Item 2.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
Except for historical information contained herein, this “Management
’s Discussion and Analysis o
f
Financial Condition and Results of
Opera
tions
” 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.
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.
Results of Operations
Three Months Ended
September 30, 2017 vs. Three Months Ended September 30, 2016
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
September
30, 2016
|
|
|
Change
|
|
|
% Change
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CVD (net of eliminations)
|
|
$
|
8,833
|
|
|
$
|
4,254
|
|
|
$
|
4,579
|
|
|
|
107.6
|
|
SDC (net of eliminations)
|
|
|
1,999
|
|
|
|
630
|
|
|
|
1,369
|
|
|
|
217.3
|
|
Total Revenue
|
|
|
10,832
|
|
|
|
4,884
|
|
|
|
5,948
|
|
|
|
121.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
|
|
6,229
|
|
|
|
3,192
|
|
|
|
3,037
|
|
|
|
95.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
4,603
|
|
|
|
1,691
|
|
|
|
2,912
|
|
|
|
172.2
|
|
Gross Margin
|
|
|
42.5
|
%
|
|
|
34.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
158
|
|
|
|
150
|
|
|
|
8
|
|
|
|
5.3
|
|
Selling and shipments
|
|
|
345
|
|
|
|
261
|
|
|
|
84
|
|
|
|
32.2
|
|
General and administrative
|
|
|
2,209
|
|
|
|
1,675
|
|
|
|
534
|
|
|
|
31.9
|
|
Total operating expenses
|
|
|
2,712
|
|
|
|
2,086
|
|
|
|
626
|
|
|
|
30.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
/(loss)
|
|
|
1,890
|
|
|
|
(395
|
)
|
|
|
2,285
|
|
|
|
578.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
14
|
|
|
|
106
|
|
|
|
(92
|
)
|
|
|
(86.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
I
ncome/(loss) before taxes
|
|
|
1,904
|
|
|
|
(289
|
)
|
|
|
2,193
|
|
|
|
758.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
/(benefit)
|
|
|
508
|
|
|
|
(204
|
)
|
|
|
712
|
|
|
|
349.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss)
|
|
|
1,396
|
|
|
|
(85
|
)
|
|
|
1,481
|
|
|
|
1,742.4
|
|
Revenue
Our revenue for
the three months ended September 30, 2017 was $10.8 million compared to $4.9 million for the three months ended September 30, 2016, resulting in an increase of $5.9 million or 121.8%, which was primarily attributable to the work performed on the increase in orders received over the past 15 months. One customer in the aerospace industry represented approximately 59% and 43% of our revenue for the three months ended September 30, 2017 and September 30, 2016, respectively. We are continuing to receive additional follow-on business from that customer as well as receiving additional orders and opportunities with new and other current customers. The mix and type of customers, and sales to any single customer, may vary significantly from quarter to quarter and from year to year. If any of our significant customers do not place orders, or they substantially reduce, delay or cancel orders, we may not be able to replace the business in a timely manner or at all, which could have a material adverse effect on our results of operations and financial condition. The SDC division increased their revenue from third party customers to $2.0 million for the three months ended September 30, 2017, an increase of 217.3% compared to revenue of $630,000 for the three months ended September 30, 2016. The increase is primarily attributable to a significant order from one customer that comprised approximately 57% of the three month total.
Gross Profit
W
e generated a gross profit of $4.6 million with a gross profit margin of 42.5% for the three months ended September 30, 2017 compared to a gross profit of $1.7 million and a gross profit margin of 34.6% for the three months ended September 30, 2016. The increased gross profit and gross margin was the result of both greater overall revenue and the product mix of orders being worked on.
Research and Development,
Selling, General and Administrative Expenses
Internal r
esearch and development expenses for the three months ended September 30, 2017 amounted to $158,000 compared to $150,000 for the three months ended September 30, 2016, as we increased the level of investment in research and development for our products.
Selling and shipping expenses for the three months ended
September 30, 2017 was $345,000 compared to $261,000 for the three months ended September 30, 2016 which represented an increase of 32.2% which was primarily a result of additional personnel costs related to CVD Materials, including its recently established CVD Tantaline ApS subsidiary, during the current period.
We incurred approximately $
2.2 million of general and administrative expenses or 20.4% of our revenue for the three months ended September 30, 2017 compared to approximately $1.7 million or 34.7% of our revenue during the three months ended September 30, 2016. This increase of 31.9% was primarily a result of additional personnel and occupancy costs related to CVD Materials, including its recently established CVD Tantaline ApS subsidiary, during the current period.
Operating
i
ncome
/(loss)
As a result of the
increased revenues and higher gross margins, we achieved income from operations of $1.9 million for the three months ended September 30, 2017 compared to having incurred a loss from operations of $395,000 for the three months ended September 30, 2016.
Other income
During the three months ended September 30, 2017 our interest income exceeded our interest expense by $14,000
. During the three months ended September 30, 2016, we received a payment from our insurance company on a property damage claim the exceeded the repair costs by $119,000, which was partially offset by our interest expense exceeding our interest income.
Income Taxes
We incurred an income tax expense of $5
08,000 for the three months ended September 30, 2017. For the three months ended September 30, 2016, we did not incur any current income tax expense and recorded $204,000 of deferred tax benefits primarily due to the tax loss that we incurred during the period.
Net
income/(loss)
We reported
net income of approximately $1.4 million or $0.22 per share basic and diluted for the three months ended September 30, 2017 compared to a net loss of $85,000 or ($0.01) per share basic and diluted for the three months ended September 30, 2016
Nine
Months Ended September 30, 2017 vs. Nine Months Ended September 30, 2016
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
|
Change
|
|
|
% Change
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CVD (net of eliminations)
|
|
$
|
26,741
|
|
|
$
|
11,584
|
|
|
$
|
15,157
|
|
|
|
130.8
|
|
SDC (net of eliminations)
|
|
|
4,571
|
|
|
|
2,047
|
|
|
|
2,524
|
|
|
|
123.3
|
|
Total Revenue
|
|
|
31,312
|
|
|
|
13,631
|
|
|
|
17,681
|
|
|
|
129.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
|
|
18,128
|
|
|
|
9,912
|
|
|
|
8,216
|
|
|
|
82.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
13,184
|
|
|
|
3,719
|
|
|
|
9,465
|
|
|
|
95.5
|
|
Gross Margin
|
|
|
42.1
|
%
|
|
|
27.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
339
|
|
|
|
305
|
|
|
|
34
|
|
|
|
11.1
|
|
Selling and shipping
|
|
|
984
|
|
|
|
806
|
|
|
|
178
|
|
|
|
22.1
|
|
General and administrative
|
|
|
6,423
|
|
|
|
5,145
|
|
|
|
1,276
|
|
|
|
24.8
|
|
Gain on settlement
|
|
|
---
|
|
|
|
(629
|
)
|
|
|
629
|
|
|
|
|
|
Total operating expenses
|
|
|
7,746
|
|
|
|
5,627
|
|
|
|
2,117
|
|
|
|
37.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
/(loss)
|
|
|
5,438
|
|
|
|
(1,908
|
)
|
|
|
7,346
|
|
|
|
385.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
5
|
|
|
|
82
|
|
|
|
(77
|
)
|
|
|
(93.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
I
ncome/(loss) before taxes
|
|
|
5,443
|
|
|
|
(1,826
|
)
|
|
|
7,269
|
|
|
|
398.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
/(benefit)
|
|
|
1,766
|
|
|
|
(908
|
)
|
|
|
2,674
|
|
|
|
294.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
/(loss)
|
|
|
3,677
|
|
|
|
(918
|
)
|
|
|
4,595
|
|
|
|
500.5
|
|
Revenue
Our
revenue for the nine months ended September 30, 2017, totaled $31.3 million, an increase of $17.7 million or 129.7% compared to $13.6 million for the nine months ended September 30, 2016.
This increase was primarily attributable to the work performed on the increase in orders received over the past 15 months. Our largest customer represented approximately 65% and 40% of our revenue for the nine months ended September 30, 2017 and September 30, 2016, respectively.
We are continuing to receive additional follow-on business from that customer as well as receiving additional orders and opportunities with new and other current customers. The mix and type of customers, and sales to any single customer, may vary significantly from quarter to quarter and from year to year. If any of our significant customers do not place orders, or they substantially reduce, delay or cancel orders, we may not be able to replace the business in a timely manner or at all, which could have a material adverse effect on our results of operations and financial condition.
R
evenue from the SDC division for the nine months ended September 30, 2017 reached $4.6 million compared to $2.0 million for the nine months ended September 30, 2016 an increase of 123.3%. One customer accounted for approximately 29% of the total.
Gross Profit
During the
nine months ended September 30, 2017, we generated a gross profit of $13.2 million resulting in a gross profit margin of 42.1% as compared to the nine months ended September 30, 2016 when our gross profit was $3.7 million with a gross profit margin of 27.3%
.
The increase in gross profit and gross margin was the result of a combination of greater overall revenue and product mix of orders being worked on.
Research and Development, Selling and General and Administrative Expenses
Internal
research and development expenses for the nine months ended September 30, 2017 were $339,000 compared to $305,000 for the nine months ended September 30, 2016 as we begin to ramp our efforts of independently conducted research and development activities.
Selling and shipping expenses for the
nine months ended September 30, 2017 and 2016 were $984,000 and $806,000, respectively, an increase of 22.1%, which was a result of the additional personnel costs associated with the start-up activity in CVD Materials.
General and administrative expenses totaled $
6.4 million and $5.1 million for the nine months ended September 30, 2017 and 2016, respectively, an increase of $1.3 million or 24.8%. The increase is primarily attributable to the additional personnel and occupancy costs associated with the start-up activity in CVD Materials including its recently established CVD Tantaline ApS subsidiary.
Gain on
S
ettlement
The Company has included in its financial statements for the nine months ended September 30, 2016, the results of a negotiated reduction to legal fees and expenses previously accrued in connection with the settlement of the Taiwan Glass litigation. The final negotiated sum was $1.1 million, resulting in a reduction of the amount that was previously billed and accrued and a gain on the statement of operations of $629,000 during the period.
Operating
Income/(loss)
As a result of the
increased revenues and higher gross margin, for the nine months ended September 30, 2017, we achieved operating income of $5.4 million compared to a loss from operations of $1.9 million for the nine months ended September 30, 2016.
Other
Income
During the nine months ended September 30, 2017 our interest income exceeded our interest expense by $5,000.
During the nine months ended September 30, 2016, we received a payment from our insurance company on a property damage claim the exceeded the repair costs by $119,000, which was partially offset by our interest expense exceeding our interest income.
Income
Taxes
For the nine months ended September 30, 2017 we incurred current income tax expense of $1,
207,000 and deferred income tax expense of $559,000 for an effective tax rate of 32.4% compared to the nine months ended September 30, 2016, when we did not incur any current income tax expense, received a refund of $71,000 as a result of an overpayment on the 2015 federal corporate tax return and recorded $837,000 of deferred tax benefits primarily due to the tax loss we incurred for the current period.
Net
Income/(loss)
We reported
net income of $3.7 million or $0.58 per share basic and diluted for the nine months ended September 30, 2017 compared to a net loss of $0.9 million or ($0.15) per share basic and diluted for the nine months ended September 30, 2016.
Inflation
Inflation has not materially impacted the operations of our Company.
Liquidity and Capital Resources
As of
September 30, 2017 we had working capital of $24.8 million compared to $19.9 million at December 31, 2016, an increase of $4.9 million primarily as a result of an increase in accounts receivables and a reduction in the billing in excess of costs and estimated earnings on contracts in progress. This was partially offset by a decrease in cash and cash equivalents. As of September 30, 2017 our cash and cash equivalents were $17.2 million, compared to $21.7 million at December 31, 2015, a decrease
of $4.5 million. This decrease was primarily the result of costs incurred and paid on orders currently being worked on that we have previously been paid.
Accounts receivable, net, as of
September 30, 2017 and December 31, 2016 were $4.1 million and $0.6 million respectively. One customer represented 23.2%, another customer represented 14.2% and a third customer represented 10.0% of the accounts receivable balance at September 30, 2017.
At September 30, 2017
, the number of full time employees increased to 204 employees compared to 173 at December 31, 2016.
We believe
that our cash and cash equivalents position and cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months.
We may also raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies or products. In addition, we may elect to raise additional funds even before we need them if the conditions for raising capital are favorable.
Any equity or equity-linked financing could be dilutive to existing shareholders.
Off-
B
alance
S
heet
A
rrangements.
We have no off-balance sheet arrangements at this time.