UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
Form 10-Q
(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: 1-16525
CVD EQUIPMENT CORPORATION
(Name of Registrant in Its Charter)
New York | 11-2621692 |
State or Other Jurisdiction of | (I.R.S. Employer Identification No.) |
355 South Technology Drive Central Islip, New York 11722 | |
(Address of principal executive offices) |
(631) 981-7081
(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 |
Common Stock | CVV | NASDAQ Capital Market |
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. Yes ☑ No☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☑ No☐
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,”filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act).
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☑ Smaller reporting company ☑ Emerging growth company ☐
Large accelerated filer ☐ | Accelerated filer ☐ | |
Non-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: 6,507,5146,555,570 shares of Common Stock, $0.01 par value at November 3, 2018.August 5, 2019.
CVD EQUIPMENTEQUIPMENT CORPORATION AND SUBSIDIARYSUBSIDIARIES
Index
Part I - Financial Information | |
Item 1 – Financial Statements (Unaudited) | |
Consolidated Balance Sheets at | 3 |
Consolidated Statements of Operations for the three and | 4 |
Consolidated Statements of Cash Flows for the | 5 |
Notes to | 6 |
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations | 18 |
Item 3 – Quantitative and Qualitative Disclosures About Market Risk | 26 |
Item 4 – Controls and Procedures | 26 |
Part II - Other Information |
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Item 1 – Legal |
|
Item |
|
Item 2 – Unregistered Sales of Equity Securities and Use of |
|
Item 3 – Defaults Upon Senior |
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Item 4 – Mine Safety |
|
Item 5 – Other |
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Item 6 | 28 |
Signatures |
|
Exhibit Index |
|
PART 1 – FINANCIAL INFORMATION
Item 1 – Financial Statements
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
September 30, 2018 | December 31, 2017 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 14,192,180 | $ | 14,210,909 | ||||
Accounts receivable, net | 2,587,367 | 2,058,617 | ||||||
Contract assets | 2,551,155 | 8,397,024 | ||||||
Inventories | 2,751,504 | 2,965,623 | ||||||
Prepaid expenses and other current assets | 537,683 | 167,425 | ||||||
Total Current Assets | 22,619,889 | 27,799,598 | ||||||
Property, plant and equipment, net | 30,272,974 | 28,839,457 | ||||||
Deferred income taxes | 1,925,108 | 1,609,186 | ||||||
Deposits | 71,875 | 67,847 | ||||||
Intangible assets, net | 520,220 | 662,162 | ||||||
Total Assets | $ | 55,410,066 | $ | 58,978,250 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 1,261,385 | $ | 1,174,968 | ||||
Accrued expenses | 1,777,662 | 2,738,373 | ||||||
Current maturities of long-term debt | 657,811 | 647,324 | ||||||
Current portion acquisition related contingent payments | 100,000 | 100,000 | ||||||
Contract liabilities | 229,216 | 466,313 | ||||||
Deferred revenue | 890,447 | 291,953 | ||||||
Total Current Liabilities | 4,916,521 | 5,418,931 | ||||||
Long-term acquisition related contingent payments | 200,000 | 200,000 | ||||||
Long-term debt, net of current portion | 12,211,266 | 12,705,683 | ||||||
Total Long-Term liabilities | 12,411,266 | 12,905,683 | ||||||
Total Liabilities | 17,327,787 | 18,324,614 | ||||||
Commitments and Contingencies | ---- | ---- | ||||||
Stockholders’ Equity | �� | |||||||
Common stock - $0.01 par value – 20,000,000 shares authorized; issued and outstanding, 6,496,332 at September 30, 2018 and 6,458,714 at December 31, 2017 | 64,963 | 64,587 | ||||||
Additional paid-in-capital | 25,912,507 | 25,209,316 | ||||||
Retained earnings | 12,104,809 | 15,379,733 | ||||||
Total Stockholders’ Equity | 38,082,279 | 40,653,636 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 55,410,066 | $ | 58,978,250 |
The accompanying notes are an integral part of these consolidated financial statements
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenue | $ | 4,027,768 | $ | 10,831,729 | $ | 19,616,879 | $ | 31,312,055 | ||||||||
Cost of revenue | 4,083,752 | 6,229,062 | 14,795,731 | 18,127,799 | ||||||||||||
Gross (loss)/profit | (55,984 | ) | 4,602,667 | 4,821,148 | 13,184,256 | |||||||||||
Operating expenses | ||||||||||||||||
Research and development | 240,613 | 158,310 | 465,536 | 339,610 | ||||||||||||
Selling and shipping | 331,280 | 345,406 | 1,244,004 | 983,731 | ||||||||||||
General and administrative | 2,225,593 | 2,208,628 | 6,434,123 | 6,423,016 | ||||||||||||
Total operating expenses | 2,797,486 | 2,712,344 | 8,143,663 | 7,746,357 | ||||||||||||
Operating (loss)/income | (2,853,470 | ) | 1,890,323 | (3,322,515 | ) | 5,437,899 | ||||||||||
Other income (expense) | ||||||||||||||||
Interest income | 40,720 | 28,485 | 86,994 | 54,538 | ||||||||||||
Interest expense | (114,692 | ) | (17,189 | ) | (355,325 | ) | (52,433 | ) | ||||||||
Other (expense)/income | --- | 2,575 | --- | 3,014 | ||||||||||||
Total other (expense), net | (73,972 | 13,871 | (268,331 | ) | 5,119 | |||||||||||
(Loss)/income before income taxes | (2,927,442 | ) | 1,904,194 | (3,590,846 | ) | 5,443,018 | ||||||||||
Income tax (benefit)/expense | (424,640 | ) | 508,316 | (315,922 | ) | 1,766,231 | ||||||||||
Net (loss)/income | $ | (2,502,802 | ) | $ | 1,395,878 | $ | (3,274,924 | ) | $ | 3,676,787 | ||||||
Basic (loss)/income per common share | $ | (0.39 | ) | $ | 0.22 | $ | (0.51 | ) | $ | 0.58 | ||||||
Diluted (loss)/income per common share | $ | (0.39 | ) | $ | 0.22 | $ | (0.51 | ) | $ | 0.58 | ||||||
Weighted average common shares Outstanding-basic | 6,494,986 | 6,378,656 | 6,482,870 | 6,314,224 | ||||||||||||
Net effect of potential common share issuance: | ||||||||||||||||
Stock options | --- | 34,410 | --- | 33,748 | ||||||||||||
Weighted average common shares Outstanding-diluted | 6,494,986 | 6,413,066 | 6,482,870 | 6,347,972 |
The accompanying notes are an integral part of these consolidated financial statements
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net (loss)/income | $ | (3,274,924 | ) | $ | 3,676,787 | |||
Adjustments to reconcile net (loss)/income to net cash provided by/(used in) operating activities: | ||||||||
Stock-based compensation expense | 703,567 | 677,552 | ||||||
Depreciation and amortization | 824,861 | 623,656 | ||||||
Deferred tax (benefit)/expense | (315,922 | ) | 559,123 | |||||
Provision for doubtful accounts | 275 | 3,724 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | (529,026 | ) | (3,453,556 | ) | ||||
Contract assets | 5,845,869 | (1,861,408 | ) | |||||
Inventories | 214,119 | 263,531 | ||||||
Prepaid expenses and other current assets | (370,257 | ) | (202,656 | ) | ||||
Deposits and other assets | 144,715 | 23,613 | ||||||
Increases/(decreases) in operating liabilities: | ||||||||
Accounts payable and accrued expenses | (874,293 | ) | 649,089 | |||||
Contract liabilities | (237,098 | ) | (5,046,437 | ) | ||||
Deferred revenue | 598,494 | 420,965 | ||||||
Total adjustments | 6,005,304 | (7,342,804 | ) | |||||
Net cash provided by/(used in) operating activities | 2,730,380 | (3,666,017 | ) | |||||
Cash flows from investing activities: | ||||||||
Capital expenditures | (2,258,379 | ) | (618,505 | ) | ||||
Deposits | (6,800 | ) | (9,127 | ) | ||||
Net cash (used in) investing activities | (2,265,179 | ) | (627,632 | ) | ||||
Cash flows from financing activities: | ||||||||
Net proceeds from stock options exercised | --- | 22,120 | ||||||
Principal payments of long-term debt | (483,930 | ) | (225,000 | ) | ||||
Net cash (used in) financing activities | (483,930 | ) | (202,880 | ) | ||||
Net (decrease) in cash and cash equivalents | (18,729 | ) | (4,496,529 | ) | ||||
Cash and cash equivalents at beginning of period | 14,210,909 | 21,677,186 | ||||||
Cash and cash equivalents at end of period | $ | 14,192,180 | $ | 17,180,657 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Income taxes paid | $ | 395,000 | $ | 701,800 | ||||
Interest paid | $ | 355,322 | $ | 52,433 |
(Unaudited) | ||||||||
June 30, 2019 | December 31, 2018 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 8,580,564 | $ | 11,439,361 | ||||
Accounts receivable, net | 2,066,025 | 4,065,220 | ||||||
Contract assets | 1,654,467 | 1,357,797 | ||||||
Inventories, net | 1,882,666 | 1,861,873 | ||||||
Other current assets | 509,806 | 723,204 | ||||||
Total Current Assets | 14,693,528 | 19,447,455 | ||||||
Property, plant and equipment, net | 31,317,156 | 30,402,558 | ||||||
Deferred income taxes | 2,802,414 | 2,104,414 | ||||||
Other assets | 41,748 | 64,583 | ||||||
Intangible assets, net | 461,058 | 495,552 | ||||||
Total Assets | $ | 49,315,904 | $ | 52,514,562 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 1,149,879 | $ | 713,194 | ||||
Accrued expenses | 1,730,518 | 1,503,309 | ||||||
Current maturities of long-term debt | 865,464 | 857,590 | ||||||
Contract Liabilities | 170,975 | 536,524 | ||||||
Deferred revenue | 482,677 | 459,899 | ||||||
Total Current Liabilities | 4,399,513 | 4,070,516 | ||||||
Long-term debt, net of current portion | 11,716,283 | 12,051,720 | ||||||
Total Long-Term Liabilities | 11,716,283 | 12,051,720 | ||||||
Total Liabilities | 16,115,796 | 16,122,236 | ||||||
Commitments and contingencies | - | - | ||||||
Stockholders’ Equity: | ||||||||
Common stock - $0.01 par value – 20,000,000 shares authorized; issued and outstanding 6,555,150 at June 30, 2019 and 6,535,888 at December 31, 2018 | 65,551 | 65,358 | ||||||
Additional paid-in capital | 26,525,521 | 26,148,256 | ||||||
Retained earnings | 6,609,036 | 10,178,712 | ||||||
Total Stockholders’ Equity | 33,200,108 | 36,392,326 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 49,315,904 | $ | 52,514,562 |
The accompanying notes are an integral part of these consolidated financial statements
CVD EQUIPMENT CORPORATION AND SUBSIDIARIESSUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018Consolidated Statements of Operations
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenue | $ | 4,918,118 | $ | 6,435,278 | $ | 8,395,378 | $ | 15,589,111 | ||||||||
Cost of revenue | 4,425,279 | 5,319,060 | 8,290,280 | 10,711,979 | ||||||||||||
Gross profit | 492,839 | 1,116,218 | 105,098 | 4,877,132 | ||||||||||||
Operating expenses | ||||||||||||||||
Research and development | 176,920 | 128,117 | 341,000 | 224,923 | ||||||||||||
Selling and shipping | 227,117 | 399,249 | 504,424 | 912,724 | ||||||||||||
General and administrative | 1,632,022 | 1,968,465 | 3,368,110 | 4,208,530 | ||||||||||||
Total operating expenses | 2,036,059 | 2,495,831 | 4,213,534 | 5,346,177 | ||||||||||||
Operating loss | (1,543,220 | ) | (1,379,613 | ) | (4,108,436 | ) | (469,045 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest income | 42,063 | 29,314 | 88,869 | 46,274 | ||||||||||||
Interest expense | (126,270 | ) | (119,279 | ) | (240,806 | ) | (240,633 | ) | ||||||||
Total other expense, net | (84,207 | ) | (89,965 | ) | (151,937 | ) | (194,359 | ) | ||||||||
Loss before income tax | (1,627,427 | ) | (1,469,578 | ) | (4,260,373 | ) | (663,404 | ) | ||||||||
Income tax (benefit) expense | (234,697 | ) | (139,052 | ) | (690,697 | ) | 108,718 | |||||||||
Net loss | $ | (1,392,730 | ) | $ | (1,330,526 | ) | $ | (3,569,676 | ) | $ | (772,122 | ) | ||||
Basic loss per common share | $ | (0.21 | ) | $ | (0.21 | ) | $ | (0.55 | ) | $ | (0.12 | ) | ||||
Diluted loss per common share | $ | (0.21 | ) | $ | (0.21 | ) | $ | (0.55 | ) | $ | (0.12 | ) | ||||
Weighted average common shares Outstanding-basic | 6,555,150 | 6,486,067 | 6,547,035 | 6,476,712 | ||||||||||||
Weighted average common shares Outstanding-diluted | 6,555,150 | 6,486,067 | 6,547,035 | 6,476,712 |
The accompanying notes are an integral part of these consolidated financial statements
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended | ||||||||
June, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (3,569,676 | ) | $ | (772,122 | ) | ||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities | ||||||||
Stock-based compensation | 377,457 | 424,015 | ||||||
Depreciation and amortization | 554,579 | 544,158 | ||||||
Deferred income tax (benefit)/expense | (698,000 | ) | 56,888 | |||||
Provision for inventory obsolescence | 50,000 | - | ||||||
(Increase)/decrease in operating assets | ||||||||
Accounts receivable | 1,999,195 | (663,864 | ) | |||||
Contract assets | (296,670 | ) | 3,082,808 | |||||
Inventories | (70,793 | ) | 317,604 | |||||
Other current assets | 213,399 | (47,204 | ) | |||||
Increase/(decrease) in operating liabilities | ||||||||
Accounts payable | 436,684 | 52,290 | ||||||
Accrued expenses | 227,209 | (663,436 | ) | |||||
Contract liabilities | (365,549 | ) | (187,051 | ) | ||||
Deferred revenue | 22,778 | 815,639 | ||||||
Total adjustments | 2,450,289 | 3,731,847 | ||||||
Net cash (used in) provided by operating activities | (1,119,387 | ) | 2,959,725 | |||||
Cash flows from investing activities: | ||||||||
Capital expenditures | (1,434,682 | ) | (1,273,857 | ) | ||||
Other assets | 22,835 | (177,789 | ) | |||||
Net cash used in investing activities | (1,411,847 | ) | (1,451,646 | ) | ||||
Cash flows from financing activities | ||||||||
Payments of long-term debt | (327,563 | ) | (322,499 | ) | ||||
Net cash used in financing activities | (327,563 | ) | (322,499 | ) | ||||
Net (decrease) increase in cash and cash equivalents | (2,858,797 | ) | 1,185,580 | |||||
Cash and cash equivalents at beginning of period | 11,439,361 | 14,210,909 | ||||||
Cash and cash equivalents at end of period | $ | 8,580,564 | $ | 15,396,489 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Income taxes paid | $ | - | $ | 395,000 | ||||
Interest paid | $ | 240,806 | $ | 242,324 | ||||
Capitalization of right to use Asset | $ | 128,947 | $ | - |
The accompanying notes are an integral part of these consolidated financial statements
NOTE 1: |
|
The accompanying unaudited consolidated financial statements for CVD Equipment Corporation and subsidiariesSubsidiaries (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 disclosuresfootnotes 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 ninesix months ended SeptemberJune 30, 20182019 are not necessarily indicative of the results that can be expected for the year ending December 31, 2018.2019.
The consolidated balance sheet as of December 31, 20172018 has been derived from the audited consolidated financial statements at such date, 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. For further information, please refer to the consolidated financial statements and notes thereto included in the Company’sCompany’ Annual Report on Form 10-K for the year ended December 31, 2017,2018, including the accounting policies followed by the Company as set forth in Note 2 to the consolidated financial statements contained therein.
All material intercompany transactions have been eliminated in consolidation. In addition, certain reclassifications have been made to prior period consolidated financial statements to conform to the current year presentation.
NOTE 2:
| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Revenue Recognition
On January 1, 2018, we adopted accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments using the modified retrospective method for all customer contracts not yet completed as of the adoption date. Results for reporting periods beginning January 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted.
The adoption of ASC 606 did not have a significant impact on our Consolidated Financial Statements as of and for the three and nine-monthsix month periods ended SeptemberJune 30, 2018 and, as a result, comparisons of revenues and operating profits performance between periods are not affected by the adoption of this ASU.
The accompanying notes are an integral part of these consolidated financial statements
NOTE 2: |
|
Revenue Recognition (continued)
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.
Incurred costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, 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 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.
“Contract assets,” include unbilled amounts typically resulting from sales under contracts when revenue recognition is utilized 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. 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.
The accompanying notes are an integral part of these consolidated financial statements
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
Impact to Previously Reported Results
(In thousands) | Adoption of | |||||||||||
As Reported | ASC 606 | As Adjusted | ||||||||||
Costs and estimated earnings in excess of billings | $ | 8,397 | $ | (8,397 | ) | $ | --- | |||||
Contract assets | --- | 8,397 | 8,397 | |||||||||
Billings in excess of costs and estimated earnings | 466 | (466 | ) | --- | ||||||||
Contract liabilities | --- | 466 | 466 |
NOTE 2: | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Research and Development
Research and development costs are expensed as incurred. Due to the highly technical nature of our projects, we use our technical staff in a dual role, and based on their contribution to the customer or research and development projects, their costs are charged accordingly to either cost of goods sold or research and development.
Recent Accounting Pronouncements
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU permits companies to elect a reclassification of disproportionate tax effects in accumulated other comprehensive income (AOCI) caused by the Tax Cuts and Jobs Act of 2017 to retained earnings. The ASU also requires additional disclosures. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the effect of this ASU on our consolidated financial statements.
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, FinancialFinancial 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. The amendments in this update are effective for fiscal years beginning after December 15, 2019 and interim periods within those annual periods. Early adoption for fiscal years beginning after December 15, 2018 is permitted. We are currently evaluating the effect of this update on our consolidated financial statements.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
RecentRecently Adopted Accounting Pronouncements
In February 2016 the FASB issued ASU No. 2016-02, Leases"Leases (Topic 842), which supersedes ASC 840, Leases," (ASU 2016-02). The primary difference between previous GAAP and createsASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The guidance requires a new topic, ASC 842, Leases. This update establisheslessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use (“ROU”) model that requires lesseesasset representing its right to recognizeuse the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, liabilitya lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease assets and a lease asset for all leases, including operatingliabilities only if the lessee is reasonably certain to exercise that purchase option. For leases with a term greater thanof 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on its balance sheet. The update also expandsa straight-line basis over the required quantitative and qualitative disclosures surrounding leases. The accounting for lessors does not fundamentally change except for changes to conform and align guidance to the lessee guidance as well as to the new revenue recognition guidance inlease term. ASU 2014-09. This update2016-02 is effective for fiscal years beginning after December 15, 20182018. Lessees and interim periods within those fiscal years. This update will be applied using a modified retrospective transition approach forlessors are required to recognize and measure leases existing at or entered into after, the beginning of the earliest comparative period presented in the financial statements. Weusing a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply.
The accompanying notes are currently evaluating the effectan integral part of this update on ourthese consolidated financial statements however we do not expect ASC
NOTE 2: | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. In addition, FASB has amended Topic 842 prior to haveit becoming effective. The effective date and transition requirements for these amendments to Topic 842 are the same as ASU 2016-02. The Company has one lease at its Denmark facility which currently expires at December 31, 2020 and has recognized a material effect on either our consolidated statementlease liability and a right-of-use asset representing its right to use the underlying asset for the lease term in the amount of operations or consolidated statement of cash flow.$129,000.
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: |
|
Cash and cash equivalents
Financial instruments that potentially subject theThe Company to concentrations of credit risk consist ofhad cash and cash equivalents of $8.6 million and $11.4 million at June 30, 2019 and December 31, 2018, respectively. The Company invests excess cash in U.S. treasury bills, certificates of deposit or money market accounts, receivable. all with maturities of less than three months. Cash equivalents were $7.5 million and $8.9 million at June 30, 2019 and December 31, 2018, respectively.
The Company places most of its temporary cash equivalentsinvestments with high credit-quality financial institutions, and invests its excess cash primarily in savings accounts and money market instruments. Cash and cash equivalents at September 30, 2018 and December 31, 2017, exceededwhich from time to time may exceed the Federal Deposit Insurance Corporation (“FDIC”) limits by approximately $12,593,000limit. The amount at risk at June 30, 2019 and $12,198,000,December 31, 2018 was $6,824,000 and $6,920,000, respectively.
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
NOTE 3: CONCENTRATION OF CREDIT RISK (continued)
Sales concentration
Revenue tofrom a single customer in any one period can exceed 10% of our total sales.revenues. During the three and six months ended SeptemberJune 30, 2018 and September 30 2017,2019, one customer represented approximately 26%13% and 59%, respectively,10% of our revenues. DuringFor the ninethree and six months ended SeptemberJune 30, 2018, and September 30, 2017 that samea different customer represented 40%approximately 37% and 65%, respectively,43% of our revenues.
The accompanying notes are an integral part of these consolidated financial statements
NOTE 3: | CONCENTRATION OF CREDIT RISK (continued) |
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. TheAt June 30, 2019 two customers each exceeded 10% of the accounts receivable balance, as of September 30,representing 24% in total, and at December 31, 2018 includes amounts from two customers that each exceed 10%represented approximately 42% of the total. The accounts receivable balance as of September 30, 2017 includes amounts from three customers, each of which exceed 10% of the total. These balances are from five different customers.balance.
NOTE 4: |
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The following table represents a disaggregation of revenue from contracts with customers for the three and ninesix months ended SeptemberJune 30, 20182019 and September 30, 2017:2018:
(in Thousands)
(In thousands) | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
Category | September 30, 2018 | September 30, 2017 | September 30, 2018 | September 30, 2017 | June 30, 2019 | June 30, 2018 | June 30, 2019 | June 30, 2018 | ||||||||||||||||||||||||
Aerospace | 429 | 6,410 | 6,508 | 20,346 | $ | 1,003 | $ | 2,205 | $ | 1,216 | $ | 6,079 | ||||||||||||||||||||
Industrial | 755 | 1,653 | 5,963 | 5,035 | 1,810 | 1,962 | 3,387 | 5,208 | ||||||||||||||||||||||||
Research | 503 | 526 | 2,378 | 1,988 | 1,102 | 1,014 | 1,954 | 1,875 | ||||||||||||||||||||||||
Point in time | 2,341 | 2,243 | 4,768 | 3,943 | 1,003 | 1,254 | 1,838 | 2,427 | ||||||||||||||||||||||||
Net revenue | 4,028 | 10,832 | 19,617 | 31,312 | ||||||||||||||||||||||||||||
Net Revenue | $ | 4,918 | $ | 6,435 | $ | 8,395 | $ | 15,589 |
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.
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
NOTE 4: REVENUE FROM CONTRACTS WITH CUSTOMERS (continued)
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. The table below outlines the impact on revenue of net changes in estimated transaction prices and input costs for systems related sales contracts (both increases and decreases) for the three and ninesix months ended SeptemberJune 30, 2019 and 2018, as well as the number of projects that comprise such changes. Also included in the table is the net change in estimate as a percentage of the aggregate revenue for such projects.
The accompanying notes are an integral part of these consolidated financial statements
Three Months Ended | Nine Months Ended | |||||
(In thousands) | September 30, 2018 | September 30, 2018 | ||||
Increase in revenue from net changes in transaction prices | $ | 71 | 146 | |||
(Decrease) in revenue from net changes in input cost estimates | (1,170 | ) | (1,740 | ) | ||
Net (decrease) in revenue from net changes in estimates | (1,099 | ) | (1,594 | ) | ||
Number of projects | 15 | 15 | ||||
Net change in estimate as a percentage of aggregate revenue for associated projects | (2.4 | %) | (3.4 | %) |
NOTE 4: | REVENUE FROM CONTRACTS WITH CUSTOMERS (continued) |
Three Months Ended | Three Months Ended | |||||||
(In thousands) | June 30, 2019 | June 30, 2018 | ||||||
Increase in revenue from net changes in transaction prices | $ | 0 | $ | 34 | ||||
(Decrease) increase in revenue from net changes in input cost estimates | $ | (61 | ) | $ | (479 | ) | ||
Net (decrease) increase in revenue from net | ||||||||
Changes in estimates | $ | (61 | ) | $ | (445 | ) | ||
Number of projects | 26 | 15 | ||||||
Net change in estimate as a percentage of aggregate revenue for associated projects | (.9 | %) | (9.2 | %) |
Six Months Ended | Six Months Ended | |||||||
(In thousands) | June 30, 2019 | June 30, 2018 | ||||||
Increase in revenue from net changes in transaction prices | $ | 9 | $ | 75 | ||||
(Decrease) increase in revenue from net changes in input cost estimates | $ | (240 | ) | $ | (570 | ) | ||
Net (decrease) increase in revenue from net | ||||||||
Changes in estimates | $ | (231 | ) | $ | (495 | ) | ||
Number of projects | 26 | 10 | ||||||
Net change in estimate as a percentage of aggregate revenue for associated projects | (.5 | %) | (8.8 | %) |
For the three and ninesix months ended SeptemberJune 30, 2019 and 2018, revenue decreased(decreased) increased by $1,099,000($61,000) and $1,594,000,($231,000) in 2019, respectively, and ($445,000) and ($495,000) in 2018, respectively, from net changes in transaction prices, input cost estimates, product cost overruns and product cost forecast changes related to redesign of certain systems.
The accompanying notes are an integral part of these consolidated financial statements
NOTE 4: | REVENUE FROM CONTRACTS WITH CUSTOMERS (continued) |
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.
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
NOTE 4: REVENUE FROM CONTRACTS WITH CUSTOMERS (continued)
Contract Assets and Liabilities
During the ninesix months ended SeptemberJune 30, 2019 and 2018, the decreaseincrease (decrease) in contract assets of approximately $5.8$.3 million and ($3.1 million), respectively, was primarily drivencaused by additional billed receivables during the 2018 period, for those projects that certain milestones had been reached. During the nine months ended September 30, 2018, the decrease in contract liabilities of $237,000 was primarily due to invoicing for those projects.
NOTE 5: |
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Inventories consist of:
(in thousands) | September 30, 2018 | December 31, 2017 | ||||||||||||||
June 30, 2019 | December 31, 2018 | |||||||||||||||
Raw materials | $ | 1,943 | $ | 2,549 | $ | 1,701,667 | $ | 2,016,488 | ||||||||
Work-in-process | 782 | 390 | 590,999 | 205,385 | ||||||||||||
Finished goods | 27 | 27 | - | - | ||||||||||||
Totals | $ | 2,752 | $ | 2,966 | ||||||||||||
Gross inventories | 2,292,666 | 2,221,873 | ||||||||||||||
Less reserve for obsolescence | (410,000 | ) | (360,000 | ) | ||||||||||||
Inventories, net | $ | 1,882,666 | $ | 1,861,873 |
NOTE 6: |
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Accounts receivable are presented net of an allowance for doubtful accounts of approximately $4,000$24,000 as of SeptemberJune 30, 20182019 and December 31, 2017, respectively.2018. The allowance is based on prior experience and management’s evaluation of the collectability of accounts receivable. Management believes the allowance is adequate. However, future estimates may change based on changes in future economic conditions.
NOTE 7: DEFERRED REVENUE
Deferred revenue of $890,000 at September 30, 2018 and $292,000 at December 31, 2017 represents amounts billed, other than deposits, in excess of the revenue than can be recognized at the balance sheet date.
NOTE 8: LONG-TERM DEBT
The Company’saccompanying notes are an integral part of these consolidated financial statements
NOTE 7: | LONG-TERM DEBT |
The Company had a revolving credit facility with HSBC Bank, USA, N.A. (“HSBC”) providing up to $7 million, although the Company had never utilized this facility. This credit facility expired by its terms on September 1, 2018. The Company elected not to renew its credit line at this time because (a) renewal terms were not acceptable to it; (b) the Company has not borrowed against this facility in the past ten years, and (c) the Company has determined that it has sufficient cash and cash equivalents to meet its working capital cand capital expenditure requirements over the next twelve months. The Company is continuing to have discussions with HSBC about securing a new revolving credit facility on mutually acceptable terms; however, there can be no assurance that the Company and HSBC will be able to reach an agreement.
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
NOTE 8: LONG-TERM DEBT (continued)
The Company has a loan agreement with HSBC which is secured by a mortgage againston our facility at 355 South Technology Drive, Central Islip, NY.NY headquarters. The loan is payable in 120 consecutive equal monthly installments of $25,000 in principal of $25,000 plus interest thereon and a final balloon payment upon maturity in March 2022. The balances on the mortgage at Septemberas of June 30, 20182019 and December 31, 20172018 were approximately $2.7$2.5 million and $3.0$2.7 million respectively. Interest accrues on the loan,Loan, at our option, at the variable rate of LIBOR plus 1.75%, or Prime less 0.5%.
On November 30, 2017, the Company purchased the premises located at 555 North Research Place, Central Islip, NY. The purchase price of the building was $13,850,000 exclusive of closing costs. The Company’s 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 4.01% and 3.31% at September 30, 2018 and December 31, 2017, respectively. At September 30, 2018, the Company was not in compliance with oneused to finance a portion of the financial covenants and has received a waiver from HSBC until October 1, 2019.
The Company has an additional loan agreement with HSBC which is secured by a mortgage against our facilitypurchase price to acquire the premises located at 555 North Research Place, Central Islip, New York. The loanLoan 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 (the “Mortgage”), dated November 30, 2017, as well as a collateral Assignment of Leases and Rents.
The Loan is payable in 60 consecutive equal monthly installments of $62,481 including interest and final balloon payment upon maturity in December 2022. The balance outstanding as of June 30, 2019 and December 31, 2018 were approximately $63,000 including interest.$9.9 million and $10.0 million respectively. The Loan bears interest for each Interest accrues onPeriod (as defined in the loanNote), at the fixed rate of 3.91%3.9148%. The maturity date for the Note is December 1, 2022. The outstanding principal balances asAs a condition of Septemberthe Bank making the Loan, the Company was required to guaranty Assignee’s obligations under the Loan pursuant that certain Unlimited Guaranty, dated November 30, 2018 and2017 (the “Guaranty”). On May 31, 2019, the Company entered into two sublease agreements for a portion of the CVD Materials facility. During the quarter ended June 30, 2019, the Company recognized $36,000 of rental income which commenced June 1, 2019. Commencing July 2019, the monthly rental income will increase to approximately $67,000 per month or approximately $800,000 per annum.
At December 31, 2017 were approximately $10.1 million and $10.4 million, respectively. At September 30, 2018, the Company was not in compliance with the one offinancial covenant (fixed charge coverage ratio) contained in the financial covenants and hasMortgage. On March 26, 2019 the Company received a waiver from HSBC until OctoberApril 1, 2020. On August 5, 2019, the Company entered into a Mortgage Modification Agreement which replaced the former covenant with a Minimum Liquid Assets covenant. The Company is in compliance with its obligations under the mortgage at June 30, 2019.
The accompanying notes are an integral part of these consolidated financial statements
NOTE 8: |
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During the three and nine months ended September 30, 2018 and September 30, 2017, theThe Company recorded compensation expense as part of selling and general administrative expense of approximately $280,000$179,000 and $242,000$378,000 during the three and $704,000six months ended June 30, 2019, respectively, and $678,000,during the three and six months ended June 30, 2018, $201,000 and $424,000, respectively, for the cost of employee and director services received in exchange for equity instruments based on the grant-date fair value of those instruments. This expense was recorded based upon the guidance of ASC 718, “Compensation-Stock Compensation.”
NOTE 9: | INCOME TAXES |
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,On December 22, 2017, the Tax Cuts and Jobs Act was enacted in the U.S. Tax Reform significantly lowering the amount of current and future income tax expense primarily due to the reduction in the U.S. statutory tax rate from 35.0% to 21.0%. This provision went into effect on January 1, 2018
(Unaudited)
NOTE 10: INCOME TAXES and resulted in the loss of our ability to take the domestic production activities deduction which has been repealed and requires us to remeasure our deferred tax assets and liabilities.
The provision for income taxes includes the following:
Nine Months Ended September 30, | ||||||||||||||||
2018 | 2017 | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | |||||||||||||||
Current: | ||||||||||||||||
Federal | $ | --- | $ | 1,195,528 | $ | --- | $ | 48,330 | ||||||||
State | --- | 11,580 | 7,303 | 3,500 | ||||||||||||
Total Current Provision | 1,207,108 | |||||||||||||||
Total current provision | 7,303 | 51,830 | ||||||||||||||
Deferred: | ||||||||||||||||
Federal | $ | (315,922 | ) | $ | 559,123 | $ | (698,000 | ) | $ | 56,888 | ||||||
State | ---- | ---- | ------ | ---- | ||||||||||||
Total deferred | (315,922 | ) | 559,123 | |||||||||||||
Income tax (benefit)/expense | $ | (315,922 | ) | $ | 1,766,231 | |||||||||||
Total deferred (benefit) provision | (698,000 | ) | 56,888 | |||||||||||||
Income tax expense (benefit) provision | $ | (690,697 | ) | $ | 108,718 |
Tax Rate Reconciliation
The reconciliation between the Company’s effective tax rate on income from continuing operations and the statutory rate is as follows:
Nine Months Ended | ||||||||
September 30, | ||||||||
2018 | 2017 | |||||||
Income tax (benefit)/expense at federal statutory rate [21%-2018; 34%-2017] | $ | (652,837 | ) | $ | 2,075,004 | |||
Change in other accruals | 45,540 | 90,781 | ||||||
Difference between tax and book depreciation | 89,558 | (201,847 | ) | |||||
Stock-based compensation | 201,817 | (197,707 | ) | |||||
Income tax (benefit)/expense | $ | (315,922 | ) | $ | 1,766,231 |
Six Months Ended | ||||||||
June 30, | ||||||||
2019 | 2018 | |||||||
Income tax provision at federal statutory rate (21%) | $ | (895,428 | ) | $ | (139,314 | ) | ||
Foreign tax loss | 28,175 | 82,715 | ||||||
State taxes | 3,000 | 3,500 | ||||||
Difference between tax and book depreciation | 48,144 | 39,827 | ||||||
Stock compensation | 62,505 | 140,052 | ||||||
Other Permanent differences | 62,907 | (18,062 | ) | |||||
Income tax (benefit) expense | $ | (690,697 | ) | $ | 108,718 |
The accompanying notes are an integral part of these consolidated financial statements
NOTE 9: | INCOME TAXES (continued) |
The Company’s foreign subsidiary, CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberTantaline ApS incurred a loss of approximately $134,000 for the six months ended June 30, 2019 which would provide a $28,000 deferred tax asset, based on the standard corporate tax rate of 22% in Denmark. For the six months ended June 31, 2018
(Unaudited) the Company had a loss of $394,000 with a deferred tax asset of $83,000. However, sufficient uncertainty exists as to the realizability of these assets such that a full valuation allowance has been necessary.
NOTE 10: INCOME TAXES (continued)We continue to evaluate for potential utilization of the Company’s deferred tax asset on a quarterly basis, reviewing our economic models, including projections and timing of orders, the commencement of operations of the new CVD Materials segment and cost containment measures.
|
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NOTE 10: |
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In accordance with ASC 260, basicBasic earnings per share areis computed by dividing net earnings available to common shareholders (the numerator) by the weighted average number of common shares (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.
Stock options to purchase 387,930467,930 shares of common stock were outstanding and 227,930 were exercisable during the three and ninesix months ended SeptemberJune 30, 2018 as no options were issued during the three and nine months ended September 30, 2018.2019. Stock options to purchase 381,930387,930 shares were outstanding and 196,930227,930 were exercisable during the three and ninesix months ended SeptemberJune 30, 2017.2018. For the three and ninesix months ended September 30,June 31, 2019 and 2018, none of the outstanding optionsno shares were included in the diluted earnings per share calculation as their effect would have been anti-dilutive. For the three and nine months ended September 30, 2017, options to purchase 34,410 and 33,748 shares were included in the diluted earnings per share calculation respectively.
The potentially dilutive potential common shares fromon warrants and options areis calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all warrants and options are used to repurchase common stock at market value. The amount of shares remaining after the proceeds are exhausted represents the potential dilutive effect of the securities.
NOTE 11: |
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The Company operates through three (3) segments,segments: CVD Equipment Corporation (“CVD”), Stainless Design Concepts (“SDC”) and CVD Materials Corporation (“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. Materials is our new segment based on recent acquisitions, for providing materialsquartzware and 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 accompanying notes are an integral part of these consolidated financial statements
NOTE 11: |
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The Company’s corporate administration activities are reported in the CorporateEliminations 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 expensesexpense for shares granted to corporate administration employees, certain consulting expenses, investor and shareholder relations activities, interest on mortgages and all of the Company’s legal, auditing and professional fee expenses.fees, and interest expense.
Three Months Ended June 30,
Ended September 30,
(In thousands)thousands)
2018 | ||||||||||||||||||||||||||||||||||||||||||||
CVD | SDC | Materials | Corporate | Eliminations * | Consolidated | Eliminations* and | ||||||||||||||||||||||||||||||||||||||
Assets | $ | 39,792 | $ | 6,288 | $ | 17,429 | $ | 1,925 | (10,024 | ) | $ | 55,410 | ||||||||||||||||||||||||||||||||
Revenue | 2,542 | 1,047 | 526 | (87 | ) | 4,028 | ||||||||||||||||||||||||||||||||||||||
Operating (loss)/income | (1,835 | ) | 125 | (343 | ) | (801 | ) | (2,854 | ) | |||||||||||||||||||||||||||||||||||
Pretax (loss)/income | (1,850 | ) | 125 | (442 | ) | (760 | ) | (2,927 | ) | |||||||||||||||||||||||||||||||||||
2017 | ||||||||||||||||||||||||||||||||||||||||||||
2019 | CVD | SDC | Materials | Unallocated | Consolidated | |||||||||||||||||||||||||||||||||||||||
Assets | $ | 39,663 | $ | 5,977 | $ | $ | 1,952 | (1,789 | ) | $ | 45,803 | $ | 37,016 | $ | 5,581 | $ | 6,728 | $ | (9 | ) | $ | 49,316 | ||||||||||||||||||||||
Revenue | 8,863 | 2,549 | (580 | ) | 10,832 | 3,194 | 1,591 | 542 | (409 | ) | 4,918 | |||||||||||||||||||||||||||||||||
Operating income/(loss) | 1,606 | 848 | (550 | ) | 1,904 | (1,021 | ) | 508 | (130 | ) | (900 | ) | (1,543 | ) | ||||||||||||||||||||||||||||||
Pretax tax income/(loss) | 1,606 | 848 | (550 | ) | 1,904 | |||||||||||||||||||||||||||||||||||||||
Pretax income/(loss) | (1,013 | ) | 515 | (229 | ) | (900 | ) | (1,627 | ) | |||||||||||||||||||||||||||||||||||
2018 | ||||||||||||||||||||||||||||||||||||||||||||
Assets | $ | 37,403 | $ | 3,481 | $ | 17,481 | $ | (9 | ) | $ | 58,356 | |||||||||||||||||||||||||||||||||
Revenue | 5,635 | 844 | 358 | (402 | ) | 6,435 | ||||||||||||||||||||||||||||||||||||||
Operating income/(loss) | 145 | (243 | ) | (627 | ) | (655 | ) | (1,380 | ) | |||||||||||||||||||||||||||||||||||
Pretax income/(loss) | 145 | (243 | ) | (627 | ) | (745 | ) | (1,470 | ) |
NineSix Months Ended June 30,
Ended September 30,
(In thousands)
Eliminations* and | ||||||||||||||||||||||||||||||||||||||||||||
2019 | CVD | SDC | Materials | Unallocated | Consolidated | |||||||||||||||||||||||||||||||||||||||
Revenue | $ | 5,213 | $ | 2,678 | $ | 970 | $ | (466 | ) | $ | 8,395 | |||||||||||||||||||||||||||||||||
Operating income/(loss) | (2,558 | ) | 682 | (328 | ) | (1,904 | ) | (4,108 | ) | |||||||||||||||||||||||||||||||||||
Pretax income/(loss) | (2,522 | ) | 691 | (525 | ) | (1,904 | ) | (4,260 | ) | |||||||||||||||||||||||||||||||||||
2018 | ||||||||||||||||||||||||||||||||||||||||||||
CVD | SDC | Materials | Corporate | Eliminations * | Consolidated | |||||||||||||||||||||||||||||||||||||||
Revenue | $ | 14,883 | $ | 4,151 | $ | 1,256 | $ | (673 | ) | $ | 19,617 | $ | 12,341 | $ | 3,104 | $ | 730 | $ | (586 | ) | $ | 15,589 | ||||||||||||||||||||||
Operating (loss)/income | (212 | ) | 535 | (1,505 | ) | (2,140 | ) | (3,322 | ) | |||||||||||||||||||||||||||||||||||
Pretax (loss)/income | (266 | ) | 535 | (1,806 | ) | (2,053 | ) | (3,590 | ) | |||||||||||||||||||||||||||||||||||
2017 | ||||||||||||||||||||||||||||||||||||||||||||
Revenue | $ | 26,848 | $ | 6,361 | $ | $ | (1,896 | ) | $ | 31,313 | ||||||||||||||||||||||||||||||||||
Operating income/(loss) | 4,604 | 2,384 | (1,551 | ) | 5,437 | 1,482 | 488 | (1,140 | ) | (1,299 | ) | (469 | ) | |||||||||||||||||||||||||||||||
Pretax tax income/(loss) | 4,604 | 2,384 | (1,545 | ) | 5,443 | |||||||||||||||||||||||||||||||||||||||
Pretax income/(loss) | 1,482 | 488 | (1,140 | ) | (1,493 | ) | (663 | ) |
*All elimination entries represent intersegment transactionsrevenues eliminated in consolidation for external financial reporting.
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)The accompanying notes are an integral part of these consolidated financial statements
NOTE 13: PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma information for the periods set forth below gives effect to the 2017 acquisition of substantially all of the assets and business of Mesoscribe Technologies, Inc., as if it had occurred as of January 1, 2017. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time. No 2018 pro forma information is provided as the results of the acquired entity are included in the consolidated statements of operations for the three and nine months ended September 30, 2018.
Three-Month Period | Nine-Month Period | |||||||
September 30, 2017 | September 30, 2017 | |||||||
Revenue | $ | 11,084 | $ | 31,952 | ||||
Net income | 1,226 | 3,360 | ||||||
Diluted income per common share | 0.19 | 0.53 |
NOTE 12: | SUBSEQUENT EVENT |
NOTE 14: COMMITMENTS AND CONTINGENCIES
On August 5, 2019, the Company entered into a Mortgage Modification Agreement, a Reaffirmation of Unlimited Continuing Guaranty, and a Note Modification Agreement with HSBC Bank USA.The Mortgage Modification Agreement amended the original Mortgage by removing the fixed charge coverage financial ratio financial covenant and replacing it with a minimum liquid Assets covenant as follows:
Pursuant to an Asset Purchase Agreement entered into on October 31, 2017, CVD Mesoscribe Technologies Corporation, (“buyer”) a wholly-owned indirect subsidiary of CVD Equipment Corporation acquired substantiallyand its consolidated subsidiaries shall own and maintain minimum Liquid Assets of (i) at least $3,000,000 at all times for the balance of the operating assets and businesscalendar year ending December 31, 2019 (ii) $3,250,000 as of Mesoscribe Technologies, Inc., (“Seller”). The purchase price for the assets acquired in the Acquisition was $800,000 of which $500,000 was paid on the Closing Date and $300,000 may be paid to the Seller as additional acquisition related contingent consideration based upon the achievement of certain revenue thresholds and other criteria set forth in the Asset Purchase Agreement with respect to each of the two (2) consecutive twelve (12) month measurement periods following the Closing Date. The contingent liability was $300,000March 31, 2020, (iii) $3,500,000 as of September 30, 20182020, (iv) $3,750,000 as of March 31, 2021, (v) $4,000,000 as of September 30, 2021, and December 31, 2017.(vi) $4,000,000 as of each quarter end thereafter as determined by the Mortgagee. As used herein, the term "Liquid Assets" shall be deemed to mean assets of the following types and nature so long as such are not pledged, encumbered, hypothecated, subject to rights of offset or otherwise restricted:
In addition, the agreements provide for a cross default between the Company’s two existing HSBC Notes.
The accompanying notes are an integral part of these consolidated financial statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations.
Except for historical information contained herein, this “Management’s Discussion and Analysis of Financial Condition and Results of Operationstions” 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. 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.performance. You should not place undue reliance on any forward-looking statements, which speak only as of the dates they are made. When used within this Report, the words “believes,” “anticipates,” ”expects,“expects,” “estimates,” “plans,” “intends,” “will” and similar expressions are intended to identify forward-looking statementsstatements.
As a result of continuing delays in the permitting process for construction of modifications needed for our new CVD Materials facility in Central Islip, NY, we believe that we will not begin operations at this facility until the latter part of the second quarter of 2019. In order to minimize the delay, we have engaged a new architect and have met with local officials to try to accelerate the permitting process in order to finish necessary construction. As a result of this delay, we have and will incur additional expenses and carrying costs associated with the CVD Materials facility which we did not anticipate. We do however, remain very optimistic about the CVD Materials business and its contribution to the Company’s future success.
Additionally, the level of new orders from customers has not been received as anticipated, and without these orders, we believe our level of revenue for the fourth quarter of 2018 will approximate the level of revenue in the third quarter. As a result, we expect to report operating losses for the fourth quarter of 2018 and first quarter of 2019 and the timing for return to profitability depends upon, among other things, the receipt of new orders, receiving the necessary building permits and the ensuing ramp up of the materials business. We are reviewing our planned expenditures and operating expenses, for potential cost savings to minimize these losses.
Our line of credit expired by its terms in September 2018. We have elected not to renew our credit line at this time because (a) renewal terms were not acceptable to us, (b) we have not borrowed on our line of credit in the past 10 years, and (c) we have sufficient cash and cash equivalents (approximately $14.2 million as of September 30, 2018) to meet our working capital and capital expenditure requirements over the next twelve months.
During the third quarter, we continued our mission to develop and enable the commercialization of next-generation technologies, by incorporating our technology into equipment built for customers’ manufacturing processes. Our endeavors into electronic applications for LED materials, medical implants and coatings, carbon composites for MEMs devices and medical applications are some of the areas we have been working on.
We continued to make a significant investment in our CVD Materials business. In November 2018, we filed a provisional patent application for afamily of advanced Fluid Reactors based on our innovations in nanotechnology and chemical vapor deposition technology. The Fluid Reactor is enabled by a novel reactor core element which allows the efficient transfer of gases into and out of liquids. The market adoption of this technology could supplant existing hollow fiber membrane technology for applications including filtration and liquid gasification or degasification. One application is blood oxygenation cartridges known as an Extra Corporeal Membrane Oxygenator which is typically used during cardio pulmonary bypass (CPB) surgery and is essential for life support.
Our Mesoscribe™ Direct Write Technology continues to make progress in specialized applications for temperature sensors, conformal antennas, flexible electronics and heaters for applications in aerospace and electronics where standard solutions have been unable to meet the physical constraints that need to be addressed. To assist in our progress, Mesoscribe™ has been notified that they have been selected for three (3) government sponsored awards which we anticipate receiving in first quarter 2019.
Our new CVD Materials facility has now received site plan approval and we anticipate permits for building modifications and obtaining a Certificate of Occupancy will be following shortly. We continue to impress upon the regulatory authorities the financial and time impact the delays are causing with our business.
Investments in our Application Laboratory and CVD Materials are driving us forward regardless of quarterly revenue fluctuations. We continue to believe that expansion and innovation in key markets like aerospace, medical, MEMs, semiconductors is the key to securing our growth over the long-term.
We continue to dedicate significant portions of our technical and manufacturing resources to new materials development and opening of the new CVD Materials facility. They pave the way for future expansion across our portfolio and to improve and streamline revenue growth and profitability over the longer term.
Constant investment in expansion and innovation is necessary, even during times of reduced order levels, to strengthen and secure our competitive position and open up new opportunities in the markets we serve. We believe we are well capitalized and will continue to drive towards increased yet stable revenue, productivity and profitability over the long-term.
Please review a new presentation that is posted on our website to gain further insight into the new applications and products.
Results of Operations
Three and Six Months Ended June 30, 2019 vs. June 30, 2018
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenue | $ | 4,918,118 | $ | 6,435,278 | $ | 8,395,378 | $ | 15,589,111 | ||||||||
Cost of revenue | 4,425,279 | 5,319,060 | 8,290,280 | 10,711,979 | ||||||||||||
Gross profit | 492,839 | 1,116,218 | 105,098 | 4,877,132 | ||||||||||||
Operating expenses | ||||||||||||||||
Research and development | 176,920 | 128,117 | 341,000 | 224,923 | ||||||||||||
Selling and shipping | 227,117 | 399,249 | 504,424 | 912,724 | ||||||||||||
General and administrative | 1,632,022 | 1,968,465 | 3,368,110 | 4,208,530 | ||||||||||||
Total operating expenses | 2,036,059 | 2,495,831 | 4,213,534 | 5,346,177 | ||||||||||||
Operating loss | (1,543,220 | ) | (1,379,613 | ) | (4,108,436 | ) | (469,045 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest income | 42,063 | 29,314 | 88,869 | 46,274 | ||||||||||||
Interest expense | (126,270 | ) | (119,279 | ) | (240,806 | ) | (240,633 | ) | ||||||||
Total other expense, net | (84,207 | ) | (89,965 | ) | (151,937 | ) | (194,359 | ) | ||||||||
Loss before income tax | (1,627,427 | ) | (1,469,578 | ) | (4,260,373 | ) | (663,404 | ) | ||||||||
Income tax (benefit) expense | (234,697 | ) | (139,052 | ) | (690,697 | ) | 108,718 | |||||||||
Net loss | $ | (1,392,730 | ) | $ | (1,330,526 | ) | $ | (3,569,676 | ) | $ | (772,122 | ) |
Three Months Ended SeptemberJune 30, 20182019 vs. Three Months Ended SeptemberJune 30, 20172018
Three Months Ended | ||||||||||||||||
September 30, 2018 | September30, 2017 | Change | % Change | |||||||||||||
(In thousands) | ||||||||||||||||
Revenue | ||||||||||||||||
CVD (net of eliminations) | $ | 2,543 | $ | 8,833 | $ | (6,290 | ) | (71.2 | ) | |||||||
SDC (net of eliminations) | 959 | 1,999 | (1,040 | ) | (52.0 | ) | ||||||||||
Materials (net of eliminations) | 526 | --- | 526 | |||||||||||||
Total Revenue | 4,028 | 10,832 | (6,804 | ) | (62.8 | ) | ||||||||||
Cost of Goods Sold | 4,084 | 6,229 | (2,145 | ) | (34.4 | ) | ||||||||||
Gross (Loss)/Profit | (56 | ) | 4,603 | (4,659 | ) | (101.2 | ) | |||||||||
Gross Margin | (1.4 | %) | 42.5 | % | ||||||||||||
Research and development | 241 | 158 | 83 | 52.5 | ||||||||||||
Selling and shipments | 331 | 345 | (14 | ) | (0.4 | ) | ||||||||||
General and administrative | 2,225 | 2,209 | 16 | 5.6 | ||||||||||||
Total operating expenses | 2,797 | 2,712 | 193 | 0.7 | ||||||||||||
Operating (loss)/income | (2,853 | ) | 1,890 | (4,743 | ) | (251.0 | ) | |||||||||
Other (expense)/income, net | (74 | ) | 14 | (88 | ) | --- | ||||||||||
(Loss)/Income before taxes | (2,927 | ) | 1,904 | (4,831 | ) | (253.7 | ) | |||||||||
Income tax (benefit)/expense | (424 | ) | 508 | (932 | ) | --- | ||||||||||
Net (loss)/income | (2,503 | ) | 1,396 | (3.899 | ) | (279.3 | ) | |||||||||
Net (loss)/income per share basic and diluted | (0.39 | ) | 0.22 | (0.61 | ) | 277.3 |
Revenue
Our revenue for the three months ended SeptemberJune 30, 20182019 was $4.0$4.9 million compared to $10.8$6.4 million for the three months ended SeptemberJune 30, 2017. This2018, resulting in a decrease of $6.4 million or 62.8%23.6% which was a resultprimarily attributable to the completion of the reduction in revenue previously generated by the large aviation component supplier production contracts which were completed, a reduced level of new orders received from customers, and having recognized revenue in previous periods as a result of higher costs than originally anticipated on certain contracts in progress. Theour then largest customer. This customer, in the aerospace industry from which we have previously secured multiple orders, represented $.7 million or approximately 26.0% and 59.0%13.8% of our revenue for the three months ended SeptemberJune 30, 2018 and September 30, 2017, respectively. We are continuing2019 as compared to receive additional follow-on business from that customer as well as undertaking opportunities with new and other current customers Our business of selling capital equipment has historically been uneven and although our current level of “RFQs” (requests for quotation) remains high, the level of new orders from customers has not been received as anticipated. The mix and type of customers, and sales to any single customer, may vary significantly from quarter to quarter and from year to year. If any$2.7 million or approximately 42.2% of our significant customers do not place orders, or they substantially reduce, delay or cancel orders, we may not be able to replace the business in a timely manner or at all, which could have a material adverse effect on our results of operations and financial condition. Third-party revenue from the SDC division for the three months ended SeptemberJune 30, 2018 decreased by 52.0% to $959,000 compared to $1,999,000 as a result of the completion of a significant order from one customer. We recorded $526,000 of2018.
The revenue from CVD Materialscontributed for the three months ended SeptemberJune 30, 2019, by the CVD Equipment segment, of $3.2 million, which totaled 64.9% of our overall revenue, was 43.3% or $2.4 million less than the segment’s $5.6 million contribution made in the prior year, which totaled 87.6% of our overall revenue.
Revenue for our SDC segment increased to $1.3 million in three months ended June 30, 2019 as compared to $.4 million in three months ended June 30, 2018, despite continuing delaysan increase of $.9 million. The increase is primarily attributable to a higher sales activity level in 2019 as compared to the timing of orders within the first two quarters of 2018. In the first half of 2019, sales were $2.3 million as compared to $2.5 million in the permitting process for constructionfirst of modifications needed2018. The SDC segment represented 26.0% and 6.9% of our total revenue during the three months ended June 30, 2019 and 2018, respectively.
Revenues for our new CVD Materials facility. We believe that we will not begin operations at this facility untilsegment were $.4 million in the latter part of the second quarter of 2019.
Gross (Loss)/Profit
We generated a negative gross profit of $56,000three months ended June 30, 2019 as compared to $.4 million for the three months ended SeptemberJune 30, 20182018.
Gross Profit
Gross profit for the three months ended June 30, 2019 amounted to $.5 million, with a gross profit margin of 10.0%, compared to a gross profit of $4.6$1.1 million and a gross profit margin of 17.3% for the three months ended SeptemberJune 30, 2017.2018. The decreased gross profit and gross profit margin were the result of the reduction in sales from our former largest customer, while costs, principally payroll, which decreased, remained at higher levels to support our anticipated expansion of the CVD Materials segment and future growth.
Research and Development,Selling andGeneral 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, 2019, our research and development expenses totaled $177,000 compared to $128,000 for the three months ended SeptemberJune 30, 2018 was (1.4)2018.
Selling
Selling expenses were $.2 million or 4.6 % compared to 42.5%of the revenue for the three months ended SeptemberJune 30, 2017. The negative gross profit and gross margin was the result of revised cost estimates and unutilized excess production labor. We recognized estimated losses on certain contracts where the actual costs incurred were greater than estimated in prior periods. Reductions in personnel began towards the end of the prior three-month period and we are continuing2019 as compared to evaluate personnel levels and other cost savings measures to minimize losses.
Research and Development, Selling, General and Administrative Expenses
Internal research and development expenses$.4 million or 6.2% for the three months ended SeptemberJune 30, 2018 were $241,000 compared to $158,000 for2018. The decrease was a result of reduced employee related costs as a result of the three months ended September 30, 2017 as we continue to ramp our efforts of independently conducted research and development activities especially for CVD Materials. As mentioned above,reduction in November 2018, we filed a provisional patent application for a family of advanced Fluid Reactors having a novel reactor core element. One application is blood oxygenation cartridges known as an Extra Corporeal Membrane Oxygenator which is typically used during cardio pulmonary bypass (CPB) surgery and is essential for life support. In addition, Mesoscribe™ was notified that they were selected for three (3) government sponsored awards which we anticipate receiving in first quarter 2019.overall sales.
SellingGeneral and shipping expenses for the three months ended September 30, 2018 totaled $331,000 inclusive of costs in personnel and trade shows related to CVD Materials of $50,000. Selling and shipping expenses for the three months ended September 30, 2017 totaled $345,000 which included costs of $96,000 related to personnel for CVD Materials Corporation.Administrative
General and administrative expenses for both the three months ended SeptemberJune 30, 2018 and 2017 totaled approximately $2.2 million. Personnel and occupancy costs attributed2019 were $1.6 million or 33.2% of revenue compared to CVD Materials Corporation totaled $433,000 during$2.0 million or 30.6% for the three months ended SeptemberJune 30, 2018, compared to $219,000a decrease of $.4 million. The decrease in these expenses is primarily the result of reductions in employees and the related payroll and benefit costs, attributed to CVD Materials during the three months ended September 30, 2017.as well as decreased outside systems and finance consulting costs.
Operating (Loss)/IncomeLoss
We incurredAs a result of the decreased revenues and gross margins, we recorded an operating loss from operations of $2.9 million($1.5 million) for the three months ended SeptemberJune 30, 2018 primarily2019 as a result of the reduced revenues for the period, unutilized excess production labor, product cost overruns of certain systems and operating expenses of $2.8 million of which approximately $500,000 was attributable to CVD Materials compared to the three months ended September 30, 2017 when we achieved $10.8 million in revenue yielding a 42.5% gross margin and incurredan operating expensesloss of $2.7 million,
Income tax (benefit)/expense
We did not incur any current income tax expense and recorded a deferred income tax benefit of $425,000($1.4 million) for the three months ended SeptemberJune 30, 2018, which was driven primarily as aby the reduced revenue from our former largest customer, offset in part by actions taken to reduce operating and manufacturing costs.
Other (expenses)/Income
Other expenses were $84,000 and $90,000 for the three months ended June 30, 2019 and 2018, respectively. This reduction is the result of actions taken to invest significantly more of the tax loss incurred during the period. Company’s cash into short-term treasury bills and certificates of deposits and thereby generating increased interest income of $13,000, while higher interest rates resulted in increased interest expense of $7,000.
Income Taxes
For the three months ended SeptemberJune 30, 20172019, we incurredrecorded an income tax expensebenefit of $508,000
Net (Loss)/Income
We reported a net loss$235,000 as compared to an income tax benefit of approximately $2.5 million or ($0.39) per share basic and diluted$139,000 for the three months ended SeptemberJune 30, 2018. Commencing in 2018, comparedour corporate tax rate was reduced to net income21% as a result of approximately $1.4 million or $0.22 per share basicThe Tax Cuts and diluted forJobs Act (“TCJA”) enacted December 22, 2017. For the three months ended SeptemberJune 30, 2017.2019 and 2018, this rate was affected by permanent differences related to fixed and intangible assets, stock-based compensation and other items resulting in an effective tax rate of 14.4% and 9.5%, respectively.
Nine Months Ended September 30, 2018 vs. Nine Months Ended September 30, 2017We continue to evaluate for potential utilization of the Company’s deferred tax asset on a quarterly basis, reviewing our economic models, including projections and timing of orders, the commencement of operations of the new CVD Materials segment and cost containment measures.
September 30, 2018 | September 30, 2017 | Change | % Change | |||||||||||||
(In thousands) | ||||||||||||||||
Revenue | ||||||||||||||||
CVD (net of eliminations) | $ | 14,883 | $ | 26,741 | $ | (11,858 | ) | (44.3 | ) | |||||||
SDC (net of eliminations) | 3,478 | 4,571 | (1,093 | ) | (23.9 | ) | ||||||||||
Materials (net of eliminations) | 1,256 | --- | 1,256 | |||||||||||||
Total Revenue | 19,617 | 31,312 | (11,695 | ) | (37.3 | ) | ||||||||||
Cost of Goods Sold | 14,796 | 18,128 | (3,332 | ) | (18.4 | ) | ||||||||||
Gross Profit | 4,821 | 13,184 | (8,363 | ) | (63.4 | ) | ||||||||||
Gross Margin | 24.6 | % | 42.1 | % | ||||||||||||
Research and development | 466 | 339 | 127 | 37.5 | ||||||||||||
Selling and shipping | 1,244 | 984 | 260 | 26.4 | ||||||||||||
General and administrative | 6,434 | 6,423 | 11 | 0.2 | ||||||||||||
Total operating expenses | 8,144 | 7,746 | 398 | 5.1 | ||||||||||||
Operating (loss)/income | (3,323 | ) | 5,438 | (8,761 | ) | (161.1 | ) | |||||||||
Other (expense) | (268 | ) | 5 | (273 | ) | --- | ||||||||||
(Loss)/Income before taxes | (3,591 | ) | 5,443 | (9,034 | ) | (166.0 | ) | |||||||||
Income tax (benefit)/expense | (316 | ) | 1,766 | (2,082 | ) | --- | ||||||||||
Net (loss)/income | (3,275 | ) | 3,677 | (6,952 | ) | (189.1 | ) | |||||||||
Net (loss)/income per share basic and diluted | (0.51 | ) | 0.58 | (1.09 | ) | (187.9 | ) |
RevenueNet loss
Revenue for the nine months ended September 30, 2018 was $19.6 million compared to $31.3 million for the nine months ended September 30, 2017, a decrease of $11.7 million or 37.3%. As a result of the reductionforegoing factors, we reported a net loss of ($1.4 million), or ($0.21) per basic and diluted share, for the three months ended June 30, 2019, as compared to net loss of ($1.3 million), or ($0.21) per basic and diluted share for the three months ended June 30, 2018.
Six Months Ended June 30, 2019 vs. June 30, 2018
Revenue
Our revenue for the six months ended June 30, 2019 was $8.4 million compared to $15.6 million for the six months ended June 30, 2018, resulting in revenuea decrease of 46.1% which was primarily attributable to the completion of orders received from our former largest customer. This customer, in the aerospace industry from which we had previously generated by the large aviation component supplier production contracts which were completed, the reduced level of newsecured multiple orders, from customers, and having recognized revenue in previous periods as a result of higher costs than originally anticipated on certain contracts in progress, we experienced this decrease in revenue. This large aviation component supplier represented approximately $7.8$1.4 million or 40.0%approximately 16.2% of our revenue for the ninesix months ended SeptemberJune 30, 20182019 as compared to $20.4$7.1 million or approximately 65%45.4% of our revenue for the ninesix months ended SeptemberJune 30, 2017. Our business2018.
The revenue contributed for the six months ended June 30, 2019, by the CVD Equipment segment, of selling capital equipment has historically been uneven and although our current level of “RFQs” (requests for quotation) remains high, the level of new orders from customers has not been received as anticipated. The mix and type of customers, and sales to any single customer, may vary significantly from quarter to quarter and from year to year. If any$5.2 million, which totaled 62.1% of our significant customers do not place orders,overall revenue, was 57.8% or they substantially reduce, delay or cancel orders, we may not be able to replace$7.1 million less than the business in a timely manner or at all, which could have a material adverse effect on our results of operations and financial condition. Despite continuing delayssegment’s $12.3 million contribution made in the permitting process for constructionprior year, which totaled 79.2% of modifications neededour overall revenue.
Revenue for our newSDC segment decreased to $2.3 million for the six months ended June 30, 2019 as compared to $2.5 million for the six months ended June 30, 2018, a decrease of 7.8%. The SDC segment represented 27.7% and 16.5% of our total revenue during the six months ended June 30, 2019 and 2018, respectively.
Revenues for our CVD Materials facility, CVD Materials has recorded $1,256,000segment were $.9 million in revenue for the ninesix months ended SeptemberJune 30, 2019 as compared to $.7 million for 2018. We believe that we will not begin operations at this facility until the latter part of the second quarter of 2019.
Gross Profit
ForGross profit for the ninesix months ended SeptemberJune 30, 2018, we generated a gross profit of $4.82019 amounted to $.1 million, resulting inwith a gross profit margin of 24.6%1.3%, compared to a gross profit of $13.2$4.9 million for the nine months ended September 30, 2017, which resulted inand a gross profit margin of 42.1%.31.3% for the six months ended June 30, 2018. The decreased gross profit and gross profit margin waswere the result of revised cost estimatesthe reduction in sales from our former largest customer, while costs, principally payroll, which decreased, remained at higher levels to support our anticipated expansion of the CVD Materials segment and unutilized excess production labor. We recognized estimated losses on certain contracts where the actual costs incurred were greater than estimated in prior periods. Reductions in personnel began towards the end of June, 2018 and we are continuing to evaluate personnel levels and other cost savings measures to minimize losses.future growth.
Research and Development, Selling and General and Administrative Expenses
Internal
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, 2019, our research and development expenses totaled $341,000 compared to $225,000 for the ninesix months ended SeptemberJune 30, 2018 were $466,000 compared to $340,000 for the nine months ended September 30, 2017, as we continue to ramp our efforts of independently conducted research and development activities. Some of the benefits from this and previous years R&D we anticipate will start to be reflected in 2019 with the Materials facility becoming operational.2018.
Selling
Selling and shipping expenses were $.5 million or 6.0% of the revenue for the ninesix months ended SeptemberJune 30, 2018 totaled $1,244,000 an increase of 26.4%2019 as compared to a total of $984,000$.9 million or 5.8% for the threesix months ended SeptemberJune 30, 2017.2018. The increase is attributable todecrease was a result of lower employee related costs and commissions as a result of the additional costs of $265,000 related to CVD Materials.reduction in overall sales.
We incurred $6.4 million of generalGeneral and Administrative
General and administrative expenses for both the ninesix months ended SeptemberJune 30, 2019 were $3.4 million or 40.1% of revenue compared to $4.2 million or 27.0% for the six months ended June 30, 2018, a decrease of $.8 million. The decrease in these expenses is primarily the result of reductions in employees and the nine months ended September 30, 2017,which included approximately $1,422,000related payroll and $635,000 of personnelbenefit costs, as well as decreased outside systems and occupancy costs attributable to CVD Materials Corporation in the respective periods.finance consulting costs.
Operating (loss) IncomeLoss
As a result of the decreased revenues and gross margins, we recorded an operating loss of ($4.1 million) for the six months ended June 30, 2019 as compared to an operating loss of ($.5 million) for the six months ended June 30, 2018, which was driven primarily by the reduced revenue from our former largest customer.
Other (expenses)/Income
Other expenses were $152,000 and $194,000 for the six months ended June 30, 2019 and 2018, respectively. This reduction is the result of actions taken to invest significantly more of the Company’s cash into short-term treasury bills and certificates of deposits and thereby generating increased interest income of $42,000.
Income Taxes
For the six months ended June 30, 2019, we recorded an income tax benefit of $691,000 as compared to an income tax expense of $109,000 for the six months ended June 30, 2018. Commencing in 2018, our corporate tax rate was reduced to 21% as a result of The Tax Cuts and Jobs Act (“TCJA”) enacted December 22, 2017. For the six months ended June 30, 2019 and 2018, this rate was affected by permanent differences related to fixed and intangible assets, stock-based compensation and other items resulting in an effective tax rate of 16.2% and 16.4%, respectively.
We continue to evaluate for potential utilization of the Company’s deferred tax asset on a quarterly basis, reviewing our economic models, including projections and timing of orders, the commencement of operations of the new CVD Materials segment and cost containment measures.
Net loss
As a result of: 1) decreased revenues; 2) unutilized excess production labor; 3) product cost overruns on certain systems; 4) recognition of losses on certain contracts due to higher costs than anticipated on contracts in progress in prior periodsthe foregoing factors, we reported net loss of ($3.6 million), or ($0.55) per basic and 4) costs attributable to CVD Materials Corporation, we incurred a loss from operations of $3.3 milliondiluted share, for the ninesix months ended SeptemberJune 30, 20182019, as compared to achieving income from operationsnet loss of $5.4 million($.8 million), or ($0.12) per basic and diluted share for the ninesix months ended SeptemberJune 30, 2017.
Income tax (benefit)/expense2018.
We did not incur any current income tax expense and recorded a deferred income tax benefit of $316,000 for the nine months ended September 30, 2018 primarily as a result of the tax loss incurred during the period. For the nine months ended September 30, 2017 we incurred an income tax expense of $1,766,000.
Net (Loss)/Income
We reported a net loss of $3.3 million or ($0.51) per share basic and diluted for the nine months ended September 30, 2018 compared to net income of $3.7 million or $0.58 per share basic and diluted for the nine months ended September 30, 2017.
Inflation
Inflation has not materially impacted the operations of our Company.
Liquidity and Capital Resources
As of SeptemberJune 30, 2018,2019, we had aggregate working capital of $17.7$10.3 million compared to $22.4aggregate working capital of $15.4 million at December 31, 2017, a decrease of $4.7 million primarily due to the reduction in contract assets of $5.8 million. As we reach certain milestones on our long-term projects, we invoice our customers for work completed thus reducing those costs in excess of billing. We had2018. Our cash and cash equivalents of $14.2 million at both SeptemberJune 30, 20182019 and December 31, 2018 were $8.6 million and $11.4 million, respectively. The decrease in working capital of $5.1 million is primarily attributable to the overall reduction in sales and resulting operating loss for the period and debt service payments of approximately $.6 million related to our investment in the CVD Materials building purchased on November 30, 2017. We have continued to invest in activities primarily related to preparing CVD Materials at the new location which we anticipate to be operational during the third quarter of 2019. Our total capital invested in the six months ended June 30, 2019 was $1.4 million, primarily related to building improvements and machinery for the CVD Materials operations and we also incurred operating costs of approximately $124,000, exclusive of interest expense, and net of $36,000 rental income which commenced June 2019. Commencing July 2019, the monthly rental income will increase to approximately $67,000 per month or approximately $800,000 per annum.
Accounts receivable, net as of Septemberallowance for doubtful accounts, decreased by $2.0 million or 49.2% at June 30, 2018 was $2.62019, to $2.1 million compared to $2.1$4.1 million at December 31, 2017.2018. This increasedecrease is principally due to the timing of customer invoicing, shipments and customer payments on outstanding balances.payments.
Inventories as of June 30, 2019 and 2018 were essentially unchanged at approximately $1.9 million.
Our
As previously reported, our Revolving Line of Credit expired on September 1, 2018. We have elected not to renew our credit line at this time because (a) renewal terms were not acceptable to us, (b) we have not borrowed on our line of credit in the past 10 years, and (c) we havebelieved we had sufficient cash and cash equivalents (approximately $14.2 million as of September 30, 2018) to meet our working capital and capital expenditure requirements over the next twelve months.
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, 2019 and December 31, 2018 were approximately $2.5 million and $2.7 million respectively. Interest accrues on the Loan, at our option, at the variable rate of LIBOR plus 1.75% or Prime less 0.5%.
On November 30, 2017, we purchased the premises located at 555 North Research Place, Central Islip, NY which is intended to house the CVD Materials segment. 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 555 North Research Place, Central Islip, New York (the ”Premises”). 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 Loan is payable in 60 consecutive equal monthly installments of $62,481, including interest. The balances as of June 30, 2019 and December 31, 2018 were approximately $9.9 million and $10.0 million respectively. The Loan bears interest for each Interest Period (as defined in the Note), at the fixed rate of 3.9148%. The maturity date for the Note is December 1, 2022. As a condition of the Bank making the Loan, we were required to guaranty Assignee’s obligations under the Loan.
At SeptemberDecember 31, 2018, we were not in compliance with the single financial covenant (fixed charge coverage ratio) contained in the Mortgage. On March 26, 2019 the Company received a waiver from HSBC until April 1, 2020. On August 5, 2019, the Company entered into a Mortgage Modification Agreement which replaced the former covenant with a Minimum Liquid Assets covenant. The Company is in compliance with its obligations under the mortgage at June 30, 2019.
At December 31, 2018 the number of fulltime employees decreasedwe had reduced our employee headcount by 15% to 187 employees197 as compared to 212 at December 31, 2017. Towards the end of the period endedAt June 30, 2018,2019 we began reducing personnelhave further reduced our headcount by 8% to more closely match our reduced revenue flow181 employees and we are continuing to evaluate personnel levels.
Weour staffing levels to support the new CVD Materials facility which we anticipate to be operational during the third quarter of 2019, and the level of current and expected orders. While we continue to monitor and take action to reduce our expenses, we believe that our cash and cash equivalents positionequivalent positions and cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months, a significant portion of which will be related to CVD Materials and the additional building.months.
Off-Off-Balance Sheet ArrangementsBalance 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. |
|
Evaluation of Disclosure ControlsControls and ProceduresProcedures
We maintain a system of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). As required by Rule 13a-15(b) under the Exchange Act, management of the Company, 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 the Company’s 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, theour 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 thethis Report on Form 10-Q, while improvements have been made since our December 31, 2018 year end, the disclosure controls and procedures were not 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. Specifically, at year end December 31, 2018, we havehad identified the following material weaknessessignificant deficiencies in our disclosure controls: (1) The Company lackswe lack sufficient internal controls over monitoring the accounting activity and consolidation of itsour foreign subsidiary into the Company’sour consolidated financial statements.statements, (2) Also, the Company haswe have not fully integrated itsour new project accounting software into itsour general ledger accounting system and continueswe continue to rely on manual reconciliations using electronic spreadsheets.spreadsheets, and (3) The Company haswe have a deficiency in internal controls regarding the estimation of costs on contracts in progressprogress.
To remediate such weaknesses, the company is implementingdeficiencies, we have implemented the following changes: (1) establishingestablished stricter formal procedures with respect to how and when the Company’sour management will communicate to the auditors and Audit Committee on a more timely basis, (2) is adopting sufficient written policies and procedures for accounting and financial reporting, (3) appointinghave appointed and /or designatingdesignated additional qualified personnel to ensure timely filing of the reports that the Company fileswe file or submitssubmit under the Exchange Act, (4) addingadded additional, multiple review levels, and (5) requesting and receivingreceive from the staff of the foreign entitysubsidiary financial information on a weekly and monthly basis in order to monitor more closely. During the three month periodyear ended September 30,December 31, 2018, the Companywe integrated three (3) more entities into its new project accounting software and isare planning the integration of the remaining two entities shortly. In addition, we are reevaluatinghave reevaluated our internal controls regarding the estimation of costs on contracts in progress and plan to implementhave implemented changes as needed. We continued to monitor and improve upon our operational and financial controls during the quarter ended June 30, 2019.
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 | Risk Factors. |
Not applicable for Smaller Reporting Companies.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Mine Safety |
Not Applicable.applicable.
Item 5. | Other Information. |
None.
Item 6. | Exhibits |
10.1* |
The exhibits below are hereby furnished to the SEC as part of this report:
10.2* |
10.3 |
10.4 |
10.5 |
31.1* | |
31.2* | |
32.1* | |
| |
101.1** | XBRL Instance. |
101.SCH** | XBRL Taxonomy Extension Schema. |
101.CAL** | XBRL Taxonomy Extension |
101.DEF** | XBRL Taxonomy Extension Definition. |
101.LAB** | XBRL Taxonomy Extension Labels. |
101.PRE** | XBRL Taxonomy Extension Presentation. |
________________
*Filed herewithherewith.
**Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not to be filed or part of a registration statement orof 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 1413th day of November 2018.August 2019.
CVD EQUIPMENT CORPORATION |
| ||
By: | /s/ Leonard A. Rosenbaum |
| |
Leonard A. Rosenbaum |
| ||
Chief Executive Officer | | ||
(Principal Executive Officer) | |||
By: | /s/
Thomas McNeill | ||
Thomas McNeill | |||
Chief Financial Officer
| |||
(Principal Financial and | |||
Accounting Officer) |
EXHIBIT INDEX
10.1* | West side sublease, dated May 31, 2019, by and between the Company and ELM Freight Handlers Inc., filed herewith. |
| East side sublease, dated May 31, 2019, by and between the Company and ELM Freight Handlers Inc., filed herewith. |
10.3 | Mortgage Modification Agreement, dated August 5, 2019, by and between 555 N Research Corporation and HSBC Bank USA, National Association, incorporated by reference to the Company’s Form 8-K filed with the Commission on August 5, 2019. |
10.4 | Reaffirmation of Unlimited Continuing Guaranty, dated August 5, 2019 by and between CVD Equipment Corporation and HSBC Bank USA, National Association, incorporated by reference to the Company’s Form 8-K filed with the Commission on August 5, 2019. |
10.5 | Note Modification Agreement, dated August 5, 2019, by and between FAE Holdings 411519R and HSBC Bank USA, National Association, incorporated by reference to the Company’s Form 8-K filed with the Commission on August 5, 2019. |
31.1* | Certification of Leonard A. Rosenbaum, Chief Executive Officer, dated |
31.2* | |
Certification of |
32.1* | |
Certification of Leonard A. Rosenbaum, Chief Executive Officer, dated |
32.2* | |
Certification of |
101.1** | |
XBRL Instance. |
101.SCH** | |
XBRL Taxonomy Extension Schema. |
101.CAL** | XBRL Taxonomy Extension Calculation. |
101.DEF** | |
XBRL Taxonomy Extension Definition. |
101.LAB** | |
XBRL Taxonomy Extension Labels. |
101.PRE** | |
XBRL Taxonomy Extension Presentation. |
_______________________________
* Filed herewithherewith.
** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not to be filed or part of a registration statement orof 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.
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