NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
NOTE 1:
|
BASIS OF PRESENTATION
|
The accompanying unaudited consolidated financial statements for CVD Equipment Corporation and Subsidiaries (collectively, “the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. They do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary in order to make the interim financials not misleading have been included and all such adjustments are of a normal recurring nature. The operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that can be expected for the year ending December 31, 2017.
The balance sheet as of December 31, 2016 has been derived from the audited consolidated financial statements at such date, but does not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, please refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, including the accounting policies followed by the Company as set forth in Note 2 to the consolidated financial statements contained therein.
All material intercompany transactions have been eliminated in consolidation. In addition, certain reclassifications have been made to prior period consolidated financial statements to conform to the current year presentation.
NOTE 2:
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Revenue Recognition
Product and service sales, including those based on time and materials type contracts, are recognized when persuasive evidence of an arrangement exists, product delivery has occurred or services have been rendered, pricing is fixed or determinable, and collection is reasonably assured. Service sales, principally representing repair, maintenance and engineering activities are recognized over the contractual period or as services are rendered.
Revenues from fixed price contracts are recognized on the percentage of completion method, measured on the basis of incurred costs to estimated total costs for each contract. This “cost to cost” method is used because management considers it to be the best available measure of progress on these contracts.
CVD EQUIPMENT CORP
ORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
NOTE 2:
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Contract 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.
The asset, “Costs and estimated earnings in excess of billings on contracts in progress,” represents revenues recognized in excess of amounts billed.
The liability, “Billings in excess of costs and estimated earnings on contracts in progress,” represents amounts billed in excess of revenues recognized.
Research and Development
Research and development costs are expensed as incurred. Due to the highly technical nature of our projects, we use our technical staff in a dual role, and based on their contribution to the customer or research and development projects, their costs are charged accordingly to either cost of goods sold or research and development.
Recent Accounting Pronouncements
In May 2014, The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which changes the criteria for recognizing revenue. The standard requires an entity which recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard requires a five-step process for recognizing revenues including identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction prices, allocating the transaction price to the performance obligations in the contract, and recognizing revenue when (or as) the entity satisfies a performance obligation. The Company is currently analyzing the impact of the standard on its contract portfolio by reviewing its current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to its revenue contracts. The Company has made progress on its contract reviews and continues to evaluate the impact of the adoption of this standard on its consolidated financial statements, related disclosures and transition method The Company does not believe the standard will have a material effect on its consolidated financial statements.
We believe there is no additional new accounting guidance adopted, but not yet effective that is relevant to the readers of our financial statements. However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on our financial reporting.
CVD EQUIPMENT CORP
ORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
NOTE 3:
|
CONCENTRATION OF CREDIT RISK
|
Cash and cash equivalents
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. The Company places its cash equivalents with high credit-quality domestic financial institutions and invests its excess cash primarily in savings accounts, treasury bills and money market instruments. The Company performs periodic evaluations of the relative credit standing of all such institutions as it seeks to maintain stability and liquidity. Cash and cash equivalents at June 30, 2017 and December 31, 2016, exceeded the Federal Deposit Insurance Corporation (“FDIC”) limits by approximately $19,846,000 and $20,157,000, respectively.
Sales concentration
Revenue to a single customer in any one period can exceed 10% of our total sales. During the three months ended June 30, 2017 and June 30 2016, one customer represented approximately 66% and 53% respectively, of our revenues. During the six months ended June 30, 2017 and June 30, 2016 that same customer represented 68% and 38% respectively, of our revenues.
Accounts receivable
The Company sells products and services to various companies across several industries in the ordinary course of business. The Company performs ongoing credit evaluations to assess the probability of accounts receivable collection based on a number of factors, including past transaction experience, evaluation of their credit history and review of the invoicing terms of the contract to determine the financial strength of its customers. The Company also maintains allowances for anticipated losses. The accounts receivable balance as of June 30, 2017 includes balances from three customers that exceed 10% of the total.
CVD EQUIPMENT CORP
ORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
NOTE 4:
|
CONTRACTS IN PROGRESS
|
Costs and estimated earnings in excess of billings on contracts in progress are summarized as follows:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Costs incurred on contracts in progress
|
|
$
|
7,417,135
|
|
|
$
|
4,678,192
|
|
Estimated earnings
|
|
|
16,467,264
|
|
|
|
10,733,826
|
|
|
|
|
23,884,399
|
|
|
|
15,412,018
|
|
Billings to date
|
|
|
(23,841,934
|
)
|
|
|
(18,077,839
|
)
|
|
|
$
|
42,465
|
|
|
$
|
(2,665,821
|
)
|
Included in accompanying balance sheets
under the following captions:
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess
of billings on contracts in progress
|
|
$
|
3,027,086
|
|
|
$
|
2,596,518
|
|
|
|
|
|
|
|
|
|
|
Billings in excess of costs and estimated
earnings on contracts in progress
|
|
$
|
(2,984,621
|
)
|
|
$
|
(5,262,339
|
)
|
|
|
$
|
42,465
|
|
|
$
|
(2,665,821
|
)
|
Inventories consist of:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
2,834,616
|
|
|
$
|
3,062,830
|
|
Work-in-process
|
|
|
225,048
|
|
|
|
159,482
|
|
Finished goods
|
|
|
41,893
|
|
|
|
64,227
|
|
Totals
|
|
$
|
3,101,557
|
|
|
$
|
3,286,539
|
|
NOTE 6:
|
ACCOUNTS RECEIVABLE, NET
|
Accounts receivable are presented net of an allowance for doubtful accounts of approximately $5,000 and $2,000 as of June 30, 2017 and December 31, 2016, respectively. The allowance is based on prior experience and management’s evaluation of the collectability of accounts receivable. Management believes the allowance is adequate. However, future estimates may change based on changes in future economic conditions.
CVD EQUIPMENT CORP
ORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
The Company has a revolving credit facility with HSBC Bank, USA, N.A. (“HSBC”) providing up to $7 million, although the Company has never utilized this facility. This credit facility remains available until September 1, 2018. The credit facility also contains certain financial covenants, all of which the Company was in compliance with at June 30, 2017 and December 31, 2016.
The Company has a loan agreement with HSBC which is secured by a mortgage against our Central Islip facility. The loan is payable in 120 consecutive equal monthly installments of principal of $25,000 plus interest thereon and a final balloon payment upon maturity in March 2022. Interest accrues on the loan, at our option, at the variable rate of LIBOR plus 1.75% which was 2.97% and 2.52% at June 30, 2017 and December 31, 2016 respectively. The principal balances on the mortgage at June 30, 2017 and December 31, 2016 were approximately $3.1 and $3.3 million respectively.
NOTE 8:
|
STOCK-BASED COMPENSATION EXPENSE
|
During the three and six months ended June 30, 2017 and June 30, 2016, the Company recorded compensation expense as part of selling and general administrative expense, of approximately $219,000 and $183,000 and $436,000 and $346,000 respectively, for the cost of employee and director services received in exchange for equity instruments based on the grant-date fair value of those instruments. This expense was recorded based upon the guidance of ASC 718, “Compensation-Stock Compensation.”
The provision for income taxes includes the following:
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
758,297
|
|
|
$
|
(71,070
|
)
|
State
|
|
|
11,580
|
|
|
|
--
|
|
Total Current Provision
|
|
|
769,877
|
|
|
|
(71,070
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
488,038
|
|
|
$
|
(632,992
|
)
|
State
|
|
|
----
|
|
|
|
----
|
|
Total deferred
|
|
|
488,038
|
|
|
|
(632,992
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense/(benefit)
|
|
$
|
1,257,915
|
|
|
$
|
(704,062
|
)
|
CVD EQUIPMENT CORP
ORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
NOTE 9:
|
INCOME TAXES (continued)
|
Tax Rate Reconciliation
The reconciliation between the Company’s effective tax rate on income from continuing operations and the statutory rate is as follows:
For
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Income tax expense/(benefit) at federal statutory rate [34%]
|
|
$
|
1,361,450
|
|
|
$
|
(353,981
|
)
|
State taxes
|
|
|
7,643
|
|
|
|
--
|
|
Change in other accruals
|
|
|
101
|
|
|
|
(108,172
|
)
|
Difference between tax and book depreciation
|
|
|
91,033
|
|
|
|
(53,112
|
)
|
Stock-based compensation
|
|
|
(58,334
|
)
|
|
|
(117,727
|
)
|
Domestic production activities deduction
|
|
|
(137,178
|
)
|
|
|
--
|
|
Net operating loss carryforward
|
|
|
(6,800
|
)
|
|
|
--
|
|
Provision for 2014 tax return true up
|
|
|
--
|
|
|
|
(71,070
|
)
|
Income tax expense/(benefit)
|
|
$
|
1,257,915
|
|
|
$
|
(704,062
|
)
|
|
●
|
Income taxes for the foreign entity, a wholly owned subsidiary, will be computed at the applicable tax rate in the country in which the Company operates. The foreign entity had a net loss during the current period. This net operating loss may result in future income tax benefits, however, because realization is uncertain at this time, a valuation reserve in the same amount has been established.
|
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
NOTE 10:
|
EARNINGS PER SHARE
|
In accordance with ASC 260, basic earnings per share are computed by dividing net earnings available to common shareholders (the numerator) by the weighted average number of common shares (the denominator) for the period presented. The computation of diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.
Stock options to purchase 381,930 shares of common stock were outstanding and 146,930 were exercisable during the three and six months ended June 30, 2017. Stock options to purchase 159,730 shares were outstanding and 79,230 were exercisable during the three and six months ended June 30, 2016. For the three and six months ended June 30, 2017, options to purchase 34,517 and 33,205 shares were included in the diluted earnings per share calculation respectively. The balance of options outstanding at June 30, 2017 were not included as their effect would have been anti-dilutive. For the three and six months ended June 30, 2016, none of the outstanding options were included in the earnings per share calculation as their effect would have been anti-dilutive.
The potentially dilutive common shares from warrants and options are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all warrants and options are used to repurchase common stock at market value. The amount of shares remaining after the proceeds are exhausted represents the potential dilutive effect of the securities.
NOTE 11:
|
SEGMENT REPORTING
|
The Company operates through two (2) segments, CVD and SDC. The CVD division, which operates out of Central Islip, New York, is utilized for silicon, silicon germanium, silicon carbide and gallium arsenide processes. SDC is the Company’s ultra-high purity manufacturing division in Saugerties, New York. The Company evaluates performance based on several factors, of which the primary financial measure is income or (loss) before taxes.
Three Months
Ended June 30,
2017
|
|
CVD
|
|
|
SDC
|
|
|
Eliminations *
|
|
|
Consolidated
|
|
Revenue
|
|
$
|
9,403,342
|
|
|
$
|
1,779,980
|
|
|
$
|
(353,613
|
)
|
|
$
|
10,829,709
|
|
Pretax income
|
|
|
1,242,809
|
|
|
|
587,849
|
|
|
|
|
|
|
|
1,830,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,243,095
|
|
|
$
|
581,710
|
|
|
$
|
(81,023
|
)
|
|
$
|
3,743,782
|
|
Pretax (loss)
|
|
|
(758,035
|
)
|
|
|
(237,921
|
)
|
|
|
|
|
|
|
(995,956
|
)
|
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
NOTE 11:
|
SEGMENT REPORTING (continued)
|
Six Months
Ended June 30,
2017
|
|
CVD
|
|
|
SDC
|
|
|
Eliminations *
|
|
|
Consolidated
|
|
Revenue
|
|
$
|
17,985,006
|
|
|
$
|
3,812,151
|
|
|
$
|
(1,316,831
|
)
|
|
$
|
20,480,326
|
|
Pretax income
|
|
|
2,348,223
|
|
|
|
1,190,601
|
|
|
|
|
|
|
|
3,538,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
7,335,877
|
|
|
$
|
1,505,688
|
|
|
$
|
(94,350
|
)
|
|
$
|
8,747,215
|
|
Pretax (loss)
|
|
|
(1,363,640
|
)
|
|
|
(173,770
|
)
|
|
|
|
|
|
|
(1,537,410
|
)
|
*All elimination entries represent intersegment revenues eliminated in consolidation for external financial reporting.