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| CVV > SEC Filings for CVV > Form 10-K on 31-Mar-2009 | All Recent SEC Filings |
31-Mar-2009
Annual Report
Except for historical information contained herein, this "Management's Discussion and Analysis or Plan of Operation" contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, as amended. These statements involve known and unknown risks and uncertainties that may cause our actual results or outcomes to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements
We design, develop and manufacture customized state-of-the-art equipment and process solutions used to develop and manufacture solar, nano and advanced electronic components, materials and coatings for research and industrial applications, with the focus on enabling tomorrow's technologies™. We offer a broad range of chemical vapor deposition, gas control and other equipment that is used by our customers to research, design and manufacture semiconductors, solar cells, smart glass, carbon nanotubes, nanowires, LEDs, MEMS and industrial coatings, as well as equipment for surface mounting of components onto printed circuit boards. Through our Application Laboratory, we provide process development support and process startup assistance. Our proprietary products are generally customized to meet the particular specifications of individual customers and to accelerate the commercialization of their proprietary intellectual property. We also offer a number of standardized products that are based on the expertise and know-how we have developed in designing and manufacturing our customized products.
Based on more than 26 years of experience, we use our engineering, manufacturing and process development to transform our customers' proprietary technology into leading-edge manufacturing solutions. This enables university, research and industrial scientists at the cutting edge of technology to develop next generation solar, nano, LEDs, semiconductors and other electronic components. We also develop and manufacture research and production equipment 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 solutions, along with our vertically integrated manufacturing facilities, allows us to provide superior design, process and manufacturing solutions to our customers on a cost effective basis.
Results of Operations
Revenue
Revenue for the year ended December 31, 2008 was approximately $18,147,000 compared to approximately $13,578,000 for the year ended December 31, 2007, representing an increase of 33.7%. Annual revenue from the CVD division increased by approximately $2,698,000 to $10,779,000 which represents 59.4% of our
Gross Profit
As a result of the increased revenues and sales volumes for the current year, cost of revenues increased to approximately $12,773,000 from approximately $8,907,000 for the last fiscal year, an increase of approximately $3,866,000. The gross profit for the current fiscal year increased to approximately $5,373,000 from last year's $4,671,000, an increase of approximately $702,000 with a decrease in gross profit margin to 29.6% from the 34.4% experienced during the prior year. This overall decrease is primarily attributable to an increase in engineering and production personnel necessary to support increased orders, the expansion of our Application Laboratory and new product development costs in the Nanomaterials, Smart Glass, Solar and Semiconductor fields. The gross profit margin of the CVD division decreased to 31.8% for the year ended December 31, 2008 compared to 43.5% for the year ended December 31, 2007 after the inclusion of approximately $700,000 of research and development costs in both the current and the prior years. All of the aforementioned increased costs were attributed to the CVD division. The SDC division's gross profit margin increased to 33.8% for the year ended December 31, 2008 from 18.8% for the year ended December 31, 2007. The increase is a result of SDC's ability to maintain its fixed costs with increased revenue. The Conceptronic division's gross profit margin decreased to 12.4% for the year ended December 31, 2008 from 19.8% for the year ended December 31, 2007 as result of that division's fixed costs having a greater impact on the reduced revenues.
Selling, General and Administrative Expenses
Selling and shipping expenses were approximately $767,000 in the year ended December 31, 2008 compared to $755,000 in the year ended December 31, 2007.
General and administrative expenses were approximately $4,146,000 during the year ended December 31, 2008. This was an increase of approximately $720,000 or 21.0% compared to approximately $3,426,000 during the year ended December 31, 2007. This increase can be attributed to a combination of increased payroll and benefit costs, workers compensation insurance costs, legal, accounting and other professional fees.
As a result of the foregoing factors, operating income for the year ended December 31, 2008 was approximately $461,000 compared to approximately $489,000 for the year ended December 31, 2007.
Interest Expense. Net
In October 2007, we concluded the sale of 1,380,000 shares of common stock under a registration statement filed with the Securities and Exchange Commission. As a result, we earned interest of approximately $107,000 and $51,000 from the temporary investment of certain net capital raising proceeds (approximately 5.0 million) for the years ending December 31, 2008 and 2007 respectively.
We incurred approximately $229,000 of interest expense in the year ended December 31, 2008, which was approximately $12,000 or 5.5% greater than the $217,000 incurred in the year ended December 31, 2007. The increase in interest expense, which is primarily mortgage interest, is a result of the acquisition of the facility at 979 Marconi Avenue, Ronkonkoma, New York in February 2008. We incurred $206,000 of mortgage interest expense in the current year and approximately $170,000 in the year ended December 31, 2007. This increase was partially offset by a decrease in the interest expense incurred from our line of credit in the year ended December 31, 2008.
Loss on Impairment
In 2006, the Company sold equipment at the selling price of $251,130 to a Customer for a purchase price of one hundred four thousand, four hundred eighty two (104,482) shares of a non-public company's common stock, par value $.001 per share. Between July 19, 2007 and July 31, 2007, the Company had the option to demand that the Customer make cash payment i.e.: two hundred fifty-one thousand, one hundred thirty 00/100 U.S. dollars ($251,130) for the equipment, the amount that would have been required had the Customer made cash payment for the equipment on July 19, 2006 in exchange for the return of said stock. The Customer's obligation to make such payment pursuant to the terms of the option is secured by a perfected lien upon the subject equipment and the Company's right to execute upon the aforementioned common stock. In the event the Customer does not make full payment, the Company has also reserved the right to maintain plenary proceedings against the Customer for the purpose of recovering such sums as may be due as well as the right to obtain a deficiency judgment in the event that the collateral in the equipment and stock is insufficient to discharge said obligation.
The Company agreed to extend the option to demand cash payment to the period between December 1, 2007 and March 12, 2008 in exchange for fifty thousand (50,000) shares of the customer's common stock.
On February 19, 2008, the Company exercised its cash payment option demanding the cash payment of $251,130. The Customer did not make payment and the Company retook possession of said equipment.
The Company has written off this investment as "Other Than - Temporary impairment of the equity investment."
Other Income
Other income for the current year decreased to approximately $189,000, a decrease of $374,000 or 66.4% compared to $563,000 of other income generated during the year end December 31, 2007. During the year ended December 31, 2007, there was a settlement of litigation between us and PrecisionFlow Technologies, Inc. Under the terms of the settlement, we are to receive payments totaling $541,600 over a specific timetable. We have received $408,300 through December 31, 2008.
Income Tax Provision
For the twelve months ended December 31, 2008, we recorded an income tax benefit of approximately $355,000 which was primarily the result of research and development tax credits that the Company has availed itself of less various federal, state and local taxes as compared to an income tax expense of $110,000 for the twelve months ended December 31, 2007, which related to various federal, state and local taxes. In 2006, we had a change in the tax accounting method of recognizing contract revenue from the completed contract method to the percentage of completion method. Contracts in progress as of December 31, 2006 are being recognized ratably over a four year period, thus increasing the current income tax provision and conversely decreasing the deferred tax provision as we recognize 25% of the tax provision annually.
Net Income
As a result of the foregoing factors, for the year ended December 31, 2008, our pre-tax income amounted to approximately $276,000, as compared to $887,000 for the same period in 2007. Net income for the year ended December 31, 2008 was approximately $632,000 or $0.13 per basic and diluted share as compared to $777,000 or $0.21 per basic and $0.20 per diluted share for the year ended December 31, 2007.
Liquidity and Capital Resources
In October 2007, we completed the sale of 1,380,000 shares of common stock in a public offering at $4.75 per share. The net proceeds of the sale after offering expenses and underwriting fees was approximately $5.7 million. We intend to use the net proceeds from the offering for working capital and other general corporate purposes, including possible product or business acquisitions in connection with the planned expansion of our business.
As of December 31, 2008, we had aggregate working capital of approximately $9,849,000 compared to aggregate working capital of $10,314,000 at December 31, 2007 and had available cash and cash equivalents of approximately $5,721,000 compared to approximately $5,110,000 in cash and cash equivalents at December 31,
Accounts receivable, net of allowance for doubtful accounts increased by approximately $874,000 or 49.4% at December 31, 2008 to $2,643,000 compared to $1,769,000 at December 31, 2007. This increase is principally due to the timing of shipments and customer payments.
Inventory as of December 31, 2008 was approximately $3,292,000 representing an increase of approximately $276,000 or 9.2% over the inventory balance of $3,016,000 as of December 31, 2007. The increase in inventory was comprised of an increase in raw materials of approximately $319,000, offset by a decrease in work in process of approximately $20,000 and a decrease in finished goods of approximately $23,000. The build-up in raw material inventory is primarily due to an increase in orders that we are experiencing in customized CVD products and our First Nano, EasyTube standardized product line. Accounts payable and accrued expenses on December 31, 2008 were approximately $2,072,000 which were approximately $192,000 greater than at December 31, 2007.
As a result of the receipt of a deposit from a customer for approximately $3,559,000, we issued an irrevocable standby letter of credit for the benefit of that customer for that same amount which expires on January 21, 2010. We have secured that letter of credit with that same amount from our Revolving Credit Agreement.
As of December 31, 2008, our backlog was approximately $15,271,000, an increase of $10,184,000 or 200.2% compared to $5,087,000 at December 31, 2007. The increase can primarily be attributed to increased order volume for our CVD Division. This division, inclusive of its expanded product line of First Nano equipment, continues to experience a strong demand for new equipment. The timing for completion of the backlog varies depending on the product mix and can be as long as two years. Included in the backlog are all accepted purchase orders with the exception of those; that are included in our percentage-of-completion. Order backlog is usually a reasonable management tool to indicate expected revenues and projected profits, however it does notprovide an assurance of future achievement or profits as order cancellations or delays are possible.
On April 22, 2008, we entered into a three year Modified and Restated Revolving Credit Agreement with Capital One, N.A. (the "Bank") as successor to North Fork Bank, pursuant to which the Bank has agreed to make revolving loans to us of up to $5 million until May 1, 2011, at which time it will be subject to renewal. The loan agreement amends and supersedes our previous $2 million revolving credit facility with the Bank. Interest on the unpaid principal balance on this facility accrues at either (i) the LIBOR rate plus 2.00% or (ii) the Bank's prime rate minus .25%. This agreement contains certain financial and other covenants. Borrowings are collateralized by our assets.
The amount available under this agreement was approximately $941,000 as of December 31, 2008, as we have utilized $500,000 of this facility in the form of equipment term loans and an additional $3,559,000 is being
In March, 2002, we received from General Electric Capital Corporation a $2,700,000 mortgage loan, secured by the real property and building and improvements to finance and improve our facility in Ronkonkoma, New York. The mortgage loan, which has an outstanding balance as of December 31, 2008 of $1,758,786, is payable in equal monthly installments of $22,285 including interest at 5.67% per annum; pursuant to an industrial development bond purchase agreement with the town of Islip Industrial Development Agency. The final payment is due March 2017.
On June 30, 2008, we entered into a Consolidation, Extension and Modification Agreement and Consolidated and Restated Mortgage note each with Capital One, N.A. The agreement consolidated various notes and mortgages relating to the property and building in Saugerties, New York into a single note in the principal sum of $805,000 of which approximately $17,000 represented additional borrowings we incurred. Principal and interest payments are to be made in equal consecutive monthly installments of $5,903.27 commencing on August 1, 2008 and continuing for 119 months, with a final balloon payment being due on July 1, 2018 equal to the remaining unpaid principal on the maturity date. The principal sum bears interest at a fixed annual rate of 6.20%. The Note is secured by a first priority mortgage lien on the property in Saugerties, New York, all of the Company's monies, deposits or other sums held by the Bank on deposit, an assignment of the leases and rents from the premises, a lien on our personal property, and $500,000 of the proceeds of a life insurance policy which is owned by us and issued on the life of our Chief ExecutiveOfficer, Leonard A. Rosenbaum.
In 2008 the order levels for the CVD/FN and SDC divisions increased by 146% and 58% respectively, while the Conceptronic division decreased slightly by 3% compared to 2007 order levels. The CVD/First Nano and SDC divisions benefited from the increased business interest in energy generation and energy savings fields (smart glass). We anticipate this trend to continue. The Conceptronic division was impacted by the downturn in the electronics industry over the last two quarters. We expect this trend to continue at least through 2009.
The large demand for energy savings, energy generation materials and products needed to address rising energy costs creates a growing demand for manufacturing solutions using thin film coatings on glass, wafers and other substrates. Using our Application Laboratory, we will perfect and expand the multiple areas where low cost thin film manufacturing solutions can be applied and further optimize our proprietary and patent pending technologies for cost and performance. The solar, energy and power semiconductor markets we are addressing with multiple products have significant growth opportunities for technologies that deliver favorable cost benefits. These fields should benefit further from a renewed drive for energy savings and generation driven by President Obama's administration.
In the fourth quarter of 2006, an internal decision was made to significantly broaden the First Nano product line and pursue a significantly larger share of the R & D market with additional equipment platforms under the First Nano brand name. In 2007, we began marketing, manufacturing and selling these products. In 2008, we expanded our marketplace to include the quality control and research market of the photovoltaic solar cell
To support the increase in our existing product sales and the development and sales of the new First Nano and patent pending proprietary products, we have begun to increase our manufacturing capacity, hired additional personnel and expanded our advertising, trade shows and marketing capabilities. Additionally, on February 8, 2008 we purchased a 13,300 square foot stand-alone building to house our Application Laboratory.
We believe that our cash and cash equivalent positions, cash flow from operations and ability to expand our credit facilities as of December 31, 2008 and for the year then ended will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months.
Critical Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used when accounting for certain items such as revenues on long-term contracts recognized on the percentage-of-completion method, allowances for doubtful accounts, depreciation and amortization, income tax provisions and product warranties.
Revenue Recognition
We continue to recognize revenues and income using the percentage-of-completion method for custom production-type contracts while revenues from other products are recorded when such products are accepted and shipped. Profits on custom production-type contracts are recorded on the basis of our total estimated costs over the percentage of total costs incurred on individual contracts, commencing, when progress reaches a point where experience is sufficient to estimate final results with reasonable accuracy. Under this method, revenues are recognized based on costs incurred to date compared with total estimated costs.
Stock-Based Compensation
On January 1, 2006, the Company adopted the provisions of SFAS No. 123-R "Share-Based Payment" using the modified prospective method. SFAS No. 123-R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based upon the grant date fair value of those awards. Under the modified prospective method of adopting SFAS No. 123-R, the Company recognized compensation cost for all share-based payments granted after January 1, 2006, plus any awards granted to
Long-Lived Assets
Long-lived assets consist primarily of property, plant and equipment. Long-lived assets are reviewed for impairment whenever events or circumstances indicate their carrying value may not be recoverable. When such events or circumstances arise, an estimate of the future undiscounted cash flows produced by the asset, or the appropriate grouping of assets, is compared to the asset's carrying value to determine if impairment exists pursuant to the requirements of Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets." If the asset is determined to be impaired, the impairment loss is measured on the excess of its carrying value over its fair value. Assets to be disposed of are reported at the lower of their carrying value or net realizable value. The Company had no recorded Long-lived asset impairment charges in the statement of operations during each of the years ended December 31, 2008 and 2007.
Off-Balance Sheet Arrangements
None
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