CVV 10-Q
Cvd Equipment Corp (CVV)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |
For the quarterly period ended | ||
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |
For the transition period from ____ to _____ | ||
Commission file number:
CVD EQUIPMENT CORPORATION
(Name of Registrant in Its Charter)
| | |
| State or Other Jurisdiction of | (I.R.S. Employer Identification No.) |
| | |
| (Address of principal executive offices) | |
(
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | |
Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act).
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes No ☑ |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
Index
| Part I - Financial Information | |
| Item 1 – Condensed Consolidated Financial Statements (Unaudited) |
|
| Condensed Consolidated Balance Sheets at June 30, 2021 and December 31, 2020 |
3 |
| Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020 |
4 |
| Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2021 and 2020 | 5 |
| Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020 | 6 |
| Notes to Condensed Consolidated Financial Statements |
7 |
| Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations |
25 |
| Item 3 – Quantitative and Qualitative Disclosures About Market Risk |
36 |
| Item 4 – Controls and Procedures |
36 |
| Part II - Other Information |
|
| Item 1 – Legal Proceedings |
37 |
| Item 1A-Risk Factors |
37 |
| Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds |
37 |
| Item 3 – Defaults Upon Senior Securities |
37 |
| Item 4 – Mine Safety Disclosures |
37 |
| Item 5 – Other Information |
37 |
| Item 6 – Exhibits |
37 |
| Signatures |
39 |
| Exhibit Index |
40 |
PART 1 – FINANCIAL INFORMATION
Item 1 – Financial Statements
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
| (Unaudited) | ||||||||
| June 30, 2021 | December 31, 2020 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Contract assets | ||||||||
| Inventories, net | ||||||||
| Taxes Receivable | ||||||||
| Other current assets | ||||||||
| Assets held for sale | ||||||||
| Total Current Assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current maturities of long-term debt | ||||||||
| Contract Liabilities | ||||||||
| Liabilities held for sale | ||||||||
| Total Current Liabilities | ||||||||
| Long-term debt, net of current portion | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies (see note 13) | ||||||||
| Stockholders’ Equity: | ||||||||
| Common stock - $ par value – shares authorized; issued and outstanding at June 30, 2021 and at December 31, 2020 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Research and development | ||||||||||||||||
| Selling and shipping | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on debt extinguishment | ||||||||||||||||
| Other Income | ||||||||||||||||
| Total other income (loss), net | ( | ) | ||||||||||||||
| Income (loss) before income tax | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax expense (benefit) | ( | ) | ||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| Basic income (loss) per common share | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| Diluted income (loss) per common share | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| Weighted average common shares | ||||||||||||||||
| Outstanding-basic | ||||||||||||||||
| Weighted average common shares | ||||||||||||||||
| Outstanding-diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
Three months ended June 30, 2021 and 2020
| Common stock | ||||||||||||||||||||
| Shares | Par Value | Additional paid-in Capital | Retained Earnings/ (Accumulated deficit) | Total | ||||||||||||||||
| Balance at April 1, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net income | - | |||||||||||||||||||
| Share-Based Compensation | ||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balance at April 1, 2020 | $ | $ | $ | $ | ||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Share-Based Compensation | ||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | ||||||||||||||||
Six months ended June 30, 2021 and 2020
| Common stock | ||||||||||||||||||||
| Shares | Par Value | Additional paid-in Capital | Retained Earnings (Accumulated deficit) | Total | ||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Share-Based Compensation | ||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | $ | ||||||||||||||||
| Net income | - | |||||||||||||||||||
| Share-Based Compensation | ||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash used in operating activities | ||||||||
| Gain on debt extinguishment | ( | ) | ||||||
| Stock-based compensation | ||||||||
| Depreciation and amortization | ||||||||
| Bad debt expense | ||||||||
| (Increase)/decrease in operating assets | ||||||||
| Accounts receivable | ( | ) | ||||||
| Contract assets | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ||||||
| Tax receivable | ( | ) | ||||||
| Other current assets | ||||||||
| Increase/(decrease) in operating liabilities | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Contract liabilities | ( | ) | ||||||
| Total adjustments | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from Payroll Protection Plan Loan | ||||||||
| Payments of long-term debt | ( | ) | ( | ) | ||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Net (decrease) increase in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Income taxes paid | $ | $ | ||||||
| Interest paid | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
NOTE 1:
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements for CVD Equipment Corporation and Subsidiaries (collectively “the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. They do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary in order to make the interim financials not misleading have been included and all such adjustments are of a normal recurring nature. The operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results that can be expected for the year ending December 31, 2021.
The condensed consolidated balance sheet as of December 31, 2020 has been derived from the audited consolidated financial statements at such date, as filed on Form 10-K with the SEC on March 31, 2021, but does not contain all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with that report.
All material intercompany balances and transactions have been eliminated in consolidation. In addition, certain reclassifications have been made to prior period consolidated financial statements to conform to the current period presentation.
BUSINESS DEVELOPMENTS
In January 2021, the Company’s Board of Directors concluded that a change in the Company’s business strategy and direction was necessary and appointed Emmanuel Lakios as President and Chief Executive Officer (previously our Vice-President- Sales and Marketing) to, among other things, evaluate the Company’s business strategy and operations. Based on this evaluation, due to the continuing losses and significant investments required to continue in the Materials business, the Board concluded that our primary focus should be on the core equipment business and that the Materials Business strategy should be revised, with some of its current element’s potentially minimized or ceased. Based upon an analysis, including forecasted continued losses and negative cash flows for the Tantaline product line, the Company has implemented plans to eliminate further investment in our Tantaline product line. In addition, we recorded an impairment charge of $
NOTE 1: (continued)
During February 2021, in order to increase the Company’s liquidity and to provide necessary working capital to support the Company’s on-going business and operations, the Board decided to sell its facility located at 555 North Research Place, Central Islip, NY (the “555 Building”). Management determined the 555 Building is not needed for present and future business operations and concluded that any remaining elements of the Materials Business can be consolidated into its remaining facility in Central Islip (the “355 Building”), which it believes can accommodate any needs for our growth for the foreseeable future. In April 2021, the Company completed the move of its Tantaline product line to the 355 Building, while the MesoScribe consolidation into the 355 Building has been initiated. All functions of the Tantaline product line have been consolidated into the Denmark office and the United States expenses related to Tantaline have ceased. On March 29, 2021, the Company entered into an agreement with Steel K, LLC for the sale of the 555 Building, and on July 26, 2021 the Company closed on the sale of the 555 Building. The sale price was $
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company designs, manufactures and sells custom chemical vapor deposition equipment through contractual agreements. These system sales require the Company to deliver functioning equipment that is generally completed within three to eighteen months from commencement of order acceptance. The Company recognizes revenue over time by using an input method based on costs incurred as it depicts the Company’s progress toward satisfaction of the performance obligation. Under this method, revenue arising from fixed price contracts is recognized as work is performed based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligations, typically within three months to eighteen months.
Incurred costs include all direct material and labor costs and those indirect costs related to contract performance, such as supplies, tools, repairs and depreciation costs. Contract material costs are included in incurred costs when the project materials have been purchased or moved to work in process, and installed, as required by the project’s engineering design. Cost based input methods of revenue recognition require the Company to make estimates of costs to complete the projects. In making such estimates, significant judgment is required to evaluate assumptions related to the costs to complete the projects, including materials, labor and other system costs. If the estimated total costs on any contract are greater than the net contract revenues, the Company recognizes the entire estimated loss in the period the loss becomes known and can be reasonably estimated.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition (continued)
“Contract assets,” include unbilled amounts typically resulting from system sales under contracts and revenue recognized exceeds the amount billed to the customer. The amount may not exceed their estimated net realizable value. Contract assets are classified as current based on our contract operating cycle.
“Contract liabilities,” include advance payments and billings in excess of revenue recognized. The Company typically receives down payments upon receipt of order and progress payments during the manufacturing cycle. Contract liabilities are classified as current based on our contract operating cycle and reported on a contract-by-contract basis, net of revenue recognized, at the end of each reporting period.
For outright sales of products, revenue is recognized when control of the promised products or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services (the transaction price). A performance obligation is a promise in a contract to transfer a distinct product or service to a customer and is the unit of account under ASC 606, “Revenue from Contracts with Customers”.
Recent Accounting Standards
In June 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326), which require that financial assets measured at amortized cost be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the increase or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. On November 15, 2019, the FASB delayed the effective date for smaller reporting companies. The amendments in this update are now effective for fiscal years beginning after December 15, 2022 and interim periods within those annual periods. We are currently evaluating the effect of this update on our consolidated financial statements.
We believe there is no additional new accounting guidance adopted, but not yet effective that is relevant to the readers of our financial statements. However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on our financial reporting.
NOTE 3: CONCENTRATION OF CREDIT RISK
Cash and cash equivalents
The Company had cash and cash equivalents of $
The Company places most of its temporary cash investments with financial institutions, which from time to time may exceed the Federal Deposit Insurance Corporation limit. The amount at risk at June 30, 2021 and December 31, 2020 was $
Sales concentration
Revenue from a single customer in any one period can exceed 10% of our total revenues. During the three months ended June 30, 2021, customers exceeded 10%, and represented
Accounts receivable
The Company sells products and services to various companies across several industries in the ordinary course of business. The Company performs ongoing credit evaluations to assess the probability of accounts receivable collection based on a number of factors, including past transaction experience, evaluation of their credit history and review of the invoicing terms of the contract to determine the financial strength of its customers. The Company also maintains allowances for anticipated losses. At June 30, 2021, customers exceeded 10% of the accounts receivable balance, representing in total, and at December 31, 2020 customers represented of the accounts receivable balance.
NOTE 4: REVENUE DISAGGREGATION
The following table represents a disaggregation of revenue for the three and six months ended June 30, 2021 and 2020 (in thousands):
| Three Month's Ending June 30, 2021 | ||||||||||||
| Over time | Point in time | Total | ||||||||||
| Aerospace | $ | $ | $ | |||||||||
| Industrial | $ | $ | $ | |||||||||
| Research | $ | $ | $ | |||||||||
| Total | $ | $ | $ | |||||||||
| Three Month's Ending June 30, 2020 | ||||||||||||
| Over time | Point in time | Total | ||||||||||
| Aerospace | $ | $ | $ | |||||||||
| Industrial | $ | $ | $ | |||||||||
| Research | $ | $ | $ | |||||||||
| Total | $ | $ | $ | |||||||||
| Six Month's Ending June 30, 2021 | ||||||||||||
| Over time | Point in time | Total | ||||||||||
| Aerospace | $ | $ | $ | |||||||||
| Industrial | $ | $ | $ | |||||||||
| Research | $ | $ | $ | |||||||||
| Total | $ | $ | $ | |||||||||
| Six Month's Ending June 30, 2020 | ||||||||||||
| Over time | Point in time | Total | ||||||||||
| Aerospace | $ | $ | $ | |||||||||
| Industrial | $ | $ | $ | |||||||||
| Research | $ | $ | $ | |||||||||
| Total | $ | $ | $ | |||||||||
NOTE 4: REVENUE DISAGGREGATION (continued)
The Company has unrecognized contract revenue of approximately $
Judgment is required to evaluate assumptions including the amount of net contract revenues and the total estimated costs to determine our progress towards contract completion and to calculate the corresponding amount of revenue to recognize.
Changes in estimates for sales of systems occur for a variety of reasons, including but not limited to (i) build accelerations or delays, (ii) product cost forecast changes, (iii) cost related change orders or add-ons, or (iv) changes in other information used to estimate costs. Changes in estimates may have a material effect on the Company’s consolidated statements of operations.
Contract Assets and Liabilities
Contract assets consist of (i) retainage which represent the earned, but unbilled, portion for which payment is deferred by the customer until certain contractual milestones are met; and (ii) unbilled receivables which represent revenue that has been recognized in advance of billing the customer, which is common for long-term contracts. Contract liabilities consist of customer advances and billings in excess of revenue recognized.
During the six months ended June 30, 2021 and 2020, the increase in contract assets of approximately million and million, respectively, was the result of work performed in excess of billings which are based upon project milestones.
Contract assets and contract liabilities on input method type contracts in progress are summarized as follows:
| 2021 | ||||
| Costs incurred on contracts in progress | $ | |||
| Estimated earnings | ||||
| Billings to date | ( | ) | ||
| $ | ||||
| Deferred revenue related to non-systems contracts | ( | ) | ||
| Included in accompanying balance sheets | ||||
| Under the following captions: | ||||
| Contract assets | $ | |||
| Contract liabilities | $ | ( | ) | |
NOTE 5: INVENTORIES, NET
| Inventories consist of: | ||||||||
| June 30, 2021 | December 31, 2020 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Inventories | $ | $ | ||||||
NOTE 6: ACCOUNTS RECEIVABLE, NET
Accounts receivable are presented net of an allowance for doubtful accounts of approximately $
NOTE 7: LONG-TERM DEBT
The Company has a loan agreement with HSBC which is secured by a mortgage against our Central Islip, NY headquarters. The loan is payable in
On November 30, 2017, the Company purchased the premises located at 555 North Research Place, Central Islip, NY (the “555 Building”). The purchase price of the building was $
The Note was payable in
NOTE 7: LONG-TERM DEBT (continued)
The Company is in compliance with its financial covenant under the mortgage at June 30, 2021.
On April 21, 2020, the Company entered into a loan agreement (the “Loan Agreement”) with HSBC Bank USA, National Association pursuant to which the Company was granted a loan in the principal amount of $
The PPP loan, the obligation of which is represented by a note issued by the Company, was to mature on April 21, 2022 and bore interest at a rate of 1% per annum. The note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Under the terms of the PPP, all or a portion of the Loan may be forgiven, based upon payments made in the first twenty-four weeks following receipt of the proceeds, related to payroll costs, continue group health care benefits, utilities and mortgage interest on other debt obligations incurred before February 15, 2020. The Company filed an application for forgiveness in April 2021 and on June 14, 2021 the Company received a notification from its lender that on June 10, 2021 the SBA approved the Company’s PPP Loan forgiveness application and remitted payment to the lender for the entire principal amount of the PPP Loan and accrued interest. As a result, the Company has recognized in the three and six months ended June 30, 2021 Gain on debt extinguishment in the amount of $
NOTE 8: ASSET AND LIABILITIES HELD FOR SALE
In order to increase the Company’s liquidity and to provide necessary working capital to support its on-going business and operations, the Company has decided to sell the 555 Building. Management has determined the 555 Building was not needed for present and future business operations, and any remaining elements of the Materials Business can be consolidated into the 355 Building, which management believes can accommodate any needs for the Company’s growth for the foreseeable future.
On March 29, 2021, the Company entered into an agreement with Steel K, LLC for the sale of its 555 Building, and on July 26, 2021 the Company closed on the sale of the 555 Building. The sale price was $
NOTE 8: ASSET AND LIABILITIES HELD FOR SALE (continued)
Building, including interest and fees, in the amount of $
In addition, the Note related to the 555 Building was classified as part of current liabilities at June 30, 2021, Liabilities Held For Sale in the amount of $
NOTE 9: STOCK-BASED COMPENSATION EXPENSE
The Company recorded, as part of general and administrative expense, $
A summary of the stock option activity related to the 2001 Stock Option Plans, the 2007 Share Incentive Plan and the 2016 Share Incentive Plan for the period from January 1, 2021 through June 30, 2021 are as follows:
NOTE 9: STOCK-BASED COMPENSATION EXPENSE (continued)
| 2001 Non-Qualified Stock Option Plan | ||||||||||||||||||||||||
| Beginning | Granted | Exercised | Canceled | Ending | ||||||||||||||||||||
| Balance | During | During | During | Balance | ||||||||||||||||||||
| Outstanding | Period | Period | Period | Outstanding | Exercisable | |||||||||||||||||||
| Number of shares | ( | ) | ||||||||||||||||||||||
| Weighted average exercise price per share | $ | $ | ||||||||||||||||||||||
| 2007 Share Incentive Plan | ||||||||||||||||||||||||
| Beginning | Granted | Exercised | Canceled | Ending | ||||||||||||||||||||
| Balance | During | During | During | Balance | ||||||||||||||||||||
| Outstanding | Period | Period | Period | Outstanding | Exercisable | |||||||||||||||||||
| Number of shares | ||||||||||||||||||||||||
| Weighted average exercise price per share | $ | $ | $ | |||||||||||||||||||||
| 2016 Share Incentive Plan | ||||||||||||||||||||||||
| Beginning | Granted | Exercised | Canceled | Ending | ||||||||||||||||||||
| Balance | During | During | During | Balance | ||||||||||||||||||||
| Outstanding | Period | Period | Period | Outstanding | Exercisable | |||||||||||||||||||
| Number of shares | ||||||||||||||||||||||||
| Weighted average exercise price per share | $ | $ | $ | $ | ||||||||||||||||||||
For the six months ended June 30, 2021, the Company granted
| Stock Price | $ | |||
| Exercise Price | $ | |||
| Dividend yield | % | |||
| Expected volatility | % | |||
| Risk-Free interest rate | % | |||
| Expected life (in years) |
NOTE 9: STOCK-BASED COMPENSATION EXPENSE (continued)
The Company has a total of
The following table summarizes information about the outstanding and exercisable options at June 30, 2021.
| Options Outstanding | Options Exercisable | ||||||||||||||||||||||||||||||
| Weighted | Weighted | Weighted | |||||||||||||||||||||||||||||
| Average | Average | Average | |||||||||||||||||||||||||||||
| Exercise | Number | Remaining | Exercise | Intrinsic | Number | Exercise | Intrinsic | ||||||||||||||||||||||||
| Price Range | Outstanding | Contractual | Price | Value | Exercisable | Price | Value | ||||||||||||||||||||||||
| $4.00 | $ | $ | $ | $ | |||||||||||||||||||||||||||
| $7.01 | $ | $ | $ | $ | |||||||||||||||||||||||||||
| $10.01 | $ | $ | $ | $ | |||||||||||||||||||||||||||
| $12.01 | $ | $ | $ | $ | |||||||||||||||||||||||||||
Restricted Stock Awards
The following table summarizes restricted stock awards for the six months ended June 30, 2021:
| Weighted | ||||||||
| Shares of | Average Grant | |||||||
| Restricted | Date Fair | |||||||
| Stock | Value | |||||||
| Unvested outstanding at December 31, 2020 | $ | |||||||
| Granted | $ | |||||||
| Vested | $ | |||||||
| Forfeited/Cancelled | ( | ) | $ | |||||
| Unvested outstanding at June 30, 2021 | $ | |||||||
The fair value of the outstanding restricted stock awards will be recorded as stock compensation expense over the vesting period. As of June 30, 2021, there was $
NOTE 9: STOCK-BASED COMPENSATION EXPENSE (continued)
Restricted Stock Units
The following table summarizes activity related to outstanding restricted stock units for the six months ended June 30, 2021:
| Weighted | ||||||||
| Shares of | Average Grant | |||||||
| Restricted | Date Fair | |||||||
| Stock Units | Value | |||||||
| Unvested outstanding at December 31, 2020 | $ | |||||||
| Granted | $ | |||||||
| Vested | ( | ) | $ | |||||
| Forfeited/Cancelled | (- | ) | $ | - - | ||||
| Unvested outstanding at June 30, 2021 | $ | |||||||
The total fair value of vested restricted stock units was $
The fair value of the outstanding restricted stock units will be recorded as stock compensation expense over the vesting period. As of June 30, 2021, there was $
NOTE 10: INCOME TAXES
As of June 30, 2021 and December 31, 2020, the Company has provided a full valuation allowance against all of the net deferred tax assets. This was based on management’s assessment, including the last three years of operating losses, that it is more likely than not that the net deferred tax assets may not be realized in the future. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted by the United States Congress. As a result of the enactment of the CARES Act, net operating losses (“NOL’s”) generated in 2018-2020 can now be carried back for five years and resulted in the Company recognizing approximately $
NOTE 11: EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings available to common shareholders (the numerator) by the weighted average number of common shares outstanding (the denominator) for the period presented. The computation of diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.
A reconciliation of basic to diluted shares used in the earnings per share calculation is as follows:
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Basic weighted average common shares outstanding | ||||||||||||||||
| Dilutive effect of options and unvested restricted shares | ||||||||||||||||
| Diluted weighted average shares outstanding | ||||||||||||||||
The following table represents common stock equivalents that were excluded from the computation of diluted earnings per share for the three and six months ended June 30, 2021 and 2020, because the effect of their inclusion would be anti-dilutive.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Stock Options | ||||||||||||||||
Stock options to purchase
The dilutive potential common shares on options is calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all options are used to repurchase common stock at market value. The number of shares remaining after the proceeds are exhausted represents the potential dilutive effect of the securities.
NOTE 12: SEGMENT REPORTING
The Company operates through (3) segments: CVD Equipment (“CVD”), Stainless Design Concepts (“SDC”) and CVD Materials (“Materials”). The CVD segment is utilized for chemical vapor deposition equipment manufacturing. SDC is the Company’s ultra-high purity manufacturing division in Saugerties, New York for gas control systems. The Materials segment was established to provide material coatings for aerospace, medical, electronic and other applications. The Company evaluates performance based on several factors, of which the primary financial measure is income or (loss) before taxes.
The Company’s corporate administration activities are reported in the Eliminations and Unallocated column. These activities primarily include intercompany profit, expenses related to certain corporate officers and support staff, expenses related to the Company’s Board of Directors, stock option expense for shares granted to corporate administration employees, certain consulting expenses, investor and shareholder relations activities, and all of the Company’s legal, auditing and professional fees, and interest expense.
Three Months Ended June 30,
(In thousands)
| Eliminations* and | ||||||||||||||||||||
| 2021 | CVD | SDC | Materials | Unallocated | Consolidated | |||||||||||||||
| Assets | $ | $ | $ | $ | $ | |||||||||||||||
| Revenue | ( | ) | ||||||||||||||||||
| Operating (loss) income | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Pretax income (loss) | ( | ) | ||||||||||||||||||
| 2020 | ||||||||||||||||||||
| Assets | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Revenue | ( | ) | ||||||||||||||||||
| Operating (loss) income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Pretax (loss) income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
NOTE 12: SEGMENT REPORTING (continued)
Six Months Ended June 30,
(In thousands)
| Eliminations* and | ||||||||||||||||||||
| 2021 | CVD | SDC | Materials | Unallocated | Consolidated | |||||||||||||||
| Revenue | ( | ) | ||||||||||||||||||
| Operating (loss) income | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Pretax income (loss) | ( | ) | ( | ) | ||||||||||||||||
| 2020 | ||||||||||||||||||||
| Revenue | ( | ) | ||||||||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Pretax income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||||||
*All elimination entries represent intersegment revenues eliminated in consolidation for external financial reporting.
NOTE 13: SIGNIFICANT EVENTS- CORONAVIRUS (COVID-19)
The Company has been actively monitoring the coronavirus (COVID-19) outbreak and resulting pandemic and its impact on both the global economic and operating environment and specifically on its impact to the Company, its employees, its operations and its financial condition. In March 2020, the World Health Organization recognized the COVID-19 outbreak as a pandemic based on the global spread of the disease, the severity of illnesses it causes and its effects on society. In response to the COVID-19 outbreak, the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations, including complete or partial government shutdowns of many schools and businesses, including our Company, and advising or requiring individuals to limit or forego their time outside of their homes. Accordingly, the COVID-19 outbreak has severely restricted the level of economic activity in many countries, including the United States, and continues to materially and adversely impact global economic activity. In particular, the aerospace sector, for which the Company relies on a significant part of its business, has been faced with significant reductions to its business due to lack of air travel. The Company’s new order levels commencing in the first quarter of 2020, continuing into the first quarter of 2021 have seen substantial reductions, while new orders in the second quarter of 2021 where substantially higher at approximately $
NOTE 14: SUBSEQUENT EVENTS – SALE OF 555 BUILDING
On March 29, 2021, the Company entered into an agreement with Steel K, LLC for the sale of its 555 Building, and on July 26, 2021 the Company closed on the sale of the 555 Building. The sale price was $
In addition, the Note related to the 555 Building was classified as part of current liabilities at June 30, 2021, Liabilities Held For Sale in the amount of $
NOTE 14: SUBSEQUENT EVENTS – SALE OF 555 BUILDING (continued)
Below represents the Proforma Balance Sheet with respect to the July 26, 2021 sale of the 555 Building:
| Proforma | Proforma | |||||||||||
| June 30, 2021 | Adjustments | June 30, 2021 | ||||||||||
| ASSETS | ||||||||||||
| Current Assets | ||||||||||||
| Cash and cash equivalents | $ | $ | (1) | $ | ||||||||
| Accounts receivable, net | ||||||||||||
| Contract assets | ||||||||||||
| Inventories, net | ||||||||||||
| Taxes Receivable | ||||||||||||
| Other current assets | ( | ) | (2) | |||||||||
| Assets held for sale | ( | ) | (3) | - | ||||||||
| Total Current Assets | ( | ) | ||||||||||
| - | ||||||||||||
| Property, plant and equipment, net | ||||||||||||
| Intangible assets, net | ||||||||||||
| Other assets | ||||||||||||
| Total Assets | $ | $ | ( | ) | $ | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
| Current Liabilities | ||||||||||||
| Accounts payable | $ | $ | ||||||||||
| Accrued expenses | ( | ) | (4) | |||||||||
| Current maturities of long-term debt | ||||||||||||
| Contract Liabilities | ||||||||||||
| Liabilities held for sale | ( | ) | (5) | - | ||||||||
| Total Current Liabilities | ( | ) | ||||||||||
| Long-term debt, net of current portion | ||||||||||||
| Total Liabilities | ( | ) | ||||||||||
| Commitments and contingencies (see note 13) | ||||||||||||
| Stockholders’ Equity: | ||||||||||||
| Common stock - $ par value – shares authorized; issued and outstanding at June 30, 2021 and at December 31, 2020 | ||||||||||||
| Additional paid-in capital | ||||||||||||
| Retained earnings | ( | ) | (6) | |||||||||
| Total Stockholders’ Equity | ||||||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ( | ) | $ | |||||||
NOTE 14: SUBSEQUENT EVENTS – SALE OF 555 BUILDING (continued)
Footnotes to the above Proforma Balance Sheet.
| (1) | Net proceeds from sale of building, net of full payment of 555 Building mortgage, and related closing fees. |
| (2) | Receipt of apportionment of prepaid Pilot taxes, and broker fees on rental space at 555 Building. |
| (3) | Building related assets sold. |
| (4) | Payment of 555 Building tenant escrow deposit to buyer of 555 Building. |
| (5) | Mortgage at 555 Building paid off at closing of sale of building. |
| (6) | Approximate net income from sale of building net of related costs |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Except for historical information contained herein, this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, as amended. These statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Important assumptions and other factors that could cause actual results to differ materially from those in the forward-looking statements, include but are not limited to: competition in the Company’s existing and potential future product lines of business; the Company’s ability to obtain financing on acceptable terms if and when needed; uncertainty as to the Company’s future profitability, uncertainty as to the future profitability of acquired businesses or product lines, uncertainty as to any future expansion of the Company and the effect of the novel coronavirus (COVID-19) on our business and operations, and those of our customers, suppliers and other third parties. Other factors and assumptions not identified above were also involved in the derivation of these forward-looking statements and the failure of such assumptions to be realized as well as other factors may also cause actual results to differ materially from those projected. The Company assumes no obligation to update these forward looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements. Past results are no guaranty of future performance. You should not place undue reliance on any forward-looking statements, which speak only as of the dates they are made. When used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “plans,” “intends,” “will” and similar expressions are intended to identify forward-looking statements.
Coronavirus (COVID-19)
We have been actively monitoring the coronavirus ("COVID-19") outbreak and its impact globally. Our primary focus to this point has been to ensure the health and safety of our employees. To that end, we have adopted social distancing practices where appropriate, implemented travel restrictions, and have taken actions to ensure that our facilities are cleaned and sanitized regularly. These are novel and challenging times and the magnitude of this crisis is requiring us to consider all options to promote the safety of employees, including, where appropriate, or where required to comply with foreign, national, state or local governmental authority recommendations, guidelines, and/or mandates, the temporary suspension of work at certain of our locations and production facilities to protect employees and curb the spread of the coronavirus. All of these actions have adversely impacted our operating results. In particular, the aerospace sector, for which we rely on for a significant part of our business, has been faced with significant reductions to its business due to lack of air travel. Due to the timing of the COVID-19 outbreak, our new order levels during the year ended December 31, 2020 and into the first quarter of 2021 have seen substantial reductions, while new orders in the second quarter of 2021 where substantially higher at approximately $6.0 million, and which have materially and adversely affected revenues commencing in our second quarter of 2020. While the financial results for the Company’s first quarter of 2020 reflected the initial impact of COVID-19, and the year ended December 31, 2020 and the six months ended June 30 2021 reflected a substantial adverse effect, we are unable to predict the extent of the impact the pandemic will have on our financial position and operating results for the remainder of 2021 due to numerous uncertainties (including the impact of the COVID Delta variant), but the impact could be material during any future period affected either directly or indirectly by this pandemic. The longer-term impacts from the outbreak are highly uncertain and cannot be predicted.
Current Developments
Historically, we have derived substantially all of our revenues through our custom equipment business and our Stainless Design Concepts (“SDC”) gas management and chemical delivery control systems segment. The marketing, sale and manufacture of our products, requires a lengthy sales cycle ranging from several months to over more than one year before we can complete production and delivery. Also, demand for our equipment and related consumable products and services may be volatile as a result of sudden changes in market conditions, competition and other factors. This can and has resulted in substantial volatility in our revenue stream.
In order to address this sales volatility, we have attempted to diversify and expand our business into providing material products and services. This strategy included the development of our capabilities to provide materials coatings and surface treatments for targeted customer / market requirements (the “Material Business”). With this objective in mind, we acquired Tantaline in December 2016 and MesoScribe in October 2017. In order to facilitate these new lines of businesses, we purchased a building to house both operating subsidiaries for $13,850,000. This 180,000 square foot building (the “555 Building”) was planned to house the Material Business in the United States and provide adequate space for the anticipated growth of these businesses. In addition, we also maintain a 130,000 square foot building (the “355 Building”), which houses the equipment products portion of our business as well as our corporate headquarters.
We invested approximately $1.6 million, $2.7 million and $2.5 million during 2020, 2019 and 2018, respectively, in building improvements, machinery, and other expenses related primarily to the Materials Business.
The projected growth of the Materials Business has not met expectations. Although we have made substantial investments in facilities, equipment and acquisitions in furtherance of our strategy, the foregoing has proven to be a significant drain on our finances and our liquidity. Since 2018 revenues for the Materials Business have been $1,700,000 in 2018, $1,600,000 in 2019 and $2,300,000 in 2020, with operating losses, exclusive of a $3.6 million impairment charge, recorded in all years for a total loss of $2.5 million. These cumulative results are due to operating losses from the Tantaline operations offset by operating profits of $.5 million from the MesoScribe operations. In the six months ended June 30, 2021 the Materials Business had revenue of $1.7 million and operating income of $.4 million. The operating income was due to operating income from the Tantaline and Mesoscribe operations.
Furthermore, our overall revenues have declined from $41.1 million in 2017 to $16.9 million in 2020. Cumulative operating losses, exclusive of a $3.6 million impairment charge, for the last three years (2018-2020) totaled ($14.5 million), which are comprised of 2018 ($5.3 million), 2019 ($5.0 million) and 2020 ($4.2 million). As a result of these continuing losses, and the investments in the Materials Business, our cash balances have declined from $21.7 million at December 31, 2016 to $7.7 million as of December 31, 2020 and $5.4 million at June 30, 2021, and liquidity has been strained. Contributing to and compounding this decline, is the negative effect the COVID-19 crisis has had on the aerospace industry, which resulted from reduced travel and reduction of industry gas turbine engine sales. Aerospace sales in recent years have represented as much as 60% of our total revenue.
Our mortgage debt on the 355 Building and 555 Building, respectively, was $1.9 million and $9.1 million, at June 30 2021. The 355 Building mortgage debt matures in March 2022, while the 555 Building mortgage debt was satisfied in full on July 26, 2021 as a result of the sale of that building (see below for details on the sale).
In January 2021, our Board of Directors concluded that we needed a change in direction and new leadership to evaluate our business strategy and operations, and take timely actions to halt and reverse the declines of the past few years. As such, they appointed Emmanuel Lakios as President and Chief Executive Officer (previously our Vice-President- Sales and Marketing). We began an intensive analysis of our entire business and operations including the Materials Business. Based upon that analysis we believe our primary focus should be on the core equipment business and that the Materials Business strategy should be revised, with some of its current elements potentially minimized or ceased. Based upon this analysis, we are forecasting continued losses and negative cash flow for our Tantaline product line and as a consequence, we have implemented plans to eliminate further investment in our Tantaline product line, which will result in the avoidance of approximately $1.5-$2.0 million in additional costs. In addition, we recorded an impairment charge of $3.6 million during the fourth quarter and year ended December 31, 2020. Based upon certain decisions and actions currently being reviewed, there may be additional costs to be incurred, inclusive of employee related and lease termination costs estimated at approximately $400,000.
In order to increase our liquidity and provide necessary working capital to support our on-going business and operations, we decided to sell the 555 Building in February 2021. We determined the 555 Building was not needed for present or future business operations and that any remaining elements of the Materials Business could be consolidated into the 355 Building, which we believe can accommodate any needs for our growth for the foreseeable future. In April 2021, we completed the move of our Tantaline product line to the 355 Building, while the MesoScribe consolidation into the 355 Building was initiated. All functions of the Tantaline product line have been consolidated into the Denmark office and the United States expenses related to Tantaline have ceased.
On March 29, 2021, we entered into an agreement with Steel K, LLC for the sale of our 555 Building, and on July 26, 2021, we closed on the sale of the 555 Building. The sale price was $24,360,000, subject to adjustment for apportionments, adjustments and credits. A portion of the sale proceeds was used to satisfy the existing mortgage debt on the 555 Building, including interest and fees, in the amount of $9,352,719, as well as various costs related to the closing of the transaction. The net proceeds to the Company were approximately $14,000,000.
Statement of Operations
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| June 30, |
June 30, |
|||||||||||||||
| 2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Revenue |
$ | 4,034,408 | $ | 3,718,884 | $ | 7,400,268 | $ | 9,755,244 | ||||||||
| Cost of revenue |
3,188,746 | 3,117,369 | 6,236,026 | 7,218,205 | ||||||||||||
| Gross profit |
845,662 | 601,515 | 1,164,242 | 2,537,039 | ||||||||||||
| Gross Profit % |
20.9 | % | 16.2 | % | 15.7 | % | 26.0 | % | ||||||||
| Operating expenses |
||||||||||||||||
| Research and development |
128,512 | 96,108 | 228,944 | 209,936 | ||||||||||||
| Selling and shipping |
217,976 | 131,263 | 353,731 | 297,040 | ||||||||||||
| General and administrative |
1,582,098 | 1,506,398 | 3,283,278 | 3,054,156 | ||||||||||||
| Total operating expenses |
1,928,586 | 1,733,769 | 3,865,953 | 3,561,132 | ||||||||||||
| Operating loss |
(1,082,924 | ) | (1,132,254 | ) | (2,701,711 | ) | (1,024,093 | ) | ||||||||
| Other income (expense): |
||||||||||||||||
| Interest income |
403 | 5,478 | 1,626 | 30,380 | ||||||||||||
| Interest expense |
(107,000 | ) | (114,484 | ) | (214,221 | ) | (230,522 | ) | ||||||||
| Gain on debt extinguishment |
2,443,418 | - | 2,443,418 | - | ||||||||||||
| Other Income |
217,592 | 107,880 | 436,827 | 218,688 | ||||||||||||
| Total other income (loss), net |
2,554,413 | (1,126 | ) | 2,667,650 | 18,546 | |||||||||||
| Income (loss) before income tax |
1,471,489 | (1,133,380 | ) | (34,061 | ) | (1,005,547 | ) | |||||||||
| Income tax expense (benefit) |
1,064 | 1,049 | 1,064 | (1,529,596 | ) | |||||||||||
| Net income (loss) |
$ | 1,470,425 | $ | (1,134,429 | ) | $ | (35,125 | ) | $ | 524,049 | ||||||
Three Months Ended June 30, 2021 vs. June 30, 2020
Revenue
Our revenue for the three months ended June 30, 2021 was $4.0 million compared to $3.7 million for the three months ended June 30, 2020, an increase of $.3 million or 8.5%. Despite achieving this modest sales increase, overall sales levels continue to be negatively affected. This is primarily attributable to the impacts of COVID-19 which significantly reduced the Company’s orders commencing in the first quarter of 2020, for the year ended December 31, 2020 and into the first quarter of 2021, which in turn significantly decreased our revenues in the subsequent quarters. The increase in revenue for the three months ended June 30, 2021 versus the prior year’s period was primarily attributable to increased revenue of $.7 million from our CVD Materials segment, $.1 million from our SDC segment, offset, in part by, decreased revenue of $.5 million from the CVD Equipment segment related to spare parts and equipment sales. New orders for the quarter ended June 30, 2021 were approximately $6.0 million as compared to $3.8 million in the prior quarter ended March 31, 2021 and $1.9 million in the quarter ended June 30, 2020.
The revenue contributed by the CVD Equipment segment for the three months ended June 30, 2021 was $1.8 million, which totaled 45.0% of our overall revenue, and was (20.9%) or ($.5 million) lower than the segment’s $2.3 million contribution made in the three months ended June 30, 2020, which totaled 61.3% of our overall revenue. This revenue decrease is the result of an increase of $.4 million from equipment sales and a decrease of ($.9) million from spare parts sales impacted by the slow down in aerospace demand due to COVID-19.
Revenue for our SDC segment was $1.1 million for the three months ended June 30, 2021 as compared to $1.0 million for the three months ended June 30, 2020, an increase of $.1 million.
Revenues for our CVD Materials segment were $1.1 million for the three months ended June 30, 2021 as compared to $.4 million for the three months ended June 30, 2020. This increase of $.7 million was primarily the result of increased Tantaline® related revenue of $.6 million related to our Denmark operations increased order rates compared to the same period last year.
Gross Profit
Gross profit for the three months ended June 30, 2021 amounted to $.8 million, with a gross profit margin of 20.9%, as compared to a gross profit of $.6 million and a gross profit margin of 16.2% for the three months ended June 30, 2020. The increase in gross profit and gross profit margin was primarily the result of improved manufacturing efficiencies, and to a lesser extent, leveraging fixed costs on higher sales levels, offset in part by reduced employee payroll and related costs commencing during the three months ended June 30, 2020 as a result of the COVID-19 mandates imposed.
Research and Development, Selling and General and Administrative Expenses
Research and Development
Due to the technical development required on our custom orders, our research and development team and their expenses are charged to costs of goods sold when they are working directly on a customer project. When they are not working on a customer project, they work in our Application Laboratory and their costs are charged to research and development. For the three months ended June 30, 2021 and 2020, our research and development expenses totaled $128,000 and $96,000, respectively, an increase of $32,000.
Selling
Selling expenses were $218,000 or 5.4% of the revenue for the three months ended June 30, 2021 as compared to $131,000 or 3.5% of the revenue for the three months ended June 30, 2020. The increase in 2021 was primarily the result of the impact of reduced employee and employee related costs, during the three months ended June 30, 2020, due to the COVID-19 related mandates, while with our return to operating normalcy, we expanded our focus in customer account engagement in 2021 with increased personnel and travel related costs.
General and Administrative
General and administrative expenses for the three months ended June 30, 2021 were $1.6 million or 39.2% of revenue as compared to $1.5 million or 40.5% of revenue for the three months ended June 30, 2020, an increase of $.1 million. The increase in these expenses is primarily due to costs to vacate the 555 Building and prepare the 355 Building for the consolidation of operations in the amount of $232,000, related to personnel costs and outside services, and the result of increased legal costs of $152,000, of which $27,000 related to the preparation of the sale of the 555 Building, and the balance was related to general corporate governance, employee related matters and intellectual property, offset, in part by, recovery of bad debts of $185,000 and less depreciation primarily due to the 555 Building in the amount of $140,000.
Operating loss
As a result of increased sales and the resultant increased gross profit margins of $.2 million, offset by higher operating expenses of $.2 million, our operating loss was $1.1 million in the three months ended June 30 2021, compared with an operating loss of $1.1 million in the three months ended June 30, 2020.
Other income (expenses)
Other income (expenses) were $2,554,000 and ($1,000) for the three months ended June 30, 2021 and 2020, respectively. Gain on debt extinguishment was $2,443,000 and $0 for the three months ended June 30, 2021 and 2020, respectively, the result of forgiveness of debt income from the Company’s PPP loan in the amount of $2,443,000 in the three months ended June 30, 2021. Other income from subleasing a portion of our 555 Building was $218,000 and $108,000 in the three months ended June 30, 2021 and 2020, respectively. The increase of $110,000 was the result of higher rent due to increased occupancy in 2021. As a result of lower interest rates and lower cash balances, interest income decreased $5,000, to $0 for the three months ended June 30, 2021 as compared to $5,000 in 2020. In addition, Interest expense related to the Company’s mortgages decreased $8,000 to $107,000 in the three months ended June 30, 2021, as compared to $115,000 in 2020.
Income Taxes
For the three months ended June 30, 2021 and 2020, respectively, there was income tax expense of $1,000 related to minimum state taxes. We continue to evaluate for potential utilization of our deferred tax asset, which has been fully reserved for, on a quarterly basis, reviewing our economic models, including projections and timing of orders, cost containment measures and other factors.
Net (loss) income
As a result of the foregoing factors, including the effect of recognizing $2.4 million in forgiveness of debt income related to the Company’s PPP Loan, we reported a net income of $1.5 million, or $0.22 per basic and diluted share, for the three months ended June 30, 2021, as compared to a net loss of ($1.1) million, or ($0.17) per basic and diluted share for the three months ended June 30, 2020.
Six Months Ended June 30, 2021 vs. June 30, 2020
Revenue
Our revenue for the six months ended June 30, 2021 was $7.4 million as compared to $9.8 million for the six months ended June 30, 2020, a decrease of $2.4 million or 24.1%. This revenue reduction is primarily attributable to the impacts of COVID-19 which significantly reduced the Company’s order levels commencing in the first quarter of 2020, for the year ended December 31, 2020 and into the first quarter of 2021, (while new orders in the second quarter of 2021 where substantially higher at approximately $6.0 million). This in turn significantly decreased our revenues in the subsequent quarters. The decrease was primarily attributable to decreased revenue of $2.6 million from our CVD Equipment segment related to spare parts and equipment sales and $.8 million decrease in our SDC segment, offset, in part by, an increase of $1.0 million in our CVD Materials segment.
The revenue contributed for the six months ended June 30, 2021 by the CVD Equipment segment was $3.8 million, which totaled 51.5% of our overall revenue, was (40.2%) or ($2.6 million) lower than the segment’s $6.4 million contribution made in the six months ended June 30, 2020, which totaled 65.4% of our overall revenue. This net revenue reduction is the result of a decrease of $2.8 million from spare part sales impacted by the slow down in aerospace demand due to COVID-19, offset, in part by, an increase of $.2 million from equipment sales.
Revenue for our SDC segment was $1.9 million for the six months ended June 30, 2021 as compared to $2.7 million for the six months ended June 30, 2020, a decrease of $.8 million, primarily the result of the revenue from one large order completed in the six months ended June 30, 2020.
Revenues for our CVD Materials segment were $1.7 million for the six months ended June 30, 2021 as compared to $.7 million for the six months ended June 30, 2020. This increase of $1.0 million was the result of increased Tantaline® related revenue of $.7 million, primarily from the Company’s Denmark operations, and increased MesoScribe product revenue of $.3 million, both the result of improvement in new order rates.
Gross Profit
Gross profit for the six months ended June 30, 2021 amounted to $1.2 million, with a gross profit margin of 15.7%, as compared to a gross profit of $2.5 million and a gross profit margin of 26.0% for the six months ended June 30, 2020. The reduction in gross profit and gross profit margin, was primarily the result of the impact of $2.3 million in decreased sales as a result of the impact of COVID-19, and the impact of fixed costs and payroll to support higher sales levels, offset in part by reduced employee payroll and related costs commencing in the six months ended June 30, 2020 as a result of the COVID-19 mandates imposed.
Research and Development, Selling and General and Administrative Expenses
Research and Development
Due to the technical development required on our custom orders, our research and development team and their expenses are charged to costs of goods sold when they are working directly on a customer project. When they are not working on a customer project, they work in our Application Laboratory and their costs are charged to research and development. For the six months ended June 30, 2021 and 2020, our research and development expenses totaled $229,000 and $210,000, respectively, an increase of $19,000.
Selling
Selling expenses were $354,000 or 4.8% of the revenue for the six months ended June 30, 2021 as compared to $297,000 or 3.0% of the revenue for the six months ended June 30, 2020. The increase in 2021 was primarily the result of the impact of reduced employee and employee related costs, during the six months ended June 30, 2020, due to the COVID-19 related mandates, while with our return to operating normalcy, we expanded our focus in customer account engagement in 2021 with increased personnel and travel related costs.
General and Administrative
General and administrative expenses for the six months ended June 30, 2021 were $3.3 million or 44.4% of revenue compared to $3.1 million or 31.3% of revenue for the six months ended June 30, 2020, an increase of $.2 million. The increase in these expenses is primarily due to costs to vacate the 555 Building and prepare the 355 Building for the consolidation of operations in the amount of $232,000, related to personnel costs and outside services, and the result of increased legal costs of $425,000, of which $100,000 related to the preparation of the sale of the 555 Building, and the balance was related to general corporate governance, employee related matters and intellectual property. This was, offset, in part by, recovery of bad debts of $185,000 and less depreciation primarily due to the 555 Building in the amount of $201,000.
Operating loss
As a result of substantially lower sales and the resultant reduction in gross profit margins and increased general and administrative expenses, our operating loss was $2.7 million in the six months ended June 30, 2021, compared with an operating loss of $1.0 million in the six months ended June 30, 2020.
Other income (expenses)
Other income (expenses) were $2,668,000 and $19,000 for the six months ended June 30, 2021 and 2020, respectively. Gain on debt extinguishment was $2,443,000 and $0 for the six months ended June 30, 2021 and 2020, respectively, the result of forgiveness of debt income from the Company’s PPP loan in the amount of $2,443,000 in the six months ended June 30, 2021. Other income from subleasing a portion of our 555 Building was $437,000 and $219,000 in the six months ended June 30, 2021 and 2020, respectively. The increase of $218,000 was the result of higher rent due to increased occupancy in 2021. As a result of lower interest rates and lower cash balances, interest income decreased $28,000, to $2,000 for the six months ended June 30, 2021 as compared to $30,000 in 2020. In addition, interest expense related to our mortgages decreased $17,000 to $214,000 for the six months ended June 30, 2021, as compared to $231,000 in 2020.
Income Taxes
For the six months ended June 30, 2021, there was $1,000 income tax expense related to minimum state taxes, as compared to an income tax benefit of $1.5 million for the six months ended June 30, 2020. On March 27, 2020, the CARES Act was enacted by the United States Congress. As a result of the enactment of the CARES Act, net operating losses (“NOL’s”) generated in 2018-2020 can now be carried back for five years and resulted in the Company recognizing approximately $1.5 million of a tax receivable. We continue to evaluate for potential utilization of our deferred tax asset, which has been fully reserved for, on a quarterly basis, reviewing our economic models, including projections and timing of orders, cost containment measures and other factors.
Net (loss) income
As a result of the foregoing factors, including the effect of recognizing $2.4 million in forgiveness of debt income related to the Company’s PPP Loan, we reported a net loss of ($35,000), or ($0.01) per basic and diluted share, for the six months ended June 30, 2021, as compared to a net income of $524,000 (which included the $1.5 million tax benefit as noted above), or $0.08 per basic and diluted share for the six months ended June 30, 2020.
Liquidity and Capital Resources
As of June 30, 2021, we had aggregate working capital of $11.5 million compared to aggregate working capital of $8.1 million at December 31, 2020. Our cash and cash equivalents at June 30, 2021 and December 31, 2020 were $5.4 million and $7.7 million, respectively.
Net cash used in operating activities was $1.9 million. This is the result of a net loss, adjusted for non-cash items, of $2.0 million, increased inventory of $.2 million and increased contract assets of $.6 million, offset, in part by, increased accrued expenses of $.4 million, increased contract liabilities of $.2 million, decreased other assets of $.2 million and a $.1 million increase in accounts payable.
Long term debt during the period decreased by $.3 million from principal payments on the mortgages related to our two facilities in Central Islip, NY.
Capital expenditures were $118,000 in the six months ended June 30, 2021 related primarily to improvements to the 355 Building related to moving the Company’s operations from the 555 Building facility.
We have a loan agreement with HSBC USA, N.A. (the “HSBC”) which is secured by a mortgage on our Central Islip headquarters at 355 South Technology Drive. The loan is payable in 120 consecutive equal monthly installments of $25,000 in principal plus interest and a final balloon payment upon maturity in March 2022. The balances as of June 30, 2021 and December 31, 2020 were approximately $1.9 million and $2.1 million respectively. Interest accrues on the loan, at our option, at the variable rate of LIBOR plus 1.75% or Prime less 0.5% (1.82% and 1.89% at June 30, 2021 and December 31, 2020, respectively).
On November 30, 2017, we purchased the 555 Building which was intended to house our Materials Business. The purchase price of the land and the building was $13,850,000 exclusive of closing costs.
As part of the acquisition, our newly formed wholly-owned subsidiary, 555 N Research Corporation (the” Assignee”) and the Islip IDA, entered into a Fee and Leasehold Mortgage and Security Agreement (the ”Loan”) with HSBC in the amount of $10,387,500, which was used to finance a portion of the purchase price to acquire the premises located at the 555 Building. The Loan was evidenced by the certain note, dated November 30, 2017 (the ”Note”), by and between Assignee and the Bank, and secured by a certain Fee and Leasehold Mortgage and Security Agreement, dated November 30, 2017 (the “Mortgage”), as well as a collateral Assignment of Leases and Rents (“Assignment of Leases”).
The Note was payable in 60 consecutive equal monthly installments of $62,481, including interest. The outstanding balances as of June 30, 2021 and December 31, 2020 were approximately $9.1 million and $9.3 million respectively. The Note bore interest for each Interest Period (as defined in the Note), at the fixed rate of 3.9148%. The maturity date for the Note was to be in December 2022, however on July 26, 2021, the Company closed on the sale of its 555 Building and satisfied this Mortgage in full. As of June 30, 2021, the full amount of this Note is recorded as Liabilities Held For Sale. The sale price was $24,360,000, subject to adjustment for apportionments, adjustments and credits. A portion of the sale proceeds was used to satisfy the existing mortgage debt on the 555 Building, including interest and fees, in the amount of $9,352,719, as well as various costs related to the closing of the transaction. The net proceeds to the Company were approximately $14,000,000.
On August 5, 2019, we entered into a Mortgage Modification Agreement which replaced the former covenant with a Minimum Liquid Assets (“MLC”) covenant, and on October 22, 2020, we entered into a Second Mortgage Modification Agreement modifying certain MLC balances. We were in compliance with our financial covenant under the mortgage at June 30, 2021.
Due to the effects of the COVID-19 pandemic, on April 21, 2020, we entered into a loan agreement (the “Loan Agreement”) with HSBC Bank USA, National Association pursuant to which we were granted a loan in the principal amount of $2,415,970, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted by the United States Congress on March 27, 2020.
The PPP loan, the obligation of which is represented by a note issued by us, was to mature on April 21, 2022 and bore interest at a rate of 1% per annum. The note may be prepaid at any time prior to maturity with no prepayment penalties. Under the terms of the PPP, all or a portion of the Loan may be forgiven, based upon payments made in the first twenty-four weeks following receipt of the proceeds, related to payroll costs, continue group health care benefits, utilities and mortgage interest on other debt obligations incurred before February 15, 2020. The Company has filed an application for forgiveness in April 2021 and on June 14, 2021 the Company received a notification from its lender that on June 10, 2021 the SBA approved the Company’s PPP Loan forgiveness application and remitted payment to the lender for the entire principal amount of the PPP Loan and accrued interest. As a result, the Company has recognized in the three and six months ended June 30, 2021 forgiveness of debt income in the amount of $2,443,418.
As a result of the March 27, 2020 CARES Act enactment allowing the carryback of NOL’s five years, we recognized a $1.5 million tax benefit. We have collected $.8 million in the year ended December 31, 2020, and as of June 30, 2021 there remains a receivable in the amount of $.7 million.
Based upon all of these factors, we believe that our cash and cash equivalent positions and cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months of the filing of this Form 10-Q. Should the current environment continue longer or worsen, we will continue to assess our operations and take actions anticipated to maintain our operating cash to support the working capital needs, as well as compliance with our loan covenant.
Off-Balance Sheet Arrangements.
We have no off-balance sheet arrangements at this time.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 13d-15(e) under the Exchange Act of 1934, as amended, (the “Exchange Act”)). As required by Rule 13a-15(b) under the Exchange Act, our management, under the direction of our Chief Executive Officer and Chief Financial Officer, reviewed and performed an evaluation of the effectiveness of design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Report”).
Based on that review and evaluation, our Chief Executive Officer and Chief Financial Officer, along with others in our management, have determined that as of the end of the period covered by this Report on Form 10-Q the disclosure controls and procedures were effective to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding disclosures.
Changes in Internal Controls
There were no changes in our internal controls over financial reporting as defined in Rule 13a-15(f) or Rule 15d-15(f) under the Exchange Act that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the internal controls over financial reporting.
Limitations on the Effectiveness of Controls
We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
CVD EQUIPMENT CORPORATION
PART II
OTHER INFORMATION
| Item 1. |
Legal Proceedings. |
None.
| Item 1A. |
Risk Factors. |
None.
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
| Item 3. |
Defaults Upon Senior Securities. |
None.
| Item 4. |
Mine Safety Disclosures. |
Not applicable.
| Item 5. |
Other Information. |
None.
| Item 6. |
Exhibits |
| 10.1 |
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| 10.2 |
| 31.1* |
Certification of Emmanuel Lakios, Chief Executive Officer, dated August 16, 2021 |
| 31.2* |
Certification of Thomas McNeill, Chief Financial Officer, dated August 16, 2021 |
| 32.1* |
| 32.2* |
| 101.1** |
Inline XBRL Instance. |
| 101.SCH** |
Inline XBRL Taxonomy Extension Schema. |
| 101.CAL** |
Inline XBRL Taxonomy Extension Calculation. |
| 101.DEF** |
Inline XBRL Taxonomy Extension Definition. |
| 101.LAB** |
Inline XBRL Taxonomy Extension Labels. |
| 101.PRE** |
Inline XBRL Taxonomy Extension Presentation. |
| 104 |
Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) |
________________
* Filed herewith.
** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not to be filed or part of a registration statement of prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 16th day of August 2021.
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CVD EQUIPMENT CORPORATION |
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By: |
/s/ Emmanuel Lakios |
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Emmanuel Lakios |
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Chief Executive Officer |
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| (Principal Executive Officer) | |||
| By: | /s/ Thomas McNeill | ||
| Thomas McNeill | |||
| Executive Vice President and | |||
| Chief Financial Officer | |||
| (Principal Financial and | |||
| Accounting Officer) | |||
EXHIBIT INDEX
| 10.1 |
Employment Agreement, dated June 1, 2021, by and between Emmanuel Lakios, the Company’s President and Chief Executive Officer, and the Company. * |
| 10.2 |
Employment Agreement, dated June 1, 2021, by and between Thomas McNeill, the Company’s Executive Vice President and Chief Financial Officer, and the Company. * |
| 31.1* |
Certification of Emmanuel Lakios, Chief Executive Officer, dated August 16, 2021 |
| 31.2* |
Certification of Thomas McNeill, Chief Financial Officer, dated August 16, 2021 |
| 32.1* |
Certification of Emmanuel Lakios, Chief Executive Officer, dated August 16, 2021, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2* |
Certification of Thomas McNeill, Chief Financial Officer, dated August 16, 2021, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.1** |
Inline XBRL Instance. |
| 101.SCH** |
Inline XBRL Taxonomy Extension Schema. |
| 101.CAL** |
Inline XBRL Taxonomy Extension Calculation. |
| 101.DEF** |
Inline XBRL Taxonomy Extension Definition. |
| 101.LAB** |
Inline XBRL Taxonomy Extension Labels. |
| 101.PRE** |
Inline XBRL Taxonomy Extension Presentation. |
| 104 |
Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) |
________________
* Filed herewith.
** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not to be filed or part of a registration statement of prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.