Except for historical information contained herein, this "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
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, uncertainties and other factors which may cause the
actual results, performance, or achievements of the Company to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. These forward-looking statements
were based on various factors and were derived utilizing numerous important
assumptions and other important factors that could cause actual results to
differ materially from those in the forward-looking statements. Important
assumptions and other factors that could cause actual results to differ
materially from those in the forward-looking statements, include but are not
limited to: competition in the Company's existing and potential future product
lines of business; the Company's ability to obtain financing on acceptable terms
if and when needed; uncertainty as to the Company's future profitability,
uncertainty as to the future profitability of acquired businesses or product
lines, uncertainty as to any future expansion of the Company and the effect of
the novel coronavirus (COVID-19) on our business and operations, and those of
our customers, suppliers and other third parties . Other factors and assumptions
not identified above were also involved in the derivation of these
forward-looking statements and the failure of such assumptions to be realized as
well as other factors may also cause actual results to differ materially from
those projected. The Company assumes no obligation to update these
forward-looking statements to reflect actual results, changes in assumptions or
changes in other factors affecting such forward-looking statements. Past results
are no guaranty of future performance. You should not place undue reliance on
any forward-looking statements, which speak only as of the dates they are made.
When used with this Report, the words "believes", "anticipates", "expects",
"estimates", "plans", "intends", "will" and similar expressions are intended to
identify forward-looking statements.
Executive Level Summary
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.
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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.
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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.
Furthermore, our overall revenues have declined from $41.1 million in 2017 to
$16.9 million in 2020. Cumulative operating losses, exclusive of a $3.6 million
impairment charge, for the last three years (2018-2020) totaled ($14.5 million),
which are comprised of 2018 ($5.3 million), 2019 ($5.0 million) and 2020 ($4.2
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 in recent years 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 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.
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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.
Statement of Operations
2020 2019
Revenue $ 16,920,219 $ 19,646,652
Cost of revenue 14,037,813 16,850,077
Gross profit 2,882,406 2,796,575
Operating expenses
Research and development 372,648 597,456
Selling and shipping 580,468 898,338
Impairment charge 3,599,322 -
General and administrative 6,153,925 6,285,496
Total operating expenses 10,706,363 7,781,290
Operating loss (7,823,957 ) (4,984,715 )
Other income (expense):
Interest income 62,667 142,579
Interest expense (444,337 ) (482,844 )
Other income 603,320 411,230
Total other income, net 221,650 70,965
Loss before income tax (7,602,307 ) (4,913,750 )
Income tax (benefit) expense (1,527,355 ) 1,413,908
Net loss $ (6,074,952 ) $ (6,327,658 )
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Revenue
2020 2019 Change %Change
CVD Equipment $ 10,385,107 $ 14,065,112 $ (3,680,005 ) (26.2 %)
SDC 4,207,182 3,941,946 265,236 6.7 %
CVD Materials 2,327,930 1,639,594 688,336 42.0 %
Total $ 16,920,219 $ 19,646,652 $ (2,726,433 ) (13.9 %)
Our revenue for the year ended December 31, 2020 was $16.9 million compared to
$19.6 million for the year ended December 31, 2019, resulting in a decrease of
13.9%. This was primarily attributable to decreased revenue of $3.7 million from
our CVD Equipment segment related to spare parts and equipment sales, offset, in
part by, an increase of $.3 million in our SDC segment and an increase of $.7
million in our CVD Materials segment. 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.
The revenue contributed for the year ended December 31, 2020, by the CVD
Equipment segment, was $10.4 million, or 61.4% of our overall revenue. This
represented a decrease of 26.2% or $3.7 million, as compared to $14.1 million in
the prior year, which totaled 71.6% of our overall revenue. This revenue
decrease is the result of decreases of $.9 million and $2.8 million, from spare
parts and equipment sales, respectively. 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.
Annual revenue for our SDC segment increased to $4.2 million in 2020 as compared
to $3.9 million in 2019, an increase $.3 million or 6.7%. The SDC segment
represented 24.9% and 20.0% of our total revenue during the years ended December
31, 2020 and December 31, 2019, respectively.
Revenues for our CVD Materials segment were $2.3 million in the year ended
December 31, 2020 as compared to $1.6 million for 2019. The increase of $.7
million was due to increased sales of Tantaline products and coatings of $.6
million, half of this increase related to a distribution sale at significantly
reduced margins, and increased sales from MesoScribe of $.1 million.
Gross Profit
Gross profit for the year ended December 31, 2020 amounted to $2.9 million, with
a gross profit margin of 17.0 %, compared to a gross profit of $2.8 million and
a gross profit margin of 14.2% for the year ended December 31, 2019. The
increase in our gross profit and gross profit margin was the result of
improvements in our operating efficiencies with certain repeat orders, as well
as lowered costs mostly due to the effects of employees furloughed during the
period as a result of Coronavirus mandates imposed, and improved mix of product
revenues resulting in our gross profit margin percentage improvement.
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Research and Development, Selling and General and Administrative Expenses
Research and Development:
Due to the technical development required on our custom orders, our research and
development team and their expenses are charged to costs of goods sold when they
are working directly on a customer project. When they are not working on a
customer project, they work in our Application Laboratory and their costs are
charged to research and development. For the years ended December 31, 2020 and
2019, we incurred $373,000 and $598,000 respectively of internal research and
development costs. This decrease was primarily due to the effects of employee
furloughs during the year ended December 31, 2020, as a result of COVID-19
mandates imposed.
Selling:
Selling expenses were $.6 million or 3.4% of the revenue for the year ended
December 31, 2020 as compared to $.9 million or 4.6% for the year ended December
31, 2019. The decrease was primarily the result of reduced employee related
costs, including the effects of employee furloughs during the year ended
December 31, 2020, as a result of COVID-19 mandates imposed, and lower trade
show expenses.
Impairment Charge:
Based upon continued operating losses and negative cash flow for our Tantaline
product line and our updated forecasting, the expected future cash flows of the
Tantaline business is negative and thus we have recorded an impairment charge of
$3.6 million in the fourth quarter and year ended December 31, 2020. We had no
recorded impairment charges in the consolidated statement of operations during
the year ended December 31, 2019.
General and Administrative:
General and administrative expenses for the year ended December 31, 2020 were
$6.2 million or 36.4% of revenue compared to $6.3 million or 32.0% during the
year ended December 31, 2019, a decrease of $.1 million. While stock
compensation costs decreased by $317,000 due to fewer equity grants, and outside
systems and finance consulting costs decreased by $67,000, due to the completion
of our system migration and completion of finance consulting costs in 2019,
these decreases were offset primarily by depreciation of our 555 facility in the
amount of $334,000 and a $142,000 bad debt provision related primarily to one
customer.
Operating Loss
Improved gross profit margins and reduced expenses, which were more than offset
by the $3.6 million impairment charge in the year ended December 31, 2020,
resulted in an operating loss of $7.8 million for the year ended December 31,
2020 as compared to operating loss of $5.0 million for the year ended December
31, 2019.
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Other (Expenses)/Income
Other income was $221,650 and $70,965 for the years ended December 31, 2020 and
2019, respectively. Net other income was $603,320 and $411,230 for the year
ended December 31, 2020 and 2019, respectively, from subleasing a portion of our
CVD Materials facility. The increase of $192,090 was the result of approximately
seven months of rental in 2019 (commencing June 2019) as compared to a full year
in 2020. Interest income of $62,667 for the year ended December 31, 2020,
included interest income of $28,000 related to the income tax refund received
during the year. As a result of lower interest rates, interest income decreased
$107,912, to $34,667 for the year ended December 31, 2020 as compared to
$142,579 in 2019. In addition, interest expense decreased $38,507 to $444,337 in
the year ended December 31, 2020, as compared to $482,844 in 2019.
Income Taxes
For the year ended December 31, 2020, we recorded an income tax benefit of
$1,527,000 as compared to an income tax expense of $1,414,000 in the year ended
December 31, 2019. The income tax benefit recorded during the year ended
December 31, 2020 was the result of a change in the tax laws pursuant to the
CARES Act. As a result of the enactment of the CARES Act, net operating losses
("NOL's") generated in 2018-2020 can now be carried back for five years and
resulted in the Company recognizing approximately a $1.5 million income tax
benefit, of which $.7 million was a receivable at December 31, 2020. As of
December 31, 2020 and December 31, 2019, we have provided a full valuation
allowance against all of the net deferred tax assets. This was based on
management's assessment, including three years of cumulative operating losses,
that it is more likely than not that the net deferred tax assets may not be
realized in the future. For the year ended December 31, 2019, we have provided a
full valuation allowance against all of the net deferred tax assets in the
amount of $2,497,414. We continue to evaluate for potential utilization of our
deferred tax asset, which has been fully reserved for, on a quarterly basis,
reviewing our economic models, including projections and timing of orders, cost
containment measures and other factors. For the year ended December 31, 2020 and
2019 our tax rate was primarily affected by permanent differences resulting in
an effective tax rate of 20.0% and 28.7%.
Net Income Loss
As a result of the foregoing factors, for the year ended December 31, 2020, we
had a net loss of $6.1 million or $.91 per diluted share compared to a net loss
of $6.3 million or $.96 per diluted share for the year ended December 31, 2019.
Inflation
Inflation has not materially impacted our operations.
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Liquidity and Capital Resources
As of December 31, 2020, we had aggregate working capital of $8.1 million
compared to aggregate working capital of $8.8 million at December 31, 2019. Our
cash and cash equivalents at December 31, 2020 and 2019 were $7.7 million and
$8.7 million, respectively.
Net cash used in operating activities was ($1.1 million). This is the result of
the net loss, adjusted for non-cash items, of $.7 million. In addition, contract
liabilities decreased $1.5 million, accrued expenses decreased $.5 million
related to the payment of vacation and other accrued expenses and an increase in
taxes receivable of $.7 million as a result of the March 27, 2020 CARES Act
enactment allowing the carryback of NOL's five years resulting in a receivable
of $1.5 million, of which $.8 million was collected in the year ended December
31, 2020. These amounts were reduced by a decrease in accounts receivable of
$1.4 million due to timing of collections, decreased inventory of $.6 million
and increased accounts payable of $.3 million. Our cash and cash equivalents at
our year end December 31, 2020 was $7.7 million and was favorably impacted by
the receipt of the PPP loan proceeds of $2.4 million and the refund of income
taxes of $.8 million for a total of $3.2 million.
Long term debt increased by $1.7 million, the result of a new loan from the
Paycheck Protection Program of $2.4 million and a ($.7 million) decrease from
principal payments on the mortgages related to our two facilities in Central
Islip, NY, including our investment in the CVD Materials building purchased on
November 30, 2017. We have invested in activities primarily related to preparing
CVD Materials for operations in the United States. Our total capital invested in
the year ended December 31, 2020 was $1.6 million, primarily related to building
improvements and machinery, and for the year ended December 31, 2020 we received
rental income of approximately $603,000.
We have a loan agreement with HSBC USA, N.A. (the "HSBC") which is secured by a
mortgage on our Central Islip headquarters at 355 South Technology Drive. The
loan is payable in 120 consecutive equal monthly installments of $25,000 in
principal plus interest and a final balloon payment upon maturity in March 2022.
The balances as of December 31, 2020 and December 31, 2019 were approximately
$2.1 million and $2.4 million, respectively. Interest accrues on the Loan, at
our option, at the variable rate of LIBOR plus 1.75% or Prime less 0.5% (1.89%
and 3.49% at December 31, 2020 and 2019, respectively).
On November 30, 2017, we purchased the premises located at 555 North Research
Place, Central Islip, NY which is intended to house the CVD Materials segment.
The purchase price of the land and the building was $13,850,000 exclusive of
closing costs.
As part of the acquisition, our newly formed wholly-owned subsidiary, 555 N
Research Corporation (the" Assignee") and the Islip IDA, entered into a Fee and
Leasehold Mortgage and Security Agreement (the "Loan") with HSBC in the amount
of $10,387,500, which was used to finance a portion of the purchase price to
acquire the premises located at 555 North Research Place, Central Islip, New
York (the "Premises"). The Loan was evidenced by the certain Note, dated
November 30, 2017 (the "Note"), by and between Assignee and the Bank, and
secured by a certain Fee and Leasehold Mortgage and Security Agreement, dated
November 30, 2017 (the "Mortgage"), as well as a collateral Assignment of Leases
and Rents ("Assignment of Leases").
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The Note is payable in 60 consecutive equal monthly installments of $62,481,
including interest.
The balances as of December 31, 2020 and 2019 were approximately $9.3 million
and $9.7 million, respectively. The Note bears interest for each Interest Period
(as defined in the Note), at the fixed rate of 3.9148%. The maturity date for
the Note is December 1, 2022. As a condition of the Bank making the Loan, we
were required to guaranty Assignee's obligations under the Loan.
On August 5, 2019, we entered into a Mortgage Modification Agreement which
replaced the former covenant with a Minimum Liquid Assets ("MLC") covenant, and
on October 22, 2020, we entered into a Second Mortgage Modification Agreement
modifying certain MLC balances. We were in compliance with our financial
covenant under the mortgage at December 31, 2020.
The COVID-19 outbreak has resulted in extended shutdowns of certain businesses
in United States and around the world.. We have been actively monitoring the
COVID-19 outbreak and its impact globally. Our primary focus to this point has
been to ensure the health and safety of our employees. To that end, we have
adopted social distancing where appropriate, implemented travel restrictions,
and we have taken actions to ensure that locations and facilities are cleaned
and sanitized regularly. These are novel and challenging times and the
magnitude of this crisis is requiring us to consider all options to promote the
safety of employees, including, where appropriate, or where required to comply
with foreign, national, state or local governmental authority recommendations,
guidelines, and/or mandates, the temporary reduction or suspension of work at
certain of the Company's locations and production facilities to protect
employees and curb the spread of the coronavirus. All of these actions have
adversely impacted our operating results. In particular, our aerospace sector,
for which we rely on a significant part of our business, has been faced with
significant reductions to its business due to lack of air travel. Due to the
timing of the COVID-19 outbreak, our new order levels during the year ended
December 31, 2020, and into 2021 have seen substantial reductions which have
materially and adversely affected revenues commencing in our second quarter of
2020, and is anticipated to continue into 2021. While the financial results for
our first quarter of 2020 reflected the initial impact of COVID-19, and the year
ended December 31, 2020 reflected a substantial adverse effect, we are unable to
predict the extent of the impact the pandemic will have on our financial
position and operating results for the 2021 due to numerous uncertainties, but
the impact could be material and adverse during any future period affected
either directly or indirectly by this pandemic. The longer-term impacts from
the outbreak are highly uncertain and cannot be predicted. Our return to
profitability is dependent upon, among other things, the receipt of new
equipment orders, the lessening of the ongoing effects of COVID-19 on our
business and the Aerospace market, improvement in the operations of the
materials business, the consolidation of our Central Islip facilities and sale
of the 555 Building, as well as managing planned capital expenditures and
operating expenses.
At December 31, 2019 we had reduced our employee headcount by 13% to 172 as
compared to December 31, 2018. Since March 16, 2020, as a result of Coronavirus
mandates imposed, we have furloughed a substantial portion of our work force
reducing to levels deemed to support essential services, and continue to assess
this on a weekly basis. During these unprecedented times we are continuing to
evaluate our staffing levels to support the continued operations, including the
level of current and expected orders. As of December 31, 2020, our active
employee headcount has been reduced to approximately 130, a 24% reduction as
compared to December 31, 2019.
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On April 21, 2020, the Company entered into a loan agreement (the "Loan
Agreement") with HSBC Bank USA, National Association pursuant to which the
Company was granted a loan in the principal amount of $2,415,970, pursuant to
the Paycheck Protection Program (the "PPP") under Division A, Title I of the
CARES Act, which was enacted by the United States Congress on March 27, 2020.
The PPP loan, the obligation of which is represented by a note issued by the
Company, matures on April 21, 2022 and bears interest at a rate of 1% per annum.
The note may be prepaid by the Company at any time prior to maturity with no
prepayment penalties. Under the terms of the PPP, all or a portion of the Loan
may be forgiven, based upon payments made in the first twenty-four weeks
following receipt of the proceeds, related to payroll costs, continue group
health care benefits, utilities and mortgage interest on other debt obligations
incurred before February 15, 2020. The Company is in process of filing its
application for forgiveness and anticipates all or substantially all of the PPP
loan to be forgiven.
As a result of the March 27, 2020 CARES Act enactment allowing the carryback of
NOL's five years, the Company recognized a $1.5 million tax benefit. The Company
has collected $.8 million in the year ended December 31, 2020.
2021 Update
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.
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.
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Due to the timing of the COVID-19 outbreak, our new orders during the year ended
December 31, 2020, and into the beginning of 2021 have decreased substantially
which have resulted in substantial reductions in revenues resulting in operating
losses commencing in our second quarter of 2020. The ongoing impact that
COVID-19 has had on our business has made the conditions to operate very
challenging. 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. While we continue to monitor and take
action to reduce our expenses, we have secured a $2.4 million loan under PPP and
have recognized a $1.5 million tax receivable from the NOL 5 year carryback. In
addition, we have decided to sell the 555 Building. Based upon all of these
factors, we believe that our cash and cash equivalent positions and cash flow
from operations will be sufficient to meet our working capital and capital
expenditure requirements for the next twelve months of the filing of this Form
10-K. Should the current environment continue longer or worsen, we will continue
to assess our operations and take actions anticipated to maintain our operating
cash to support the working capital needs, as well as compliance with our loan
covenant.
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.
Our significant estimates include accounting for certain items such as revenues
on long-term contracts recognized on the input method; valuation of inventories
at the lower of cost or realizable value; allowance for doubtful accounts
receivable; valuation of stock-based compensation; estimated lives and
recoverable value of our long-lived assets and certain components of the
deferred income tax provisions which are based on estimates of future taxable
events.
Revenue Recognition
We design, manufacture and sell custom chemical vapor deposition equipment
through contractual agreements. These system sales require us to deliver
functioning equipment that is generally completed within three to eighteen
months from commencement of order acceptance. We recognize revenue over time by
using an input method based on costs incurred as it depicts our progress toward
satisfaction of the performance obligation. Under this method, revenue arising
from fixed price contracts is recognized as work is performed based on the ratio
of costs incurred to date to the total estimated costs at completion of the
performance obligations.
Incurred costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs and depreciation costs. Contract material costs are included in incurred
costs when the project materials have been purchased or moved to work in process
as required by the project's engineering design. Cost based input methods of
revenue recognition require us to make estimates of costs to complete the
projects. In making such estimates, significant judgment is required to evaluate
assumptions related to the costs to complete the projects, including materials,
labor and other system costs. If the estimated total costs on any contract are
greater than the net contract revenues, we recognize the entire estimated loss
in the period the loss becomes known and can be reasonably estimated.
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We have been engaged in the production and delivery of goods on a continual
basis under contractual arrangements for many years. Historically, we have
demonstrated an ability to accurately estimate total revenues and total expenses
relating to our long-term contracts. However, there exist many inherent risks
and uncertainties in estimating revenues, expenses and progress toward
completion, particularly on larger or longer-term contracts. If we do not
estimate the total sales, related costs and progress toward completion on such
contracts, the estimated gross margins may be significantly impacted or losses
may need to be recognized in future periods. Any such resulting changes in
margins or contract losses could be material to our results of operations and
financial condition.
Stock-Based Compensation
We record stock-based compensation in accordance with the provisions set forth
in the Financial Accounting Standard Board ("FASB") Accounting Standards
Codification ("ASC") 718, "Stock Compensation". ASC 718 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.
Long-Lived Assets and Intangibles
Long-lived assets consist primarily of property, plant and equipment.
Intangibles consist of patents, copyrights, intellectual property, licensing
agreements and certifications. 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 ASC 360-10-35, "Impairment or 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. Based upon continued operating losses and our updated
forecasting, the future value of the cash flows of the Tantaline product line is
negative and thus we have recorded an impairment charge of $3.6 million in the
fourth quarter and year ended December 31, 2020. We had no recorded impairment
charges in the consolidated statement of operations during the year ended
December 31, 2019.
Off-Balance Sheet Arrangements
None.
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CVD EQUIPMENT CORPORATION 
