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CVD EQUIPMENT : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

08/16/2021 | 04:10pm EDT

Except for historical information contained herein, this "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, as amended. These statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Important assumptions and other factors that could cause actual results to differ materially from those in the forward-looking statements, include but are not limited to: competition in the Company's existing and potential future product lines of business; the Company's ability to obtain financing on acceptable terms if and when needed; uncertainty as to the Company's future profitability, uncertainty as to the future profitability of acquired businesses or product lines, uncertainty as to any future expansion of the Company and the effect of the novel coronavirus (COVID-19) on our business and operations, and those of our customers, suppliers and other third parties. Other factors and assumptions not identified above were also involved in the derivation of these forward-looking statements and the failure of such assumptions to be realized as well as other factors may also cause actual results to differ materially from those projected. The Company assumes no obligation to update these forward looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements. Past results are no guaranty of future performance. You should not place undue reliance on any forward-looking statements, which speak only as of the dates they are made. When used in this Report, the words "believes," "anticipates," "expects," "estimates," "plans," "intends," "will" and similar expressions are intended to identify forward-looking statements.

Coronavirus (COVID-19)

We have been actively monitoring the coronavirus ("COVID-19") outbreak and its impact globally. Our primary focus to this point has been to ensure the health and safety of our employees. To that end, we have adopted social distancing practices where appropriate, implemented travel restrictions, and have taken actions to ensure that our facilities are cleaned and sanitized regularly. These are novel and challenging times and the magnitude of this crisis is requiring us to consider all options to promote the safety of employees, including, where appropriate, or where required to comply with foreign, national, state or local governmental authority recommendations, guidelines, and/or mandates, the temporary suspension of work at certain of our locations and production facilities to protect employees and curb the spread of the coronavirus. All of these actions have adversely impacted our operating results. In particular, the aerospace sector, for which we rely on for a significant part of our business, has been faced with significant reductions to its business due to lack of air travel. Due to the timing of the COVID-19 outbreak, our new order levels during the year ended December 31, 2020 and into the first quarter of 2021 have seen substantial reductions, while new orders in the second quarter of 2021 where substantially higher at approximately $6.0 million, and which have materially and adversely affected revenues commencing in our second quarter of 2020. While the financial results for the Company's first quarter of 2020 reflected the initial impact of COVID-19, and the year ended December 31, 2020 and the six months ended June 30 2021 reflected a substantial adverse effect, we are unable to predict the extent of the impact the pandemic will have on our financial position and operating results for the remainder of 2021 due to numerous uncertainties (including the impact of the COVID Delta variant), but the impact could be material during any future period affected either directly or indirectly by this pandemic. The longer-term impacts from the outbreak are highly uncertain and cannot be predicted.


Current Developments

Historically, we have derived substantially all of our revenues through our custom equipment business and our Stainless Design Concepts ("SDC") gas management and chemical delivery control systems segment. The marketing, sale and manufacture of our products, requires a lengthy sales cycle ranging from several months to over more than one year before we can complete production and delivery. Also, demand for our equipment and related consumable products and services may be volatile as a result of sudden changes in market conditions, competition and other factors. This can and has resulted in substantial volatility in our revenue stream.

In order to address this sales volatility, we have attempted to diversify and expand our business into providing material products and services. This strategy included the development of our capabilities to provide materials coatings and surface treatments for targeted customer / market requirements (the "Material Business"). With this objective in mind, we acquired Tantaline in December 2016 and MesoScribe in October 2017. In order to facilitate these new lines of businesses, we purchased a building to house both operating subsidiaries for $13,850,000. This 180,000 square foot building (the "555 Building") was planned to house the Material Business in the United States and provide adequate space for the anticipated growth of these businesses. In addition, we also maintain a 130,000 square foot building (the "355 Building"), which houses the equipment products portion of our business as well as our corporate headquarters.

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

The projected growth of the Materials Business has not met expectations. Although we have made substantial investments in facilities, equipment and acquisitions in furtherance of our strategy, the foregoing has proven to be a significant drain on our finances and our liquidity. Since 2018 revenues for the Materials Business have been $1,700,000 in 2018, $1,600,000 in 2019 and $2,300,000 in 2020, with operating losses, exclusive of a $3.6 million impairment charge, recorded in all years for a total loss of $2.5 million. These cumulative results are due to operating losses from the Tantaline operations offset by operating profits of $.5 million from the MesoScribe operations. In the six months ended June 30, 2021 the Materials Business had revenue of $1.7 million and operating income of $.4 million. The operating income was due to operating income from the Tantaline and Mesoscribe operations.


Furthermore, our overall revenues have declined from $41.1 million in 2017 to $16.9 million in 2020. Cumulative operating losses, exclusive of a $3.6 million impairment charge, for the last three years (2018-2020) totaled ($14.5 million), which are comprised of 2018 ($5.3 million), 2019 ($5.0 million) and 2020 ($4.2 million). As a result of these continuing losses, and the investments in the Materials Business, our cash balances have declined from $21.7 million at December 31, 2016 to $7.7 million as of December 31, 2020 and $5.4 million at June 30, 2021, and liquidity has been strained. Contributing to and compounding this decline, is the negative effect the COVID-19 crisis has had on the aerospace industry, which resulted from reduced travel and reduction of industry gas turbine engine sales. Aerospace sales in recent years have represented as much as 60% of our total revenue.

Our mortgage debt on the 355 Building and 555 Building, respectively, was $1.9 million and $9.1 million, at June 30 2021. The 355 Building mortgage debt matures in March 2022, while the 555 Building mortgage debt was satisfied in full on July 26, 2021 as a result of the sale of that building (see below for details on the sale).

In January 2021, our Board of Directors concluded that we needed a change in direction and new leadership to evaluate our business strategy and operations, and take timely actions to halt and reverse the declines of the past few years. As such, they appointed Emmanuel Lakios as President and Chief Executive Officer (previously our Vice-President- Sales and Marketing). We began an intensive analysis of our entire business and operations including the Materials Business. Based upon that analysis we believe our primary focus should be on the core equipment business and that the Materials Business strategy should be revised, with some of its current elements potentially minimized or ceased. Based upon this analysis, we are forecasting continued losses and negative cash flow for our Tantaline product line and as a consequence, we have implemented plans to eliminate further investment in our Tantaline product line, which will result in the avoidance of approximately $1.5-$2.0 million in additional costs. In addition, we recorded an impairment charge of $3.6 million during the fourth quarter and year ended December 31, 2020. Based upon certain decisions and actions currently being reviewed, there may be additional costs to be incurred, inclusive of employee related and lease termination costs estimated at approximately $400,000.

In order to increase our liquidity and provide necessary working capital to support our on-going business and operations, we decided to sell the 555 Building in February 2021. We determined the 555 Building was not needed for present or future business operations and that any remaining elements of the Materials Business could be consolidated into the 355 Building, which we believe can accommodate any needs for our growth for the foreseeable future. In April 2021, we completed the move of our Tantaline product line to the 355 Building, while the MesoScribe consolidation into the 355 Building was initiated. All functions of the Tantaline product line have been consolidated into the Denmark office and the United States expenses related to Tantaline have ceased.


On March 29, 2021, we entered into an agreement with Steel K, LLC for the sale of our 555 Building, and on July 26, 2021, we closed on the sale of the 555 Building. The sale price was $24,360,000, subject to adjustment for apportionments, adjustments and credits. A portion of the sale proceeds was used to satisfy the existing mortgage debt on the 555 Building, including interest and fees, in the amount of $9,352,719, as well as various costs related to the closing of the transaction. The net proceeds to the Company were approximately $14,000,000.

© Edgar Online, source Glimpses

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