What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2022-03-31 compared with 2021-03-31 · 189 added, 176 removed, 106 unchanged (77% of the section changed)

Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on the NASDAQ Capital Market under the symbol “CVV.” The following table sets forth, for the periods indicated, the high and low prices of our common stock on the NASDAQ Capital Market.

Market for Registrant ’

s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on the NASDAQ Capital Market under the symbol “CVV.”

The following table sets forth, for the periods indicated, the high and low prices of our common stock on the NASDAQ Capital Market.

Year Ended December 31, 2021:

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and rights(1)

Weighted-average

exercise price of

outstanding options,

securities remaining

available for future

Weighted-average exercise price of outstanding options, warrants and

securities remaining available for future issuance

Plan Category

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Issuer Purchases of Equity Securities

Selected Financial Data.

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.

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.

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Important assumptions and other factors that could cause actual results to differ materially from those in the forward-looking statements, include but are not limited to:

competition in the Company ’ s existing and potential future product lines of business;

the Company ’ s ability to obtain financing on acceptable terms if and when needed;

uncertainty as to the Company ’ s future profitability, uncertainty as to the future profitability of acquired businesses or product lines, uncertainty as to any future expansion of the Company and the effect of the novel coronavirus (COVID-19) on our business and operations, and those of our customers, suppliers and other third parties .

competition in the Company ’

s existing and potential future product lines of business;

the Company ’

s ability to attract and retain key personnel and employees;

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, uncertainty as to the Company ’

s ability to adequately obtain raw materials and components from foreign markets in light of geopolitical developments and the effect of the novel coronavirus (COVID-19) on our business and operations (including with respect to supply chain disruptions), and those of our customers, suppliers and other third parties .

Other factors and assumptions not identified above were also involved in the derivation of these forward-looking statements and the failure of such assumptions to be realized as well as other factors may also cause actual results to differ materially from those projected.

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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.

When used with this Report, the words “

believes ”

anticipates ”

expects ”

estimates ”

plans ”

intends ”

will ”

and similar expressions are intended to identify forward-looking statements.

Executive Level Summary

We develop, design, manufacture and service a broad range of chemical vapor deposition, gas control and other state-of-the-art process equipment and solutions used in research & development and production of advanced materials and coatings.

Our served markets extend from research to industrial applications.

This equipment is used by our customers to research, design, and manufacture these materials or coatings for aerospace engine and structural components, medical devices such as implants, advanced semiconductor devices, solar cells, smart glass, carbon nanotubes, nanowires, LEDs, MEMS and other applications.

Through CVD Materials and our Application Laboratory, we develop new material systems, provide material coating services, process development support and process startup assistance with the focus on enabling tomorrow ’ s technologies TM .

Based on more than 39 years of experience, we use our capabilities in process development, engineering and manufacturing to transform new applications into leading-edge manufacturing solutions.

This enables university, research and industrial scientists at the cutting edge of technology to develop next generation aerospace, medical, nano, LEDs, semiconductors and other electronic components.

We develop, manufacture and provide equipment for research and production based on our proprietary designs.

We have built a significant library of design expertise, know-how and innovative solutions to assist our customers in developing these intricate processes and to accelerate their commercialization.

This library of equipment design solutions, along with our manufacturing and systems integration facilities, allows us to provide superior design, process and manufacturing solutions to our customers.

Our strategy is to target opportunities in the research, development and production equipment market, with a focus on high growth applications such as aerospace, carbon nanotubes, nanowires, medical, graphene, MEMS and LEDs.

To expand our penetration into these growth markets, we have developed a line of proprietary standard products and custom systems.

Historically, we manufactured products for research and development on an applications specific basis to meet an individual customer’s specific research requirements.

Our proprietary systems leverage the technological expertise that we have developed through designing these custom systems onto a standardized basic core.

This core is easily adapted through a broad array of available options to meet the diverse product and budgetary requirements of the research community.

By manufacturing the basic core of these systems in higher volumes, we are able to reduce both the cost and delivery time for our systems.

These systems, which we market and sell under the EasyTube® and CVD product lines, are sold to researchers at universities, research laboratories, and startup companies in the United States and throughout the world.

CVD has continued to serve the advanced materials markets with chemical vapor and thermal process equipment for over 38 years.

Our products are used in research and development centers as well as in production environments.

We develop, design, manufacture and service a broad range of chemical vapor deposition, gas control and other state-of-the-art process equipment and solutions used in advanced materials and coatings.

We serve markets ranging from academic/research initiatives to industrial applications.

With the adoption of our technology in these markets we see increased usage of our systems across production environments.

Major target markets for our business include advanced nanomaterials, batteries and Silicon Carbide for high power electronics;

aerospace gas turbine engines and structural components;

medical devices (such as implants);

advanced semiconductor devices and Silicon for solar cells;

and carbon nanotubes and nanowires.

Our Application Laboratory supports the development of new material systems and processes.

Our CVD Materials group provides material coating services, process development support and process startup assistance with the focus on enabling tomorrow ’

s technologies TM .

Our Mesoscribe product line continues to support the aerospace and defense markets with robust direct write instrumentation.

Our CVD Tantaline subsidiary which underwent a restructuring and consolidation in 2021 provides chemical-resistant coating services to many industrial applications.

Based on more than 38 years of experience, we use our capabilities in process development, engineering and vertical manufacturing to transform new applications into mainstream manufacturing solutions.

We have built a significant library of design expertise, know-how and innovative solutions to assist our customers in developing these intricate processes and to accelerate their production and commercialization.

This library of equipment design solutions, along with our manufacturing and systems integration facilities, allows us to provide application-specific design, process and manufacturing solutions to our customers.

To expand our presence into various growth markets, we are developing a line of proprietary standard use products to complement our customized legacy systems.

Historically, we manufactured products for research and development on an application-specific basis to meet an individual customer’s specific research and production requirements.

Our proprietary systems leverage the technological expertise that we have developed through designing these custom systems into a broader standardized product line.

The standard product line is easily configured from a wide range of available options to meet diverse product and budgetary requirements.

Manufacturing these standardized systems in higher volumes provides us the flexibility to reduce both the cost and delivery time of our systems.

These systems, which we market and sell under the EasyTube®

and CVD product lines, are sold to universities, research laboratories, and production companies in the United States and throughout the world.

Sales of our proprietary standard systems, custom systems and process solutions have been driven by our installed customer base, which includes Fortune 500 companies.

The strong performance and success of our products has historically driven repeat orders from existing customers as well as business from new customers.

Furthermore, with our proprietary solutions and expanded focus on “ accelerating the commercialization of tomorrow ’ s technologies ” TM we have been developing a new customer base in addition to growing with our existing customers.

We have generally gained new customers through our reputation in the markets and industries, limited print advertising and trade show attendance (which has been negatively impacted by COVID-19).

The core competencies we have developed in equipment and software design, as well as in systems manufacturing and process solutions, are used to engineer our finished products and to accelerate the commercialization path of our customer base.

Our proprietary-real-time, software allows for rapid configuration, and provides our customers with powerful tools to understand, optimize and repeatedly control their processes.

These factors significantly reduce cost, improve quality and reduce the time it takes from customer order to shipment of our products.

Our Application Laboratory allows customers the option to bring up their process tools in our Application Laboratory and to work together with our scientists and engineers to optimize process performance.

Current Developments

Historically, we have derived substantially all of our revenues through our custom equipment business and our Stainless Design Concepts (“SDC”) gas management and chemical delivery control systems segment.

The marketing, sale and manufacture of our products, requires a lengthy sales cycle ranging from several months to over more than one year before we can complete production and delivery.

Also, demand for our equipment and related consumable products and services may be volatile as a result of sudden changes in market conditions, competition and other factors.

This can and has resulted in substantial volatility in our revenue stream.

In order to address this sales volatility, we have attempted to diversify and expand our business into providing material products and services.

This strategy included the development of our capabilities to provide materials coatings and surface treatments for targeted customer / market requirements (the “Material Business”).

With this objective in mind, we acquired Tantaline in December 2016 and MesoScribe in October 2017.

In order to facilitate these new lines of businesses, we also purchased a building to house both operating subsidiaries for $13,850,000.

This 180,000 square foot building (the “555 Building”) was to house the Material Business in the United States and provide adequate space for the anticipated growth of these businesses.

In addition, we also maintain a 130,000 square foot building (the “355 Building”), which houses the equipment products portion of our business as well as our corporate headquarters.

We have invested approximately $1.6 million, $2.7 million and $2.5 million during 2020, 2019 and 2018, respectively, in building improvements, machinery, and other expenses related primarily to the Materials Business.

The projected growth of the Materials Business has not met expectations.

Although we have made substantial investments in facilities, equipment and acquisitions in furtherance of our strategy, the foregoing has proven to be a significant drain on our finances and our liquidity.

Since 2018 revenues for the Materials Business have been $1,700,000 in 2018, $1,600,000 in 2019 and $2,300,000 in 2020, with operating losses, exclusive of a $3.6 million impairment charge, recorded in all years for a total loss of $2.5 million.

These cumulative results are due to operating losses from the Tantaline operations offset by operating profits of $.5 million from the MesoScribe operations.

Furthermore, our overall revenues have declined from $41.1 million in 2017 to $16.9 million in 2020.

Cumulative operating losses, exclusive of a $3.6 million impairment charge, for the last three years (2018-2020) totaled ($14.5 million), which are comprised of 2018 ($5.3 million), 2019 ($5.0 million) and 2020 ($4.2 million).

As a result of these continuing losses, and the investments in the Materials Business, our cash balances have declined from $21.7 million at December 31, 2016 to $7.7 million as of December 31, 2020, and liquidity has been strained.

Contributing to and compounding this decline, is the negative effect the COVID-19 crisis has had in 2020 on the aerospace industry, which resulted from reduced travel and reduction of industry gas turbine engine sales.

Aerospace sales in recent years have represented as much as 60% of our total revenue.

Our mortgage debt on the 355 Building and 555 Building, in the amount of $2.1 million and $9.3 million respectively, at December 31 2020, matures in March and December 2022, respectively.

In January 2021, our Board of Directors concluded that we needed a change in direction and new leadership to evaluate our business strategy and operations, and take timely actions to halt and reverse the declines of the past few years.

As such, they appointed Emmanuel Lakios as President and Chief Executive Officer (previously our Vice-President- Sales and Marketing).

We began an intensive analysis of our entire business and operations including the Materials Business.

Based upon that analysis we believe our primary focus should be on the core equipment business and that the Materials Business strategy should be revised, with some of its current elements potentially minimized or ceased.

Based upon this analysis, we are forecasting continued losses and negative cash flow for our Tantaline product line and as a consequence, we have implemented plans to eliminate further investment in our Tantaline product line, which will result in the avoidance of approximately $1.5-$2.0 million in additional costs.

In addition, we have recorded an impairment charge of $3.6 million during the fourth quarter and year ended December 31, 2020.

Based upon certain decisions and actions currently being reviewed, there may be additional costs to be incurred, inclusive of employee related and lease termination costs estimated at approximately $400,000.

In order to increase our liquidity and to provide necessary working capital to support our on-going business and operations, we have decided to sell the 555 Building in February 2021.

We have determined the 555 Building is not needed for present and future business operations.

We have concluded that any remaining elements of the Materials Business can be consolidated into the 355 Building, which we believe can accommodate any needs for our growth for the foreseeable future.

On March 29, 2021, the Company entered into an agreement with Steel K, LLC for the sale of its 555 Building.

The purchase price is $24,360,000, and the closing of the sale is subject to the satisfaction or waiver of certain conditions to closing or contingencies.

A portion of the sale proceeds would be used to satisfy the existing mortgage debt on the 555 Building in the approximate amount of $9.3 million at December 31, 2020, and for various costs related to the sale closing in an amount to be determined.

Any excess proceeds will be used for general working capital purposes.

Statement of Operations

The performance and success of our products has historically driven repeat orders from existing customers as well as generated business from new customers.

Furthermore, with our proprietary solutions and expanded focus on “

accelerating the commercialization of tomorrow ’

s technologies ”

TM we have been developing a new customer base in addition to growing with our existing customers.

We have generally gained new customers through our industry reputation, as well as limited print advertising and trade show attendance (which has been negatively impacted by COVID-19 in 2020, 2021 and into 2022).

Our core competencies in equipment and software design, manufacturing and process development are used to engineer our finished products and to accelerate the commercialization path of our customer base.

Our proprietary real-time software allows for rapid configuration, and provides our customers with enabling tools to understand, optimize and repeatedly control their processes.

These factors significantly reduce cost, improve quality and reduce the time it takes between customers’

orders and the shipment of our products.

Our Application Laboratory allows customers the option to bring up their process tools in our Application Laboratory and to work collaboratively with our scientists and engineers to optimize process performance.

In 2021 our focus has been on our growth markets, the development of standard product solutions and being able to provide solutions from gas/liquid storage through process and process by-product treatment.

This has allowed us to provide increased value to our customers.

2021 Developments

In January 2021, our Board of Directors appointed Emmanuel Lakios as President and Chief Executive Officer (previously our Vice-President, Sales and Marketing) to, among other things, evaluate our business strategy and operations, and set a new course toward growth and profitability.

Based on this evaluation, our Board concluded that our primary focus should be on bolstering our core equipment business.

Furthermore, due to continued losses and the significant investments required to continue its present operations, we aim to revise the current strategy of our Materials business, potentially reallocating or ceasing existing elements entirely. 

Based upon that analysis and planning, which included forecasted losses and negative cash flows for the Tantaline product line, we implemented plans to eliminate further investment in our Tantaline product line.

This resulted in a discontinuation of all US Tantaline operations, including the freezing of substantial capital investments and the consolidation of all Tantaline operations into the Denmark Tantaline facility.

In addition, we recorded an impairment charge of $3.6 million during the fourth quarter and year ended December 31, 2020, related to the long lived assets of Tantaline.

With these actions completed, including the migration of all sales, operations and marketing to Denmark, and our focused customer support and increased demand for the Tantaline coating services, we are pleased with the favorable results achieved in 2021 including achieving profitability and positive cash flow at our Denmark Tantaline operations.

We continue to monitor the results of our growth and profitability initiatives, and we will take actions as required to improve our results in line with anticipated revenue levels.

The 2021 company strategy to focus on growth market applications has yielded multi system orders in the Silicon Carbide wafer and Battery nanomaterial fields, both fields are essential for the support of the Electric Vehicles (EV) market.

 These orders will provide us with standard product to continue to support the EV focused market as well as all energy storage and power transmission.

We continue to engage customers in the aerospace market in what we believe will be an eventual recovery in air travel and therefor gas turbine engine components which we provide production solutions and have a considerable installed base of systems.

During 2021, new order bookings exceeded $21 million, representing an increase of approximately 75% compared to 2020.

We have achieved order growth in all segments, including a 100% growth in the CVD equipment portion of the business, with 23 system orders in 2021.

Our order rate has also increased in the SDC Division and CVD Materials Division which includes the Tantaline and MesoScribe product lines.

As a result of increased new orders primarily in the last three quarters of 2021, the result of a recovery in the marketplace, excluding aerospace, as well as our execution of our operating plan, we have achieved four sequential quarters of revenue growth during 2021.

Quarterly revenue in 2021 was $3.4 million, $4.0 million, $4.3 million and $4.7 million, during Q1 to Q4, respectively.

Our order rate has benefited from the increased demand for nanotechnology materials including carbon nanotubes (CNTs), Graphene and silicon nanowires (Si-NWs) to support development and manufacturing for battery materials used in electric vehicles.

CVD received two system orders in 2021 to deposit coatings onto powders used in silicon-graphite anodes, including a production system and a second for research and material development.

Both systems are planned to ship in the middle of 2022.

In addition, demand for Silicon Carbide wafers to support high power electronics for energy storage and transmission/charging has resulted in a multi system order from a US-based, Silicon Carbide wafer provider for approximately $2 million.

The systems are scheduled to be delivered in 2022.

CVD is also a leading manufacturer of Chemical Vapor Infiltration (CVI) and Tow-Coating Systems to manufacture ceramic composite materials (CMCs) for Aerospace gas turbine engine applications.

Even though the aerospace industry has been greatly impacted by the COVID-19 global pandemic, according to industry forecasts, the demand for increased manufacturing is anticipated to recover in 2023.

All of these business growth opportunities are consistent with our strategic plan to address and serve growth production markets.

During February 2021, in order to increase our liquidity and to provide necessary working capital to support our on-going business and operations, the Board decided to sell its facility located at 555 North Research Place, Central Islip, NY (the “555 Building”).

On March 29, 2021, we entered into an agreement with Steel K, LLC for the sale of the 555 Building, and on July 26, 2021 we closed on the sale of the 555 Building.

The sale price was $24,360,000, subject to adjustment for apportionments, adjustments and credits.

A portion of the sale proceeds were used to satisfy the existing mortgage debt on the 555 Building, including interest and fees, in the amount of $9,352,719, as well as various costs related to the closing of the transaction.

We recognized a gain on the sale of the building in the amount of $6,894,109 and received approximately $14,000,000 in net proceeds.

Management determined the 555 Building was not needed for its on-going business operations and concluded that any remaining elements of the Materials Business could be consolidated into its remaining facility in Central Islip (the “355 Building”), which we believe can accommodate our growth-related needs for the foreseeable future.

In April 2021, we completed the transfer of our United States Tantaline equipment to the 355 Building, while the MesoScribe consolidation into the 355 Building was completed during Q3 2021.

All functions of the Tantaline product line have been consolidated into the Denmark facility and, the expenses related to Tantaline operations in the United States have ceased.

In April 2021, we filed an application for forgiveness on our Paycheck Protection Program (the “PPP”) loan and on June 14, 2021 we received a notification from our lender that on June 10, 2021 the SBA approved our PPP Loan forgiveness application and remitted payment to the lender for the entire principal amount of the PPP Loan and accrued interest.

As a result, we recognized in the year ended December 31, 2021 a gain on debt extinguishment in the amount of $2,443,418.

Statements of Operations

Cost of revenue

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Interest expense

Gain on Sale of Building

Gain on Debt extinguishment

Total other income, net

Loss before income tax

Income tax (benefit) expense

Income (loss) before income tax

Income tax expense (benefit)

Net income (loss)

CVD Equipment

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Our revenue for the year ended December 31, 2021 was $16.4 million compared to $16.9 million for the year ended December 31, 2020, resulting in a decrease of 2.8%.

This was primarily attributable to decreased revenue of $3.7 million from our CVD Equipment segment related to spare parts and equipment sales, offset, in part by, an increase of $.3 million in our SDC segment and an increase of $.7 million in our CVD Materials segment.

Aerospace sales have represented as much as 60% of our total revenue.

This was primarily attributable to decreased revenue of $1.8 million from our CVD Equipment segment related to spare parts and equipment sales, offset, in part by, an increase of $1.0 million in our CVD Materials segment and an increase of $.3 million in our SDC segment.

Contributing to and compounding this decline, is the negative effect the COVID-19 crisis has had initially in 2020, during 2021 and into 2022 on the aerospace industry, which resulted from reduced travel and reduction of industry gas turbine engine sales.

While aerospace sales had represented as much as 60% of our total revenue, during 2021 and 2020 it represented approximately 15.8% and 45.0%, respectively.

Further, the impacts of COVID-19 which significantly reduced the Company’s orders commencing in the first quarter of 2020, for the year ended December 31, 2020 and into the first quarter of 2021, has in turn significantly decreased our revenues in the subsequent quarters.

In addition, we have had delays, and continue to experience delays in our supply chain delivery of components which hampers our ability to recognize revenue more timely.

However, as a result of increased new orders, primarily in the last three quarters of 2021, the result of a recovery in the marketplace, exclusive of aerospace, as well as the execution of our operating plan, we have achieved four sequential quarters of revenue increases during 2021.

Quarterly revenue in 2021 was $3.4 million, $4.0 million, $4.3 million and $4.7 million, during Q1 to Q4, respectively.

The revenue contributed for the year ended December 31, 2021, by the CVD Equipment segment, was $8.6 million, or 52.2% of our overall revenue.

This represented a decrease of 17.3% or $1.8 million, as compared to $10.4 million in the prior year, which totaled 61.4% of our overall revenue.

This revenue decrease is the result of decreases of $.9 million and $2.8 million, from spare parts and equipment sales, respectively.

Aerospace sales have represented as much as 60% of our total revenue.

Annual revenue for our SDC segment increased to $4.2 million in 2020 as compared to $3.9 million in 2019, an increase $.3 million or 6.7%.

This revenue decrease is the result of a decrease of $3.5 million from spare parts to support aerospace customers, which was an industry which was negatively affected by the COVID-19 pandemic.

This decrease in spare part sales were offset, in part by, increased equipment sales of $1.7 million for industrial / commercial applications.

For year end December 31, 2021 and 2020, sales for spares parts were $3.1 million and $6.6 million, respectively and equipment sales were $5.5 million and $3.7 million, respectively.

Revenue for our SDC segment increased to $4.5 million in 2021 for the year ended December 31, 2021 as compared to $4.2 million in 2020, an increase $.3 million or 7.5%.

The SDC segment represented 27.5% and 24.9% of our total revenue during the years ended December 31, 2021 and December 31, 2020, respectively.

Revenues for our CVD Materials segment were $3.3 million in the year ended December 31, 2021 as compared to $2.3 million for 2020.

The increase of $.7 million was due to increased sales of Tantaline products and coatings of $.6 million, half of this increase related to a distribution sale at significantly reduced margins, and increased sales from MesoScribe of $.1 million.

The increase of $1.0 million was due to increased Tantaline®

related revenue from our Denmark operations of $.5 million and increased MesoScribe revenue of $.5 million, both the result of improvement in new order rates.

Gross profit for the year ended December 31, 2021 amounted to $2.5 million, with a gross profit margin of 15.4 %, compared to a gross profit of $2.9 million and a gross profit margin of 17.0% for the year ended December 31, 2020.

The increase in our gross profit and gross profit margin was the result of improvements in our operating efficiencies with certain repeat orders, as well as lowered costs mostly due to the effects of employees furloughed during the period as a result of Coronavirus mandates imposed, and improved mix of product revenues resulting in our gross profit margin percentage improvement.

The reduction in gross profit and gross profit margin, was the result of the impact of $.5 million in decreased sales as a result of the impact of COVID-19, increased costs on certain components in the second half of the year, and supply chain delays impacting our manufacturing efficiencies, and the impact of fixed costs and payroll to support anticipated higher sales levels in the future, offset in part by reduced employee payroll and related costs commencing in the year ended December 31, 2020 as a result of the COVID-19 mandates imposed.

In late 2021, we initiated price increases on new quotations which will attempt to mitigate our cost increases and we anticipate will benefit margins during 2022.

Research and Development, Selling and General and Administrative Expenses

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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.

When they are not working on a customer project, and they work in our Application Laboratory or other research applications, their costs are charged to research and development.

For the years ended December 31, 2021 and 2020, we incurred $481,000 and $373,000 respectively of internal research and development costs.

This decrease was primarily due to the effects of employee furloughs during the year ended December 31, 2020, as a result of COVID-19 mandates imposed.

This increase is the result of increased efforts on research and development as well as the effects of employee furloughs during the year ended December 31, 2020, as a result of COVID-19 mandates imposed.

Selling expenses were $.8 million or 4.9% of the revenue for the year ended December 31, 2021 as compared to $.6 million or 3.4% for the year ended December 31, 2020.

The decrease was primarily the result of reduced employee related costs, including the effects of employee furloughs during the year ended December 31, 2020, as a result of COVID-19 mandates imposed, and lower trade show expenses.

During the year ended December 31, 2020, due to COVID-19 related furloughs, selling expenses were impacted by reduced employee and employee related costs and during the year ended December 31, 2021 selling expenses increased due to the comparison to the prior year COVID-19 impacted period.

In addition, during 2021 we expanded our focus in customer account engagement which resulted in increased personnel and travel related costs, as well as the transfer of one employee from administration during 2021 to focus on sales and marketing initiatives.

Impairment Charge:

Based upon continued operating losses and negative cash flow for our Tantaline product line and our updated forecasting, the expected future cash flows of the Tantaline business is negative and thus we have recorded an impairment charge of $3.6 million in the fourth quarter and year ended December 31, 2020.

For the year ended December 31, 2020, based upon continued operating losses and negative cash flow for our Tantaline product line and the updated forecasts, the expected future cash flows of the Tantaline business was negative and thus we have recorded an impairment charge related to long-term Tantaline assets of $3.6 million in the fourth quarter and year ended December 31, 2020.

We had no recorded impairment charges in the consolidated statement of operations during the year ended December 31, 2021.

General and Administrative:

General and administrative expenses for the year ended December 31, 2020 were $6.2 million or 36.4% of revenue compared to $6.3 million or 32.0% during the year ended December 31, 2019, a decrease of $.1 million.

While stock compensation costs decreased by $317,000 due to fewer equity grants, and outside systems and finance consulting costs decreased by $67,000, due to the completion of our system migration and completion of finance consulting costs in 2019, these decreases were offset primarily by depreciation of our 555 facility in the amount of $334,000 and a $142,000 bad debt provision related primarily to one customer.

General and administrative expenses for the year ended December 31, 2021 were $6.1 million or 36.8% of revenue compared to $6.2 million or 36.4% of revenue for the year ended December 31, 2020, a decrease of $.1 million.

The decrease in these expenses is primarily due to the reduction in employees and employee-related costs of $346,000, recovery of bad debts of $244,000, reduced depreciation and operating costs primarily due to the 555 Building in the amount of $413,000, offset, in part by, costs to vacate the 555 Building and prepare the 355 Building for the consolidation of operations in the amount of $232,000, related to personnel costs and outside services, increased legal costs of $533,000, of which $135,000 related to the preparation of the sale of the 555 Building, and the balance was related to general corporate governance, employee related matters and intellectual property.

Operating Loss

Improved gross profit margins and reduced expenses, which were more than offset by the $3.6 million impairment charge in the year ended December 31, 2020, resulted in an operating loss of $7.8 million for the year ended December 31, 2020 as compared to operating loss of $5.0 million for the year ended December 31, 2019.

Other (Expenses)/Income

Other income was $221,650 and $70,965 for the years ended December 31, 2020 and 2019, respectively.

Net other income was $603,320 and $411,230 for the year ended December 31, 2020 and 2019, respectively, from subleasing a portion of our CVD Materials facility.

The increase of $192,090 was the result of approximately seven months of rental in 2019 (commencing June 2019) as compared to a full year in 2020.

Interest income of $62,667 for the year ended December 31, 2020, included interest income of $28,000 related to the income tax refund received during the year.

Our operating loss of $4.8 million, in the year ended December 31, 2021, is primarily the result of lower sales and the reduction in gross profit margins, as compared with an operating loss of $7.8 million (which included a $3.6 million impairment charge) in the year ended December 31, 2020.

Other Income / (Expenses)

Other income (expenses) was $9,582,000 and $221,000 for the year ended December 31, 2021 and 2020, respectively.

On July 26, 2021, we sold our 555 building and recognized a gain on the sale in the amount of $6,894,000.

Gain on debt extinguishment was $2,443,000 and $0 for the year ended December 31, 2021 and 2020, respectively, the result of forgiveness of the Company’s PPP loan during the year ended December 31, 2021.

Other income from subleasing a portion of our 555 Building was $500,000 and $603,000 in the year ended December 31, 2021 and 2020, respectively.

The decrease of $103,000 was the result of the impact of the sale of the 555 Building which occurred on July 26, 2021.

As a result of lower interest rates, interest income decreased $57,000, to $6,000 for the year ended December 31, 2021 as compared to $63,000 in 2020.

In addition, interest expense decreased $38,507 to $444,337 in the year ended December 31, 2020, as compared to $482,844 in 2019.

For the year ended December 31, 2020, we recorded an income tax benefit of $1,527,000 as compared to an income tax expense of $1,414,000 in the year ended December 31, 2019.

The income tax benefit recorded during the year ended December 31, 2020 was the result of a change in the tax laws pursuant to the CARES Act.

As a result of the enactment of the CARES Act, net operating losses (“NOL’s”) generated in 2018-2020 can now be carried back for five years and resulted in the Company recognizing approximately a $1.5 million income tax benefit, of which $.7 million was a receivable at December 31, 2020.

As of December 31, 2020 and December 31, 2019, we have provided a full valuation allowance against all of the net deferred tax assets.

This was based on management’s assessment, including three years of cumulative operating losses, that it is more likely than not that the net deferred tax assets may not be realized in the future.

For the year ended December 31, 2019, we have provided a full valuation allowance against all of the net deferred tax assets in the amount of $2,497,414.

We continue to evaluate for potential utilization of our deferred tax asset, which has been fully reserved for, on a quarterly basis, reviewing our economic models, including projections and timing of orders, cost containment measures and other factors.

For the year ended December 31, 2020 and 2019 our tax rate was primarily affected by permanent differences resulting in an effective tax rate of 20.0% and 28.7%.

In addition, interest expense related to our mortgages decreased $183,000 to $261,000 for the year ended December 31, 2021, as compared to $444,000 in 2020, the result of our 555 Building mortgage satisfied on July 26, 2021.

For the year ended December 31, 2021, there was a $28,000 income tax expense related to the gain on the sale of the building, which was reduced by the benefit of our net operating loss carryforwards, as compared to an income tax benefit of $1.5 million for the year ended December 31, 2020.

On March 27, 2020, the CARES Act was enacted by the United States Congress.

We continue to evaluate the potential utilization of our deferred tax asset, which has been fully reserved for, on a quarterly basis, reviewing our economic models, including projections and timing of orders, cost containment measures and other factors.

For the years ended December 31, 2021 and 2020 our tax rate was primarily affected by permanent differences resulting in an effective tax rate of 0.5% and 20.0%.

Net Income (Loss)

As a result of the foregoing factors, for the year ended December 31, 2020, we had a net loss of $6.1 million or $.91 per diluted share compared to a net loss of $6.3 million or $.96 per diluted share for the year ended December 31, 2019.

Inflation has not materially impacted our operations.

As a result of the foregoing factors (including the effect of recognizing a $6.9 million gain on the sale of our 555 Building and $2.4 million in forgiveness of debt income related to our PPP Loan) we reported net income of $4.7 million, or $0.71 per diluted share, for the year ended December 31, 2021, as compared to a net loss of ($6.1 million) (which included the $1.5 million tax benefit as noted above), or $0.91 per diluted share for the year ended December 31, 2020.

Inflation and Supply Chain Matters

During the third and fourth quarters of 2021, and thus far in 2022, we experienced increased costs on certain materials and components as well as delays in supply chain delivery, which may also impact our ability to recognize revenue and reduce our gross profit margins, as well as extend our manufacturing lead times and reduce our manufacturing efficiencies.

We have commenced placing orders with more lead time to help mitigate the manufacturing delays, as well as assessing other suppliers or components to attempt to mitigate the potential cost impacts.

In addition, we are utilizing our in-house flexible manufacturing to attempt to further mitigate both potential schedule delivery delays and material cost increase.

While we have initiated actions to mitigate the potential negative impacts to our revenue and profitability, there can be no assurance of the ultimate impact and the length of time that the supply chain factors may impact our revenues and profitability.

Inflation has also had an impact on salaries and compensation.

In an effort to remain competitive in the acquisition and retention of our employees, we have reviewed and adjusted salaries and implemented bonus incentives to mitigate the potential negative impacts of inflation on our employees.

Liquidity and Capital Resources

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Our cash and cash equivalents at December 31, 2021 and 2020 were $16.7 million and $7.7 million, respectively.

Net cash used in operating activities was ($1.1 million).

This is the result of the net loss, adjusted for non-cash items, of $.7 million.

In addition, contract liabilities decreased $1.5 million, accrued expenses decreased $.5 million related to the payment of vacation and other accrued expenses and an increase in taxes receivable of $.7 million as a result of the March 27, 2020 CARES Act enactment allowing the carryback of NOL’s five years resulting in a receivable of $1.5 million, of which $.8 million was collected in the year ended December 31, 2020.

These amounts were reduced by a decrease in accounts receivable of $1.4 million due to timing of collections, decreased inventory of $.6 million and increased accounts payable of $.3 million.

Our cash and cash equivalents at our year end December 31, 2020 was $7.7 million and was favorably impacted by the receipt of the PPP loan proceeds of $2.4 million and the refund of income taxes of $.8 million for a total of $3.2 million.

Long term debt increased by $1.7 million, the result of a new loan from the Paycheck Protection Program of $2.4 million and a ($.7 million) decrease from principal payments on the mortgages related to our two facilities in Central Islip, NY, including our investment in the CVD Materials building purchased on November 30, 2017.

We have invested in activities primarily related to preparing CVD Materials for operations in the United States.

Our total capital invested in the year ended December 31, 2020 was $1.6 million, primarily related to building improvements and machinery, and for the year ended December 31, 2020 we received rental income of approximately $603,000.

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.

Net cash used in operating activities during 2021 was $4.3 million.

This is the result of the net income, adjusted for non-cash items (including, gain on sale of building and gain on debt extinguishment), of ($3.5 million).

In addition, contract assets increased $2.0 million, accounts receivables increased $.4 million and inventories increased $.1 million, offset, in part by, increased contract liabilities of $.9 million, increased accrued expenses of $.4 million and increase accounts payables of $.3 million and decreased other assets of $.2 million.

In order to increase our liquidity and to provide necessary working capital to support our on-going business and operations, on July 26, 2021 we completed the sale of the 555 Building.

The sale price was $24,360,000, subject to adjustment for apportionments, adjustments and credits.

A portion of the sale proceeds was used to satisfy the existing mortgage debt on the 555 Building, including interest and fees, in the amount of $9,352,719, as well as various costs related to the closing of the transaction.

We recognized a gain on the sale of the building in the amount of $6,894,109 and received approximately $14,000,000 in net proceeds.

Long term debt decreased by $9.6 million from principal payments on our mortgages in Central Islip, NY.

This included the principal repayment in the amount of approximately $9.1 million, to satisfy our loan at closing of the sale of the 555 Building.

Capital expenditures in the year ended December 31, 2021 were $.2 million related primarily to improvements to the 355 building related to moving the Company’s operations from the 555 Building facility.

We had a loan agreement with HSBC USA, N.A.

(the “HSBC”) which was secured by a mortgage on our Central Islip headquarters at 355 South Technology Drive.

The loan was 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 December 31, 2021 and December 31, 2020 were approximately $1.8 million and $2.1 million, respectively.

Interest accrues on the Loan, at our option, at the variable rate of LIBOR plus 1.75% or Prime less 0.5% (1.89% and 3.49% at December 31, 2020 and 2019, respectively).

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 Note is payable in 60 consecutive equal monthly installments of $62,481, including interest.

The balances as of December 31, 2020 and 2019 were approximately $9.3 million and $9.7 million, respectively.

The Note 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.

On August 5, 2019, we entered into a Mortgage Modification Agreement which replaced the former covenant with a Minimum Liquid Assets (“MLC”) covenant, and on October 22, 2020, we entered into a Second Mortgage Modification Agreement modifying certain MLC balances.

Interest accrued on the Loan, at our option, at the variable rate of LIBOR plus 1.75% or Prime less 0.5% (1.86% and 1.89% at December 31, 2021 and 2020, respectively).

We were in compliance with our financial covenant under the mortgage at December 31, 2021.

On March 1, 2022, according to the terms of the agreement, the loan amount outstanding of approximately $1.7 million was satisfied.

The COVID-19 outbreak has resulted in extended shutdowns of certain businesses in United States and around the world.

We have been actively monitoring the COVID-19 outbreak and its impact globally.

Our primary focus to this point has been to ensure the health and safety of our employees.

To that end, we have adopted social distancing where appropriate, implemented travel restrictions, and we have taken actions to ensure that locations and facilities are cleaned and sanitized regularly.

These are novel and challenging times and the magnitude of this crisis is requiring us to consider all options to promote the safety of employees, including, where appropriate, or where required to comply with foreign, national, state or local governmental authority recommendations, guidelines, and/or mandates, the temporary reduction or suspension of work at certain of the Company’s locations and production facilities to protect employees and curb the spread of the coronavirus.

All of these actions have adversely impacted our operating results.

We have been actively monitoring the COVID-19 outbreak and its impact globally. 

Our primary focus to this point has been to ensure the health and safety of our employees. 

All of these actions have adversely impacted our operating results. 

In particular, our aerospace sector, for which we rely on a significant part of our business, has been faced with significant reductions to its business due to lack of air travel.

Due to the timing of the COVID-19 outbreak, our new order levels during the year ended December 31, 2020, and into 2021 have seen substantial reductions which have materially and adversely affected revenues commencing in our second quarter of 2020, and is anticipated to continue into 2022.

While the financial results for our first quarter of 2020 reflected the initial impact of COVID-19, and the year ended December 31, 2020 reflected a substantial adverse effect, we are unable to predict the extent of the impact the pandemic will have on our financial position and operating results for the 2021 due to numerous uncertainties, but the impact could be material and adverse during any future period affected either directly or indirectly by this pandemic.

While the financial results for our first quarter of 2020 reflected the initial impact of COVID-19, and the years ended December 31, 2020 and 2021 reflected a substantial adverse effect, we are unable to predict the extent of the impact the pandemic will have on our financial position and operating results for the 2022 due to numerous uncertainties, but the impact could be material and adverse during any future period affected either directly or indirectly by this pandemic. 

The longer-term impacts from the outbreak are highly uncertain and cannot be predicted.

Our return to profitability is dependent upon, among other things, the receipt of new equipment orders, the lessening of the ongoing effects of COVID-19 on our business and the Aerospace market, improvement in the operations of the materials business, the consolidation of our Central Islip facilities and sale of the 555 Building, as well as managing planned capital expenditures and operating expenses.

At December 31, 2019 we had reduced our employee headcount by 13% to 172 as compared to December 31, 2018.

Since March 16, 2020, as a result of Coronavirus mandates imposed, we have furloughed a substantial portion of our work force reducing to levels deemed to support essential services, and continue to assess this on a weekly basis.

During these unprecedented times we are continuing to evaluate our staffing levels to support the continued operations, including the level of current and expected orders.

As of December 31, 2020, our active employee headcount has been reduced to approximately 130, a 24% reduction as compared to December 31, 2019.

On April 21, 2020, the Company entered into a loan agreement (the “Loan Agreement”) with HSBC Bank USA, National Association pursuant to which the Company was granted a loan in the principal amount of $2,415,970, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted by the United States Congress on March 27, 2020.

The PPP loan, the obligation of which is represented by a note issued by the Company, matures on April 21, 2022 and bears interest at a rate of 1% per annum.

The note may be prepaid by the Company at any time prior to maturity with no prepayment penalties.

Under the terms of the PPP, all or a portion of the Loan may be forgiven, based upon payments made in the first twenty-four weeks following receipt of the proceeds, related to payroll costs, continue group health care benefits, utilities and mortgage interest on other debt obligations incurred before February 15, 2020.

The Company is in process of filing its application for forgiveness and anticipates all or substantially all of the PPP loan to be forgiven.

As a result of the March 27, 2020 CARES Act enactment allowing the carryback of NOL’s five years, the Company recognized a $1.5 million tax benefit.

The Company has collected $.8 million in the year ended December 31, 2020.

As such, they appointed Emmanuel Lakios as President and Chief Executive Officer (previously our Vice-President- Sales and Marketing).

We began an intensive analysis of our entire business and operations including the Materials Business.

In addition, we have recorded an impairment charge of $3.6 million in the fourth quarter and year ended December 31, 2020.

In order to increase our liquidity and to provide necessary working capital to support our on-going business and operations, we have decided to sell the 555 Building.

We have determined the 555 Building is not needed for present and future business operations.

On March 29, 2021, the Company entered into an agreement with Steel K, LLC for the sale of its 555 Building.

The purchase price is $24,360,000, and the closing of the sale is subject to the satisfaction or waiver of certain conditions to closing or contingencies.

Any excess proceeds will be used for general working capital purposes.

Due to the timing of the COVID-19 outbreak, our new orders during the year ended December 31, 2020, and into the beginning of 2021 have decreased substantially which have resulted in substantial reductions in revenues resulting in operating losses commencing in our second quarter of 2020.

The ongoing impact that COVID-19 has had on our business has made the conditions to operate very challenging.

In particular, the aerospace sector, for which we rely on a significant part of our business, has been faced with significant reductions to its business due to lack of air travel.

While we continue to monitor and take action to reduce our expenses, we have secured a $2.4 million loan under PPP and have recognized a $1.5 million tax receivable from the NOL 5 year carryback.

In addition, we have decided to sell the 555 Building.

Based upon all of these factors, we believe that our cash and cash equivalent positions and cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months of the filing of this Form 10-K.

Should the current environment continue longer or worsen, we will continue to assess our operations and take actions anticipated to maintain our operating cash to support the working capital needs, as well as compliance with our loan covenant.

Our return to profitability is dependent upon, among other things, the receipt of new equipment orders, the lessening of the ongoing effects of COVID-19 on our business and the Aerospace market, improvement in the operations of the materials business, as well as managing planned capital expenditures and operating expenses.

Due to the effects of the COVID-19 pandemic, on April 21, 2020, we entered into a loan agreement (the “Loan Agreement”) with HSBC Bank USA, National Association pursuant to which we were granted a loan in the principal amount of $2,415,970, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted by the United States Congress on March 27, 2020.

The PPP loan, the obligation of which is represented by a note issued by us, was to mature on April 21, 2022 and bore interest at a rate of 1% per annum.

The note may be prepaid at any time prior to maturity with no prepayment penalties. Under the terms of the PPP, all or a portion of the Loan may be forgiven, based upon payments made in the first twenty-four weeks following receipt of the proceeds, related to payroll costs, continue group health care benefits, utilities and mortgage interest on other debt obligations incurred before February 15, 2020.

The Company filed an application for forgiveness in April 2021 and on June 14, 2021 the Company received a notification from its lender that on June 10, 2021 the SBA approved the Company’s PPP Loan forgiveness application and remitted payment to the lender for the entire principal amount of the PPP Loan and accrued interest.

As a result, the Company has recognized in the year ended December 31, 2021 forgiveness of debt income in the amount of $2,443,418.

As a result of the March 27, 2020 CARES Act enactment allowing the carryback of NOL’s five years, the Company recognized a $1.5 million tax benefit.

The Company has collected $.8 million in the year ended December 31, 2020 and at December 31, 2021 has a remaining tax receivable in the amount of $.7 million outstanding.

Based upon all of these factors, we believe that our cash and cash equivalent positions and our projected cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next twelve to eighteen months from the filing of this Form 10-K.

Should the current environment continue longer or worsen, we will continue to assess our operations and take actions anticipated to maintain our operating cash to support the working capital needs.

Critical Accounting Policies

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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 us to make estimates of costs to complete the projects.

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Stock-Based Compensation

We record stock-based compensation in accordance with the provisions set forth in the Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) 718, “Stock Compensation”.

ASC 718 requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based upon the grant date fair value of those awards.

ASC 718 requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based upon the grant date fair value of those awards over the vesting period.

The Company uses the Black-Scholes option-pricing model to compute the estimated fair value of option awards and includes assumptions regarding expected volatility, expected option term, dividend yields and risk-free interest rates.

Long-Lived Assets and Intangibles

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Long-lived assets are reviewed for impairment whenever events or circumstances indicate their carrying value may not be recoverable.

When such events or circumstances arise, an estimate of the future undiscounted cash flows produced by the asset, or the appropriate grouping of assets, is compared to the asset’s carrying value to determine if impairment exists pursuant to the requirements of ASC 360-10-35, “Impairment or Disposal of Long-Lived Assets.” If the asset is determined to be impaired, the impairment loss is measured on the excess of its carrying value over its fair value.

If the asset is determined to be impaired, the impairment loss is measured on the excess of its carrying value over its fair value.

Assets to be disposed of are reported at the lower of their carrying value or net realizable value.

Based upon continued operating losses and our updated forecasting, the future value of the cash flows of the Tantaline product line is negative and thus we have recorded an impairment charge of $3.6 million in the fourth quarter and year ended December 31, 2020.

We had no recorded impairment charges in the consolidated statement of operations during the year ended December 31, 2019.

Off-Balance Sheet Arrangements

Quantitative and Qualitative Disclosures About Market Risk.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity