UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 2008
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____ to _____
Commission file number: 1-16525
CVD EQUIPMENT CORPORATION
(Name of Registrant in Its Charter)
New York 11-2621692
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1860 Smithtown Avenue
Ronkonkoma, New York 11779
(Address including zip code of registrant's Principal Executive Offices)
(631) 981-7081
(Registrant's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock, Par value $0.01
(Title of class)
Indicate by check whether the issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether issuer is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act). (check one)
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether issuer is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 4,749,500 shares of Common
Stock, $0.01 par value at August 12, 2008.
------------------------------------------------------------------------------
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
Index
Page
Part I - Financial Information
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2008 (Unaudited) and
December 31, 2007 3
Consolidated Statements of Operations (Unaudited) for the three
and six months ended June 30, 2008 and 2007 4
Consolidated Statements of Cash Flows (Unaudited) for the six
months ended June 30, 2008 and 2007 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3 - Quantitative and Qualitative Disclosures About Market
Risk 17
Item 4T - Controls and Procedures 17
Part II - Other Information 18
Item 1 - Legal Proceedings 18
Item 2 - Changes in Securities and Use of Proceeds 18
Item 3 - Defaults Upon Senior Securities 18
Item 4 - Submission of Matters to a Vote of Security Holders 18
Item 5 - Other Information 18
Item 6 - Exhibits and Reports Filed on Form 8-K 18
Signatures 19
Exhibit Index 20
Certification of Chief Executive Officer 21
Certification of Chief Financial Officer 22
Certification of Chief Executive Officer pursuant to U.S.C. Section 1350 23
Certification of Chief Financial Officer pursuant to U.S.C. Section 1350 24
2
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 2008
(Unaudited) December 31, 2007*
------------------ ------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,167,912 $ 5,110,447
Accounts receivable, net 2,497,663 1,769,265
Investment 251,130 251,130
Cost and estimated earnings in excess
of billings on uncompleted contracts 3,244,370 1,847,288
Inventories 2,890,647 3,015,635
Deferred income taxes - current 103,488 90,774
Other current assets 267,960 379,360
---------------- -----------------
Total Current Assets 12,423,170 12,463,899
Property, plant and equipment, net 7,473,608 5,055,727
Deferred income taxes - non-current 381,382 266,077
Other assets 639,894 1,114,637
Intangible assets, net 73,968 106,566
---------------- -----------------
Total Assets $ 20,992,022 $ 19,006,906
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 279,961 $ 222,193
Accounts payable 1,187,441 517,934
Accrued expenses 1,124,175 1,245,819
Accrued professional fees - related party 17,500 116,165
Deferred revenue -- 47,444
---------------- ---------------
2,609,077 2,149,555
Long-term debt, net of current portion 4,018,743 2,678,421
---------------- ---------------
Total liabilities 6,627,820 4,827,976
---------------- ---------------
Commitments and contingencies - -
Stockholders' Equity
Common stock - $0.01 par value - 10,000,000
shares authorized; issued and outstanding,
4,733,500 at June 30, 2008 and 4,718,500 at
December 31, 2007 47,335 47,185
Additional paid-in-capital 9,751,472 9,592,728
Retained earnings 4,565,395 4,539,017
---------------- ---------------
Total Stockholders' Equity 14,364,202 14,178,930
---------------- ---------------
Total liabilities and stockholders' equity $ 20,992,022 $ 19,006,906
================ ---------------
o Derived from audited financial statements for the year ended December 31,
2007 (see Form 10-KSB Annual Report filed on March 31, 2008 with the
Securities and Exchange Commission).
The accompanying notes are an integral part of the consolidated financial
statements
3
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
----- ---- ---- ----
Revenue $ 4,268,904 $ 3,071,244 $8,312,403 $ 6,882,521
Cost of revenue 3,117,172 1,899,693 5,943,820 4,455,022
--------- --------- --------- ---------
Gross profit 1,151,732 1,171,551 2,368,583 2,427,499
Operating expenses
Selling and shipping 203,902 148,260 385,433 426,570
General and administrative 878,190 780,020 1,897,843 1,543,246
Related party - professional fees 5,000 25,000 17,500 35,000
--------- --------- --------- ---------
Total operating expenses 1,087,092 953,280 2,300,776 2,004,816
--------- --------- --------- ---------
Operating income 64,640 218,271 67,807 422,683
Other income (expense)
Interest income 21,954 34 59,545 61
Interest expense (63,557) (52,300) (104,441) (105,773)
Other income 5,629 34,309 13,517 39,403
--------- --------- --------- ---------
Total other income (expense) (35,974) (17,957) (31,379) (66,309)
--------- --------- --------- ---------
Income before income taxes 28,666 200,314 36,428 356,374
Income tax expense (21,492) (35,387) (10,050) (95,037)
--------- --------- --------- ---------
Net income $ 7,174 $ 164,927 $ 26,378 $ 261,337
========= ========= ========= =========
Basic income per common share $ 0.00 $ 0.05 $ 0.01 $ 0.08
========= ========= ========= =========
Diluted income per common share $ 0.00 $ 0.05 0.01 $ 0.08
========= ========= ========= =========
Weighted average common shares outstanding
basic income per share 4,733,500 3,286,732 4,732,758 3,292,660
Effect of potential common share issuance:
Stock options 31,778 151,480 33,008 139,432
--------- --------- --------- ---------
Weighted average common shares outstanding
diluted income per share 4,765,278 3,438,212 4,765,766 3,432,092
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements
4
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
2008 2007
---------- --------
Cash flows from operating activities
Net income $ 26,378 $ 261,337
Adjustments to reconcile net income to net
cash provided by (used in)
operating activities:
Stock-based compensation expense 137,893 85,268
Depreciation and amortization 250,042 211,638
Deferred tax benefit (128,019) (96,628)
Bad debt provision 17,397 (2,000)
Changes in operating assets and liabilities:
Accounts receivable (745,795) 892,566
Cost and estimated earnings in excess of billings
on uncompleted contracts (1,397,082) (1,070,426)
Inventories 124,988 (199,170)
Other current assets 111,400 (59,951)
Accounts payable 669,507 (84,678)
Accrued expenses (220,309) 98,443
Deferred revenue (47,444) (199,369)
----------- ---------
Net cash (used in) operating activities (1,201,044) (162,970)
----------- ---------
Cash flows from investing activities:
Capital expenditures (2,585,893) (388,435)
Deposits 425,312 13,766
----------- ---------
Net cash (used in) investing activities (2,160,581) (374,669)
----------- ----------
Cash flows from financing activities:
Proceeds received on bank line of credit - net - 375,000
Proceeds from real estate and other loans 2,305,000 139,510
Payments of long-term debt (906,910) (125,591)
Net proceeds from stock options exercised 21,000 91,000
---------- ----------
Net cash provided by financing activities 1,419,090 479,919
Net (decrease) in cash and cash equivalents (1,942,535) (57,720)
Cash and cash equivalents at beginning of period 5,110,447 257,341
---------- ----------
Cash and cash equivalents at end of period $ 3,167,912 $ 199,621
========== ==========
Supplemental disclosure of cash flow
information
Income taxes paid $ 491,495 $ 104,250
Interest paid $ 114,630 $ 101,447
The accompanying notes are an integral part of the consolidated financial
statements
5
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q and
Article 8 of Regulation S-X. They do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary in order to make the interim financials not misleading have been
included and all such adjustments are of a normal recurring nature. The
operating results for the three and six months ended June 30, 2008 are not
necessarily indicative of the results that can be expected for the year ending
December 31, 2008.
The balance sheet as of December 31, 2007 has been derived from the audited
financial statements at such date, but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements.
The accounting policies followed by the Company are set forth in Note 2 to CVD
Equipment Corporation's ("the Company") consolidated financial statements in the
December 31, 2007 Form 10-KSB.
For further information, please refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 2007.
All material intercompany transactions have been eliminated in consolidation.
Certain reclassifications have been made to prior period financial statements to
conform to the current year presentation.
6
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue and Income Recognition
The Company recognizes 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 the Company's estimates
of the percentage-of-completion of 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.
The asset, "Costs and estimated earnings in excess of billings on uncompleted
contracts," represents revenues recognized in excess of amounts billed.
The liability, "Billings in excess of costs on uncompleted contracts" represents
amounts billed in excess of revenues earned.
NOTE 3: UNCOMPLETED CONTRACTS
Costs and estimated earnings in excess of billings on uncompleted contracts are
summarized as follows:
June 30, 2008 December 31, 2007
------------- -----------------
(Unaudited)
Costs incurred on uncompleted contracts $ 2,424,735 $ 1,887,022
Estimated earnings 2,605,893 2,158,386
------------- ----------------
5,030,628 4,045,408
Billings to date (1,786,258) (2,198,120)
------------- ----------------
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 3,244,370 $ 1,847,288
============== ================
7
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4: INVENTORIES
Inventories consist of the following:
June 30, 2008 December 31, 2007
------------- -----------------
(Unaudited)
Raw materials $1,374,550 $ 1,077,756
Work-in-process 1,334,694 1,733,738
Finished goods 181,403 204,141
------------- ------------------
$2,890,647 $ 3,015,635
============= ==================
NOTE 5: FAIR VALUE MEASUREMENTS
Effective January 1, 2008, we adopted SFAS 157, Fair Value Measurements (SFAS
157). SFAS 157 clarifies the definition of fair value, prescribes methods for
measuring fair value, and establishes a fair value hierarchy to classify the
inputs used in measuring fair value as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical
assets or liabilities available at the measurement date.
Level 2 - Inputs are unadjusted quoted prices for similar assets and liabilities
in active markets, quoted prices for identical or similar assets and liabilities
in markets that are not active, inputs other than quoted prices are observable,
and inputs derived from or corroborated by observable market data.
Level 3 - Inputs are unobservable inputs which reflect the reporting entity's
own assumptions on what assumptions the market participants would use in pricing
the asset or liability based on the best available information.
The Company measured the fair value of the equity investment based on the
combination of its best estimate of the fair value of the non-marketable
securities and the equipment. Based on our analysis, the assigned fair value of
the Company's equity investment of approximately $250,000 at June 30, 2008
appears appropriately stated.
The adoption of SFAS No. 157 did not have a material impact on our fair value
measurements.
8
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents our assets and liabilities that are measured at
fair value on a recurring basis and are categorized using the fair value
hierarchy. The fair value hierarchy has three levels based on the reliability of
the inputs used to determine fair value.
Fair Value Measurement at Reporting Date Using
----------------------------------------------
Quoted Prices in
Active Markets
for Identical Significant Other Significant
Assets Observable Inputs Unobservable Inputs
Description June 30, 2008 Level (1) Level (2) Level (3)
----------- ------------- --------- --------- ---------
Equity investment $251,130 $ --- $ --- $251,130
Total Assets $251,130 $ --- $ --- $251,130
======== ========
Liabilities $ --- $ --- $ --- $ ---
Total Liabilities $ --- $ --- $ --- $ ---
NOTE 6: BAD DEBTS
Accounts receivables are presented net of an allowance for doubtful accounts of
$29,985 and $12,588 as of June 30, 2008 and December 31, 2007 respectively. The
allowance is based on prior experience and management's evaluation of the
collectibility of accounts receivable. Management believes the allowance is
adequate. However, future estimates may change based on changes in economic
conditions.
NOTE 7: SHORT TERM BORROWINGS
On April 22, 2008, the Company 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 the Company of up to $5 million dollars until May 1, 2011, at which time it
will be subject to renewal. The loan agreement amends and supersedes the
Company's previous $2 million dollar 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 the Company's assets. The amount available under this
agreement, was $4,840,000 as of June 30, 2008. The amount available under the
prior facility as of June 30, 2007 was $1,220,000. As of June 30, 2008 , the
Company is in full compliance with the terms of the Revolving Credit Agreement.
9
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8: STOCK-BASED COMPENSATION EXPENSE
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 employees prior to
January 1, 2006 that remain unvested at that time. Under this method of
adoption, no restatement of prior periods is made.
During the three and six months ended June 30, 2008 and June 30, 2007, the
Company recorded as part of selling and general administrative expense,
approximately $69,000 and $138,000 and $44,000 and $85,000 respectively for the
cost of employee and director services received in exchange for equity
instruments based on the grant-date fair value of those instruments in
accordance with the provisions of SFAS No. 123-R.
NOTE 9: INCOME TAXES
The (benefit) expense for income taxes includes the following:
Six Months Ended June 30,
2008 2007
--------- ---------
Current:
Federal $ 100,199 $ 166,981
State 37,870 24,684
--------- ---------
Total Current Provision 138,069 191,665
Deferred:
Federal (98,043) (88,423)
State (29,976) ( 8,205)
---------- ---------
Total Deferred (Benefit) (128,019) (96,628)
---------- ---------
$ 10,050 $ 95,037
========== =========
The majority of the Company's state and all of the federal net operating loss
(NOL'S) carry forwards have been utilized through June 30, 2008. For the three
and six months ended June 30, 2008, the Company recorded a current income tax
expense of approximately $92,000 and $138,000 respectively, that was reduced by
a deferred tax benefit of $70,000 and $128,000 respectively.
10
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10: EARNINGS PER SHARE
We have applied SFAS No. 128, "Earnings Per share" in its calculation and
presentation of earnings per share - "basic" and "diluted". Basic earnings per
share are computed by dividing net earnings available to common shareholders
(the numerator) by the weighted average number of common shares (the
denominator) for the period presented. The computation of diluted earnings per
share is similar to basic earnings per share, except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potentially dilutive common shares had been issued.
Stock options to purchase 248,500 shares of common stock were outstanding and
121,125 were exercisable during the six months ended June 30, 2007. Stock
options to purchase 441,000 shares were outstanding and 234,125 were exercisable
during the six months ended June 30, 2008, However, during the six months ended
June 30, 2008, only 84,125 were included in the computation of diluted earnings
per share because the option exercise prices were less than the average market
price of our common stock during these periods.
The dilutive potential common shares on warrants and options is calculated in
accordance with the treasury stock method, which assumes that proceeds from the
exercise of all warrants and options are used to repurchase common stock at
market value. The amount of shares remaining after the proceeds are exhausted
represents the potential dilutive effect of the securities.
The following table sets forth our computation of basic and diluted net income
per share:
Three months ended June 30,
---------------------------
2008 2007
---- ----
Numerator:
Net income used in calculation of basic and diluted
earnings per share $ 7,174 $ 164,927
----------- -----------
Denominator:
Weighted-average common shares outstanding used
in calculation of basic earnings per share 4,733,500 3,286,732
Effect of dilutive securities:
Stock options and equivalents 31,778 151,480
----------- ------------
Weighted-average common shares used in calculation
of diluted earnings per share 4,765,278 3,438,212
=========== =============
Net income per share:
Basic $ 0.00 $ 0.05
Diluted $ 0.00 $ 0.05
11
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10: EARNINGS PER SHARE (continued)
Six months ended June 30,
---------------------------
2008 2007
---- ----
Numerator:
Net income used in calculation of basic and diluted
earnings per share $ 26,378 $ 261,337
----------- -----------
Denominator:
Weighted-average common shares outstanding used
in calculation of basic earnings per share 4,732,758 3,292,660
Effect of dilutive securities:
Stock options and equivalents 33,008 139,432
----------- -----------
Weighted-average common shares used in calculation
of diluted earnings per share 4,765,766 3,432,092
=========== ===========
Net income per share:
Basic $ 0.01 $ 0.08
Diluted $ 0.01 $ 0.08
12
Item 2. Management's Discussion and Analysis or Plan of Operation.
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. 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.
Results of Operations
Three and Six Months Ended June 30, 2008 vs. Three and Six Months Ended June 30,
2007
Revenue
Revenue for the three and six month period ended June 30, 2008 was approximately
$4,269,000 and $8,312,000 respectively as compared to $3,071,000 and $6,883,000
respectively for the three and six month periods ended June 30, 2007, an
increase of 39.0% and 20.8% respectively. We attribute the increase to an
increase in selling effort for all of our products. The proceeds received during
the latter half of 2007, as a result of the sale of our common stock, has
allowed us to hire additional personnel, and enabled our key personnel to focus
their efforts on selling into our targeted market segments.
Gross Profit
The Company generated gross profits of approximately $1,152,000 and $2,369,000
respectively resulting in gross profit margins of 27.0 % and 28.5% respectively
for the three and six months ended June 30, 2008 as compared to gross profits of
approximately $1,171,000 and $2,427,000 respectively resulting in gross profit
margins of 38% and 35.3% respectively for the three and six months ended June
30, 2007. The decrease in gross profit is primarily attributable to an increase
in engineering and production personnel to support our increased orders, the
expansion of our First Nano laboratory and new product development costs in the
Nanomaterials, Energy and Semiconductor fields.
13
Selling, General and Administrative Expenses
Selling and shipping expenses for the three months ended June 30, 2008 and 2007
were approximately $204,000 and $148,000 respectively, representing a 37.5%
increase versus the prior period. This increase is primarily attributable to an
increase in sales commissions earned during the current period for sales that
were concluded through efforts by our outside sales representatives.
Selling and shipping expenses for the six months ended June 30, 2008 were
approximately $385,000 compared to $427,000 for the six months ended June 30,
2007. This decrease of 9.8% is primarily attributable to the Company's reduced
attendance at trade shows and overall reduction in sales commission expense
during the six month period.
The Company incurred approximately $883,000 of general and administrative
expenses during the three months ended June 30, 2008, compared to the
approximately $805,000 incurred during the three months ended June 30, 2007.
This represents an increase of 9.7% or approximately $80,000 which is primarily
attributable to the costs associated with employee recruitment efforts, costs
associated with the new facility purchased earlier this year, increased payroll
and benefit costs, general insurance, stock-based compensation and investor
relations costs which were partially offset with a decrease in legal fees.
The Company incurred approximately $1,915,000 of general and administrative
expenses during the six months ended June 30, 2008, compared to the
approximately $1,578,000 of general and administrative expenses incurred in the
six months ended June 30, 2007, representing an increase of approximately
$337,000 or 21.4%. $168,000 of this increase can be attributed to additional
contributions required as a result of the findings of a forensic audit performed
on the Manufacturing Industry Workers' Compensation Self-Insurance Trust Fund
(the "Fund") of which the Company was a member from January 2000 through March
2006. The Company is no longer a member of the Fund. The Fund was established to
enable the participating employers to self insure their workers' compensation
liability exposure as provided for under the Workers' Compensation Laws of the
State of New York. Under the terms of the agreement, the Company is jointly and
severally liable for the expenses and obligations of the Fund and for the
workers' compensation liability of all participating employers incurred while a
member. The Company was advised that certain adjustments were necessary to
comply with New York State Workers' Compensation Board regulatory guidelines for
Group Self Insurance Trusts. The contributions previously charged have not been
adequate to cover Fund expenses including future claims. As a result, the
Company was advised that additional contributions of approximately $168,000 are
required, which the Company expensed in full during this period. There may be
additional contributions necessary as a result of any outstanding residual
liability for any given contribution year. The Company is accruing an additional
$5,000 per quarter for this potential liability. Additionally, the Company
incurred increased costs to support our continued sales growth.
14
Operating Income
As a result of the foregoing factors, operating income was approximately $65,000
and $68,000 for the three and six months ended June 30, 2008 respectively. This
represents a decrease of 70.2% and 83.9% compared to operating income of
$218,000 and $423,000 respectively for the three and six month periods ended
June 30, 2007.
Interest Expense, Net
Interest income for the three and six months ended June 30, 2008 was
approximately $22,000 and $60,000 respectively, compared to $0 for the three and
six months ended June 30, 2007. This is a result of the temporary investment of
certain net capital proceeds from the sale of the Company's common stock in
2007. Interest expense for the three and six months ended June 30, 2008 was
$64,000 and $104,000 respectively, compared to approximately $52,000 and
$106,000 for the three and six months ended June 30, 2007. The primary source of
this interest expense is from the mortgages on the three buildings that we own.
The increase for the three months ended June 30, 2008 compared to the three
months ended June 30, 2007 is attributable to the interest on the mortgage on
the building we purchased in February, 2008. As a result of equipment purchases,
the Company has utilized $160,000 of its Revolving Credit Facility and converted
it into term loans.
Other Income
Other income during the three months ended June 30, 2008 was approximately
$6,000 compared to approximately $34,000 for the three months ended June 30,
2007. This was primarily the result of the receipt of $28,000 in 2007 which was
previously written off as uncollectible in 2004.
Other income during the six months ended June 30, 2008 was approximately $14,000
compared to approximately $39,000 for the corresponding period one year ago.
Income Taxes
For the three and six months ended June 30, 2008, the Company recorded a current
income tax expense of approximately $92,000 and $138,000 respectively, that was
reduced by the realization of the deferred tax benefits of approximately $70,000
and $128,000.
Net Income
The Company reported net income of approximately $7,000 for the three month
period ended June 30, 2008 compared to net income of $165,000 for the same
period, in 2007. This decrease was primarily attributable to approximately
$200,000 of expenses incurred from an increase in the number of engineering and
production personnel employed by the Company in response to both the increased
orders received for the Company's products and the costs associated with the
Company's expansion growth and new product development in the Nanomaterials,
Energy, Solar and Semiconductor fields.
15
For the six month period ended June 30, 2008, the Company reported net income of
approximately $26,000 compared to net income of $261,000 for the six months
ended June 30, 2007. As previously discussed, the decreased net income in 2008
versus 2007 is attributable to the hiring of additional personnel and associated
costs related to our increased order levels, expansion and product development
as well as the audit assessment of $168,000 for workers' compensation
contributions for the years 2000 through 2006.
Liquidity and Capital Resources
As of June 30, 2008, the Company had aggregate working capital of approximately
$9,814,000 and cash and cash equivalents of $3,168,000 compared to $10,314,000
and $5,110,000 at December 31, 2007, a decrease of $500,000 and $1,942,000
respectively. The decrease in cash and cash equivalents was primarily the result
of funding the uncompleted contracts, increased by approximately $1,398,000, an
increase in accounts receivable of approximately $746,000 partially offset by an
increase in accounts payable of $670,000.
Accounts receivable, net as of June 30, 2008 was $2,498,000 compared to
$1,769,000 as of December 31, 2007. This increase is attributable to the timing
of shipments and customer payments.
As of June 30, 2008 the Company's backlog was approximately $4,017,000, a
decrease of $1,070,000 or 21.0% compared to $5,087,000 at December 31, 2007.
Timing for completion of the backlog varies depending on the product mix,
however, there is generally a one to six month lag in the completion and
shipping of backlogged product. Backlog from quarter to quarter can vary based
on the timing of order placements and shipments.
On April 22, 2008, the Company entered into a three year Modified and Restated
Revolving Credit Agreement with Capital One, N.A., successor by merger to North
Fork Bank pursuant to which the bank has agreed to make revolving loans to the
Company of up to $5 million until May 1, 2011, at which time it will be subject
to renewal. The loan agreement amends and supersedes the Company's 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%. Borrowings are collateralized by
the Company's assets.
On June 30, 2008, the Company 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 incurred by the Company. 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 premises, all of
the Company's monies, deposits or other sums held by the Bank on deposit, the
Agreement, an assignment of the leases and rents from the premises, a lien on
16
the Company's personal property, and $500,000 of the proceeds of a life
insurance policy which is owned by the Company and issued on the life of the
Company's Chief Executive Officer, Leonard A. Rosenbaum.
The Company believes that based on its historical growth rate, its cash and cash
equivalents position at June 30, 2008 and available credit facilities, the
Company's funds at June 30, 2008 will be sufficient to meet its working capital
and investment requirements for the next twelve months.
However, we anticipate the business will grow at a faster rate. This may require
additional funding. For this reason, as well as other reasons that arise from
time to time, we may consider raising capital through equity or debt financings.
Any decision to raise additional capital, as well as the determination of the
appropriate vehicle for doing so, will depend on market conditions, order
levels, opportunities presented to us and other factors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4T. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company maintains a system of disclosure controls and procedures (as defined
in Rule 13a-15(e) under the Exchange Act). As required by Rule 13a-15(b) under
the Exchange Act, management of the Company, under the direction of the
Company's Chief Executive Officer and Chief Financial Officer, reviewed and
performed an evaluation of the effectiveness of design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Exchange Act) as of the end of the period covered by this Report. Based on
that review and evaluation, the Chief Executive Officer and Chief Financial
Officer, along with the management of the Company, have determined that as of
end of the period covered by this Report, the disclosure controls and procedures
were and are effective.
Changes in Internal Controls
There were no significant changes in the Company's internal controls over
financial reporting that occurred during the six months ended June 30, 2008 that
have materially affected, or are reasonably likely to materially affect, the
internal controls over financial reporting.
Limitations on the Effectiveness of Controls
We believe that a control system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the control systems are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
17
CVD EQUIPMENT CORPORATION
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None.
Item 6. Exhibits and Reports Filed on Form 8-K
(a) Exhibits filed with this report:
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer pursuant to U.S.C. Section 1350
32.2 Certification of Chief Financial Officer pursuant to U.S.C. Section 1350
(b) Reports on Form 8-K
None
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 14th day of August 2008.
CVD EQUIPMENT CORPORATION
By: /s/ Leonard A. Rosenbaum
--------------------------
Leonard A. Rosenbaum
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Glen R. Charles
--------------------------
Glen R. Charles
Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
31.1 Certification of Chief Executive Officer *
31.2 Certification of Chief Financial Officer *
32.1 Certification of Chief Executive Officer pursuant to U.S.C. Section 1350*
32.2 Certification of Chief Financial Officer pursuant to U.S.C. Section 1350*
* Filed herewith
20
Exhibit 31.1
Certifications of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Leonard A. Rosenbaum, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CVD Equipment
Corporation;
2. Based upon my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based upon my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
report is being prepared; b. Designed such internal controls
over financial reporting, or caused such internal controls
over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance
with generally accepted accounting principles; c. Evaluated
the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this
report based on such evaluation; and d. Disclosed in this
report any change in the registrant's internal control over
financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrants' board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Dated: August 14, 2008
/s/ Leonard A. Rosenbaum
----------------------------------------------
President, Chief Executive Officer and Director
21
Exhibit 31.2
Certifications of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Glen R. Charles, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CVD Equipment
Corporation;
2. Based upon my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based upon my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b. Designed such internal controls over financial reporting, or
caused such internal controls over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrants' board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls over financial reporting.
Dated: August 14, 2008
/s/ Glen R. Charles
----------------------------------
Chief Financial Officer
22
Exhibit 32.1
Certification of Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of2002
I, Leonard A. Rosenbaum, President and Chief Executive Officer of CVD Equipment
Corporation, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge,
the quarterly report on Form 10-Q for the period ending June 30, 2008 of CVD
Equipment Corporation (the "Form 10-Q") fully complies with the requirements of
Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 and the
information contained in the Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of CVD Equipment
Corporation.
Dated: August 14, 2008 /s/ Leonard A. Rosenbaum
------------------------------
Leonard A. Rosenbaum
Chief Executive Officer
(Principal Executive Officer)
23
Exhibit 32.2
Certification of Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
I, Glen R. Charles, Chief Financial Officer of CVD Equipment Corporation, hereby
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to my knowledge, the quarterly report on
Form 10-Q for the period ending June 30, 2008 of CVD Equipment Corporation (the
"Form 10-Q") fully complies with the requirements of Section 13 (a) or 15 (d) of
the Securities Exchange Act of 1934 and the information contained in the Form
10-Q fairly presents, in all material respects, the financial condition and
results of operations of CVD Equipment Corporation.
Dated: August 14, 2008 /s/ Glen R. Charles
---------------------------------
Glen R. Charles
Chief Financial Officer
(Principal Financial Officer)
24