased the building for $14 million to house CVD Materials. During 2018, the Company invested $2.5 million in building improvements and machinery and an additional $400,000 in the first quarter of 2019 as well as other materials-related expenses.
With the operations at our new materials facility coming online during the third quarter of 2019 and our continued investment in CVD Materials, we are enhancing our marketing efforts and have started to showcase the materials operations to new and existing customers.
Additionally, we are underway and expect to complete the move of our MesoScribe operations from California to the new materials facility in New York with integration to be completed in July 2019. The consolidating of MesoScribe operations into our materials facility enhances our ability to execute on operational improvements and reduce costs.
During the first quarter, MesoScribe received two Phase I small business innovation research awards from the U.S. Air Force. The first award is related to the development of advanced temperature and heat flux sensors to support hypersonic flight system testing.
The second award is for development of a material, Direct Write printing system, utilizing MesoScribe's proprietary aperture system to deposit metallic and ceramic coatings for aero engine applications and eliminate the need for port masking during deposition.
The materials operations enhance our abilities to provide, one, corrosion-resistant coatings through our Tantaline subsidiary for medical, pharma, oil and gas applications; two, sensors through our MesoScribe subsidiary for defense, aerospace and turbine applications; and three, through our CVD Materials subsidiary for carbon composite materials, medical coatings, electronic substrate materials and further expansion into other coatings for defense, aerospace, medical and industrial applications.
The strategy CVD embarked on over two years ago to develop a materials business using CVD's technology and equipment manufacturing capability expands our product offerings, grows our revenue and diversifies our customer base. We are tapping into high-margin growth markets in corrosion-resistant medical, aerospace and defense coatings to reduce risk and flatten the uneven levels of our results. We are committed to returning to profitable quarterly results by Q1 2020.
With that, I would like to turn the call over to our CFO, Tom McNeill.
Thomas McNeill
Thank you, Len. In the first quarter, our revenue was $3.5 million as compared to $9.2 million in 2018, a decrease of $5.7 million or 62%, and our net loss was $2.2 million or $0.33 per share diluted as compared to net income of $600,000 or $0.09 per diluted share in 2018.
Our revenue decrease during the quarter was primarily attributable to the completion of large aerospace equipment orders received, which now represented $800,000 or approximately 22% of our revenue this quarter as compared to $4.4 million or approximately 47.5% of our revenue in 2018.
During the first quarter, we received new orders of approximately $6.5 million, and our order backlog at March 31, 2019, is approximately $6 million. The level of new orders received from customers in the second half of 2018, however, will continue to affect our revenue levels in the next one to two quarters. Our return to profitability depends upon, among other things, the continued receipt of higher levels of new equipment orders, the ramp-up of the materials business and managing our planned expenditures and operating expenses.
With respect to our liquidity, cash and cash equivalents were $11.3 million at March 31, 2019, as compared to $11.4 million at December 31, 2018, essentially unchanged. Working capital was $12.6 million at March 31, 2019, as compared to working capital of $15.4 million at December 31, 2018, a decrease of $2.8 million.
This decrease was primarily attributable to overall reduced sales and the resulting operating loss. $400,000 of capital invested in the quarter end March 31, 2019, primarily related to building improvements and machinery for the CVD Materials operation; and debt service payments of approximately $300,000, which includes payments on our investment in the CVD Materials building.
With respect to our cash receivable, the decrease of approximately $2 million from $4.1 million at December 31, 2018, to $2.1 million at March 31, 2019, was the result of normal collections and decreased revenue during the quarter.
While our cash is expected to decrease during the next quarter, we believe our continued cost containment measures to aligning expenses to order rates will reduce our operating losses and net cash usage while positioning the company to a return to profitability by Q1 2020.
As such, we believe our cash and cash equivalents positions, cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next 12 months.
I'll now turn the call back to the operator for your questions.
Question-and-Answer Session
Operator
Thank you. At this time, we will be conducting the question-and-answer session. [Operator Instructions] Our first question comes from the line of Brett Reiss with Janney Montgomery Scott. Please proceed with your question.
Brett Reiss
Hi, Leon. Hi, Tom. How are you doing?
Leonard Rosenbaum
Good afternoon.
Thomas McNeill
Hi. How are you?
Brett Reiss
I've got a number of questions. Can I ask a couple of them? And then will I be able to come back in the queue out of respect for other callers? Would that work for you guys?
Leonard Rosenbaum
Works for us.
Brett Reiss
Great. On the materials business, the key decision-makers of your customers, can you give me some sense of the lead times that you expect it's going to take these engineering teams or key opinion leaders to look at – kick the tires in what you have and then ultimately give us orders that put money in our pocket?
Leonard Rosenbaum
Some have already kicked the tires. They're waiting for the new facility to get online, okay, and we do have some orders.
Brett Reiss
Are we still – you said the new facility is in sight. You've use prior, you're shooting for the third quarter of 2019. When are we in there and up and running?
Leonard Rosenbaum
We're moving the equipment in as we speak. The gases were brought in, I think, the past week. We expect to be testing equipment in there during the latter part of this quarter and start operations sometime in the third quarter.
Brett Reiss
The lease-up of the new space, can you give us a progress report on that?
Leonard Rosenbaum
We have the proper permits for that, and we've been showing it. And hopefully, we'll report something positive shortly.
Brett Reiss
If you accomplish what you want to accomplish with the lease-up of the new space, can you give us some sense of what the economics are going to look like? Will the rent from the lease-up more than cover your mortgage payments? What does that look like when things are up and running?
Leonard Rosenbaum
Well, the rents are at market rate, okay, that we're looking at, and we expect it to be accretive to our needs in the new building. Beyond that, I'd really rather not comment.
Brett Reiss
Okay. The $400,000 in the first quarter that you spent on CapEx for the new building on top of the $2.5 million from 2018, have we reached – is that the end of what you need to spend on the new building?
Leonard Rosenbaum
Hopefully not, okay? I hope to be spending a lot more over the next three, four, five years as the building gets further expanded for the needs of the sales by Tantaline, MesoScribe and CVD Materials.
Brett Reiss
Okay. Now the large aerospace customer, is that absolutely – any recurring business for them? Is that dead, dead, dead in the water?
Leonard Rosenbaum
I've always used the words cautiously optimistic.
Brett Reiss
Look, can I probe that a little bit more? The equipment that you'd sold them to handle the aircraft composite engine flow, to your knowledge, was that enough to cover the volumes that are coming out of the facilities for this large aerocraft manufacturer?
Leonard Rosenbaum
Long term, I don't believe it is for them, but that's something that they would have to answer.
Brett Reiss
Right. The machines that you did sell them, do they have a – what's the useful – shelf life of these machines?
Leonard Rosenbaum
With proper maintenance and repair and et cetera, that'll be 20, 30 years.
Brett Reiss
Okay. To your knowledge, have they ordered comparable equipment from any other vendor?
Leonard Rosenbaum
Not to my direct knowledge. No.
Brett Reiss
Okay. I have other questions quite to ask – respect for other callers, I’m going to drop back. Thank you so far.
Operator
Thank you. [Operator Instructions] We do have a follow-up question coming from the line of Brett Reiss with Janney Montgomery Scott. Please proceed with your question.
Brett Reiss
Gentlemen, looks like you're stuck with me here. Yes. On April 16, this order of [First Nanosystems] to TAG Heuer, can you give us some sense of the size, scope and potential business that could flow from that relationship?
Leonard Rosenbaum
Well, it's not an order. It was an announcement of an actual operation of the equipment at the customer site.
Brett Reiss
Okay. With respect to the MesoScribe order with the Air Force, can you give us some color on what that is and what the potential magnitude of business of that might be?
Leonard Rosenbaum
Can you repeat the question, Brett, please?
Brett Reiss
Yes, the April 30 announcement of the order that MesoScribe got from the Air Force...
Leonard Rosenbaum
We had two SBIR contracts. Actually, we got three. There was a third one, I believe, in the fourth quarter of last year that we announced also. And what you're seeing is the technology that MesoScribe is capable of, starting to work its way through some of the beginnings of what may become production contracts later on. Right now, it's proving feasibility and capability, but they're also – already producing certain materials for the aerospace and defense market. This is just further continuation of new capabilities.
Brett Reiss
Okay. Could you give us an update on the – you filed for a patent of the novel fluid reactors. How is that going?
Leonard Rosenbaum
It's going very well in the lab. We expect that over the next year, two years, to move further forward with it. It's very new technology. We're looking for a potential partner with somebody in the medical industry to help move it further forward.
Brett Reiss
Okay. And that ties – I was going to ask you, any update on your intentions for the membrane oxygenator cartridge? So does that...
Leonard Rosenbaum
Well, that is the fluid reactor.
Brett Reiss
Okay. All right. Now a number of the Board members in January made some non-open market purchases of CVD stock at $3.99. Are you at liberty to say who was the seller?
Leonard Rosenbaum
I'm not cognizant of this, Brett. I mean I can look into it further.
Thomas McNeill
I think you might be referring to a grant of restricted stock as part of Board compensation.
Brett Reiss
Okay. All right, so it was not – okay...
Thomas McNeill
If you look at that, I think that's what you'll find.
Brett Reiss
Okay. Okay. It would be nice to see with the stock down here, some insight of buying to kind of give shareholders comfort that we all have confidence on what's going on here. It's not a question, just a fortuitous comment. Now what was the cash burn this quarter? And what do you think it will be for the coming year, Tom?
Thomas McNeill
Yes. Brett, for the quarter compared to December, cash for Q1 was down about $100,000. And basically, the operating loss – the cash operating loss was offset by the collections of the receivables. So about $2 million and change cash operating loss and that's about what our receivables were reduced by.
And so for the quarter, cash was flat. With the continued impacts of our cost containment measures, with improvement in order flow, we are working towards positioning the company to be profitable by Q1 2020. But there's obviously a variety of factors in play, but we're working towards that.
Brett Reiss
Will you reach cash flow breakeven prior to Q1 2020 when you look at your internal budgets?
Thomas McNeill
I think what we can say is based on continued progression of the order flows. We'll see progression towards that. And when the results come out, we'll let those stand for themselves.
Brett Reiss
Right.
Thomas McNeill
But I think the key is just the focus on driving the company towards profitability in 2020.
Brett Reiss
Right. Right. Now on order flows, when you announced the year-end figures on April 1, you had said at that time, you had $6 million of new orders. Now you have $6.5 million. So in basically April and the first week of May, we've gotten another $0.5 million in orders...?
Thomas McNeill
No. Look, I think the end of the year, we had total orders of approximately $6 million in Q1. When we completed the execution of those orders again within the quarter, January to March 31, the final number came in at just about $6.5 million.
Brett Reiss
Right, right.
Thomas McNeill
But it's just an adjustment to that approximate number.
Brett Reiss
Okay. Now before we got involved with this large industrial – aerospace customer, the old legacy businesses, the run rate was like around $6 million a quarter, $24 million for the year. That legacy business seems to have just fallen off a cliff. And I know, Len, you say it's always been lumpy. But is it lumpy or it's just not what it used to be? Can you talk to that a little bit?
Leonard Rosenbaum
Well, basically, it is lumpy. It's not where we fell off a cliff. It takes a little bit of time to get back to where we were. I think the first quarter sort of helps show that it's capable of being done. And we suspect that the rest of the year, we'll be in that magnitude.
Brett Reiss
Right, right. All right, gentlemen. Thank you for answering all my questions. I appreciate it.
Leonard Rosenbaum
You’re welcome.
Operator
Thank you. Our next question comes from the line of [Howard Morton], a Private Investor. Please proceed with your question.
Unidentified Analyst
Hi. Can you hear me?
Leonard Rosenbaum
Yes, we can.
Unidentified Analyst
Okay. Several years ago, you had hoped that you would outgrow the building that you bought, not for over at Tantaline, but just for the regular business. What I'm trying to figure out is sort of what Brett was talking about, why the old business, which we felt would have a lot of growth potential in different areas not just the aerospace, what happened? Is it also cyclical or – we were hoping to do $100 million by this time without even knowing about Tantaline. So that's the mystery to me. Where did the dream fade? Thank you.
Leonard Rosenbaum
Well, it's still there. The issue was that we got sidetracked significantly by the large aerospace company, which ordered a lot of equipment, which took a while to eat through it. It was more than we expected at one-time. And it's had its own issues now with the drop-off, but we will get the equipment business back up over a period of time.
Unidentified Analyst
Well, my follow-on comment is for years, you didn't have to sell. People came to you because you were so expert at this or that. So the aerospace company came to you because you were good at something. Now apparently, it seems you have to sell. Do you have that capability?
Leonard Rosenbaum
Well, we always sold. It's just that we sold in a different fashion than just going out and knocking on doors, okay? And we still do that. They still come to us every day.
Unidentified Analyst
Okay. Well, let's hope your future is a lot better than your current. And needless to say, you wish yourself luck and I do, too. So carry on.
Leonard Rosenbaum
Thank you.
Operator
[Operator Instructions] Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the floor back to Mr. Rosenbaum for any additional or concluding comments.
Leonard Rosenbaum
Thank you for joining our conference call, and I look forward to speaking with you at the next call. Thank you.
Operator
Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.