Statement of Operations
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Three Months Ended
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March 31,
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2020
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2019
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Revenue
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$
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6,036,360
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$
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3,468,675
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Cost of revenue
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4,100,836
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3,856,417
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Gross profit
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1,935,524
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(387,742
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)
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Operating expenses
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Research and development
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113,828
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164,080
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Selling and shipping
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165,777
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277,306
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General and administrative
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1,547,758
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1,735,974
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Total operating expenses
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1,827,363
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2,177,360
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Operating income (loss)
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108,161
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(2,565,102
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)
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Other income (expense):
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Interest income
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24,902
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46,806
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Interest expense
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(116,038
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)
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(114,651
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)
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Other Income (expense)
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110,809
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-
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Total other income (expense), net
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19,673
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(67,845
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)
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Income (loss) before income tax
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127,834
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(2,632,947
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)
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Income tax (benefit)
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(1,530,644
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)
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(456,000
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)
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Net income (loss)
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$
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1,658,478
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$
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(2,176,947
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)
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Three Months Ended March 31, 2020 vs. March 31, 2019
Revenue
Our revenue for the three months ended March 31, 2020 was $6.0 million compared to $3.5 million for the three months ended March 31, 2019, an increase of $2.5 million or 74.0%. This was primarily attributable to increased revenue of $2.1 million from our CVD Equipment segment related to spare parts and equipment sales, $.5 million increase in our SDC segment and a ($.1 million) decrease in our CVD Materials segment.
The revenue contributed for the three months ended March 31, 2020, by the CVD Equipment segment, of $4.1 million, which totaled 67.9% of our overall revenue, was 103.0% or $2.1 million more than the segment’s $2.0 million contribution made in the prior year, which totaled 58.2% of our overall revenue. This revenue increase is the result of $1.9 million and $.2 million from spare parts and equipment sales, respectively.
Revenue for our SDC segment was $1.6 million in three months ended March 31, 2020 as compared to $1.1 million in three months ended March 31, 2019, an increase of $.5 million. This increase was due to the timing of one large order primarily completed in the three months ended March 31, 2020.
Revenues for our CVD Materials segment were $.3 million in the three months ended March 31, 2020 as compared to $.4 million for the three months ended March 31, 2019, a decrease of $.1 million.
Gross Profit
Gross profit for the three months ended March 31, 2020 amounted to $1.9 million, with a gross profit margin of 32.1%, compared to a gross profit of ($388,742) and a gross profit margin of (11.2%) for the three months ended March 31, 2019. In addition to the higher level of sales during the quarter increasing our gross profit, we achieved improvements in our operating efficiencies with certain repeat orders, lowered our costs mostly due to the effects of certain furloughed employees during the last two and one-half weeks of March 2020, as a result of Coronavirus mandates imposed, and achieved improved mix of product revenues resulting in our gross profit margin percentage improvement.
Research and Development, Selling and General and Administrative Expenses
Research and Development
Due to the technical development required on our custom orders, our research and development team and their expenses are charged to costs of goods sold when they are working directly on a customer project. When they are not working on a customer project, they work in our Application Laboratory and their costs are charged to research and development. For the three months ended March 31, 2020, our research and development expenses totaled $114,000 compared to $164,000 for the three months ended March 31, 2019, primarily due to the effects of certain furloughed employees during the last two and one-half weeks of March 2020, as a result of Coronavirus mandates imposed.
Selling
Selling expenses were $.2 million or 2.7 % of the revenue for the three months ended March 31, 2020 as compared to $.3 million or 8.0% for the three months ended March 31, 2019. The decrease was primarily the result of reduced employee related costs, including the effects of certain furloughed employees during the last two and one-half weeks of March 2020, as a result of Coronavirus mandates imposed, and lower trade show expenses.
General and Administrative
General and administrative expenses for the three months ended March 31, 2020 were $1.5 million or 25.6% of revenue compared to $1.7 million or 50.0% for the three months ended March 31, 2019, a decrease of $.2 million. The decrease in these expenses is primarily the result of decreased stock compensation costs of $126,000, due to less equity grants, and decreased outside systems and finance consulting costs of $134,000, due to the completion of the Company’s system migration and finance consulting costs in 2019.
Operating income (loss)
As a result of the increased revenues, improved gross profit margins and reduced expenses, we recorded an operating income of $.1 million for the three months ended March 31, 2020 as compared to an operating loss of ($2.6 million) for the three months ended March 31, 2019.
Other income (expenses)
Other income (expenses) were $20,000 and ($68,000) for the three months ended March 31, 2020 and 2019, respectively. This increase in income is primarily the result of subleasing a portion of our CVD Materials facility and receiving $111,000 in rental income during the three months ended March 31, 2020, as compared to none in three months ended March 31, 2019. In addition, as a result of lower interest rates, interest income decreased $22,000, to $25,000 for the three months ended March 31, 2020 as compared to $47,000 in 2019.
Income Taxes
For the three months ended March 31, 2020, we recorded an income tax benefit of $1.5 million as compared to $456,000 for the three months ended March 31, 2019. For the year ended December 31, 2019, the Company has provided a full valuation allowance against all of the net deferred tax assets in the amount of $2,497,414. This was based on management’s assessment, including the last two years of operating losses, that it is more likely than not that the net deferred tax assets may not be realized in the future. On March 27, 2020, the CARES Act was enacted by the United States Congress. As a result of the enactment of the CARES Act, net operating losses (“NOL’s”) can now be carried back for five years and resulted in the Company recognizing approximately $1.5 million of a tax receivable. We continue to evaluate for potential utilization of the Company’s deferred tax asset, which has been fully reserved for, on a quarterly basis, reviewing our economic models, including projections and timing of orders, the commencement of operations of the new CVD Materials segment and cost containment measures. For the three months ended March 31, 2019 our tax rate was primarily affected by permanent differences resulting in an effective tax rate of 17.3%.
Net income (loss)
As a result of the foregoing factors, we reported net income of $1.7 million, or $0.25 per basic and diluted share, for the three months ended March 31, 2020, as compared to a net loss of ($2.2 million), or ($0.33) per basic and diluted share for the three months ended March 31, 2019.
Liquidity and Capital Resources
As of March 31, 2020, we had aggregate working capital of $10.2 million compared to aggregate working capital of $8.8 million at December 31, 2019. Our cash and cash equivalents at March 31, 2020 and December 31, 2019 were $7.4 million and $8.7 million, respectively.
Net cash used in operating activities was $.7 million. This is the result of net income, adjusted for non-cash items, of $2.0 million, a $1.4 million increase in deferred revenue and other sources of $.4 million. These amounts were offset, in part by, an increase in taxes receivable of $1.5 million as a result of the March 27, 2020 CARES Act enactment allowing the carryback of NOL’s five years. In addition, contract assets increased $1.2 million, contract liabilities decreased $.7 million, accounts receivable increased $.7 million and accrued expenses decreased $.4 million related to the payment of vacation and other accrued expenses.
Long term debt decreased by $.2 million on our two facilities in Central Islip, NY, including our investment in the CVD Materials building purchased on November 30, 2017. We have continued to invest in activities primarily related to preparing CVD Materials for larger scale operations. Our total capital invested in the three months ended March 31, 2020 was $.4 million, primarily related to building improvements and machinery, and during the quarter we received rental income of approximately $111,000.
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. The balances as of March 31, 2020 and December 31, 2019 were approximately $2.3 million and $2.4 million respectively. Interest accrues on the loan, at our option, at the variable rate of LIBOR plus 1.75% or Prime less 0.5% (2.56% and 3.49% at March 31, 2020 and December 31, 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 March 31, 2020 and December 31, 2019 were approximately $9.6 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, the Company entered into a Mortgage Modification Agreement which replaced the former covenant with a Minimum Liquid Assets covenant. The Company is in compliance with its obligations under the mortgage at March 31, 2020.
The Company has been actively monitoring the coronavirus ("COVID-19") outbreak and its impact globally. The Company’s primary focus to this point has been to ensure the health and safety of its employees. To that end, the Company has adopted social distancing where appropriate, implemented travel restrictions, and has 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 the Company 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 the Company’s locations and production facilities to protect employees and curb the spread of the coronavirus. All of these actions may adversely impact the Company’s operating results. 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. Due to the timing of the COVID-19 outbreak, the Company’s new order levels during the first quarter of 2020 and into the second quarter of 2020 have seen substantial reductions which will negatively affect revenues commencing in the second quarter of 2020. The longer-term impacts from the outbreak are highly uncertain and cannot be predicted.
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.
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 (the “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 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, payable monthly commencing in October 2020. 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 eight 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.
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, and expects to receive these funds during the second half of 2020.
Our orders during the three months ended March 31, 2020, and into the start of the second quarter ending June 30, 2020 have decrease substantially as compared to the last two quarters of 2019. As a result, we anticipate substantial reductions in revenues resulting in operating losses commencing in our second quarter 2020. 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, 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 date of this Form 10-Q.
Off-Balance Sheet Arrangements.
We have no off-balance sheet arrangements at this time.