Omni-Lite Industries Canada Inc. (OML) Earnings Call Transcript & Summary

Okay. Ladies and gentlemen, please allow me to introduce myself. I'm David Robbins, the Chief Executive Officer of the Corporation and a member of the Board. I'll be acting as the Chairman of this meeting. With me here today is Roger Dent, a Director of the Corporation. Additionally, the complete Board of Directors and CFO, Carl Lueders. It is now 11:00 a.m., and I would ask that the annual meeting of the shareholders come to order. I would like to remind all those present that this is a meeting of shareholders of the Corporation and that although other persons are present who we are pleased to welcome at the meeting, only shareholders or their proxies are entitled to participate in the business of the meeting. As noted in the management information circular circulated in connection with the meeting, shareholders were encouraged to vote on the matters before the meeting by proxy. We welcome those that have accessed the webcast and remind participants that shareholders would not be able to vote over the webcast but will be able to ask questions of management at the conclusion of the meeting. In accordance with the bylaws of the Corporation, I will act as Chairman of the meeting and Roger Dent will act as Secretary for the meeting. With the consent of the meeting, I appoint Elissa Rojo of Computershare Trust Company of Canada to act as the scrutineer of the meeting. In view of the need to attend to a number of formal matters, certain shareholders have volunteered to move and second resolutions where required. While this procedure will facilitate the handling of the formal matters, any shareholder or proxy holder may speak on a matter when that matter is before the meeting. When I recognize you, please give your name and state whether you are a shareholder or a proxy holder. I am tabling copies of the audited financial statements for the fiscal year ended December 31, 2020, and the auditor's report therein. Unless there is an objection, I will dispense with the reading of the auditor's report. During the full portion of this meeting, I would ask you to limit your questions and discussions to those matters directly relating to the specific matters being considered. Management will be available to answer any other questions you may have following the meeting. Notice and proxy materials for this meeting were duly mailed to shareholders and additional copies are available here today. Would the Secretary please report whether there is a quorum present?

Under the bylaws of the Corporation, a quorum for any meeting of shareholders shall be 2 persons, each of whom is a shareholder or entitled to attend the meeting and vote as proxy holder. In accordance with the preliminary attendance figures received from the scrutineer, it is clear that we have a quorum of shareholders. A copy of the final report of the scrutineer will be annexed to the minutes of the meeting.

I am advised that there is a quorum present. As a quorum is present, I declare this meeting to be regularly called and properly constituted for the transaction of business. The first item of business for which this meeting has been called is to set the number of directors of the Corporation at 5 and to elect the 5 directors to hold office until the next Annual Meeting of Shareholders of the Corporation or until their successor is duly elected or appointed. Five candidates have been proposed by management. The Secretary will now read their names.

The names of the nominees are David Robbins, Charles Samkoff, Roger Dent, Patrick Hutchins and Jan Holland.

I nominate the 5 persons whose names have been read to this meeting by the Secretary for election as directors of the Corporation and that the number of directors of the Corporation be set at 5. Does any shareholder or proxy holder wish to make any further nominations? Since there are no further nominations, I declare the nominations closed. Five persons have been nominated as directors, and there are 5 directors to be elected. Accordingly, I propose with the consent of the meeting, not to take a formal vote on the election of directors. I therefore declare that the 5 nominees whose names have been read by the Secretary have been elected directors of the Corporation and the number of directors of the Corporation has been set at 5. The next item of business is to consider and if thought appropriate, to approve a resolution reappointing MNP LLP as auditor of the Corporation. In order to be approved, the resolution must be passed by a majority of the votes cast therein. Can I have a motion for the approval of this resolution?

Mr. Chairman, I hereby move that MNP LLP be reappointed auditor of Corporation had a remuneration to be fixed by the Board of Directors of the Corporation.

I second the motion.

Is there any discussion? The meeting will now vote on the motion. Based on proxies received in favor of management, if a ballot vote were conducted on this matter, enough of the votes eligible to be cast at this meeting would be voted in favor of the reappointment of MNP LLP as the Corporation's auditors. Therefore, I propose to take the vote by way of a show of hands. Will those in favor of the motion, please signify by raising your hands? [Voting]

Those opposed? [Voting]

The motion is carried. I declare MNP LLP has been reappointed auditors of the Corporation in accordance with the motion. The next item of business for which this meeting has been called is to consider and if thought appropriate, to approve an ordinary resolution approving the option plan of the Corporation, as more particularly described in the management information circular. In order to be approved, this resolution must be approved by a majority of the votes cast therein. May I have a motion for the approval of this resolution?

Mr. Chairman, I hereby move that the resolution approving the option plan in the form set out in the management information circular be passed without variation.

I second the motion.

Is there any discussion? The meeting will now vote on the motion. Based on proxies received in favor of management, if a ballot vote were conducted on this matter, enough votes eligible to be cast at this meeting would be voted in favor of the option plan of the Corporation. Therefore, I propose to take the vote by way of show of hands. Will those in favor of the motion, please signify by raising your hands? [Voting]

Those opposed? [Voting]

The motion is carried. I declare the option plan of the Corporation has been approved in accordance with the motion. Is there any other business to come before the meeting? As there is no further business, I declare the formal portion of this meeting terminated. I'd like to take the opportunity to just give a little update and status on Omni-Lite. So Omni-Lite has been active over the last 6 months, taking steps towards our long-term strategic and financial goals. With this recently announced acquisition of DP Cast, we have taken an important step to help realize Omni-Lite's vision to build a leading platform manufacturer of precision engineered components, supporting valuable long-lived, ruggedized assets and programs in aerospace, transportation, national defense and industrial automation markets. Our technology platform now is constituted of mechanical and electromechanical elements of metal forming, metal casting and microelectronic manufacturing. The DP Cast transaction embodied 2 major elements. First, we acquired DP Cast for approximately $5.6 million, comprised of the issuance of 3.1 million shares of Omni-Lite and $300,000 in cash or as of the closing of the transaction, valued at approximately $2.6 million. And we assumed and repaid DP Cast's outstanding net debt of approximately $3 million. And today, we expect to close on the private placement of 1 million shares of Omni-Lite common stock at a price per share of CAD 1.25 that will result in cash proceeds of approximately USD 1 million. As a result of these 2 transactions, Omni-Lite will have issued outstanding shares of approximately [indiscernible] million. The shareholders of DP Cast will own in the aggregate, 26.4% of the combined company. And finally, after factoring in the net proceeds from our sale-leaseback transaction involving our California facility and completion of the DP Cast transaction, Omni-Lite will have no outstanding debt and approximately USD 2.5 million in cash and possess an asset base that can support an ABL borrowing capacity in excess of $4 million. For context, our balance sheet, as of September 30, 2021, the end of our third quarter, fiscal 2021 quarter, we had an outstanding debt of about $1.5 million and cash on hand of $1.4 million for a net debt of approximately $150,000. This translates to a positive swing in our net liquidity position of approximately USD 2.7 million and have acquired a strategic asset valued at $5.6 million that has a current revenue run rate in excess of USD 4 million and expect its organic growth to be consistent with our long-term model objectives. As we head into 2022, we are aiming to capture new product wins in each operating leverage, leveraging its core ability to engineer precision components for our customers' application specific needs and deliver meaningful total value. And we continue to explore the landscape for strategic acquisitions and vertical manufacturing operations, which enable higher value components and horizontal complementary manufacturing technologies. So that concludes any prepared remarks and open up the floor to any questions or discussions.

Can I jump in here? Is that okay? Can you hear?

Yes. [indiscernible].

Just a question related to the private placement. [indiscernible] And if you can unpack that a little bit more, what is the message, I guess, you're trying to share with the market. Obviously, there's more value than the current share price, et cetera. But I'd love to visibly get -- a Tier 1 supplier, a Tier 2 supplier, et cetera. That could be [indiscernible] in the future? I'd just love to -- I know those details that you [ can't ] share, but just kind of -- the kind of the context would be helpful.

Well, so the private placement is members of DP Cast, ownership of DP Cast. So actually, in a way, Jan, you could -- why don't you answer directly because you're one of [indiscernible].

Sure. Happy to jump in here. Yes. So the subscription is by [indiscernible], which is one of our holding companies of our family. And we are big fans of the platform of Omni-Lite Designed Precision Castings and the operating entities within Omni-Lite. And we think there's a great future here that we got a bigger, more valuable opportunity. And yes, we believe that the share price undervalues the organization as it currently reflected on the market. And we're big supporters of increasing shareholder and stakeholder value as we go forward. We think there are excellent business prospects, both organically on the pipeline within all 3 of these operating enterprises and opportunities for vertical integration and transformational opportunities in here. So we're very enthusiastic. And we want to see this thing thrive and prosper, become much bigger than it is today.

I'll leave the questions. Anybody else in the interim, I might jump back in a second, sir. I might be the only person. So -- does anybody else have a question for me?

You may ask a question. Don't forget to unmute.

I'll jump back in. Just as it relates to the Cal Nano, it's been a piece that kind of sits off to the side. Has there been any movement at this stage just in terms of being able to release value for Omni-Lite? Just as really -- as you talked about, our last speaker has talked about is [ really ] funding those avenues for growth in the future. Another way to fund the growth is to get out of an investment, which is kind of, let's say, dead mind at this stage and get money to be argued. And they don't know what the current status and see if there's been improvements recently with the potential for growth. I'd love to hear a little bit more about Cal Nano in terms of a driver of acquisitions, whatever in the future, if we can release some funds.

Dave, do you want me to take that one?

Sure.

So I'm Roger Dent. I'm a Director of Cal Nano as well as Omni-Lite. Cal Nano was started many years ago as basically a kind of a research project. And it has, over the period of years, been able to get itself to a breakeven position. Now in recent months, we have at Cal Nano put out a number of press releases referring to a thermoelectrics industry customer who has been coming to us for Spark Plasma Sintering parts. Our capability in that technical area is among the only capabilities in North America. So it's a unique scale, and that's why this customer has come to us. One thing -- Cal Nano just announced its results on Monday. And in the press release, we put in what we thought was a very interesting comment. I don't think many people paid much attention. But in the press release, we say that we are operating our Spark Plasma Sintering operation on a 2-shift basis. And we have never done this in the past, and I think it's pretty obvious why you would run an operation on a 2-shift basis, it's because you can't produce enough on 1-shift basis. So I think you can draw your own conclusions about where that will lead to revenue, but things are going well at Cal Nano. We don't expect this to be a -- as you've correctly described it in the past, a dead money investment. We have managed over the last couple of years to be -- to pay off the bank, 30,000 a quarter. And Omni-Lite, many years ago, was contingently liable for that. So we have been reducing contingent liability. But we are looking forward to hopefully having the capability to make a more obvious positive contribution to Omni-Lite.

Sorry. My name is [indiscernible]. I'm a shareholder. Maybe I'll just follow up on this question as well. In addition to our equity stake, the sort of loan that we have provided to Cal Nano has been accumulating, I think, interest. And just help us understand how you think about potentials converting that loan into additional equity given that it seems like things that Cal Nano are turning around. So please provide us some thoughts around just the opportunity to move that base into equity potential.

Chip in here, Dave or Roger.

Yes.

So Cal Nano is beginning to see some success. And we believe that's because we've just let them do their thing and start to work themselves into a good position. So yes, they owe us a lot of money and they are paying down, as Roger mentioned, the contingent loan, which our priority have been to get them to have that paid down. So we're out from underneath that and then to begin to pay down the $250,000 loan that we provided when the bank called their line of credit. So from a priority standpoint, get their term debt paid down, begin to pay down the line of credit loan, which we've advanced to them and then begin to pay down the larger funds that were advanced to help Cal Nano get up and running. So in that sort of set of priorities, how do we further monetize that? It really can only happen if Cal Nano can continue to grow as they have been. And then that opens up the door for us to monetize our equity investment. But if we were to try to do any of that at this point, it would be -- it would probably be fairly damaging to Cal Nano. So we've chosen this more conservative path, and we believe it's showing the results that we hoped it would at this point.

And what's the total accrued interest?

I'd have to -- yes, I'd have to go and take a look at our 10-Q, honestly. I think we disclosed it in every Q. So it's -- every quarterly report we provide with the principal balance with the interest balance is. So it should be easily available in there. May pay on the revolving credit loan, the $250,000 loan, that is paid currently every month.

Maybe if I can jump in back in. It's not related to the Cal Nano, it's just more kind of inflection points. This has been a long journey as an investor and thus basically the interest you get in the bank account is probably how most investors feel, if not [indiscernible] just net zero in terms of an investment, which is [indiscernible] for a long-time horizon. How now you've seen this roller coaster of big contract success for a bit and then kind of now we're in a much -- we're very thankful to the new management, tremendously thankful. Now with this acquisition, kind of how do you see -- I know you can't do forward-looking statements, but just kind of as of today, kind of the pieces fitting together. Is this what you envision to your -- or 2, 3 years ago with David and Carl to finally get to this point? I'd just love to get your kind of your thoughts in terms of that trajectory, the momentum that we've been building.

Sure. So I think that maybe the best way to characterize it for me is that going back to late 2018 and 2019, basically engaging our customers in a different way, just talking with their engineering teams being instead of moving the company away from sort of a scientific research project in a sense, just engage customers looking for precision components that we could manufacture where we're adding value. So we started down that path aggressively in 2019. In addition, we did put some business systems in place to help us with that, attaining AS9100. It's an important step to be able to, at least with aerospace and defense customers, you needed that. But we started really getting some traction. In 2019, we were growing organically. We were on pace to grow 25%. And that's both the Monzite and the recently acquired Monzite and Omni-Lite [ forging ]. We were getting new wins. And really, it's kind of that simple, right, that we were engaging our customers and looking at product wins that had an annuitized nature, right, that these are custom engineered products, not easily manufactured by any commoditized -- commodity manufacturers. And very often, we were, in a sense, supplying materials that our customers could make, but we could make better, right? So there was our value. And of course, COVID changed all that in a very dramatic matter. But I mean, the dynamic is still there. So in context with -- we anticipated and we're projecting to do acquisitions. Carl and my background as well as the board makeup is very powerful. And so our intention was to always do acquisitions. I think 2020 and COVID kind of stalled that process a little bit, it stalled the sale-leaseback as we sort of dealt with that. But being able to do this transaction is very much kind of in line with where we hope to go. The DP Cast fits very nicely. Their customer engagement is the same. They've got a good customer relationship. They -- how they go to market is very, very similar to what we're doing. So it's an easy -- it adds in the right areas. It's kind of -- in terms of acquisitions, there's both the horizontal kind of -- which this is, is broadening our base of precision component technology, and it's a good step because as we have a little bit more competencies to address, let's say, a particular platform. In this case, DP Cast, Pratt & Whitney as a platform, there is opportunities to now have forged components into a Pratt & Whitney, a DP Cast customer that wouldn't easily be attained prior. And it works in reverse too is there's castings that DP Cast could do that could address applications. So we're really excited about being able to bring on a technology like casting. It's efficient. It has some real value. It's a competency that if you have certain engineering capabilities, which DP does, you can produce things that aren't easy to produce, that have value in things like jet engines and other industrial nuclear applications, too. So we're very excited about how that fits. And yes, per plan, [ John ], that was what we kind of set out to do. I think there's opportunity also with some verticals. I think dating back to -- even the thought process, the investment thesis of what we're trying to do is there's an opportunity to move up the food chain, if you will, and not just supply sort of subcomponents but finished components. So that's something we're actively looking at as we -- as we're out there looking at other acquisition targets and philosophy is in that area, too. So -- yes, I mean, other than the COVID sort of having a little 1 year dealing with that, I mean, things are -- and especially kind of having done this transaction, I can say, yes, we're fortunate ahead like we intended.

One last comment, but I'll let someone else go in between -- If there's any other questions.

May I just add one other comment to what Dave said. One of the things with Designed Precision Casting is one of the benefits is when you win a product suite or a product tool, you have the product for the life of tool. So in the case of Pratt, as an example, we started building parts for the PT6 engine in 1963, and we still make those parts today of those tools. And we're on 13 of Pratt & Whitney's engine platform, which is all of them. And so across the customer base, when you win the tools, you've got it for the life of the tool. So it's very good, long-standing business as long as you continue to have customer-focused service and quality.

Is there anybody else just before [indiscernible] comment? Anybody else?

Just a food for thought for the Board of Directors. I haven't checked recently, but I know like a year or 2 years ago, when I checked just in terms of ownership of the Board of Directors, I would just encourage the Board of Directors, we see value in the open market just to support the company in a way that helps Dave tell the story that our Board of Directors are also purchasing shares in the open market, food for thought for the Board of Directors because you recall in the past, the ownership was very low, 25,000 shares or I don't know what it was for some of the Board of Directors. But I just [indiscernible] a comment. So I think that's it for me. I just listen -- thank you so much. We're all appreciative of all your great work, sir.

Just one follow-up question on Cal Nano. It seems like the interest is accrued at 2.9%, 2.89%. Maybe help us understand why -- given that the [indiscernible] 2.89% is well below our cost of capital. Help me understand how we should have arrived that number and why it's the right number?

The 2.9% was generated as the minimum amount that we could charge a related party according to the IRS. So that's how we develop the number. It was developed a few years ago. That had been the approach that the company had taken all along with Cal Nano as a -- interested in developing the technology. And we just chose not to depart from that strategy.

And is this still the right number to use? Again, and it is sort of a [ separate public ] traded company. I appreciate Roger serving on both boards. It's a little bit on sort of [ conflict ] of interest. But as an investor on the line, I would say, lending money at 2.3% sounds like a really good deal for Cal Nano. And just [indiscernible] sort of your voice thoughts on does it make sense to revise the interest we're currently talking?

Good input. Let us take that under advisement and let us take that under advisement.

I think hopefully this year, Cal Nano will be sufficiently successful that we can renegotiate our arrangements in a way that we'll make everybody happy.

Any other questions or comments? If there are none, I'm -- I think this concludes this investor conference. And I appreciate everybody's attendance and attention.

And Investment. Thank you for being investing with us.

And continued investment.

Thank you. Thank you all.

Thank you.