Cvd Equipment Corp 10-Q for FY2021 Q3
Cvd Equipment Corp (CVV)
About this 10-Q
Cvd Equipment Corp filed this 10-Q on November 15, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $4.33M
- up 8.4% from $3.99M a year earlier
- Net income
- $5.97M
- compared with a net loss of $1.29M a year earlier
- Diluted EPS
- $0.89
- compared with -$0.19 a year earlier
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 |
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 September 30, 2021 and December 31, 2020 |
3 |
| Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020 |
4 |
| Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020 |
5 |
| Condensed Consolidated Statements of Cash Flows for the nine months ended September 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 |
22 |
| Item 3 – Quantitative and Qualitative Disclosures About Market Risk |
32 |
| Item 4 – Controls and Procedures |
32 |
| Part II - Other Information |
|
| Item 1 – Legal Proceedings |
33 |
| Item 1A-Risk Factors |
33 |
| Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds |
34 |
| Item 3 – Defaults Upon Senior Securities |
34 |
| Item 4 – Mine Safety Disclosures |
34 |
| Item 5 – Other Information |
34 |
| Item 6 – Exhibits |
34 |
| Signatures |
35 |
| Exhibit Index |
36 |
PART 1 – FINANCIAL INFORMATION
Item 1 – Financial Statements
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
| (Unaudited) | ||||||||
| September 30, 2021 | December 31, 2020 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Contract assets | ||||||||
| Inventories, net | ||||||||
| Taxes Receivable | ||||||||
| Other current assets | ||||||||
| 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 | ||||||||
| Total Current Liabilities | ||||||||
| Long-term debt, net of current portion | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies (see note 12) | ||||||||
| Stockholders’ Equity: | ||||||||
| Common stock - par value – shares authorized; issued and outstanding at September 30, 2021 and at December 31, 2020 | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings (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 |
Nine Months Ended |
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| September 30, |
September 30, |
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| 2021 |
2020 |
2021 |
2020 |
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| Revenue |
$ | $ | $ | $ | ||||||||||||
| Cost of revenue |
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| Gross profit |
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| Operating expenses |
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| Research and development |
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| Selling and shipping |
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| General and administrative |
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| Total operating expenses |
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| Operating loss |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other income (expense): |
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| Interest income |
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| Interest expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Gain on Sale of Building |
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| Gain on Debt Extinguishment |
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| Other Income |
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| Total other income, net |
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| 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 |
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| Weighted average common shares |
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| Outstanding-diluted |
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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 September 30, 2021 and 2020 | ||||||||||||||||||||
| Common stock | ||||||||||||||||||||
| Shares | Par Value | Additional paid-in Capital | Retained Earnings/ (Accumulated deficit) | Total | ||||||||||||||||
| Balance at July 1, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net income | - | |||||||||||||||||||
| Share-Based Compensation | ||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | ||||||||||||||||
| Balance at July 1, 2020 | $ | $ | $ | |||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Share-Based Compensation | ||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | ||||||||||||||||
| Nine months ended September 30, 2021 and 2020 | ||||||||||||||||||||
| Common stock | ||||||||||||||||||||
| Shares | Par Value | Additional paid-in Capital | Retained Earnings/ (Accumulated deficit) | Total | ||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net income | - | |||||||||||||||||||
| Share-Based Compensation | ||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | ||||||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | $ | ||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Share-Based Compensation | ||||||||||||||||||||
| Balance at September 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)
| Nine Months Ended |
||||||||
| September 30, |
||||||||
| 2021 |
2020 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income (loss) |
$ | $ | ( |
) | ||||
| Adjustments to reconcile net income (loss) to net cash (used in) operating activities |
||||||||
| Gain on sale of building |
( |
) | ||||||
| Gain on Debt Extinguishment |
( |
) | ||||||
| Stock-based compensation |
||||||||
| Depreciation and amortization |
||||||||
| Bad debt expense |
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| (Increase)/decrease in operating assets |
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| Accounts receivable |
( |
) | ||||||
| Contract assets |
( |
) | ( |
) | ||||
| Inventories |
( |
) | ||||||
| Tax receivable |
( |
) | ||||||
| Other current assets |
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| Increase/(decrease) in operating liabilities |
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| Accounts payable |
( |
) | ||||||
| Accrued expenses |
( |
) | ||||||
| Contract liabilities |
( |
) | ||||||
| Total adjustments |
( |
) | ( |
) | ||||
| Net cash used in operating activities |
( |
) | ( |
) | ||||
| Cash flows from investing activities: |
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| Net proceeds from sale of building |
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| Capital expenditures |
( |
) | ( |
) | ||||
| Net cash provided by (used in) investing activities |
( |
) | ||||||
| Cash flows from financing activities |
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| Proceeds from Payroll Protection Plan Loan |
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| Payments of long-term debt |
( |
) | ( |
) | ||||
| Net cash (used in) provided by financing activities |
( |
) | ||||||
| Net increase (decrease) 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: |
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| 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 nine months ended September 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 was not needed for its on-going business operations and concluded that any remaining elements of the Materials Business could be consolidated into its remaining facility in Central Islip (the “355 Building”), which it believes can accommodate any needs for its growth for the foreseeable future. In April 2021, the Company completed the move of its United States Tantaline equipment to the 355 Building, while the MesoScribe consolidation into the 355 Building was completed during Q3 2021. All functions of the Tantaline product line have been consolidated into the Denmark facility and, the expenses related to Tantaline operations in the United States 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. Management is currently evaluating the effect of this update on the Company’s consolidated financial statements and currently believes it will not have a material impact.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Standards (continued)
The Company believes there is no additional new accounting guidance adopted, but not yet effective that is relevant to the readers of its 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 September 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 September 30, 2021,
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 September 30, 2021,
NOTE 4: REVENUE DISAGGREGATION
The following table represents a disaggregation of revenue for the three and nine months ended September 30, 2021 and 2020 (in thousands):
| Three Month's Ending September 30, 2021 | ||||||||||||
| Over time | Point in time | Total | ||||||||||
| Aerospace | $ | $ | $ | |||||||||
| Industrial | $ | $ | $ | |||||||||
| Research | $ | $ | $ | |||||||||
| Total | $ | $ | $ | |||||||||
| Three Month's Ending September 30, 2020 | ||||||||||||
| Over time | Point in time | Total | ||||||||||
| Aerospace | $ | $ | $ | |||||||||
| Industrial | $ | $ | $ | |||||||||
| Research | $ | $ | $ | |||||||||
| Total | $ | $ | $ | |||||||||
| Nine Month's Ending September 30, 2021 | ||||||||||||
| Over time | Point in time | Total | ||||||||||
| Aerospace | $ | $ | $ | |||||||||
| Industrial | $ | $ | $ | |||||||||
| Research | $ | $ | $ | |||||||||
| Total | $ | $ | $ | |||||||||
| Nine Month's Ending September 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 nine months ended September 30, 2021 and 2020, the increase in contract assets of approximately $
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: | ||||||||
| September 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 its 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 $
NOTE 7: LONG-TERM DEBT (continued)
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 nine months ended September 30, 2021 Gain on Debt Extinguishment in the amount of $
NOTE 8: STOCK-BASED COMPENSATION EXPENSE
The Company recorded, as part of general and administrative expense, $
NOTE 8: STOCK-BASED COMPENSATION EXPENSE (continued)
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 September 30, 2021 are as follows:
| 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 nine months ended September 30, 2021, the Company granted
| June 2021 Grant | 3rd quarter 2021 Grant | |||||||
| 150,000 Stock Options | 178,500 Stock Options | |||||||
| Stock Price | $ | $ | ||||||
| Exercise Price | $ | $ | ||||||
| Dividend yield | % | % | ||||||
| Expected volatility | % | % | ||||||
| Risk-Free interest rate | % | % | ||||||
| Expected life (in years) | ||||||||
NOTE 8: STOCK-BASED COMPENSATION EXPENSE (continued)
The Company has a total of
The following table summarizes information about the outstanding and exercisable options at September 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 | |||||||||||||||||||||||||
| $ | - | $ | $ | $ | $ | |||||||||||||||||||||||||||
| $ | - | $ | $ | $ | $ | |||||||||||||||||||||||||||
| $ | - | $ | $ | $ | $ | |||||||||||||||||||||||||||
| $ | - | $ | $ | $ | $ | |||||||||||||||||||||||||||
Restricted Stock Awards
The following table summarizes restricted stock awards for the nine months ended September 30, 2021:
| Shares of Restricted Stock | Weighted Average Grant Date Fair Value | |||||||
| Unvested outstanding at December 31, 2020 | ||||||||
| Granted | $ | |||||||
| Vested | ||||||||
| Forfeited/Cancelled | ( | ) | $ | |||||
| Unvested outstanding at September 30, 2021 | $ | |||||||
The fair value of the outstanding restricted stock awards will be recorded as stock compensation expense over the vesting period. As of September 30, 2021, there was $
NOTE 8: STOCK-BASED COMPENSATION EXPENSE (continued)
Restricted Stock Units
The following table summarizes activity related to outstanding restricted stock units for the nine months ended September 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 September 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 September 30, 2021, there was $
NOTE 9: INCOME TAXES
As of September 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 10: 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 Sept. 30, | Nine months ended Sept. 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 nine months ended September 30, 2021 and 2020, because the effect of their inclusion would be anti-dilutive.
| Three months ended Sept. 30, | Nine months ended Sept. 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 11: SEGMENT REPORTING
The Company operates through
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 September 30,
(In thousands)
| Eliminations* and | ||||||||||||||||||||
| 2021 | CVD | SDC | Materials | Unallocated | Consolidated | |||||||||||||||
| Assets | $ | $ | $ | $ | $ | |||||||||||||||
| Revenue | ( | ) | ||||||||||||||||||
| Operating (loss) income | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Pretax (loss) income | ( | ) | (1) | ( | ) | |||||||||||||||
| 2020 | ||||||||||||||||||||
| Assets | $ | $ | $ | $ | $ | |||||||||||||||
| Revenue | ( | ) | ||||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Pretax loss | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
NOTE 11: SEGMENT REPORTING (continued)
Nine Months Ended September 30,
(In thousands)
| Eliminations* and | ||||||||||||||||||||
| 2021 | CVD | SDC | Materials | Unallocated | Consolidated | |||||||||||||||
| Revenue | ( | ) | ||||||||||||||||||
| Operating (loss) income | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Pretax (loss) income | ( | ) | (1) | ( | ) | |||||||||||||||
| 2020 | ||||||||||||||||||||
| Revenue | ( | ) | ||||||||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Pretax income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| (1) | The Materials segment includes a gain on the sale of building in the amount of $ |
*All elimination entries represent intersegment revenues eliminated in consolidation for external financial reporting.
NOTE 12: 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, and continuing into the first quarter of 2021 saw substantial reductions, while new orders in the second and third quarter of 2021 were substantially higher at approximately $
NOTE 13: SALE OF 555 BUILDING
In order to increase the Company’s liquidity and to provide necessary working capital to support its on-going business and operations, the Company sold the 555 Building. Management had determined the 555 Building was not needed for business operations, and any remaining elements of the Materials Business would 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 $
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 and third quarter of 2021 were substantially higher at approximately $6.0 million and $6.1 million, respectively. These overall reduced order levels 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 nine months ended September 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 and into 2022 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 pandemic are highly uncertain and cannot be predicted.
Recent Developments
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 forecasted 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.
During the third quarter of 2021, we started to experience increased costs on certain components as well as delays in supply chain delivery, which also impacts the timing of revenue recognition as well as manufacturing lead times and efficiencies. We have commenced placing purchase orders with more lead time to help mitigate the manufacturing delays, as well as assessing other suppliers or components to attempt to mitigate the potential cost impacts. In addition, we are utilizing our in-house flexible manufacturing to attempt to further mitigate both potential schedule delivery delays and material cost increase.
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 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 completed during the third quarter of 2021. 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 Company recognized a gain on the sale of the building in the amount of $6,894,109 and received approximately $14,000,000 in net proceeds resulting in increasing our cash balance at September 30, 2021 to $17,446,000.
Statement of Operations
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Revenue |
$ | 4,329,459 | $ | 3,993,204 | $ | 11,729,727 | $ | 13,748,448 | ||||||||
| Cost of revenue |
3,595,244 | 3,557,413 | 9,831,270 | 10,775,618 | ||||||||||||
| Gross profit |
734,215 | 435,791 | 1,898,457 | 2,972,830 | ||||||||||||
| Operating expenses |
||||||||||||||||
| Research and development |
138,064 | 90,227 | 367,008 | 300,162 | ||||||||||||
| Selling and shipping |
220,745 | 142,306 | 574,476 | 439,346 | ||||||||||||
| General and administrative |
1,297,730 | 1,595,911 | 4,581,008 | 4,650,067 | ||||||||||||
| Total operating expenses |
1,656,539 | 1,828,444 | 5,522,492 | 5,389,575 | ||||||||||||
| Operating loss |
(922,324 | ) | (1,392,653 | ) | (3,624,035 | ) | (2,416,745 | ) | ||||||||
| Other income (expense): |
||||||||||||||||
| Interest income |
1,776 | 30,348 | 3,402 | 60,728 | ||||||||||||
| Interest expense |
(35,973 | ) | (104,041 | ) | (250,194 | ) | (336,107 | ) | ||||||||
| Gain on Sale of Building |
6,894,109 | - | 6,894,109 | - | ||||||||||||
| Gain on Debt Extinguishment |
- | - | 2,443,418 | - | ||||||||||||
| Other Income |
63,143 | 174,705 | 499,970 | 394,938 | ||||||||||||
| Total other income, net |
6,923,055 | 101,012 | 9,590,705 | 119,559 | ||||||||||||
| Income (loss) before income tax |
6,000,731 | (1,291,641 | ) | 5,966,670 | (2,297,186 | ) | ||||||||||
| Income tax expense (benefit) |
27,327 | - | 28,391 | (1,529,595 | ) | |||||||||||
| Net income (loss) |
$ | 5,973,404 | $ | (1,291,641 | ) | $ | 5,938,279 | $ | (767,591 | ) | ||||||
Three Months Ended September 30, 2021 vs. September 30, 2020
Revenue
Our revenue for the three months ended September 30, 2021 was $4.3 million compared to $4.0 million for the three months ended September 30, 2020, an increase of $.3 million or 8.4%. 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. In addition, we have had delays, and continue to experience delays in our supply chain delivery of components which hampers our ability to recognize revenue more timely. The increase in revenue for the three months ended September 30, 2021 versus the prior year’s period was primarily attributable to increased revenue of $.5 million from our SDC segment, offset, in part by, decreased revenue of $.2 million from the CVD Equipment segment related to spare parts and equipment sales. New orders for the quarter ended September 30, 2021 were approximately $6.1 million and improved as compared to $6.0 million in the prior quarter ended June 30, 2021 and $3.4 million in the quarter ended September 30, 2020.
The revenue contributed by the CVD Equipment segment for the three months ended September 30, 2021 was $2.1 million, which totaled 47.9% of our overall revenue, and was (10.2%) or ($.2 million) lower than the segment’s $2.3 million contribution made in the three months ended September 30, 2020, which totaled 57.8% of our overall revenue. This revenue decrease is the result of a decrease of $.4 million in spare parts sales impacted by the slow down in aerospace demand due to COVID-19, offset, in part by, and increase of $.2 million from equipment sales.
Revenue for our SDC segment was $1.3 million for the three months ended September 30, 2021 as compared to $.8 million for the three months ended September 30, 2020, an increase of $.5 million resulting from the receipt of one large order in 2021, compared to 2020.
Revenues for our CVD Materials segment were $.9 million for each of the three months ended September 30, 2021 and 2020.
Gross Profit
Gross profit for the three months ended September 30, 2021 amounted to $.7 million, with a gross profit margin of 17.0%, as compared to a gross profit of $.4 million and a gross profit margin of 10.9% for the three months ended September 30, 2020. The increase in gross profit and gross profit margin was primarily the result of improved manufacturing efficiencies, and product mix, and to a lesser extent, leveraging fixed costs on higher sales levels, which more than offset certain component cost increases. During the quarter ended September 30, 2021, we started to experience increased costs on certain components as well as delays in supply chain delivery, which also impacts revenue as well as manufacturing lead times and efficiencies. We have begun placing orders with more lead time to help mitigate the manufacturing delays, as well as assessing other suppliers or components to attempt to mitigate the potential cost impacts. In addition, we are utilizing our in-house flexible manufacturing to attempt to further mitigate both potential schedule delivery delays and material cost increase.
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 September 30, 2021 and 2020, our research and development expenses totaled $138,000 and $90,000, respectively, an increase of $48,000 related to focusing development on more standard products and value added development.
Selling
Selling expenses were $221,000 or 5.1% of the revenue for the three months ended September 30, 2021 as compared to $142,000 or 3.5% of the revenue for the three months ended September 30, 2020. The increase in 2021 was primarily the result of increased employee compensation, including the transfer of one employee from administration to focus on all sales and marketing initiatives, which is now in line with ongoing expectations, and benefit costs during the three months ended September 30, 2021, as compared to September 30, 2020.
General and Administrative
General and administrative expenses for the three months ended September 30, 2021 were $1.3 million or 30.0% of revenue as compared to $1.6 million or 40.0% of revenue for the three months ended September 30, 2020, an decrease of $.3 million. The decrease in these expenses is primarily due to a reduction in employees and employee related costs of $132,000, reduced costs of $101,000 for real estate taxes and utilities related to the 555 Building sold in July 2021, as well as less depreciation expense, primarily due to the 555 Building in the amount of $133,000, and a reduction of bad debt expense of $40,000, offset, in part by, increased legal costs of $92,000, of which $33,000 related to the sale of the 555 Building, and the balance was related to general corporate governance, employee related matters and intellectual property matters, and increased shareholder relations costs of $42,000.
Operating loss
As a result of increased sales and the increased gross profit margins of $.3 million, and reduced operating expenses of $.2 million, our operating loss was $.9 million in the three months ended September 30 2021, compared with an operating loss of $1.4 million in the three months ended September 30, 2020.
Other income (expenses)
Other income (expenses) was $6,923,000 and $101,000 for the three months ended September 30, 2021 and 2020, respectively. On July 26, 2021, we sold our 555 building and recognized a gain on the sale in the amount of $6,894,109. Other income from subleasing a portion of our 555 Building was $63,000 and $175,000 in the three months ended September 30, 2021 and 2020, respectively. The decrease of $112,000 was the result of no longer receiving rental income upon the sale of the 555 Building. As a result of lower interest rates, interest income decreased $28,000, to $2,000 for the three months ended September 30, 2021 as compared to $30,000 in 2020. In addition, interest expense related to the Company’s mortgages decreased $68,000 to $36,000 in the three months ended September 30, 2021, as compared to $104,000 in 2020, the result of our 555 Building mortgage satisfied on July 26, 2021.
Income Taxes
Income tax expense for the three months ended September 30, 2021 and 2020, were $27,000 and $0, respectively. The tax expense for the three months ended 2021 related the gain on the sale of the building, which were reduced by the benefit of our net operating loss carryforwards. 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 income (loss)
As a result of the foregoing factors, including the effect of recognizing the $6.9 million gain on the sale of our 555 Building, we reported net income of $6.0 million, or $0.89 per basic and diluted share, for the three months ended September 30, 2021, as compared to a net loss of ($1.3) million, or ($0.19) per basic and diluted share for the three months ended September 30, 2020.
Nine Months Ended September 30, 2021 vs. September 30, 2020
Revenue
Our revenue for the nine months ended September 30, 2021 was $11.7 million as compared to $13.7 million for the nine months ended September 30, 2020, a decrease of $2.0 million or 14.7%. 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 and third quarter of 2021 where substantially higher at approximately $6.0 million and $6.1 million, respectively). This in turn significantly decreased our revenues in the subsequent quarters. The decrease was primarily attributable to decreased revenue of $2.8 million from our CVD Equipment segment related to spare parts and equipment sales and $.2 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 nine months ended September 30, 2021 by the CVD Equipment segment was $5.9 million, which totaled 50.2% of our overall revenue, was (32.3%) or ($2.8 million) lower than the segment’s $8.7 million contribution made in the nine months ended September 30, 2020, which totaled 63.2% of our overall revenue. This net revenue reduction is the result of a decrease of $3.3 million from spare part sales impacted by the slow down in aerospace demand due to COVID-19, offset, in part by, an increase of $.5 million from equipment sales.
Revenue for our SDC segment was $3.2 million for the nine months ended September 30, 2021 as compared to $3.5 million for the nine months ended September 30, 2020, a decrease of $.3 million.
Revenues for our CVD Materials segment were $2.6 million for the nine months ended September 30, 2021 as compared to $1.6 million for the nine months ended September 30, 2020. This increase of $1.0 million was the result of increased Tantaline® related revenue of $.8 million, primarily from the Company’s Denmark operations, and increased MesoScribe product revenue of $.2 million, both the result of improvement in new order rates.
Gross Profit
Gross profit for the nine months ended September 30, 2021 amounted to $1.9 million, with a gross profit margin of 16.2%, as compared to a gross profit of $3.0 million and a gross profit margin of 21.6% for the nine months ended September 30, 2020. The reduction in gross profit and gross profit margin, was primarily the result of the impact of $2.0 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 nine months ended September 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 nine months ended September 30, 2021 and 2020, our research and development expenses totaled $367,000 and $300,000, respectively, an increase of $67,000, related to focusing development on more standard products and value added development.
Selling
Selling expenses were $575,000 or 4.9% of the revenue for the nine months ended September 30, 2021 as compared to $439,000 or 3.2% of the revenue for the nine months ended September 30, 2020. The increase in 2021 was primarily the result of the impact of reduced employee and employee related costs, during the nine months ended September 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 which resulted in increased personnel and travel related costs, as well as the transfer of one employee from administration during 2021 to focus on sales and marketing initiatives.
General and Administrative
General and administrative expenses for the nine months ended September 30, 2021 were $4.6 million or 39.1% of revenue compared to $4.7 million or 33.8% of revenue for the nine months ended September 30, 2020, a decrease of $.1 million. The decrease in these expenses is primarily due to reduction in employees and employee-related costs of $259,000, recovery of bad debts of $225,000, less depreciation primarily due to the 555 Building in the amount of $318,000, and lower insurance and general office expenses of $100,000, offset, in part by, 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, increased legal costs of $518,000, of which $135,000 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, and increased shareholder relations costs of $99,000 due the timing of the shareholder meeting as well as additional efforts.
Operating loss
Primarily the result of substantially lower sales and the reduction in gross profit margins, our operating loss was $3.6 million in the nine months ended September 30, 2021, compared with an operating loss of $2.4 million in the nine months ended September 30, 2020.
Other income (expenses)
Other income (expenses) was $9,591,000 and $120,000 for the nine months ended September 30, 2021 and 2020, respectively. On July 26, 2021, we sold our 555 building and recognized a gain on the sale in the amount of $6,894,109. Gain on debt extinguishment was $2,443,000 and $0 for the nine months ended September 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 nine months ended September 30, 2021. Other income from subleasing a portion of our 555 Building was $500,000 and $395,000 in the nine months ended September 30, 2021 and 2020, respectively. The increase of $105,000 was the result of higher rent due to increased occupancy in 2021, until the sale of the Building which occurred on July 26, 2021. As a result of lower interest rates, interest income decreased $58,000, to $3,000 for the nine months ended September 30, 2021 as compared to $61,000 in 2020. In addition, interest expense related to our mortgages decreased $86,000 to $250,000 for the nine months ended September 30, 2021, as compared to $336,000 in 2020, the result of our 555 Building mortgage satisfied on July 26, 2021.
Income Taxes
For the nine months ended September 30, 2021, there was a $28,000 income tax expense related to the gain on the sale of the building, which were reduced by the benefit of our net operating loss carryforwards, as compared to an income tax benefit of $1.5 million for the nine months ended September 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 the 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 a $6.9 million gain on the sale of our 555 Building and $2.4 million in forgiveness of debt income related to the Company’s PPP Loan, we reported net income of $5.9 million, or $0.89 per diluted share, for the nine months ended September 30, 2021, as compared to a net loss of ($.8 million) (which included the $1.5 million tax benefit as noted above), or $0.12 per diluted share for the nine months ended September 30, 2020.
Liquidity and Capital Resources
As of September 30, 2021, we had aggregate working capital of $17.7 million compared to aggregate working capital of $8.1 million at December 31, 2020. Our cash and cash equivalents at September 30, 2021 and December 31, 2020 were $17.4 million and $7.7 million, respectively.
Net cash used in operating activities was $3.6 million. This is the result of a net loss, adjusted for non-cash items, of $2.6 million, increased contract assets of $1.1 million, increased accounts receivable of $.8, increased inventory of $.3 million, offset, in part by, increased contract liabilities of $.7 million, and decreased other assets of $.5 million.
In order to increase our liquidity and to provide necessary working capital to support our on-going business and operations, 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. We recognized a gain on the sale of the building in the amount of $6,894,109 and received approximately $14,000,000 in net proceeds.
Long term debt during the period decreased by $9.5 million from principal payments on our mortgages in Central Islip, NY. This included the principal repayment in the amount of approximately $9.1 million, to satisfy our loan at closing of the sale of the 555 Building.
Capital expenditures were $213,000 in the nine months ended September 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 September 30, 2021 and December 31, 2020 were approximately $1.8 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% (1.85% and 1.89% at September 30, 2021 and December 31, 2020, respectively).
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 September 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 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 nine months ended September 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 September 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 our projected 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. |
The following risk factor is in addition to the risk factors previously disclosed in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 31, 2021. The risk factor set forth below should be read in conjunction with the risk factors section and the Management's Discussion and Analysis section included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 31, 2021.
Supply chain delays and cost increases may adversely affect our business.
The COVID-19 pandemic has adversely impacted worldwide supply chains and the ability to obtain sufficient amounts of component parts. In addition, disruptions and delays in the ability of our third party freight carriers to transport these items to our manufacturing facility also continues to be a challenge. During Q3 2021, we experienced increased costs on certain components as well as delays in supply chain delivery, which may also impact our ability to recognize revenue and reduce our gross profit margins, as well as extend our manufacturing lead times and reduce our manufacturing efficiencies. We have commenced placing orders with more lead time to help mitigate the manufacturing delays, as well as assessing other suppliers or components to attempt to mitigate the potential cost impacts. In addition, we are utilizing our in-house flexible manufacturing to attempt to further mitigate both potential schedule delivery delays and material cost increase. While we have initiated actions to mitigate the potential negative impacts to our revenue and profitability, there can be no assurance of the ultimate impact and the length of time period that the supply chain factors may impact our revenues and profitability.
Except as noted above, there have been no other material changes to the risk factors disclosed in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 31, 2021.
| 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 |
| 31.1* | Certification of Emmanuel Lakios, Chief Executive Officer, dated November 15, 2021 |
| 31.2* | Certification of Thomas McNeill, Chief Financial Officer, dated November 15, 2021 |
| 32.1* | Certification of Emmanuel Lakios, Chief Executive Officer, dated November 15, 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 November 15, 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 (formatted as Inline XBRL and contained in Exhibit 101). |
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* 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 15th day of November 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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President and Chief Executive Officer |
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| By: | /s/ Thomas McNeill | ||
| Thomas McNeill | |||
| Executive Vice President and | |||
| Chief Financial Officer | |||
| (Principal Financial and | |||
| Accounting Officer) | |||
EXHIBIT INDEX
| 31.1* | Certification of Emmanuel Lakios, Chief Executive Officer, dated November 15, 2021 |
| 31.2* | Certification of Thomas McNeill, Chief Financial Officer, dated November 15, 2021 |
| 32.1* | Certification of Emmanuel Lakios, Chief Executive Officer, dated November 15, 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 November 15, 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 (formatted as 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.