CVD EQUIPMENT CORP 10-Q

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 of Financial Condition and Results of Operations” contains forward – looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. These statements involve known and unknown risks and uncertainties that may cause our actual results or outcomes to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements are based on various factors and are 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: ● uncertainty as to our future profitability; ● competition in our existing and potential future product lines of business, including our PVT150 / PVT200 systems; ● uncertainty as to our ability to develop new products for the high power electronics market including our plan to develop a PVT200 to grow silicon carbide crystals for 200 mm wafers; ● our ability to obtain financing on acceptable terms if and when needed; ● our ability to attract and retain key personnel and employees; and ● uncertainty as to our ability to adequately obtain raw materials and on commercially reasonable terms. 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. We assume 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 performance is no guaranty of future results. 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. 20 Executive Summary We have served the advanced materials markets with chemical vapor and thermal process equipment for over 40 years. CVD designs, develops, and manufactures a broad range of chemical vapor deposition, gas control, and other state-of-the-art equipment and process solutions used to develop and manufacture materials and coatings for industrial applications and research. To learn more about CVD’s systems and offerings, visit www.cvdequipment.com. During the three months ended March 31, 2024: ● Revenue declined by $3.8 million or 43.4% as the first quarter of 2023 benefited from a large PVT150 order. ● Gross margin declined by $1.6 million or 64.7% due to lower gross profit margins on contracts in progress and overall lower revenues as compared to the prior period quarter. ● Total bookings for the first quarter of 2024 were approximately $13.6 million compared to bookings of $2.9 million in the first quarter of 2023. ● Bookings in 2024 included a $10.0 million multisystem order from an industrial customer that will be used to deposit a silicon carbide protective coating on OEM components. ● During the first quarter of 2024, we received an order from an additional customer for our new PVT200 system that will be used to grow silicon carbide crystals for the manufacture of 200 mm wafers. ● Increased our backlog from $18.4 million at December 31, 2023 to $27.1 million. ● Cash balance at March 31, 2024 was $11.9 million. Business Update Our core strategy is to focus on growth market applications in end markets related to the “electrification of everything,” aerospace and industrial applications. The phrase “electrification of everything” refers to the shift from fossil fuels to the use of electricity to power devices, buildings, electric vehicles (“EVs”), and many other applications. With respect to aerospace, our systems are being used by our customers to produce ceramic matrix composite materials (“CMCs”) that will be used in next generation gas turbine jet engines with the objective of reducing jet fuel consumption and contributing to the decarbonization of that industry. Our current strategy yielded multisystem orders of PVT150 equipment that was delivered to one company that manufactures silicon carbide wafers in 2023 and 2022. In February 2024, we received an order from an additional customer for our new PVT200 system used to grow silicon carbide crystals for the manufacture of 200 mm wafers. This represents our second customer for our PVT equipment. This customer plans to evaluate our equipment for potential additional purchases of PVT equipment. We have also received orders from OneD Battery Materials in 2023, a company that is engaged in providing battery nanomaterials. 21 Both technologies are essential for the support of the EV market. These systems should provide us with standard product offering to continue to support the EV focused market as well as energy storage, power conversion and power transmission. We plan to expand our product offerings in the power electronics market to build off the introduction of the PVT150 and PVT200 systems. We are also evaluating our ability to provide other equipment used in the manufacturing process of silicon carbide wafers. During 2022, we also received an order from an aerospace company for a production chemical vapor infiltration (CVI) system that will be used to manufacture CMCs for gas turbine jet engines. In 2023, we received an order from the same aerospace company for an additional three CVI systems. In February 2024, we received a multisystem order from an industrial customer for approximately $10 million that will be used for depositing a silicon carbide protective coating on OEM components. We have generally gained new customers through our industry reputation, as well as limited print advertising and trade show attendance. We have increased the number of trade shows and industry conferences. In addition, we added to our sales and marketing team in 2022 and expanded our sales team in early 2023. During the three months ended March 31, 2024, new order bookings approximated $13.6 million, representing an increase of $10.7 million as compared to bookings of $2.9 million in three months ended March 31, 2023. Our backlog increased from $18.4 million at December 31, 2023 to $27.1 million at March 31, 2024 as revenues were in excess of orders by approximately $8.7 million. Historically, our orders have fluctuated based on end user market conditions, adoption of our new products and acceptance of our products. The order rate as well as other factors in our manufacturing process ultimately impacts the timing of revenue recognition, whether accounted for over time or at a point in time. Accordingly, orders received from customers and the corresponding revenue recognized may fluctuate from quarter to quarter. The sales cycle for our equipment is typically six months, but can range up to twelve to eighteen months, depending on the application and product stage of the equipment. The order cycle to manufacture and test a system also will vary from six to eighteen months for our CVD Equipment segment and two to twelve months for our SDC segment, depending on system complexity and magnitude of the system. 22 Results of Operations Three Months Ended March 31, 2024 and 2023 The following table presents revenue and expense line items reported in our condensed consolidated statements of operations for the three months ended March 31, 2024 and 2023 and the period-over-period dollar and percentage changes for those line items (in thousands, except percentages). March 31 2024 2023 Change Percent Revenue $ 4,922 $ 8,695 $ (3,773 ) (43 )% Cost of revenue 4,063 6,261 (2,198 ) (35 )% Gross profit 859 2,434 (1,575 ) (65 )% Gross profit percentage 17.5 % 28.0 % Operating expenses: Research and development 746 602 144 24 % Selling 419 419 - 0 % General and administrative 1,317 1,600 (283 ) (18 )% Total operating expenses 2,482 2,621 (139 ) (5 )% Operating loss (1,623 ) (187 ) (1,438 ) (769 )% Other income (expense): Interest income 157 120 37 31 % Interest expense (6 ) (6 ) - - Foreign exchange income - 27 (27 ) * Other income - 8 (8 ) * Total other income, net 151 149 2 1 % Loss before income taxes (1,472 ) (38 ) (1,434 ) * Income tax expense - 2 2 * Net loss $ (1,472 ) $ (40 ) $ (1,432 ) * Revenue CVD Equipment $ 2,947 $ 5,845 $ (2,898 ) (50 )% SDC 1,931 2,312 (381 ) (16 )% CVD Materials 59 667 (608 ) (91 )% Intersegment sales elimination (15 ) (129 ) 114 * Total $ 4,922 $ 8,695 $ (3,773 ) (43 )% * Not meaningful 23 Revenue Our revenue for the three months ended March 31, 2024 was $4.9 million compared to $8.7 million for the three months ended March 31, 2023, a decrease of 43%. The decrease in revenue versus the prior year period was primarily attributable to lower revenue of $2.9 million from the CVD Equipment segment, a $0.3 million decrease in revenue from our SDC segment and a $0.6 million decrease from the CVD Materials segment due to the disposition of Tantaline in May 2023 and the wind down of MesoScribe’s operations. The decrease in CVD Equipment revenue in the period was principally the result of the recognition of revenue associated with our PVT150 systems in the prior period as compared to no such revenue in the current period. Revenue related to PVT150 systems sold to one customer for the three months ended March 31, 2023 represented 28.3% of our total revenues and 42.2% of CVD Equipment segment revenues. Revenue from one aerospace customer for the three months ended March 31, 2024 represented 29.6% of our total revenues and 49.5% of CVD Equipment segment revenues. The revenue contributed by the CVD Equipment segment for the three months ended March 31, 2024 of $2.9 million represented 60% of overall revenue as compared to $5.8 million or 67% of overall revenue for the three months ended March 31, 2023. The decrease in revenues of $2.9 million or 50% resulted principally due to a contract for PVT150 systems which was completed in 2023. The revenue contributed by the SDC segment for the three months ended March 31, 2024 of $1.9 million represented 40% of overall revenue as compared to $2.2 million or 25% of overall revenue for the three months ended March 31, 2023. Revenue for our SDC segment decreased by $0.3 million or 12% due to lower orders of SDC’s gas and chemical delivery system products as compared to the prior period. The revenue contributed by the CVD Materials segment for the three months ended March 31, 2024 of $59,000 represented 1% of our overall revenue as compared to $0.7 million or 8% of overall revenue for the three months ended March 31, 2023. The decrease of $0.6 million was principally due to the disposition of Tantaline in May 2023 and the wind down of MesoScribe’s operations. Our order backlog at March 31, 2024 was approximately $27.1 million as compared to December 31, 2023 of $18.4 million. Our backlog at March 31, 2024 consists of approximately $24.8 million related to remaining performance obligations of contracts in progress and not yet started that will be recognized over time with the balance of approximately $2.3 million representing other orders received from customers. Historically, our revenues and orders have fluctuated based on changes in order rate as well as other factors in our manufacturing process that impact the timing of revenue recognition. Accordingly, orders received from customers and revenue recognized may fluctuate from quarter to quarter. 24 Gross Profit Gross profit for the three months ended March 31, 2024 was $0.9 million, with a gross profit margin of 17.5%, compared to a gross profit of $2.4 million and a gross profit margin of 28.0% for the three months ended March 31, 2023. The decrease in gross profit of $1.6 million was primarily the result of lower gross profit margins on contracts in progress during the current period as compared to the first quarter of 2023 which benefited from contracts with higher gross margins. In addition, lower CVD Equipment segment revenues reduced the Company’s ability to spread its fixed costs. Research and Development For the three months ended March 31, 2024, research and development expenses were $0.7 million, or 15.2% of revenue as compared to $0.6 million, or 6.9% for the three months ended March 31, 2023. The increase in 2024 was the result of less amounts charged to cost of goods sold as a result of lower revenues offset by reductions in personnel costs. General engineering support and expenses related to the development of more standardized products and value-added development of existing products are reflected as part of research and development expense. General engineering support and expenses are charged to costs of goods sold when work is performed directly on a customer order. Selling Selling expenses were $0.4 million or 8.5% of the revenue for the three months ended March 31, 2024 as compared to $0.4 million or 4.8% for the three months ended March 31, 2023. Increase in marketing costs were offset by lower personnel costs. General and Administrative General and administrative expenses for the three months ended March 31, 2024 were $1.3 million or 26.8% of revenue compared to $1.6 million or 18.4% of revenue for the three months ended March 31, 2023, a decrease of $0.3 million. The decrease in expenses was principally due to lower personnel costs of $0.2 million due to a reduction of bonus accruals. Other Income, Net Other income, net was $151,000 for the three months ended March 31, 2024 as compared to other income, net of $149,000 for the three months ended March 31, 2023. Other income consists principally of interest earned on amounts invested in U.S. treasury securities. Income Taxes We continue to evaluate the potential utilization of our deferred tax asset, which has been fully reserved for, on a quarterly basis, by reviewing our economic models, including projections of future operating results. 25 Liquidity and Capital Resources As of March 31, 2024, aggregate working capital was $13.1 million as compared to aggregate working capital of $14.3 million at December 31, 2023. Cash and cash equivalents at March 31, 2024 and December 31, 2023 were $11.9 million and $14.0 million, respectively. Net cash used in operating activities for the three months ended March 31, 2024 was $2.0 million. This decrease was principally due to the net loss of $1.5 million, increase in contract assets of $1.1 million, increase in accounts receivable of $1.1 million, increase in inventories of $0.5 million, offset by an increase in contract liabilities of $1.1 million and non-cash items of $0.4 million. Net cash used in investing activities for the three months ended March 31, 2024 consisted of capital expenditures of $70,000 related to purchases of equipment, building improvements and software. Net cash used in financing activities for the three months ended March 31, 2024 consisted of repayments of an equipment loan. We believe that our cash and cash equivalent positions and our projected cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months .from the filing of these condensed consolidated financial statements included in this Form 10-Q. We will continue to assess our operations and take actions anticipated to maintain our operating cash to support the working capital needs. Critical Accounting Estimates This discussion and analysis of the Company’s financial condition and results of operations is based on the Company’s consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. In accordance with U.S. GAAP, the Company bases its estimates on historical experience and on various other assumptions the Company believes are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. 26 We believe that of our significant accounting policies, which are described in the notes to the consolidated financial statements, the following accounting policies involve a greater degree of judgments, estimates and assumptions and are considered critical accounting estimates. 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 two 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. 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. 27 Inventory Valuation Inventories (raw materials, work-in-process and finished goods) are valued at the lower of cost (determined on the first-in, first-out method) or net realizable value. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its estimated net realizable value if less than cost. The Company evaluates usage requirements by analyzing historical usage, anticipated demand, alternative uses of materials, and other qualitative factors. Unanticipated changes in demand for the Company’s products may require a write down of inventory, which would be reflected in cost of sales in the period the revision is made. Any such charge could be material to our results of operations and financial condition. Long-Lived Assets Long-lived assets consist primarily of property, plant and equipment. Long-lived assets are reviewed for impairment whenever events or circumstances indicate their carrying value may not be recoverable. When such events or circumstances arise, an estimate of the future undiscounted cash flows produced by the asset, or the appropriate grouping of assets, is compared to the asset’s carrying value to determine if impairment exists pursuant to the requirements of 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 it carrying value over its fair value. Assets to be disposed of are reported at the lower of their carrying value or net realizable value. In the future, if we determine that our long-lived assets are impaired, we would be required to recognize a charge in our financial statements at the time of such determination. Any such charge could be material to our results of operations and financial condition. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.