Item 1. Description of Business.
The use of the words “CVD,” “we,” “us” or “our” refers to CVD Equipment Corporation, a New York corporation incorporated on October 13, 1982, and its wholly owned subsidiaries, CVD Materials Corporation (including its wholly owned subsidiaries CVD Tantaline ApS, and CVD MesoScribe Technologies Corporation) collectively “CVD Materials”), FAE Holdings 411519R LLC and 555 N Research Corporation except where the context otherwise requires.
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 technologiesTM.
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.
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.
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.
Business Developments
CVD Materials Segment:
On October 31, 2017, through our newly formed and wholly-owned subsidiary, CVD MesoScribe Technologies Corporation (“CVD MesoScribe Technologies”), we acquired substantially all of the operating assets and business of MesoScribe Technologies, Inc. (“MTI”). Formed in 2002, by a group from Stony Brook University, MTI established itself as a pioneer and leader in the direct deposition of thermal sensors, heaters, and instrumentation for harsh environments.
MTI specialized in materials processing using Direct Write MesoPlasma™ printing technology. This technology is an enabling additive manufacturing process whereby materials are printed onto conformal components in precise patterns. MTI has provided MesoPlasma™ printing services and products to its customers for use in aerospace, power generation, satellite, and defense markets, focusing on developing and manufacturing innovative products for advanced sensing, heating, and communication.
This acquisition provided CVD access to an additional materials deposition technology, a presence in new markets including a broader presence in the aerospace and defense markets, and additional end user applications. In addition, the proprietary MesoPlasma™ technology complimented our Tantaline® business which we acquired in the fourth quarter of 2016. The two technologies when combined provide a treatment and coating which can provide both corrosion and wear resistance. This was consistent with our strategic plan to leverage our equipment know-how, business infrastructure and proven ability to scale up new technologies, all offering high value-added materials, products, and services and was another step in our combined organic and acquisition growth strategy.
In 2017, to support the expected growth of CVD Materials and to relocate the California MesoScribe operations as well as Tantaline USA business on November 30, 2017, we purchased the premises located at 555 North Research Place, Central Islip, NY (the “Premises”). The purchase price of the Premises was $13,850,000, exclusive of closing costs. On November 30, 2017, the Company’s 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 Bank USA, N.A. (the “Bank”) in the amount of $10,387,500, which was used to finance a portion of the purchase price to acquire 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 Loan is payable in sixty consecutive equal monthly installments of $62,481, including interest. The Loan 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, the Company was required to guaranty Assignee’s obligations under the Loan pursuant to that certain Unlimited Guaranty, dated November 30, 2017 (the “Guaranty”).
Our new management evaluated our business projections, the utilization of our facilities and ability to raise capital to maintain and ultimately grow our operations, which as a result, has caused us to initiate the consolidation of the 555 Building into the 355 Building operations, and to sell the 555 Building.
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 in 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.
With the pending completion of the consolidation of facilities, we believe we have adequate manufacturing space to accommodate our capabilities of providing materials, coatings and surface treatments to meet our customers’ needs as well as improved capital utilization and facilities cost absorption. We continue to be positioned for the expansion of our carbon composites and electronic materials, MesoScribe Technologies and other product lines.
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 operations of CVD Materials. The start up of MesoScribe™ operations have been completed and it was fully operational during 2020, since the move of its operations in the middle of 2019 from California. Since September 2019, MesoScribe™ has secured orders and contracts in excess of $2.0 million, and in early 2020 we have hired four employees including test and project management to support those orders and growth opportunities. Tantaline® US equipment and facilitation continued to be installed in 2020 and was in various stages of process testing, qualification and refinement at the end of the year.
With regard to Tantaline® our Demark facility provides both local and global deposition services, although the majority of the business has been in Europe. The 555 Building was contemplated to primarily support the US customer base as well as serve as our application and technology center.
With respect to our CVD MesoScribe Technologies subsidiary, we have completed the process of consolidating the manufacturing and development operations in Central Islip in 2019. This has resulted in a reduction of our operating expenses associated with no longer leasing space in California and has provided synergies with the Central Islip sales and marketing functions and place the operations near the local Thermal Spray Center of Excellence located at Stony Brook University.
Segments
CVD/First Nano supplies state-of-the-art chemical vapor deposition systems for use in the research, development and manufacturing of aerospace, medical components, semiconductors, LEDs, carbon nanotubes, nanowires, solar cells and a number of other industrial applications. We utilize our expertise in the design and manufacture of chemical vapor deposition systems to work with laboratory scientists to bring state-of-the-art processes from the research laboratory into production, as well as to provide production equipment and process solutions based on our designs. CVD/First Nano also operates our Application Laboratory where our personnel interact effectively with the scientists and engineers of our customer base. CVD/First Nano operates from our main facility in Central Islip, New York.
SDC designs and manufactures ultra-high purity gas and chemical delivery control systems for state-of-the-art semiconductor fabrication processes, solar cells, LEDs, carbon nanotubes, nanowires, and a number of industrial applications. Our SDC products are sold on either a stand-alone basis, or together with our CVD/First Nano systems. SDC operates from a 22,000 square foot facility fitted with Class 10 and Class 100 clean room manufacturing space located in Saugerties, New York.
CVD Materials Has several elements and product groups. These are the Tantaline® corrosion resistant surface treatment, the MesoScribe robust material direct write, the Electronic Materials for advance electronics and Carbon Composite products.
Tantaline® treatment is a diffusion bonded protective layer of tantalum formed by chemical vapor deposition on the surface of common materials. Tantalum is the most corrosion resistant metal commercially available. This surface layer provides protection against many of the most aggressive environments, including high temperature concentrated acid. Global sales and technical support is provided by our facility in Central Islip, New York with production provided from our European facility located in Nordborg, Denmark. Tantaline®. We continue to develop new Tantalum processes to improve the corrosion resistance of additional base material such as Nickel based alloys. In 2018, we announced that two patent applications were filed. With the recent change in new leadership in January 2021, 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 in 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.
MesoScribe Technologies provides MesoPlasma™ printing services and products (heaters, antennas, and sensors) to aerospace, satellite, power generation, defense, and other markets requiring high performance. MesoScribe Technologies operated from a 22,000 square foot facility located in Huntington Beach, CA, until May 2019. The relocation of MesoSccribe’s operations to Central Islip, New York was completed during the third quarter of 2019. The consolidation of our Materials Business into the 355 Building is underway and estimated to be completed mid-year 2021.
Carbon Composites
Our developments and opportunities for the Carbon composite business come from achievements in our applications laboratory. In the fourth quarter of 2018, we announced the development of a family of advanced Fluid Reactors based on our innovations in nanotechnology and chemical vapor deposition technology. The Fluid Reactor is enabled by a novel reactor core element which allows the efficient transfer of gases into and out of liquids. The market adoption of this technology could supplant existing hollow fiber membrane technology for applications including filtration and liquid gasification or degasification. One such application being investigated is blood oxygenation cartridges, known as Extra Corporeal Membrane Oxygenators, which are typically used during cardio pulmonary bypass (CPB) surgery and are essential for life support. CVD has a patent pending embodying this technology. While holding promise the technology is in the evaluation phase and is not expected to generate revenue in the near future. We continue to investigate other application end uses for the liquid-gas and liquid-liquid exchange technology. As to this time there is not a near term revenue stream projected.
The applications lab, along with the sales and marketing team are exploring other possible carbon based products and applications that can be made from this carbon nano tube, infiltrated carbon and carbon nano fiber technology.
Principal Equipment Products
Chemical Vapor Deposition/Infiltration - A process which passes a gaseous compound over or through pores of a substrate material surface that is heated to such a degree that the compound decomposes and deposits a desired layer onto and or into a substrate material. The process is accomplished by combining appropriate gases in a reaction chamber, of the kind produced by the Company, at elevated temperatures (typically 150-1,600° Celsius). Our chemical vapor deposition systems are complete and include all necessary instrumentation, subsystems and components and include state-of-the-art process control software. We provide both standard and application specified engineered products. Some of the standard systems we offer are for silicon, silicon-germanium, silicon dioxide, silicon nitride, polysilicon, liquid phase epitaxial, metalorganic chemical vapor deposition, carbon nanotubes, graphene, silicon nanowires, solar cell research and solar material quality control.
Chemical Vapor Deposition Systems - Used in a variety of models for laboratory research and production. All models are offered as standard with total system automation, a microprocessor control system by which the user can measure, predict and regulate gas flow, temperature, pressure and chemical reaction rates, thus controlling the process in order to enhance the quality of the materials produced. Our standard microprocessor control system is extremely versatile and capable of supporting the complete product line and most custom system requirements. These chemical vapor deposition systems are typically priced between $100,000 and $2,500,000, but can be significantly higher for plant size chemical vapor deposition systems.
Rapid Thermal Processing (“RTP”) - Used to heat semiconductor materials to elevated temperatures of up to 1,200° Celsius at rapid rates of up to 200° Celsius per second. Our RTP systems are offered for implant activation, oxidation, silicide formation and many other processes. We offer systems that can operate both at atmospheric or reduced pressures. Our RTP systems are priced up to $600,000.
Annealing, Diffusion and Low Pressure Chemical Vapor Deposition (LPCVD) Furnaces - Used for diffusion, oxidation, implant anneal, solder reflow, solar cell manufacturing and other processes. The systems are normally operated at atmospheric and/or reduced pressure with gaseous atmospheres related to the process. An optional feature of the system allows for the heating element to be moved away from the process chamber allowing the wafers to rapidly cool or be heated in a controlled environment. Our cascade temperature control system enables more precise control of the wafers. The systems are equipped with an automatic process controller, permitting automatic process sequencing and monitoring with safety alarm provisions. Our annealing and diffusion furnace systems are priced up to $900,000.
Ultra-high Purity Gas and Liquid Control Systems - Our standard and custom designed gas and liquid control systems, which encompass gas cylinder storage cabinets, custom gas and chemical delivery systems, gas and liquid valve manifold boxes and gas isolation boxes, provide safe storage and handling of pressurized gases and chemicals. Our system design allows for automatic or manual control from both a local and remote location. A customer order often includes multiple systems to outfit a facility and can total up to $1,000,000.
Principal Materials Products
Quartz-ware - All process equipment, especially systems in production/manufacturing environments, require routine maintenance, consumable and spare parts. One such spare part and consumable which is core to our technology offering is quartz hardware. We provide standard and custom fabricated quartz-ware used in our equipment and to a lesser extent for other customer tools. We also provide repair and replacement of existing quartz-ware. The business volume is favorably impacted by our CVD/First Nano systems being in production/manufacturing environments.
MesoPlasma™ Direct Write Printing: A materials deposition process that provides robust high definition instrumentation, fine feature patterns, and coatings onto conformal components. Powder materials are injected into a thermal plasma where they are rapidly heated and deposited onto the substrate or component. A 6-axis robotic system ensures pattern placement accuracy and manufacturing consistency. The versatility of the process enables a wide range of materials to be deposited including ceramic dielectrics, nickel-based sensor alloys, metallic conductors, precious metals, and protective coatings. Products include temperature sensors, heaters, antennas and patterns per customer specifications.
Tantaline® Corrosion Resistant Coating: Tantaline® treatment is provided as part of either a finished product or as a service applied to customer sourced components. These include valves, fittings, fasteners, vessels, bellows, and a wide range of custom designed items. The Tantaline® treatment drastically improves the corrosion resistance of these base stainless-steel parts extending the service life and increasing value in a wide range of applications.
Markets and Marketing
We serve multiple emerging and mature global markets including aerospace, defense, biomedical implants, microelectronic and micromechanical devices, semiconductor, universities and research centers. Due to the highly technical nature of our products, we believe it is essential to contact customers directly through our sales personnel and through a network of domestic and international independent sales representatives and distributors specializing in the type of equipment, products and services that we sell. In addition to our traditional customer base, we are now accessing new markets and new customers through MesoScribe,® and other components of our materials business. Our primary marketing activities include direct sales contacts, participation in trade shows (which were significantly impacted in 2020 by COVID-19) and our internet websites www.cvdequipment.com, cvdmaterialscorporation.com, www.stainlessdesign.com, www.firstnano.com, tantaline.com and www.MesoScribe.com.
Customers
We continue to work on expanding our product and service offerings. Our systems and products are used in research and in production applications. We market and sell primarily to aerospace/defense, electronic component manufacturers, institutions involved in electronic component research (such as universities, government and industrial laboratories) and to industries such as medical that require specialized coatings. We have both a domestic and international customer base with hundreds of installed systems.
Given the complexity of some of the systems we sell, revenue from a single customer in any one year can exceed 10.0% of our total sales. Two customers represented 30.5% in total and two customers represented 39.3%, respectively, of our annual revenues in fiscal years 2020 and 2019. We believe that our relationships with these customers are positive and may provide us with ongoing continuous sustainability for years to come, however the loss of a large customer would have to be replaced by others, and our inability to do so has had a material adverse effect on our business and financial condition.
For the year ended December 31, 2020, approximately $2.8 million or 16.8% of our revenues were generated by sales to customers outside the U.S., compared to approximately $4.2 million or 21.3% for the year ended December 31, 2019.
Warranties
Warranties on our equipment are typically for twelve months but can range up to twenty-four months from shipment with extended contracts. We furnish any warranties from original manufacturers of components used in our products. We provide service and support for our installed base of equipment with in-house field service personnel. Warranty costs, including those incurred in fiscal years 2020 and 2019, are and have been historically insignificant and expensed as incurred.
Competition
We can experience intense direct competition from both domestic and international competitors in all of our equipment segments. Our First Nano product line, targeted at universities and introductory sites, faces price pressure from lower value-added competitors. Our MesoScribe operations, which is in the adoption phase, faces barriers from established indirect competitors of existing solution providers. We are aware of other competitors that offer a substantial number of products and services comparable to ours. Many of our competitors (including customers who may elect to manufacture systems for internal use) have financial, marketing and other resources greater than ours. To date, we believe that each of our product and service segments has been able to compete favorably in markets that include these competitors, primarily on the basis of know-how, technical performance, quality, delivery, price and aftermarket support. We will continue to focus on products which serve both markets that are growing and where we have a technical and commercial competitive advantage.
CVD/First Nano competes with companies located in Asia, Europe and the US in the research market. These companies have limited support and safety and system design capabilities. For the academia market, we also compete with laboratory built systems. Our equipment for production applications competes with in-house design and engineering capability and the capacity to build their own equipment internally. Additionally, there are large, established companies who compete with us and pose a competitive risk in the market. Due to budgetary and funding constraints, many customers are price sensitive. We believe that our systems are among the most advanced available for the targeted market, and coupled with our vertical integration in engineering and manufacturing, we can be very competitive.
SDC’s gas management and chemical delivery control systems are among the most advanced available. We further believe that SDC is differentiated from our competitors through our intimate understanding of how the systems in which our products are incorporated are actually used in field applications. We have gained this understanding as a result of having designed and built complex process gas systems for CVD/First Nano as well as for a number of the world’s leading semiconductor, aerospace, medical, solar manufacturers, research laboratories and universities.
Sources of Supply
Many of the components used in producing our products are purchased from unrelated suppliers. We have OEM status with our suppliers but we are not obligated to purchase a pre-determined quantity. We are not dependent on a principal or major supplier and alternate suppliers are available. Subject to lead times, the components and raw materials we use in manufacturing our products are readily obtainable.
Currently we maintain a fully-equipped machine shop that we use to fabricate a significant portion of our metal components in-house, including the most complex designed parts of our equipment. Similarly, our quartz fabrication capability is sufficient to meet our quartz-ware needs.
Materials procured from the outside and/or manufactured internally undergo a rigorous quality control process to ensure that the parts meet or exceed our requirements and those of our customers. Upon final assembly, all equipment undergoes a final series of complete testing to ensure maximum product performance.
Backlog
As of December 31, 2020, our order backlog was approximately $5.7 million, compared to $8.9 million as of December 31, 2019, a decrease of $3.2 million. 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 have represented as much as 60% of our total revenue. We continue to work at diversifying our customer base away from any one customer as we focus on new opportunities with new and existing customers within our existing marketplaces and in new applications, including the start-up of the CVD Materials operations. The timing for completion of backlog varies depending on the product mix and can be as long as two years or as short as 30-60 days. Order backlog is usually a reasonable management tool to indicate expected revenues, however, it does not provide an assurance of future achievement or profits as order cancellations or delays are possible.
Intellectual Property
Our success is dependent, in part upon our proprietary technology and other proprietary rights. We have historically protected our proprietary information and intellectual property such as design specifications, blueprints, technical processes and employee know-how through the use of non-disclosure agreements. In addition, where we deem appropriate, we have, and will continue to file for patent protection of our proprietary technology that we believe has the potential to be incorporated into our products and sold to multiple customers. We also maintain and/or assert rights in certain trademarks relating to certain of our products and product lines, and claim copyright protection for certain proprietary software and documentation.
In the fourth quarter of 2018, we announced the development of a family of advanced Fluid Reactors based on our innovations in nanotechnology and chemical vapor deposition technology. The Fluid Reactor is enabled by a novel reactor core element which allows the efficient transfer of gases into and out of liquids. The market adoption of this technology could supplant existing hollow fiber membrane technology for applications including filtration and liquid gasification or degasification. One such application is blood oxygenation cartridges, known as Extra Corporeal Membrane Oxygenators, which are typically used during cardio pulmonary bypass (CPB) surgery and are essential for life support. CVD has a patent pending embodying this technology. CVD is continuing development of its Fluid Reactor technology and during 2019 filed two related US Provisional Patent Applications.
While patent, copyright and trademark protections for our intellectual property are important to different degrees for our various products and solutions, we believe our future success in highly dynamic markets is most dependent upon the technical competence and creative skills of our personnel and our ability to accelerate the commercialization of next generation intellectual properties. We attempt to protect our trade secrets and other proprietary information through non-disclosure agreements with our customers, suppliers, employees and consultants and other security measures.
Research and Development
The university research community is at the forefront of nanotechnology research, and we are focused on providing state-of-the-art systems to this market that will help bridge the gap between pioneering research and marketable products. Our Application Laboratory, together with a number of leading universities and startup companies with whom we partner from time to time, conducts cutting-edge research on the growth and infiltration of carbon nanotubes, graphene and nanowires as well as on selected aerospace manufacturing processes. The results of this research could have far reaching implications concerning the use and manufacture of carbon nanotubes, graphene, nanowires and aerospace coatings for many markets. Our intention is that together with leading edge universities and start-up companies and major aerospace/defense companies, we will leverage our collective expertise in this field, which will allow us to capitalize on commercial opportunities in the future.
In 2020, we incurred approximately $373,000 in research and development expenses as compared to $598,000 in 2019.
Government Regulation
We are subject to a variety of federal, state and local government regulations, such as environmental, labor and export control. We believe that we have obtained all necessary permits to operate our business and that we are in material compliance with all laws and regulations applicable to us. These regulations change on an ongoing basis and the effect of the changes could materially impact our business in certain technology areas and regions.
Insurance
Our products are used in our customers’ manufacturing processes which in some cases contain explosive, flammable, corrosive and toxic gases. There are potential exposures to personal injury as well as property damage, particularly if operated without regard to the design limits of the systems and components. Additionally, the end products of some of our customers are used in areas such as aerospace and high-tech devices where safety is of great concern. Management reviews its insurance coverage on an annual basis or more frequently if appropriate and we believe we have the types and amounts of insurance coverage that are sufficient for our business.
Employees
At December 31, 2020, we had 130 employees. We had 62 employees in manufacturing, 28 in engineering (including research and development and efforts related to product improvement) 4 in field service, 9 in sales and marketing and 27 in general management, maintenance and administration, compared to 172 employees as of December 31, 2019. None of our employees were subject to a collective bargaining agreement. We generally consider our employee relations to be good.
The implementation of our business strategy largely depends on our ability to hire, train, and retain qualified and diverse professionals, and we must emphasize employee development and training in order to do so. We are committed to identifying and developing the talents of our next generation of managers and intend to establish a strong succession planning program for our critical positions, including internships for technical and engineering resources from local universities. Moreover, a key strategic focus of our new management team is to foster and maintain a strong and healthy culture, where collaboration to achieve results and focus on the success of our customers and shareholders is paramount.
Employee Compensation
In addition, our new management is undertaking a review of our compensation programs to better align the compensation of our employees with our performance, and to provide the proper short-term and long-term incentives to attract, retain and motivate them to achieve superior results. We believe we must offer wages that are competitive and consistent with employee positions, skill levels, experience and knowledge, and in order to do so we may work with a nationally recognized outside compensation and benefits consulting firm to independently evaluate the effectiveness of our executive and non-executive compensation and benefit programs and to provide benchmarking against our peers within our industry.
Employee Safety
The health and safety of our employees and partners is our highest priority, and this is consistent with our operating philosophy. We maintain strong environmental, health and safety protocols that focus on implementing policies and training programs, as well as performing self audits to ensure our colleagues and partners leave the workplace safely on a daily basis. Our safety focus is also evident in our response to the COVID-19 pandemic, which included:
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adding work from home flexibility;
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adjusting attendance policy is to encourage those who are sick to stay home;
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increase in cleaning protocols;
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establishing proper physical distancing procedures for employees who need to be on site;
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providing additional personal protective equipment and cleaning supplies;
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requiring masks to be worn at all locations, where allowed or required by local law;
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limiting all domestic and international nonessential travel for all employees; and
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implementing protocols to address actual and suspected COVID-19 cases and potential exposure.
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Item 1A. Risk Factors
In addition to the other information set forth in this Annual Report on Form 10-K, our shareholders should carefully consider the risk factors described below. The risks set forth below may not be the only risk factors relating to the Company. Any of these factors, many of which are beyond our control, could materially adversely affect our business, financial condition, operating results, cash flow and stock price.
We have significant investments in our CVD Materials segment, which could be met with further delays and ongoing losses that could further materially and adversely impact our financial results and cash flow.
In 2017, to support the expected growth of our CVD Materials segment and to house the US based business, on November 30, 2017, we purchased the 555 Building located at 555 North Research Place, Central Islip, NY (the “Premises”). The purchase price of the building was $13,850,000, exclusive of closing costs. We have monthly principal and interest payments of $62,481 and have invested $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 CVD Materials. Since September 2019, MesoScribe™ has secured orders of in excess of $2 million, and in early 2020 we have hired four employees including test and project management to support those orders and growth opportunities. Tantaline® US equipment continued to be installed in 2020 and are in various stages of process testing and refinement.
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 recorded in all years for a total loss of $2.5 million, exclusive of a $3.6 million impairment charge. These cumulative results are due to operating losses from the Tantaline operations offset by operating profits of $.5 million from the MesoScribe operations.
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 in 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. 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.
We might require additional financing.
Our overall revenues have declined from $41.1 million in 2017 to $16.9 million in 2020. Cumulative operating losses for the last three years (2018-2020) totaled ($18.1 million), which are comprised of 2018 ($5.3 million), 2019 ($5.0 million) and 2020 ($7.8 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 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 in 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. 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.
Our continuing operating losses and decline in revenues may make it difficult for us to obtain financing on commercially reasonable terms, if at all. If any financing is not available if and when required on commercially reasonable terms, if at all, or, even if available and we issue additional common stock, it may materially dilute the ownership interests of the then existing shareholders.
A pandemic, epidemic or outbreak of an infectious disease such as COVID-19 in the United States or worldwide has adversely affected our business.
Our operations expose us to risks associated with pandemics, epidemics or other public health emergencies, such as the recent outbreak of coronavirus disease (COVID-19) which has spread from China to the rest of the world. Outbreaks such as these have resulted, and can continue to result, in governments around the world implementing increasingly stringent measures to help control the spread, including quarantines, "shelter in place" and "stay at home" orders, travel restrictions, business curtailments, school closures, and other measures. These actions with respect to the COVID-19 outbreak have negatively impacted, and could continue to have negative impacts on, our operations, supply chain, transportation networks, customers and employees. The COVID-19 outbreak has materially and adversely affected, and any continuing economic downturn as a result of this pandemic could continue to adversely affect, demand for our products, and negatively impact our business or results of operations through the temporary closure of our operating locations or those of our customers or suppliers. 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.
Since the end of our first quarter 2020, we have experienced the impacts of COVID-19 on our markets and operations which have included significant decreases in demand, supply chain disruptions, and logistics constraints. Given government mandates and concerns over employee safety, some of our production facilities were closed or significantly slowed production during the end of the first quarter 2020 and into the second quarter 2020. The extent to which COVID-19 has and may continue to adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects. While we expect this matter to materially and adversely impact our financial results, the current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial impact cannot be reasonably estimated at this time.
We have made investments in our proprietary technologies. If third parties violate our proprietary rights, or accuse us of infringing upon their proprietary rights, such events could result in a loss of value of some of our intellectual property or costly litigation.
Our success is dependent in part on our technologies and our other proprietary rights. We believe that while patents can be useful and may be utilized by us in the future, they are not always necessary or feasible to protect our intellectual property. The process of seeking patent protection is lengthy and expensive, and we cannot be certain that applications will actually result in issued patents or that issued patents will be of sufficient scope or strength to provide meaningful protection or commercial advantage to us. In addition to patent protection, we have also historically protected our proprietary information and intellectual property such as design specifications, blueprints, technical processes and employee know-how, by limiting access to this confidential information and trade secrets and through the use of non-disclosure agreements. Other companies and individuals, including our larger competitors, may develop technologies that are similar or superior to our technology, or design around the intellectual property that we own or license. Our failure to adequately protect our intellectual property, could result in the reduction or extinguishment of our rights to such intellectual property. We also assert rights to certain trademarks relating to certain of our products and product lines. We have not filed trademark applications to protect such marks with any governmental agency, including, but not limited to the U.S. Patent and Trademark Office. We claim copyright protection for certain proprietary software and documentation, but we have not filed any copyright applications with the U.S. Copyright Office in connection with those works. As a result, we can give no assurance that our trademarks and copyrights will be upheld or successfully deter infringement by third parties.
While patent, copyright and trademark protection for our intellectual property may be important, we believe our future success in highly dynamic markets is most dependent upon the technical competence and creative skills of our personnel. We attempt to protect our trade secrets and other proprietary information through confidentiality agreements with our customers, suppliers, employees and consultants, and through other internal security measures. However, these employees, consultants and third parties may breach these agreements, and we may not have adequate remedies for wrongdoing. In addition, the laws of certain territories in which we sell our products may not protect our intellectual property rights to the same extent as do the laws of the United States.
Occasionally, we may receive communications from other parties asserting the existence of patent rights or other intellectual property rights that they believe cover certain of our products, processes, technologies or information. In addition, it is possible we could have a dispute with a customer on intellectual property utilized in their equipment. If such cases arise, we will evaluate our position and consider the available alternatives, which may include seeking licenses to use the technology in question on commercially reasonable terms, developing new alternative technology or defending our position. Nevertheless, we cannot ensure that we will be able to obtain licenses, or, if we are able to obtain licenses, that related terms will be acceptable, or that litigation or other administrative proceedings will not occur. Defending our intellectual property rights through litigation could be very costly. If we are not able to negotiate the necessary licenses on commercially reasonable terms or successfully defend our position, our ability to utilize such intellectual property could substantially inhibit our access to certain markets and our ability to compete in these markets which could have a material adverse effect on our financial position and results of operations.
We have a highly concentrated customer base so that changes in ordering patterns, delays or order cancellations could have a material adverse effect on our business and results of operations.
Two customers represented 30.5% in total and two customers represented 39.3%, respectively, of our annual revenues in fiscal years 2020 and 2019. We believe that our relationships with these customers are positive and may provide us with ongoing continuous sustainability for years to come, however the loss of a large customer would have to be replaced by others, and our inability to do so may have a material adverse effect on our business and financial condition. We expect that contracts or orders from a relatively limited number of customers will continue to account for a substantial portion of our business. The mix and type of customers, and sales to any single customer, may vary significantly from quarter to quarter and from year to year. If any of our significant customers do not place orders, or they substantially reduce, delay or cancel orders, we may not be able to replace the business in a timely manner or at all, which can and has had a material adverse effect on our results of operations and financial condition. Major customers may also seek, and on occasion receive, pricing, payment, intellectual property-related, or other commercial terms that are less favorable to us and can hurt our competitive position.
Our lengthy and variable sales cycle makes it difficult to predict our financial results.
The marketing, sale and manufacture of our products, often requires a lengthy sales cycle ranging from several months to over one year before we can complete production and delivery. The lengthy sales cycle makes forecasting the volume and timing of sales difficult, and raises additional risks that customers may cancel or decide not to enter into contracts. The length of the sales cycle depends on the size and complexity of the project, the customer’s in-depth evaluation of our products, and, in some cases, the protracted nature of a bidding process.
Because a significant portion of our operating expenses are fixed, we have and may continue to incur substantial expense before we earn associated revenue. If customer cancellations occur, they could result in the loss of anticipated sales without allowing us sufficient time to reduce our operating expenses.
We have and may continue to be required to take additional impairment charges on assets.
We are required to assess goodwill and indefinite-lived intangible assets at least annually for impairment, or on an interim basis, whenever certain events occur or circumstances change, such as an adverse change in business climate or a decline in the overall industry, that would more likely than not reduce the fair value below its carrying amount. We are also required to test our long-lived assets, including acquired intangible assets and property, plant and equipment, for recoverability and impairment whenever there are indicators or impairment, such as an adverse change in business climate.
As part of our long-term strategy, we have pursued acquisitions of other companies or assets, such as our acquisitions of assets owned by Tantaline ApS and MesoScribe Technologies, Inc. and may pursue future acquisitions of other companies or assets which could potentially increase our assets. Adverse changes in business conditions could materially impact our estimates of future operations and result in impairment charges to these assets. If our assets were impaired, our financial condition and results of operations could be materially and adversely affected.
Following our recent change in management, 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 in 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.
Our success is highly dependent on the technical, sales, marketing and managerial contributions of key individuals, including our newly appointed Chief Executive Officer and President, and we may be unable to retain these individuals or recruit others.
We depend on our senior executives including our newly appointed Chief Executive Officer and President, and certain key managers as well as, engineering, research and development, sales, marketing and manufacturing personnel, who are critical to our business. We do not have long-term employment agreements with our key employees. Furthermore, larger competitors may be able to offer more generous compensation packages to our executives and key employees, and therefore we risk losing key personnel to those competitors. If we were to lose the services of any of our key personnel, our engineering, product development, manufacturing and sales efforts could be slowed. We may also incur increased operating expenses, and be required to divert the attention of our senior executives to search for their replacements. The integration of any new personnel could disrupt our ongoing operations.
Acquisitions can result in an increase in our operating costs, divert management’s attention away from other operational matters and expose us to other associated risks.
We continually evaluate potential acquisitions of businesses and technologies, and we consider targeted acquisitions that expand our core competencies to be an important part of our future growth strategy. In the past, we have made acquisitions of other businesses with synergistic products, services and technologies, and plan to continue to do so in the future.
Acquisitions involve numerous risks, which include but are not limited to:
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difficulties and increased costs in connection with the integration of the personnel, operations, technologies, services and products of the acquired companies into our existing facilities and operations;
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diversion of management’s attention from other operational matters;
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failure to commercialize the acquired technology;
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the potential loss of key employees of the acquired companies;
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lack of synergy, or inability to realize expected synergies, resulting from the acquisitions;
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the risk that the issuance of our common stock, if any, in an acquisition or merger could be dilutive to our shareholders;
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the inability to obtain and protect intellectual property rights in key technologies and
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the acquired assets becoming impaired as a result of technological advancements or worse-than-expected performance of the acquired assets.
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If demand declines for chemical vapor deposition, gas control and related equipment, or for carbon nanotube and nanowire deposition systems, our financial position and results of operations could be materially adversely affected.
Our products are utilized to develop and manufacture materials and coatings for industrial and research applications that are used in numerous markets including but not limited to aerospace, medical, solar, nano and advanced electronic components. A significant part of our growth strategy involves continued expansion of the sales of our products for industrial as well as research and development purposes by companies, universities and government-funded research laboratories. The availability of funds for these purposes may be subject to budgetary and political restrictions, as well as cost-cutting measures by manufacturers in the markets in which we operate.
If the availability of funds or the demand for capital equipment in the markets in which we operate declines, the demand for our products would also decline and our financial position and results of operations could be harmed.
The conditions of the markets in which we operate are volatile. The demand for our products and the profitability of our products can change significantly from period to period as a result of numerous factors.
The industries in which we operate are characterized by ongoing changes, including:
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the availability of funds for research and development;
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global and regional economic conditions;
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governmental budgetary and political constraints;
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changes in the capacity utilization and production volume for research and industrial applications in the markets in which we operate;
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the profitability and capital resources of manufacturers in the markets in which we operate; and
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For these and other reasons, our results of operations for past periods may not necessarily be indicative of future operating results.
Volatile and cyclical demand for our products may make it difficult for us to accurately budget our expense levels, which are based in part on our projections of future revenues.
Demand for our equipment and related consumable products may be volatile as a result of sudden changes in supply and demand, and other factors in the manufacturing process. Our orders tend to be more volatile than our revenue, as any change in demand is reflected immediately in orders booked, which are net of cancellations, while revenue, tends to be recognized over multiple quarters as a result of procurement and production lead times, and the deferral of certain revenue under our revenue recognition policies. The fiscal period in which we are able to recognize revenue is also at times subject to the length of time that our customers require to evaluate the performance of our equipment. This could cause our quarterly operating results to fluctuate.
When cyclical fluctuations result in lower than expected revenue levels, operating results have been and may continue to be materially adversely affected and cost reduction measures have been and may continue to be necessary for us to remain competitive and financially sound. During a down cycle, we must be able to make timely adjustments to our cost and expense structure to correspond to the prevailing market conditions. In addition, during periods of rapid growth, we must be able to increase manufacturing capacity and the number of our personnel to meet customer demand, which may require additional liquidity. We can provide no assurance, that these objectives can be met in a timely manner in response to changes within the industry cycles in which we operate. If we fail to respond to these cyclical changes, our business could be seriously harmed. In 2018, 2019 and 2020, we reported pre-tax income (loss) of ($5,558,000), ($4,914,000) and ($7,602,000), respectively.
We do not have long-term volume production contracts with our customers, and we do not control the timing or volume of orders placed by our customers. Whether and to what extent our customers place orders for any specific products, and the mix and quantities of products included in those orders are factors beyond our control. Insufficient orders would result in under-utilization of our manufacturing facilities and infrastructure, and will negatively affect our financial position and results of operations.
We face significant competition and we are relatively small in size and have fewer resources in comparison with many of our competitors.
We face significant competition throughout the world, which may increase as certain markets in which we operate continue to evolve. Our future performance depends, in part, upon our ability to continue to compete successfully worldwide. Some of our competitors are diversified companies that have substantially greater financial resources and more extensive research, engineering, manufacturing, marketing and customer service and support capabilities than we can provide. We face competition from companies whose strategy is to provide a broad array of products, some of which compete with the products and services that we offer, as well as companies, universities and research laboratories that have the capacity to design and build their own equipment internally. These competitors may bundle their products and services in a manner that may discourage customers from purchasing our products. In addition, we face competition from smaller emerging processing equipment companies, whose strategy is to provide a portion of the products and services that we offer at often lower prices than ours, using innovative technology to sell products into specialized markets. Loss of competitive position could impair our prices, customer orders, revenue, gross margin and market share, any of which would negatively affect our financial position and results of operations. Our failure to compete successfully with these other companies would seriously harm our business. There is a risk that larger, better financed competitors will develop and market more advanced products than those we currently offer, or that competitors with greater financial resources may decrease prices, thereby putting us under financial pressure.
The health and environmental effects of nanotechnology are unknown, and this uncertainty could adversely affect the expansion of our business.
The health and environmental effects of nanotechnology are unknown. There is no scientific agreement on the health effects of nanomaterials in general and carbon nanotubes, in particular, but some scientists believe that in some cases, nanomaterials may be hazardous to an individual’s health or to the environment.
The science of nanotechnology is based on arranging atoms in such a way as to modify or build materials not made in nature; therefore, the effects are unknown. Future research into the effects of nanomaterials in general, and carbon nanotubes in particular, on health and environmental issues, may have an adverse effect on products incorporating nanotechnology. Since part of our growth strategy is based on sales of research equipment for the production of carbon nanotubes and the sale of such materials, the determination that these materials are harmful could adversely affect the expansion of our business.
We may experience increasing price pressure.
Our historical business strategy for many of our products has focused on product performance and customer service rather than on price. As a result of budgetary constraints, many of our customers are extremely price sensitive when purchasing capital equipment. If we are unable to obtain prices that allow us to continue to compete on the basis of product performance and customer service, our profit margins will be reduced.
We may not be able to keep pace with the rapid change in the technology we use in our products.
We believe that our continued success in the markets in which we operate depends, in part, on our ability to continually improve existing technologies and to develop and manufacture new products and product enhancements on a timely and cost-effective basis. We must be able to introduce these products and product enhancements into the market in a timely manner, in response to customer’s demands for higher-performance research and assembly equipment, customized to address rapid technological advances in capital equipment designs.
Technological innovations are inherently complex, and require long development cycles and appropriate professional staffing. Our future business success depends on our ability to develop and introduce new products, or new uses for existing products, that successfully address changing customer needs. Our success also depends on our ability to achieve market acceptance of our new products. In order to maintain our success in the marketplace, we may have to substantially increase our expenditures on research and development. If we do not develop and introduce new products, technologies or uses for existing products in a timely manner and continually find ways to reduce the cost of developing and producing them in response to changing market conditions or customer requirements, our business could be seriously harmed.
Manufacturing interruptions or delays could affect our ability to meet customer demand and lead to higher costs, while the failure to estimate customer demand accurately could result in excess or obsolete inventory.
Our business depends on timely supply of equipment, services and related products that meet the rapidly changing technical and volume requirements of our customers. Some key parts to our products are subject to long lead-times and/or obtainable only from a single supplier or limited group of suppliers. Cyclical industry conditions and the volatility of demand for manufacturing equipment increase capital, technical, operational and other risks for us and for companies throughout our supply chain. Further, these conditions may cause some suppliers to scale back operations, exit businesses, merge with other companies, or file for bankruptcy protection and possibly cease operations.
We may also experience significant interruptions of our manufacturing operations, delays in our ability to deliver products or services, increased costs or customer order cancellations as a result of:
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The failure or inability of suppliers to timely deliver sufficient quantities of quality parts on a cost-effective basis;
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Volatility in the availability and cost of materials, including rare earth elements;
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Difficulties or delays in obtaining required import or export approvals;
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Information technology or infrastructure failures; and
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Natural disasters or other events beyond our control (such as earthquakes, floods or storms, regional economic downturns, pandemics, social unrest, political instability, terrorism, or acts of war).
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The effects of COVID-19 on our employees, suppliers and other third-parties upon which we rely.
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For example, we may source certain materials used in the development and manufacture of our products from regions affected by the COVID-19, which could make access to our supply chain difficult and could affect our business. If a supplier fails to meet our requirements concerning quality, cost, socially-responsible business practices, or other performance factors, we may transfer our business to alternative sources, which could entail manufacturing delays, additional costs, or other difficulties. In addition, if we need to rapidly increase our business and manufacturing capacity to meet increases in demand or expedited shipment schedules, this may exacerbate any interruptions in our manufacturing operations and supply chain and the associated effect on our working capital.
If any of our customers cancel or fail to accept a large system order, our financial position and results of operations could be materially and adversely affected.
Our backlog, consists of orders for customized systems including our chemical vapor deposition equipment and annealing and diffusion furnaces which are built to client specifications. We also have a significant concentration of revenue with customers exceeding 10% of revenues. Two customers represented 30.5% in total and two customers represented 39.3%, respectively, of our annual revenues in fiscal years 2020 and 2019. These customized systems can have prices that range from $100,000 to several million dollars, depending on the configuration, specific options included and any special requirements of the customer. Because our orders are subject to cancellation or delay by the customer, our backlog at any particular point in time is not necessarily representative of actual sales for succeeding periods, nor does our backlog provide any assurance of achievement of revenues or that we will realize a profit from completing these orders. Our financial position and results of operations could be materially and adversely affected should any large system order be cancelled prior to shipment, or not be accepted by the customer due to alleged non-conformity with product specifications or otherwise. Likewise, a significant change in the liquidity or financial position of any of our customers that purchase large systems, could have a material impact on the collectability of our accounts receivable and our future operating results. Our backlog does not provide any assurance that we will realize a profit from those orders, or indicate in which period revenue will be recognized.
We may not be able to hire or retain the number of qualified personnel, particularly engineering personnel, required for our business, which would harm the development and sales of our products and limit our ability to grow.
Competition in our industry for senior management, technical, sales, marketing and other key personnel is intense. If we are unable to retain our existing personnel, or attract and train additional qualified personnel, our growth may be limited due to a lack of capacity to develop and market our products.
In particular, we have, from time to time, experienced difficulty in hiring and retaining skilled engineers with appropriate qualifications to support our growth strategy. Our success depends on our ability to identify, hire, train and retain qualified engineering personnel with experience in equipment design. Specifically, we need to continue to attract and retain mechanical, electrical, software and field service engineers to work with our direct sales force to technically qualify and perform on new sales opportunities and orders, and to demonstrate our products.
Our financial position and results of operations may be materially harmed if we are unable to recoup our investment in research and development.
The rapid change in technology in our industry requires that we continue to make substantial investments in research and development and selective acquisitions of technologies and products, in order to enhance the performance and functionality of our product line, to keep pace with competitive products and to satisfy customer demands for improved performance, features and functionality. These efforts include those related to the development of technology for the commercialization of carbon nanotubes. There can be no assurance that revenue from future products or enhancements will be sufficient to recover the development costs associated with such products, enhancements or acquisitions, or that we will be able to secure the financial resources necessary to fund future research and development or acquisitions. Research and development costs are typically incurred before we confirm the technical feasibility and commercial viability of a product, and not all development activities result in commercially viable products. In addition, we cannot ensure that products or enhancements will receive market acceptance, or that we will be able to sell these products at prices that are favorable to us. Our business could be seriously harmed if we are unable to sell our products at favorable prices, or if our products are not accepted by the markets in which we operate.
Our reputation and operating performance may be negatively affected if our products are not timely delivered.
We provide complex products that often require substantial lead-time for design, ordering parts and materials, and for assembly and installation. The time required to design, order parts and materials and to manufacture, assemble and install our products, may in turn lead to delays or shortages in the availability of some products. If a product is delayed or is the subject of shortage because of problems with our ability to design, manufacture or assemble the product on a timely basis, or if a product or software otherwise fails to meet performance criteria, we may lose revenue opportunities entirely, or experience delays in revenue recognition associated with a product or service. In addition, we may incur higher operating expenses during the period required to correct the problem.
Our business might be adversely affected by our dependence on foreign business.
During the year ended December 31, 2020, approximately $2.8 million or 16.8% of our revenues were generated by sales to customers outside the U.S. compared to approximately $4.2 million or 21.3% for the year ended December 31, 2019.
Because a portion of our revenues are derived from international customers, our operating results could be negatively affected by a decline in the economies of any of the countries or regions in which we do business. Each region can exhibit unique characteristics, which can cause capital equipment investment patterns to vary significantly from period to period. Periodic local or international economic downturns, trade balance issues and political instability, as well as fluctuations in interest and currency exchange rates, could negatively affect our business and results of operations.
All of our sales to date have been primarily priced in U.S. dollars. While our business has not been materially affected in the past by currency fluctuations, there is a risk that it may be materially adversely affected in the future. Such risks include possible losses due to both currency exchange rate fluctuations and from possible social and political instability.
If our critical suppliers fail to deliver sufficient quantities of quality materials and components in a timely and cost-effective manner, it could negatively affect our business.
We do not manufacture many components used in the production of our products, and consequently, we use numerous unrelated suppliers of materials and components. We generally do not have guaranteed supply arrangements with our suppliers. Because of the variability and uniqueness of our customer’s orders, we try to avoid maintaining an extensive inventory of materials and components for manufacturing. While we are not dependent on any principal or major supplier for most of our material and component needs, switching over to an alternative supplier may take significant amounts of time and added expense, which could result in a disruption of our operations and adversely affect our business.
It is not always practical or even possible to ensure that component parts are available from multiple suppliers; accordingly, we procure some key parts from a single supplier or a limited group of suppliers. At certain times, increases in demand for capital equipment can result in longer lead-times for many important system components, which may cause delays in meeting shipments to our customers. The delay in the shipment of even a few systems could cause significant variations in our quarterly revenue, operating results and the market value of our common stock.
We cannot assure you that our financial position and results of operations will not be materially and adversely affected if, in the future, we do not receive in a timely and cost-effective manner a sufficient quantity of quality component parts and materials to meet our production requirements.
The price of our common shares is volatile and could decline significantly.
The stock market in general and the market for technology stocks in particular has experienced volatility. If those industry-based market fluctuations continue, the trading price of our common shares could decline significantly independent of the overall market, and shareholders could lose all or a substantial part of their investment. The market price of our common shares could fluctuate significantly in response to several factors, including, among others:
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difficult macroeconomic conditions, unfavorable geopolitical events, and general stock market uncertainties, such as those occasioned by a global liquidity crisis and a failure of large financial institutions;
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receipt of large orders or cancellations of orders for our products;
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issues associated with the performance and reliability of our products;
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actual or anticipated variations in our results of operations;
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announcements of financial developments or technological innovations;
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changes in recommendations and/or financial estimates by investment research analysis;
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strategic transactions, such as acquisitions, divestitures, or spin-offs; and
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the occurrence of major catastrophic events, including the effects of the spread of COVID-19
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Significant price and value fluctuations have occurred with respect to our publicly traded securities and technology companies generally. The price of our common shares is likely to be volatile in the future. In the past, securities class action litigation often has been brought against a company following periods of volatility in the market price of its securities. If similar litigation were pursued against us, it could result in substantial costs and a diversion of management’s attention and resources, which could materially and adversely affect our financial condition, results of operations, and liquidity.
We face the risk of product liability claims.
The manufacture and sale of our products, which in operation sometimes involve the use of toxic materials and extreme temperatures, and could result in product liability claims. For example, our rapid thermal processing systems used to heat semiconductor materials to temperatures in excess of 1000º Celsius have certain inherent risks. A failure of our product(s) at a customer site could also result in losses due to interruption of the business operations of our customer. While we regularly evaluate the nature and limits of our insurance coverages, there can be no assurance that our existing policies of insurance will be adequate to protect us from all liabilities that we might incur in connection with the manufacture and sale of our products in the event of a successful product liability claim or series of successful claims against us.
We are subject to environmental regulations, and our inability or failure to comply with these regulations could adversely affect our business.
We are subject to environmental regulations in connection with our business operations, including regulations related to the development and manufacture of our products and our customers’ use of our products. Our failure or inability to comply with existing or future environmental regulations could result in significant remediation liabilities, the imposition of fines or the suspension or termination of development, manufacturing or use of certain of our products, or affect the operation of our facilities, use or value of our real property, each of which could damage our financial position and results of operations.
If we are subject to cyber-attacks we could incur substantial costs and, if such attacks are successful, we could incur significant liabilities, reputational harm, and disruption to our operations.
We manage, store and transmit proprietary information and sensitive data relating to our operations. We may be subject to breaches of the information technology systems we use for these purposes. Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate and/or compromise our confidential information (and or third-party confidential information), create system disruptions, or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our systems or our products, or that otherwise exploit any security vulnerabilities.
The costs to address the foregoing security problems and security vulnerabilities before or after a cyber-incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays, or cessation of service, and loss of existing or potential customers, impeding our sales, manufacturing, distribution, or other critical functions. In addition, breaches of our security measures and the unapproved dissemination of proprietary information or sensitive data about us, our customer, or other third parties, could expose us, our customers, or other third parties to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our reputation, or otherwise harm our business.
Regulations related to conflict minerals will force us to incur additional expenses, may make our supply chains more complex, and may result in damage to our relationships with customers.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, the SEC adopted requirements for companies that manufacture products that contain certain minerals and metals known as “conflict minerals”. These rules require public companies to perform diligence and to report annually to the SEC whether such minerals originate from the Democratic Republic of Congo and adjoining countries. The implementation of these requirements could adversely affect the sourcing, availability, and pricing of minerals we use in the manufacture of our products. In addition, we have incurred and will continue to incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals used in our products. Given the complexity of our supply chain, we may not be able to ascertain the origins of these minerals used in our products through the due diligence procedures that we implement, which may harm our reputation. We may also face difficulties in satisfying customers who may require that our products be certified as conflict mineral free, which could harm our relationships with these customers and lead to a loss of revenue. These requirements could limit the pool of suppliers that can provide conflict-free minerals, and we may be unable to obtain conflict-free minerals at competitive prices, which could increase our costs and adversely affect our manufacturing operations and our profitability.
Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. We have agreements with third parties and make sales in countries known to experience corruption, extortion, bribery, pay-offs, theft and other fraudulent practices. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.