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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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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 June 30, 2016
☐	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

 

(Exact Name of Registrant as specified in its charter)

 

	New York	11-2621692
	(State or Other Jurisdiction of Incorporation or Organization)	(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)

        

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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐      (Do not check if a smaller reporting company)	Smaller reporting company ☑

 

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: 6,322,680 shares of Common Stock, $0.01 par value at August 5, 2016.

 

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CVD EQUIPMENT CORPORATION AND SUBSIDIARY

 

Index

 

Part I - Financial Information
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2016 and December 31, 2015	3
Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015	4
Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015	5
Notes to Unaudited Consolidated Financial Statements	6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3 Quantitative and Qualitative Disclosures About Market Risk	20
Item 4 Controls and Procedures	20
Part II - Other Information	21
Item 1 Legal Proceedings.	21
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds.	21
Item 3 Defaults Upon Senior Securities.	21
Item 4 Mine Safety Disclosures.	21
Item 5 Other Information.	21
Item 6 Exhibits.	21
Signatures	23
Exhibit Index	24

 

 

PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

 

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

 

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

 

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

 

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

 

  

The accompanying notes are an integral part of these consolidated financial statements

 

 

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

 

 

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016 

(Unaudited)

 

 

 

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016 

(Unaudited)

 

 

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016 

(Unaudited)

 

 

 

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

 

 

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

 

 

 

Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Except for historical information contained herein, this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, as amended. These statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Important assumptions and other factors that could cause actual results to differ materially from those in the forward-looking statements, include but are not limited to: competition in the Company’s existing and potential future product lines of business; the Company’s ability to obtain financing on acceptable terms if and when needed; uncertainty as to the Company’s future profitability, uncertainty as to the future profitability of acquired businesses or product lines, uncertainty as to any future expansion of the Company. 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 future performance. You should not place undue reliance on any forward-looking statements, which speak only as of the dates they are made. When used with this Report, the words “believes,” “anticipates,” ”expects,” “estimates,” “plans,” “intends,” “will” and similar expressions are intended to identify forward-looking statements.

 

 

Results of Operations

 

Three Months Ended June 30, 2016 vs. Three Months Ended June 30, 2015

 

		Three Months Ended								Change				% Change
		June 30, 2016				June 30, 2015
(In thousands)
Orders		$	31,893			$	13,142			$	18,751				142.7
Order Backlog			31,023				19,270				11,753				61.0
Revenue
CVD (net of eliminations)		$	3,241			$	9,967			$	(6,726	)			(67.5	)
SDC (net of eliminations)			503				467				36				7.7
Total Revenue			3,744				10,434				(6,690	)			(64.1	)
Cost of Goods Sold			3,250				6,277				(3,027	)			(48.2	)
Gross Profit			494				4,157				(3,663	)			(88.1	)
Gross Margin			13.2	%			39.8	%
Research and development			72				258				(186	)			(72.1	)
Selling and shipments			287				274				13				4.7
General and administrative			1,744				2,109				(365	)			(17.3	)
Gain on settlement			(629	)			--				(629	)			--
Total operating expenses			1,474				2,641				(1,167	)			(44.2	)
Operating (loss)/income			(980	)			1,516				(2,496	)			(164.6	)
Other (expense)			(16	)			(18	)			2				(11.1	)
(Loss)/income before taxes			(996	)			1,498				(2,494	)			(166.5	)
Income tax (benefit)/expense			(500	)			163				(663	)			(406.7	)
Net (loss)/income			(496	)			1,335				(1,831	)			(137.2	)

 

 

 

Orders/Order Backlog

 

We received approximately $31.9 million in new orders, during the three months ended June 30, 2016, including our largest order ever for $29.6 million compared to $13.1 million in new orders received during the three months ended June 30, 2015, an increase of $18.8 million or 143.5%. This resulted in a backlog of $31.0 million as of June 30, 2016 compared to $19.3 million as of June 30, 2015. Approximately $29.5 million or 90.8% of the backlog at June 30, 2016 is a result of multiple orders from one customer compared to $8.4 million or 43.7% of the backlog at June 30, 2015. Timing for completion of the backlog varies depending on the product mix and can be as long as two years. Included in the backlog are all accepted purchase orders, less any amounts which have been previously billed or recognized as a component of our percentage-of-completion calculations. Management utilizes the order backlog to assist it in gauging projected revenues and profits; however, it does not provide an assurance of future achievement of revenues or profits as, for example, order cancellations or delays are possible.

 

Revenue

 

Our revenue for the three months ended June 30, 2016 was $3.7 million compared to $10.4 million in revenue for the three months ended June 30, 2015. This decrease of 64.4% was a result of the completion of the large aviation component supplier pilot production contract and the protracted negotiations which caused a delay in receiving the follow-on orders from that same customer. We have received additional multiple orders from that customer representing $3.2 million or 85.7% of our revenue for the three months ended June 30, 2016 compared to $8.0 million of our revenue or 76.7% of our revenue from that same customer for the three months ended June 30, 2015.

 

Revenue of $500,000 from the SDC division remained the same for both the three months ended June 30, 2016 and 2015 respectively.

 

 

Gross Profit

 

We generated a gross profit of $0.5 million for the three months ended June 30, 2016 compared to a gross profit of $4.2 million for the three months ended June 30, 2015. The gross margin for the three months ended June 30, 2016 was 13.2% compared to 39.8% for the three months ended June 30, 2015. The reduced gross profit and gross margin was the result of the lower revenue and the costs of maintaining production staff in anticipation of the follow-on order from our largest customer.

 

Research and Development, Selling, General and Administrative Expenses

 

Internal research and development expenses for the three months ended June 30, 2016 was $72,000 compared to $258,000 for the three months ended June 30, 2015. The reduction in research and development expenses compared to the prior year is due to the reduction of independently conducted research that we funded. Although we continue to invest in research for our products, we have temporarily curtailed the independent activities to reduce spending. 

 

Selling and shipping expenses for each of the three months ended June 30, 2016 and 2015 were $287,000 and $274,000 respectively.

 

Our general and administrative expenses for the three months ended June 30, 2016 totaled $1,726,000 compared to approximately $2,109,000 during the three months ended June 30, 2015, an 18.2% reduction which was primarily the result of reduced legal fees in the current period compared to the prior year when we were actively involved in settling our legal disputes.

 

Gain on Settlement 

 

The Company has included in its financial statements for the three months ended June 30, 2016, the results of a negotiated reduction to legal fees and expenses previously accrued in connection with the settlement of the Taiwan Glass litigation. The final negotiated sum was $1.1 million, resulting in a reduction of the amount that was previously billed and accrued and a gain on the statement of operations of $629,000 during the period

 

Operating (Loss)/Income

 

As a result of the aforementioned, we incurred a loss from operations of $1.0 million for the three months ended June 30, 2016 compared to the three months ended June 30, 2015 when we earned $1.5 million from operations. 

 

Income Taxes 

 

For the three months ended June 30, 2016, we did not incur any current income tax expense. Primarily as a result of the operating loss and timing differences of depreciation and stock-based compensation for the three month period we recorded $500,000 of deferred tax benefits which drove our effective tax rate to 50%. We incurred an income tax expense of $163,000 for the three months ended June 30, 2015

 

Net (Loss)/Income

 

We reported a net loss of approximately $0.5 million or ($0.08) per share basic and diluted for the three months ended June 30, 2016, compared to net income of approximately $1.3 million or $0.22 per share basic and $0.21 per diluted share for the three months ended June 30, 2015.

 

 

 

Six Months Ended June 30, 2016 vs. Six Months Ended June 30, 2015

 

		June 30, 2016				June 30, 2015				Change				% Change
(In thousands)
Orders		$	34,163			$	18,323			$	15,840				86.4
Order Backlog			31,023				19,270				11,753				61.0
Revenue
CVD (net of eliminations)		$	7,330			$	18,538			$	(11,208	)			(60.5	)
SDC (net of eliminations)			1,417				1,589				(172	)			(10.8	)
Total Revenue			8,747				20,127				(11,380	)			(56.5	)
Cost of Goods Sold			6,720				12,210				(5.490	)			(45.0	)
Gross Profit			2,027				7,917				(5,890	)			(74.4	)
Gross Margin			23.2	%			39.3	%
Research and development			154				470				(316	)			(67.2	)
Selling and shipping			545				588				(43	)			(7.3	)
General and administrative			3,470				4,136				(666	)			(16.1	)
Gain on settlement			(629	)			--				(629	)
Total operating expenses			3,540				5,194				(1,654	)			(31.8	)
Operating (loss)/income			(1,513	)			2,723				(4,236	)			(155.6	)
Other (expense)			(24	)			(36	)			12				33.3
(Loss)/income before taxes			(1,537	)			2,687				(4,224	)			(157.2	)
Income tax (benefit)/expense			(704	)			684				(1,388	)			(203.9	)
Net (loss)/income			(833	)			2,003				(2,836	)			(141.6	)

 

Orders/Order Backlog

 

During the six months ended June 30, 2016, we received approximately $34.2 million in new orders, including our largest single order in our history which totaled $29.6 million compared to approximately $18.3 million in new orders received during the six months ended June 30, 2015, an increase of $15.9 million or 86.9%. This resulted in a backlog of $31.0 million as of June 30, 2016 compared to $19.3 million as of June 30, 2015. Approximately $29.5 million or 90.8% of the backlog at June 30, 2016 is a result of multiple orders from one customer compared to $8.4 million or 43.7% of the backlog at June 30, 2015. Timing for completion of the backlog varies depending on the product mix and can be as long as two years. Included in the backlog are all accepted purchase orders, less any amounts which have been previously billed or recognized as a component of our percentage-of-completion calculations. Management utilizes the order backlog to assist it in gauging projected revenues and profits; however, it does not provide an assurance of future achievement of revenues or profits as, for example, order cancellations or delays are possible.

 

 

 

Revenue

 

Revenue for the six months ended June 30, 2016 was $8.7 million compared to $20.1 million for the six months ended June 30, 2015, a decrease of $11.4 million or 56.7%. This decrease was the result of the completion of the large aviation component supplier pilot production contract and the protracted negotiations which caused a delay in receiving the follow-on orders from that same customer. Our largest customer from which we have secured multiple orders represented $6.2 million or 71.3% of our revenue for the six months ended June 30, 2016 compared to $13.3 million or 66.2% of our revenue for the six months ended June 30, 2015 from that same customer.

 

Gross Profit

 

For the six months ended June 30, 2016, we generated a gross profit of $2.0 million resulting in a gross profit margin of 23.2% compared to a gross profit of $7.9 million for the six months ended June 30, 2015, which resulted in a gross profit margin of 39.3%. The decreased gross profit we are now experiencing is the result of the lower revenues.

 

Research and Development, Selling and General and Administrative Expenses

 

Internal research and development expenses for the six months ended June 30, 2016 were $154,000 compared to $470,000 for the six months ended June 30, 2015. The reduction in research and development expenses compared to the prior year is due to the reduction of independently conducted research that we funded. Although we continue to invest in research for our products, we have temporarily curtailed the independent activities to reduce spending.

 

Selling and shipping expenses for the six months ended June 30, 2016 and 2015 were $545,000 million and $588,000 million, respectively.

 

General and administrative expenses totaled $3.5 million and $4.1 million for the six months ended June 30, 2016 and 2015, a decrease of 14.6%. This decrease is primarily attributable to a decrease in legal costs during the current period.

 

Gain on settlement

 

The Company has included in its financial statements for the six months ended June 30, 2016, the results of a negotiated reduction to legal fees and expenses previously accrued in connection with the settlement of the Taiwan Glass litigation. The final negotiated sum was $1.1 million, resulting in a reduction of the amount that was previously billed and accrued and a gain on the statement of operations of $629,000 during the period.

 

Operating Income

 

As a result of the decreased revenues, we incurred a loss from operations of $1.5 million for the six months ended June 30, 2016 compared to income from operations of 2.7 million for the six months ended June 30, 2015.

 

 

Income Taxes

 

For the six months ended June 30, 2016, we did not incur any current income tax expense, received a refund of $71,000 as a result of an overpayment on the 2015 federal corporate tax return.As a result of the operating loss and timing differences of depreciation and stock-based compensation for the six month period we recorded $633,000 of deferred tax benefits which drove our effective tax rate to 46%. Income tax expense for the six months ended June 30, 2015 amounted to $684,000.

 

Net (Loss)/Income

 

We reported a net loss of $0.8 million or $0.13 per share basic and diluted for the six months ended June 30, 2016 compared to net income of $2.0 million or $0.32 per share (basic and diluted) for the six months ended June 30, 2015.

 

Inflation

 

Inflation has not materially impacted the operations of our Company.

 

Liquidity and Capital Resources

 

Our working capital as of June 30, 2016 and December 31, 2015 was $19.9 million, and cash and cash equivalents of $14.0 million at June 30, 2016, compared to $13.1 million at December 31, 2015, an increase of $0.9 million. The increase in cash and cash equivalents was primarily the result of the timing of both shipments and customer payments on outstanding balances.

 

Accounts receivable, net, as of June 30, 2016 was $7.7 million compared to $3.1 million at December 31, 2015. One customer represented 87.0% and 44.2% of the balances on June 30, 2016 and December 31, 2015, respectively.

 

At June 30, 2016 the number of full time employees decreased to 180 employees compared to 192 at December 31, 2015

 

We believe that our cash and cash equivalents position and cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months.

 

We may also raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies or products. In addition, we may elect to raise additional funds even before we need them if the conditions for raising capital are favorable. Any equity or equity-linked financing could be dilutive to existing shareholders.

 

 

Off-Balance Sheet Arrangements.

 

We have no off-balance sheet arrangements at this time.

 

Item 3.               Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4.               Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain a system of disclosure controls and procedures (as defined in Rule 13a-15(e) 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, the Chief Executive Officer and Chief Financial Officer, along with our management, have determined that as of the end of the period covered by the Report on Form 10-Q, the disclosure controls and procedures were and are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and were effective to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosures.

 

Changes in Internal Controls

 

There were no changes in our internal controls over financial reporting as defined in Rule 13a-15(f) or Rule 15d-15(f) under the Exchange Act that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the internal controls over financial reporting.

 

Limitations on the Effectiveness of Controls

 

We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

 

CVD EQUIPMENT CORPORATION

 

PART II

 

OTHER INFORMATION

 

 

Item 1.          Legal Proceedings.

 

None.

 

Item 2.          Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3.          Defaults Upon Senior Securities.

 

None.

 

Item 4.          Mine Safety Disclosures.

 

Not Applicable.

 

Item 5.          Other Information.

 

None.

 

Item 6.          Exhibits

 

The exhibits below are hereby furnished to the SEC as part of this report:

 

	31.1	Certification of Leonard A. Rosenbaum, Chief Executive Officer, dated August 11, 2016.
	31.2	Certification of Glen R. Charles, Chief Financial Officer, dated August 11, 2016.
	32.1	Certification of Leonard A. Rosenbaum, Chief Executive Officer, dated August 11, 2016, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of Glen R. Charles, Chief Financial Officer, dated August 11, 2016, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.

 

 

	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.

 

____________

 

 **Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not to be filed or part of a registration statement or 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 Act of 1934, as amended, and otherwise 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 11^th day of August 2016.

 

	CVD EQUIPMENT CORPORATION
	By:	/s/ Leonard A. Rosenbaum
		Leonard A. Rosenbaum
	Chief Executive Officer, President and Chairman
	(Principal Executive Officer)

 

	By:	/s/ Glen R. Charles
		Glen R. Charles
		Chief Financial Officer
	(Principal Financial and Accounting Officer)

 

 

 

EXHIBIT INDEX

 

EXHIBIT NUMBER	DESCRIPTION
31.1*	Certification of Leonard A. Rosenbaum, Chief Executive Officer, dated August 11, 2016
31.2*	Certification of Glen R. Charles, Chief Financial Officer, Dated August 11, 2016
32.1*	Certification of Leonard A. Rosenbaum, Chief Executive Officer, dated August 11, 2016, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	Certification of Glen R. Charles, Chief Financial Officer, dated August 11, 2016 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**	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 herewith

 

** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not to be filed or part of a registration statement or 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 Act of 1934, as amended, and otherwise not subject to liability under these sections.

 

 24