CVD(CVV) - 2021 Q4 - Annual Report

Part I Item 1. Business Description CVD Equipment Corporation designs and manufactures chemical vapor deposition and thermal process equipment for advanced materials, experiencing significant order growth and improved liquidity in 2021 Business Overview CVD Equipment Corporation develops and manufactures chemical vapor deposition and process equipment for advanced materials, serving diverse markets with custom and standardized systems - The company develops, designs, manufactures, and services a broad range of chemical vapor deposition, gas control, and other process equipment for advanced materials and coatings[10] - Key target markets include advanced nanomaterials, batteries, Silicon Carbide for high power electronics, aerospace components, medical devices, semiconductors, and solar cells[10] - CVD is developing a line of proprietary standard use products (EasyTube® and CVD product lines) to complement its legacy custom systems, aiming to reduce cost and delivery times[12] 2021 Developments In 2021, new leadership focused on core equipment, achieving significant order growth, restructuring Tantaline for profitability, and improving liquidity through asset sales and PPP loan forgiveness - In January 2021, Emmanuel Lakios was appointed President and CEO to set a new course toward growth and profitability, focusing on the core equipment business[17] 2021 Business Performance Highlights | Metric | Value/Change | Note | | :--- | :--- | :--- | | New Order Bookings | > $21 million | ~75% increase vs 2020 | | CVD Equipment Orders | 100% growth | 23 system orders in 2021 | | Quarterly Revenue Trend | Sequential growth | Q1: $3.4M, Q2: $4.0M, Q3: $4.3M, Q4: $4.7M | - The company sold its 555 Building for $24.36 million, resulting in a gain of $6.9 million and net proceeds of approximately $14 million[25] - A Paycheck Protection Program (PPP) loan was forgiven, resulting in a gain on debt extinguishment of $2,443,418[27] Segments The company operates through three segments: CVD/First Nano for deposition systems, SDC for gas and chemical delivery, and CVD Materials for coatings and advanced materials - CVD/First Nano: Supplies CVD systems for research, development, and manufacturing in aerospace, medical, semiconductor, and battery sectors[29] - SDC: Designs and manufactures ultra-high purity gas and chemical delivery control systems, sold standalone or with CVD systems[30] - CVD Materials: Comprises Tantaline® corrosion-resistant coatings, MesoScribe™ printing services, and carbon composite products[31] Principal Products CVD's principal products include Chemical Vapor Deposition, Rapid Thermal Processing, and Annealing/Diffusion systems, alongside ultra-high purity gas control and various advanced material products - Equipment products include Chemical Vapor Deposition (CVD) systems, Rapid Thermal Processing (RTP) systems, and Annealing/Diffusion Furnaces, with prices ranging from $200,000 to over $2,500,000 for large systems[36][37][38] - Materials products consist of Quartz-ware consumables, MesoPlasma™ direct write printing for sensors and heaters, and Tantaline® corrosion-resistant coating services[41][42][43] Markets, Customers, and Competition CVD serves global markets, diversified its customer base in 2021 with no single customer exceeding 10% of revenue, and faces intense competition from both larger and smaller firms - In 2021, no customer exceeded 10% of revenues, compared to 2020 where two customers represented 30.5% of annual revenues[47] International Revenue | Year | International Revenue | % of Total Revenue | | :--- | :--- | :--- | | 2021 | $4.3 million | 26.0% | | 2020 | $2.8 million | 16.8% | - The company faces intense competition from both large, established companies with greater financial resources and smaller, lower-cost competitors[50][52] Backlog and R&D The company's order backlog significantly increased to $10.4 million in 2021, accompanied by a rise in research and development expenses Order Backlog Comparison | Date | Backlog Amount | | :--- | :--- | | Dec 31, 2021 | $10.4 million | | Dec 31, 2020 | $5.7 million | Research and Development Expenses | Year | R&D Expense | | :--- | :--- | | 2021 | $481,000 | | 2020 | $373,000 | Human Capital As of December 31, 2021, CVD had 113 employees, a decrease from 2020, with management focusing on culture, performance-based compensation, and employee safety Employee Headcount | Date | Total Employees | | :--- | :--- | | Dec 31, 2021 | 113 | | Dec 31, 2020 | 130 | - A key strategic focus is to foster a strong culture, align compensation with performance, and establish succession planning[69][71] - The company implemented various safety protocols in response to COVID-19, including work-from-home flexibility, increased cleaning, and physical distancing procedures[72] Item 1A. Risk Factors The company faces significant risks including supply chain disruptions, inflation, customer concentration, dependence on key personnel, intense competition, and historical operating losses - The company is experiencing supply chain delays and cost increases for components, which may impact revenue recognition, reduce gross margins, and extend manufacturing lead times[75] - The COVID-19 pandemic has adversely affected business operations, supply chains, and customer demand, particularly in the aerospace sector, which is a significant part of the business[76] - Recent inflation has adversely affected costs for materials, production, and labor[79] - Historically, a concentrated customer base poses a risk; while no customer accounted for over 10% of revenue in 2021, the loss of a major customer could have a material adverse effect[86][87] - The company's success is highly dependent on key personnel, including the CEO and President, and the current labor market is very competitive[95][96] - The company has reported operating losses in 2019, 2020, and 2021, and volatile demand makes it difficult to budget expense levels accurately[108] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments - None[152] Item 2. Property Description The company owns two manufacturing facilities in New York and leases a facility in Denmark for its CVD Materials segment Company Properties | Location | Size (sf) | Segment | Ownership | Principal Use | | :--- | :--- | :--- | :--- | :--- | | Central Islip, NY | 130,000 | CVD Equipment | Owned | Corporate, R&D, Manufacturing | | Saugerties, NY | 22,000 | SDC | Owned | Manufacturing | | Nordborgvej, Denmark | 7,793 | CVD Materials | Leased | Process Coatings, Administration | Item 3. Legal Proceedings The company reports no legal proceedings - Not applicable[157] Item 4. Mine Safety Disclosures The company reports no mine safety disclosures - Not applicable[159] Part II Item 5. Market for Common Equity and Related Matters The company's common stock trades on NASDAQ under CVV, has never paid dividends, and had 618,500 securities issuable from options as of December 31, 2021 2021 Quarterly Stock Price Range (CVV) | Quarter | High | Low | | :--- | :--- | :--- | | 1st Quarter | $6.86 | $3.83 | | 2nd Quarter | $5.11 | $3.85 | | 3rd Quarter | $5.27 | $3.96 | | 4th Quarter | $5.85 | $4.09 | - The company has never paid dividends on its common stock and does not anticipate paying them at the present time, intending to retain earnings for business use[163] Equity Compensation Plan Information (as of Dec 31, 2021) | Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 618,500 | $7.32 | 138,198 | Item 7. Management's Discussion and Analysis (MD&A) In 2021, revenue slightly decreased, but the company achieved a net income of $4.7 million due to significant gains from asset sales and PPP loan forgiveness, substantially improving working capital Results of Operations In 2021, revenue slightly decreased to $16.4 million, gross profit margin declined, but the company reported a net income of $4.7 million due to significant non-operating gains Consolidated Statements of Operations (2021 vs 2020) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Revenue | $16,446,813 | $16,920,219 | | Gross Profit | $2,538,839 | $2,882,406 | | Operating Loss | ($4,807,253) | ($7,823,957) | | Net Income (Loss) | $4,746,485 | ($6,074,952) | | Diluted EPS | $0.71 | ($0.91) | Revenue by Segment (2021 vs 2020) | Segment | 2021 Revenue | 2020 Revenue | % Change | | :--- | :--- | :--- | :--- | | CVD Equipment | $8,588,541 | $10,385,107 | (17.3%) | | SDC | $4,524,767 | $4,207,182 | 7.5% | | CVD Materials | $3,333,505 | $2,327,930 | 43.2% | | Total | $16,446,813 | $16,920,219 | (2.8%) | - The decrease in operating loss was primarily due to the absence of a $3.6 million impairment charge that was recorded in 2020[202][205] - Other income of $9.6 million in 2021 was driven by a $6.9 million gain on the sale of the 555 building and a $2.4 million gain on PPP loan extinguishment[206] Liquidity and Capital Resources As of December 31, 2021, working capital and cash significantly increased to $16.7 million, primarily due to asset sales, with management confident in sufficient liquidity for the next 12-18 months Working Capital and Cash Position | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Working Capital | $16.7 million | $8.1 million | | Cash and Cash Equivalents | $16.7 million | $7.7 million | - Net cash used in operating activities was $4.3 million in 2021[213] - The sale of the 555 Building in July 2021 generated approximately $14 million in net proceeds, significantly improving liquidity[214] - Management believes cash and projected cash flow are sufficient to meet needs for the next 12-18 months from the filing date[223] Critical Accounting Policies The company's critical accounting policies involve significant management estimates, particularly for revenue recognition on long-term contracts, inventory valuation, and long-lived asset impairment - Revenue Recognition: For custom equipment sales, revenue is recognized over time using an input method based on the ratio of costs incurred to total estimated costs, which requires significant estimates of costs to complete projects[226][227] - Use of Estimates: The preparation of financial statements requires management to make significant estimates, including revenue on long-term contracts, inventory valuation, allowance for doubtful accounts, and the valuation of stock-based compensation and long-lived assets[224] - Long-Lived Assets: Assets are reviewed for impairment whenever events indicate their carrying value may not be recoverable, with an impairment loss measured as the excess of carrying value over fair value[231] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2021, the company's disclosure controls and procedures were effective[238] - Management concluded that as of December 31, 2021, the company's internal control over financial reporting was effective based on the COSO Internal Control – Integrated Framework (2013)[242] - The annual report does not include an attestation report from the registered public accounting firm regarding internal control over financial reporting, as permitted by SEC rules for the company[243] Part III Item 10. Directors, Executive Officers, and Corporate Governance The Board of Directors comprises five members, with separate Chairman and CEO roles, and an independent Audit Committee, operating under a Corporate Code of Conduct and Ethics - The Board consists of five members: Emmanuel Lakios (CEO), Lawrence J. Waldman (Chairman), Conrad J. Gunther, Raymond A. Nielsen, and Robert M. Brill[259] - The positions of Chairman (Lawrence J. Waldman) and CEO (Emmanuel Lakios) are separate, with Mr Waldman also serving as the Lead Independent Director[253] - The Audit Committee consists of four independent directors: Lawrence J. Waldman (Chairman), Conrad J. Gunther, Raymond A. Nielsen, and Robert M. Brill, with Mr Waldman designated as the audit committee financial expert[271][273] Item 11. Executive Compensation In 2021, CEO Emmanuel Lakios's total compensation was $666,095, with new employment agreements for key executives and a revised compensation plan for non-employee directors 2021 Summary Compensation Table | Name and Principal Position | Year | Salary ($) | Bonus ($) | Option Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Emmanuel Lakios, President & CEO | 2021 | 294,190 | 101,000 | 258,400 | 666,095 | | Thomas McNeill, EVP & CFO | 2021 | 237,306 | 74,000 | 129,200 | 444,698 | | Jeffrey A. Brogan, VP Sales & Marketing | 2021 | 183,179 | 21,000 | 48,660 | 252,839 | - In June 2021, the company entered into employment agreements with CEO Emmanuel Lakios (initial base salary $288,000) and CFO Thomas McNeill (initial base salary $238,000)[279][285] - A new director compensation plan effective October 2021 provides each non-employee director with a $40,000 annual cash retainer and a $40,000 annual equity retainer, plus additional compensation for committee and board leadership roles[299] Item 12. Security Ownership As of March 15, 2022, Leviticus Partners, L.P. and former CEO Leonard A. Rosenbaum are the only beneficial owners of more than 5% of common stock Security Ownership of Certain Beneficial Owners (as of March 15, 2022) | Name of Beneficial Owner | Amount of Beneficial Ownership | Percent of Class (%) | | :--- | :--- | :--- | | Leviticus Partners, L.P. | 660,000 | 9.8 | | Leonard A. Rosenbaum | 353,862 | 5.3 | | All directors and executive officers as a group (nine persons) | 452,725 | 6.7 | Item 13. Related Transactions and Director Independence The company reports no related party transactions, and four of its five directors are deemed independent under Nasdaq rules - There were no transactions with related persons to report[310] - Four of the five directors have been determined to be independent: Lawrence J. Waldman, Conrad J. Gunther, Raymond A. Nielsen, and Robert M. Brill[311] Item 14. Principal Accountant Fees and Services Marcum, LLP served as the independent auditor, with total fees of $164,000 in 2021, primarily for audit and audit-related services, all pre-approved by the Audit Committee Accountant Fees (Marcum, LLP) | Fee Type | 2021 | 2020 | | :--- | :--- | :--- | | Audit Fees | $149,000 | $147,500 | | Audit-Related Fees | $15,000 | $10,000 | | All Other Fees | - | - | | Total Fees | $164,000 | $157,500 | Part IV Item 15. Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including corporate governance documents, material contracts, and required certifications - Lists exhibits including corporate governance documents, material contracts (e.g., employment agreements for CEO and CFO), and required certifications[319][320][321] Financial Statements Report of Independent Registered Public Accounting Firm Marcum LLP issued an unqualified opinion on the financial statements, identifying revenue recognition for system projects as a critical audit matter due to complex cost estimation - Marcum LLP issued an opinion that the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020[327] - A Critical Audit Matter was identified related to "Revenue Recognition – Estimated Total Contract Costs" due to the subjective judgment required by management in estimating costs to complete on long-term system projects[333][334] Consolidated Financial Statements The consolidated financial statements include Balance Sheets, Statements of Operations, Changes in Stockholders' Equity, and Cash Flows, showing a decrease in total assets and liabilities, and an increase in equity Key Balance Sheet Figures (2021 vs 2020) | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $23,070,500 | $11,789,957 | | Total Assets | $35,524,229 | $40,935,925 | | Total Current Liabilities | $6,336,254 | $3,704,296 | | Total Liabilities | $6,336,254 | $16,810,353 | | Total Stockholders' Equity | $29,187,975 | $24,125,572 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, revenue disaggregation, significant debt reduction, income taxes, stockholders' equity, and the gain from the 555 Building sale - Note 3 (Revenue): Disaggregates revenue by market (Aerospace, Industrial, Research) and timing (over time vs point in time), with Industrial revenue being the largest contributor in 2021 at $10.0 million[397] - Note 7 (Long-term Debt): Total long-term debt decreased from $13.8 million in 2020 to $1.8 million in 2021, primarily due to the satisfaction of a $9.3 million mortgage and the forgiveness of a $2.4 million PPP loan[416] - Note 9 (Income Taxes): The company maintains a full valuation allowance against its net deferred tax assets due to recent operating losses, recognizing a tax benefit of $1.5 million in 2020 due to the CARES Act allowing for NOL carrybacks[425][426] - Note 14 (Sale of 555 Building): The sale of the 555 Building on July 26, 2021, for $24.36 million resulted in a recognized gain of $6,894,109 and net proceeds of approximately $14 million[469]