CVD EQUIPMENT CORP 10-Q

Item 1 – Financial Statements CVD EQUIPMENT CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (in thousands, except share amounts) (Unaudited) September 30, 2024 December 31, 2023 ASSETS Current assets Cash and cash equivalents $ 10,005 $ 14,025 Accounts receivable, net of allowance for credit losses 5,124 1,906 Contract assets 1,348 1,604 Inventories 2,558 4,454 Other current assets 892 852 Total current assets 19,927 22,841 Property, plant and equipment, net 11,909 12,166 Other assets 10 18 Total assets $ 31,846 $ 35,025 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 1,393 $ 1,203 Accrued expenses 1,903 1,765 Current maturities of long-term debt 85 81 Contract liabilities 3,288 4,908 Deposit from purchaser of MesoScribe assets-Note 11 - 597 Total current liabilities 6,669 8,554 Long-term debt, net of current portion 203 268 Total liabilities 6,872 8,822 Stockholders’ equity: Common stock - $ 0.01 par value – 20,000,000 shares authorized; issued and outstanding 6,881,838 at September 30, 2024 and 6,824,511 at December 31, 2023 69 68 Additional paid-in capital 29,495 28,695 Accumulated deficit ( 4,590 ) ( 2,560 ) Total stockholders’ equity 24,974 26,203 Total liabilities and stockholders’ equity $ 31,846 $ 35,025 The accompanying notes are an integral part of these condensed consolidated financial statements 3 CVD EQUIPMENT CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (in thousands, except per share and share amounts) (Unaudited) 2024 2023 2024 2023 Three months ended Nine months ended September 30, September 30, 2024 2023 2024 2023 Revenue $ 8,194 $ 6,234 $ 19,462 $ 19,998 Cost of revenue 6,359 4,636 15,158 14,579 Gross profit 1,835 1,598 4,304 5,419 Operating expenses Research and development 644 704 2,055 1,865 Selling 423 434 1,268 1,281 General and administrative 1,316 1,450 4,057 4,410 Gain on sale of equipment-Note 11 ( 625 ) - ( 625 ) - Loss on disposition of Tantaline - - - 162 Impairment charge - - - 111 Total operating expenses, net 1,758 2,588 6,755 7,829 Operating income (loss) 77 ( 990 ) ( 2,451 ) ( 2,410 ) Other income (expense): Interest income 136 173 438 400 Interest expense ( 5 ) ( 6 ) ( 14 ) ( 18 ) Foreign exchange income - - - 42 Other income - 70 2 91 Total other income, net 131 237 426 515 Income (loss) before income tax 208 ( 753 ) ( 2,025 ) ( 1,895 ) Income tax expense 5 - 5 11 Net income (loss) $ 203 $ ( 753 ) $ ( 2,030 ) $ ( 1,906 ) Income (loss) per common share - basic $ 0.03 $ ( 0.11 ) $ ( 0.30 ) $ ( 0.28 ) Income (loss) per common share - diluted $ 0.03 $ ( 0.11 ) $ ( 0.30 ) $ ( 0.28 ) Weighted average common shares Basic 6,825,495 6,789,487 6,817,220 6,787,415 Diluted 6,834,627 6,789,487 6,817,220 6,787,415 The accompanying notes are an integral part of these condensed consolidated financial statements 4 CVD EQUIPMENT CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Changes in Stockholders’ Equity (in thousands, except share amounts) (Unaudited) Three months ended September 30, 2024 and 2023 Shares Par Value Capital Earnings Total Common stock Additional paid-in (Accumulated Deficit) Retained Shares Par Value Capital Earnings Total Balance at July 1, 2024 6,825,338 $ 68 $ 29,229 $ ( 4,793 ) $ 24,504 Net income - - - 203 203 Stock-based compensation 56,500 1 266 - 267 Balance at September 30, 2024 6,881,838 $ 68 $ 29,496 $ ( 4,590 ) $ 24,974 Balance at July 1, 2023 6,779,063 $ 67 $ 28,185 $ 467 $ 28,719 Net loss - - - ( 753 ) ( 753 ) Stock-based compensation 41,320 1 249 - 250 Exercise of stock options and issuance of shares 272 - - - - Balance at September 30, 2023 6,820,655 $ 68 $ 28,434 $ ( 286 ) $ 28,216 Nine months ended September 30, 2024 and 2023 Common stock Additional paid-in (Accumulated Deficit) Retained Shares Par Value Capital Earnings Total Balance at January 1, 2024 6,824,511 $ 68 $ 28,695 $ ( 2,560 ) $ 26,203 Net loss - - - ( 2,030 ) ( 2,030 ) Stock-based compensation 57,327 1 800 - 801 Balance at September 30, 2024 6,881,838 $ 68 $ 29,496 $ ( 4,590 ) $ 24,974 Balance at January 1, 2023 6,760,938 $ 67 $ 27,712 $ 1,620 $ 29,399 Balance 6,760,938 $ 67 $ 27,712 $ 1,620 $ 29,399 Net loss - - - ( 1,906 ) ( 1,906 ) Net income (loss) - - - ( 1,906 ) ( 1,906 ) Stock-based compensation 41,320 1 646 - 647 Exercise of stock options and issuance of shares 18,397 - 76 - 76 Balance at September 30, 2023 6,820,655 $ 68 $ 28,434 $ ( 286 ) $ 28,216 Balance 6,820,655 $ 68 $ 28,434 $ ( 286 ) $ 28,216 The accompanying notes are an integral part of these condensed consolidated financial statements 5 CVD EQUIPMENT CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (in thousands) (Unaudited) 2024 2023 Nine months ended September 30, 2024 2023 Cash flows from operating activities: Net loss $ ( 2,030 ) $ ( 1,906 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 801 647 Depreciation and amortization 476 545 Gain on sale of equipment ( 625 ) Loss on disposition of Tantaline - 162 Provision for excess and obsolete inventory 1,253 197 Impairment charge - 111 Changes in assets and liabilities, net of effects of disposition of Tantaline and sale of equipment: Accounts receivable ( 3,218 ) 1,163 Contract assets 256 ( 725 ) Inventories 633 ( 1,953 ) Employee retention credit receivable - 1,529 Other current assets 48 ( 46 ) Other noncurrent assets 8 - Accounts payable 140 113 Accrued expenses 138 ( 729 ) Contract liabilities ( 1,620 ) 816 Net cash used in operating activities ( 3,740 ) ( 76 ) Cash flows from investing activities: Purchases of property and equipment ( 219 ) ( 308 ) Deposits from purchaser of MesoScribe assets - 597 Net cash used in connection with disposition of Tantaline - ( 312 ) Net cash used in investing activities ( 219 ) ( 23 ) Cash flows from financing activities Payments of long-term debt ( 61 ) ( 57 ) Proceeds from exercise of stock options - 76 Net cash (used in) provided by financing activities ( 61 ) 19 Net decrease in cash and cash equivalents ( 4,020 ) ( 80 ) Cash and cash equivalents at beginning of period 14,025 14,365 Cash and cash equivalents at end of period $ 10,005 $ 14,285 Supplemental disclosure of cash flow information: Income taxes paid $ 2 $ 11 Interest paid $ 14 $ 18 The accompanying notes are an integral part of these condensed consolidated financial statements 6 CVD EQUIPMENT CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 1: BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements for CVD Equipment Corporation and Subsidiaries (collectively “the Company”) 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 nine months ended September 30, 2024 are not necessarily indicative of the results that can be expected for the year ending December 31, 2024. The condensed consolidated balance sheet as of December 31, 2023 has been derived from the audited consolidated financial statements at such date, as filed on Form 10-K with the SEC on March 28, 2024, but does not contain all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with that report. All material intercompany balances and transactions have been eliminated in consolidation. Reclassifications Certain reclassifications have been made to the prior period condensed consolidated financial statements to conform to the current period presentation. These reclassifications had no effect on net loss. Liquidity At September 30, 2024, the Company had $ 10.0 million in cash and cash equivalents. The Company anticipates that the existing cash and cash equivalents balance together with potential future income from operations, collections of existing accounts receivable, revenue from its existing backlog of products as of this filing date, the sale of inventory on hand, deposits and down payments against significant orders will be adequate to meet its working capital and capital equipment requirements, and its anticipated cash needs over the next 12 months from the date of issuance of these condensed consolidated financial statements. 7 CVD EQUIPMENT CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition In accordance with FASB ASC 606 - Revenue from Contracts with Customers (“ASC 606”), the Company records revenue in an amount that reflects the consideration to which the Company expects to be entitled in exchange for goods or services promised to its customers. Under ASC 606, the Company follows a five-step model to: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price for the contract; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue using one of the following two methods: Over time The Company designs, manufactures and sells custom chemical vapor deposition equipment through contractual agreements. These system sales require the Company to deliver functioning equipment that is generally completed within two to eighteen months from order acceptance. For systems sales that meet the criteria to recognize revenue over time, the Company recognizes revenue over time by using an input method based on costs incurred as it depicts the Company’s progress toward satisfaction of the performance obligation. For system sales that do not meet the criteria to recognize revenue over time based on the contract provisions, the Company recognizes revenue based on point in time as discussed below. 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 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, and installed, as required by the project’s engineering design. Cost based input methods of revenue recognition require the Company 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, the Company recognizes the entire estimated loss in the period the loss becomes known and can be reasonably estimated. There were no material impairment losses recognized on contract assets during the three and nine months ended September 30, 2024 and 2023 . The timing of revenue recognition, billings and collections results in accounts receivables, unbilled receivables or contract assets and contract liabilities on our consolidated balance sheet. Under typical payment terms for our contracts accounted for over time, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. 8 CVD EQUIPMENT CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Under ASC 606, payments received from customers in excess of revenue recognized to-date results in a contract liability. These contract liabilities are not considered to represent a significant financing component of the contract because we believe these cash advances and deposits are generally used to meet working capital demands which can be higher in the earlier stages of a contract. Also, advanced payments and deposits provide us with some measure of assurance that the customer will perform on its obligations under the contract. Contract assets include unbilled amounts typically resulting from system sales under contracts and represents revenue recognized that exceeds the amount billed to the customer. Contract liabilities include advance payments and billings in excess of revenue recognized. The Company typically receives down payments upon receipt of orders and progress payments as the system is manufactured. Contract assets and contract liabilities are classified as current as these contracts in progress are expected to be substantially completed within the next twelve months. Point in time For non-system sales of products and services, revenue is recognized at the point in time when control of the promised products or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products or services (the transaction price). A performance obligation is a promise in a contract to transfer a distinct product or service to a customer and is the unit of account under ASC 606, “Revenue from Contracts with Customers”. For any system equipment sales where the equipment would have an alternative use or where the contract provisions of the contract preclude the use of over time revenue recognition, revenue is recognized at the point in time when control of the equipment is transferred to the customer. For the three and nine months ended September 30, 2024 and 2023, all system equipment sales were recorded over time by using an input method except for one PVT200 system that was recorded at the point in time when the equipment was transferred to the customer during the third quarter of 2024. There was one system equipment contract in 2023 where the revenue was to be recognized based on point in time. This contract was modified during the three months ended September 30, 2023 such that the revenue under this contract will be recognized over time using an input method based on the revised contract provisions. Revenues for the three months ended September 30, 2023 includes $ 0.8 million of revenue that was deferred as of June 30, 2023 and recognized on the date of the contract modification. 9 CVD EQUIPMENT CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Inventories 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. Work-in-process and finished goods inventory reflect all accumulated production costs, which are comprised of direct production costs and overhead, and is reduced by amounts recorded in cost of sales as the related revenue is recognized. Indirect costs relating to long-term contracts, which include expenses such as general and administrative, are charged to expense as incurred and are not included in our cost of sales or work-in-process and finished goods inventory. 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. Product Warranty The Company typically provides standard warranty coverage on its systems for one year from the date of final acceptance or fifteen months from the date of shipment by providing labor and parts necessary to repair the systems during the warranty period. The Company records the estimated warranty cost when revenue is recognized on the related system. Warranty cost is included in “Cost of revenue” in the condensed consolidated statements of operations. The estimated warranty cost is based on the Company’s historical cost. The Company updates its warranty estimates based on actual costs incurred. Recent Accounting Standards In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures . The amendments in this update expand annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. This update is effective for our annual report for fiscal year 2025, and interim periods thereafter, with early adoption permitted, and will be applied retrospectively to all prior periods presented in the financial statements. We are currently evaluating the impact of this ASU on our Consolidated Financial Statements and related disclosures. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvement to Income Tax Disclosures . The amendments further enhance income tax disclosures, primarily through standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. This ASU is effective for our annual report for fiscal year 2026, with early adoption permitted, and should be applied either prospectively or retrospectively. We are currently evaluating the timing of adoption and impact of this ASU on our Consolidated Financial Statements and related disclosures. The Company believes there is no additional new accounting guidance adopted, but not yet effective, that is relevant to the readers of our financial statements. However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on our financial reporting. 10 CVD EQUIPMENT CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 3: CONCENTRATION OF CREDIT RISK Cash and cash equivalents The Company had cash and cash equivalents of $ 10.0 million and $ 14.0 million at September 30, 2024 and December 31, 2023, respectively. The Company invests excess cash in U.S. treasury bills, certificates of deposit or deposit accounts, all with maturities of less than three months. Cash equivalents consisting of U.S. treasury bills were $ 9.4 million and $ 12.1 million at September 30, 2024 and December 31, 2023, respectively. The Company places most of its temporary cash investments in the United States with financial institutions, which from time to time may exceed the Federal Deposit Insurance Corporation limit. The amount at risk at September 30, 2024 and December 31, 2023 was $ 0 and $ 1.5 million, respectively. Accounts receivable The Company sells products and services to various companies across several industries in the ordinary course of business. The Company performs ongoing credit evaluations to assess the probability of accounts receivable collection based on a number of factors, including past transaction experience, evaluation of their credit history and review of the invoicing terms of the contract to determine the financial strength of its customers. Accounts receivables are presented net of an allowance for credit losses of approximately $ 36,000 at both September 30, 2024 and December 31, 2023. The allowance is based on prior experience and management’s evaluation of the collectability of accounts receivable. Measurement of credit losses requires consideration of historical loss experience, including the need to adjust for changing business conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and the financial health of specific customers. Future changes to the estimated allowance for credit losses could be material to our results of operations and financial condition. 11 CVD EQUIPMENT CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 3: CONCENTRATION OF CREDIT RISK (continued) At September 30, 2024, the accounts receivable balance included amounts from one customer that represented 17.2 % of total accounts receivable. As of December 31, 2023, the accounts receivable balance included amounts from three customers that represented 37.6 %, 13.0 % and 12.8 % of total accounts receivable. Sales concentration Revenue from a single customer in any one period can exceed 10% of our total revenues. During the three months ended September 30, 2024, two customers represented 29.1 % and 11.2 %, respectively, of revenues, and during the nine months ended September 30, 2024, one customer represented 31.2 % of revenues. During the three months ended September 30, 2023, two customers represented 40.3 % and 10.3 % of revenues, respectively, and during the nine months ended September 30, 2023, three customers represented 16.7 %, 13.9 % and 11.7 % of revenues, respectively. NOTE 4: REVENUE RECOGNITION The following table represents a disaggregation of revenue for the three and nine months ended September 30, 2024, and 2023 (in thousands): SCHEDULE OF DISAGGREGATION OF REVENUE Over time Point in time Total Three months ended September 30, 2024 Over time Point in time Total Energy $ - $ 448 $ 448 Aerospace 3,814 969 4,783 Industrial 1,522 368 1,890 Research 927 146 1,073 Total $ 6,263 $ 1,931 $ 8,194 Over time Point in time Total Three months ended September 30, 2023 Over time Point in time Total Energy $ 970 $ 136 $ 1,106 Aerospace 2,511 371 2,882 Industrial 695 739 1,434 Research 504 308 812 Total $ 4,680 $ 1,554 $ 6,234 12 CVD EQUIPMENT CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 4: REVENUE RECOGNITION (continued) Over time Point in time Total Nine months ended September 30, 2024 Over time Point in time Total Energy $ 216 $ 500 $ 716 Aerospace 8,285 1,488 9,773 Industrial 4,324 1,142 5,466 Research 2,963 544 3,507 Total $ 15,788 $ 3,674 $ 19,462 Over time Point in time Total Nine months ended September 30, 2023 Over time Point in time Total Energy $ 4,246 $ 189 $ 4,435 Aerospace 2,774 1,226 4,000 Industrial 5,450 1,866 7,316 Research 2,960 1,287 4,247 Total $ 15,430 $ 4,568 $ 19,998 The energy market includes customers involved in the manufacture of silicon carbide wafers and batteries. Aerospace market includes customers that manufacture aircraft engines. Industrial end market consists of various end customers in diverse industries. Research market principally represents customers such as universities and other research institutions. The Company has unrecognized contract revenue of approximately $ 17.0 million at September 30, 2024, which it expects to substantially recognize as revenue within the next twelve months based on over time revenue recognition. Judgment is required to evaluate assumptions including the amount of net contract revenues and the total estimated costs to determine our progress towards contract completion and to calculate the corresponding amount of revenue to recognize. Changes in estimates for sales of systems may occur for a variety of reasons, including but not limited to (i) build accelerations or delays, (ii) product cost forecast changes, (iii) cost related change orders or add-ons, or (iv) changes in other information used to estimate costs. Changes in estimates may have a material effect on the Company’s condensed consolidated statements of operations. 13 CVD EQUIPMENT CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 4: REVENUE RECOGNITION (continued) Contract assets and liabilities Contract assets and contract liabilities on input method type contracts in progress are summarized as follows as of September 30, 2024 (in thousands): SCHEDULE OF COST AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS Costs incurred on contracts in progress $ 13,540 Estimated earnings 6,672 Costs and estimated earnings on uncompleted contracts 20,212 Billings to date ( 21,693 ) Net cost in excess of billings ( 1,481 ) Deferred revenue related to non-system contracts ( 459 ) Contract liability in excess of contract assets $ ( 1,940 ) Included in accompanying condensed consolidated balance sheet as of September 30, 2024 under the following captions (in thousands): Contract assets $ 1,348 Contract liabilities $ 3,288 Of the contract liability balances at December 31, 2023 and 2022 of $ 4.6 million and $ 4.0 million, respectively, $ 4.2 million and $ 3.7 million was recognized as revenue during the nine months ended September 30, 2024 and 2023, respectively. NOTE 5: INVENTORIES Inventories consist of: SCHEDULE OF INVENTORIES September 30, 2024 December 31, 2023 Raw materials $ 1,366 $ 2,351 Work-in-process 661 1,248 Finished goods 531 855 Total $ 2,558 $ 4,454 14 CVD EQUIPMENT CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 5: INVENTORIES (continued) Included in our inventories are finished goods and raw materials related to PVT 150 systems that were purchased and built, respectively, in anticipation of future orders. During the three months ended September 30, 2024, the Company recorded a non-cash charge to reduce the net realizable value of such inventory by approximately $ 1.0 million based on its assessment of the current market for silicon carbide equipment. As of September 30, 2024, the net amount of PVT 150 systems inventory is approximately $ 0.7 million. If future PVT 150 orders do not materialize and if the Company is not otherwise able to sell this inventory, the Company could incur additional charges to further reduce the carrying value of such inventory to net realizable value. Such charges may be material to the Company’s financial position and future results of operations. NOTE 6: LONG-TERM DEBT In September 2022, the Company entered into a loan agreement to fund the acquisition of machinery. The loan amount of $ 432,000 is payable in 60 equal monthly installments of $ 8,352 and secured by equipment. The interest rate is 6 %. NOTE 7: EARNINGS PER SHARE The calculation of basic and diluted weighted average common shares outstanding for the three and nine months ended September 30, 2024 and 2023 is as follows: SCHEDULE OF BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2024 2023 2024 2023 Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Basic weighted average common shares outstanding 6,825,495 6,789,487 6,817,220 6,787,415 Dilutive effect of unvested restricted stock 9,132 - - - Diluted weighted average shares outstanding 6,834,627 6,789,487 6,817,220 6,787,415 At September 30, 2024, stock options to purchase 838,125 shares of common stock were outstanding and 493,750 were exercisable. For the three and nine months ended September 30, 2024 and the three and nine months ended September 30, 2023, all stock options were excluded in the computation of diluted earnings per share because their effect was antidilutive. 15 CVD EQUIPMENT CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 8: STOCK-BASED COMPENSATION EXPENSE The Company recorded stock-based compensation for the three and nine months ended September 30, 2024 and 2023, that were included in the following line items in our condensed consolidated statements of operations (in thousands): SCHEDULE OF STOCK BASED COMPENSATION EXPENSE 2024 2023 2024 2023 Three months ended Sept. 30, Nine months ended Sept. 30, 2024 2023 2024 2023 Cost of revenue $ 38 $ 22 $ 114 $ 82 Research and development 47 47 141 113 Selling 27 30 81 72 General and administrative 155 150 465 380 Total $ 267 $ 249 $ 801 $ 647 Stock-based compensation expense for three months ended September 30, 2024 and 2023 included $ 50,000 and $ 44,783 , respectively, and for the nine month periods ended September 30, 2024 and 2023 included $ 153,736 and $ 124,783 , respectively, related to restricted stock awards that directors are entitled to receive pursuant to the Director Compensation Plan. Under this plan each of the Company’s independent directors is entitled to an Annual Equity Retainer in the amount of $ 40,000 , to be granted on the date of the Company’s annual meeting of shareholders. For the nine months ended September 30, 2024, the Company granted 5,000 stock options, vesting 25 % per year over four years, with a ten-year life. The Company determined the weighted average fair value of stock options granted was $ 3.30 and is based upon weighted average assumptions below. SCHEDULE OF WEIGHTED AVERAGE ASSUMPTIONS Stock price $ 4.75 Exercise price $ 4.75 Dividend yield 0 % Expected volatility 77 % Risk-free interest rate 4.12 % Expected life (in years) 6.00 The following table summarizes stock options awards through September 30, 2024: SCHEDULE OF STOCK OPTIONS AWARDS Weighted Stock Option Average Awards Exercise (in shares) Price Outstanding at January 1, 2024 846,875 8.20 Granted 5,000 4.75 Forfeited ( 13,750 ) 7.94 Outstanding at September 30, 2024 838,125 $ 8.18 16 CVD EQUIPMENT CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 8: STOCK-BASED COMPENSATION EXPENSE (continued) The following table summarizes information about the outstanding and exercisable options at September 30, 2024 by ranges of exercise prices: SCHEDULE OF OUTSTANDING AND EXERCISABLE OPTIONS RANGES OF EXERCISE PRICES Options Outstanding Options Exercisable Weighted Weighted Weighted Average Average Average Exercise Number Remaining Exercise Intrinsic Number Exercise Intrinsic Price Range Outstanding Contractual Price Value Exercisable Price Value $ 4.00 - 7.00 459,625 7.1 $ 4.55 $ - 294,125 $ 6.07 $ - $ 7.01 - 10.00 20,000 3.6 $ 8.07 $ - 20,000 $ 8.07 $ - $ 10.01 - 13.00 130,000 2.9 $ 10.62 $ - 122,500 $ 10.55 $ - $ 13.01 - 16.00 228,500 8.5 $ 14.11 $ - 57,125 $ 14.11 $ - As of September 30, 2024, there was $ 1.8 million of unrecognized compensation costs related to stock options expected to be recognized over a weighted average period of 1.3 years. NOTE 9: INCOME TAXES As of September 30, 2024 and December 31, 2023, the Company has provided a full valuation allowance against its net deferred tax assets. This was based on management’s assessment, including the last six years of operating losses, that it is more likely than not that the net deferred tax assets may not be realized in the future. Management continues to evaluate for potential utilization of the Company’s net deferred tax asset, which has been fully reserved for, on a quarterly basis, reviewing our economic models, including projections of future operating results. NOTE 10: SEGMENT REPORTING The Company operates through three segments: CVD Equipment, Stainless Design Concepts (“SDC”) and CVD Materials. The CVD Equipment segment manufactures and sells chemical vapor deposition, physical vapor transport and similar equipment. The SDC segment designs and manufactures ultra-high purity gas and chemical delivery control systems. The CVD Materials segment provides material coatings for aerospace, medical, electronic and other applications and is not considered a core business of the Company. The Company evaluates performance based on several factors, of which the primary financial measure is income (loss) before taxes. The Company’s corporate administration activities are reported in the “Corporate” column. These activities primarily include expenses related to certain corporate officers and support staff, expenses related to the Company’s Board of Directors, stock option expense for options and shares of restricted stock granted to corporate administration employees and board members, certain consulting expenses, investor and shareholder relations activities, and all the Company’s legal, auditing and professional fees. 17 CVD EQUIPMENT CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 10: SEGMENT REPORTING (continued) Elimination entries included in the “Eliminations” column represent intersegment revenues and cost of revenues that are eliminated in consolidation. Intersegment sales by the SDC segment to the CVD Equipment segment for the three months ended September 2024 and 2023 were $ 151,000 and $ 184,000 , respectively and $ 298,000 and $ 450,000 for the nine months ended September 30, 2024 and 2023, respectively. Intersegment sales by the CVD Equipment segment to the SDC segment for the three months ended September 30, 2024 and 2023 were $ 5,000 and $ 39,000 , respectively and $ 5,000 and $ 104,000 for the nine months ended September 30, 2024 and 2023, respectively. The following table presents certain information regarding the Company’s segments as of and for the three months ended September 30, 2024 and 2023 (in thousands): SCHEDULE OF SEGMENTS 2024 CVD Equipment SDC CVD Materials Eliminations Corporate Consolidated Assets $ 27,270 $ 3,805 $ 836 $ ( 65 ) $ - $ 31,846 Revenue $ 5,681 $ 2,005 $ 661 $ ( 153 ) $ - $ 8,194 Operating (loss) income *( 736 ) 538 ** 1,104 18 ( 847 ) 77 Pretax (loss) income *( 741 ) 538 ** 1,104 18 ( 711 ) 208 Depreciation and amortization $ 157 $ 12 $ - $ - $ - $ 169 Purchase of property, plant & equipment $ 30 $ 7 $ - $ - $ - $ 37 2023 CVD Equipment SDC CVD Materials Eliminations Corporate Consolidated Assets $ 32,915 $ 4,237 $ 177 $ ( 102 ) $ - $ 37,227 Revenue $ 4,795 $ 1,572 $ 90 $ ( 223 ) $ - $ 6,234 Operating (loss) income ( 323 ) 436 ( 35 ) ( 76 ) ( 992 ) ( 990 ) Pretax (loss) income ( 262 ) 434 ( 31 ) ( 76 ) ( 818 ) ( 753 ) Depreciation and amortization $ 137 $ 12 $ 4 $ - $ - $ 153 Purchase of property, plant & equipment $ 83 $ - $ - $ - $ - $ 83 * Includes a $ 1.0 million non-cash charge to reduce certain inventory to net realizable value – see Note 5. ** Includes gain on sale of equipment of $ 0.6 million related to MesoScribe – see Note 11. 18 CVD EQUIPMENT CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 10: SEGMENT REPORTING (continued) The following table presents certain information regarding the Company’s segments as of and for the nine months ended September 30, 2024 and 2023 (in thousands): 2024 CVD Equipment SDC CVD Materials Eliminations Corporate Consolidated Revenue $ 12,737 $ 6,252 $ 775 $ ( 302 ) $ - $ 19,462 Operating (loss) income *( 2,884 ) 1,884 ** 1,034 28 ( 2,513 ) ( 2,451 ) Pretax (loss) Income *( 2,894 ) 1,884 ** 1,034 28 ( 2,075 ) ( 2,025 ) Depreciation and amortization $ 441 $ 35 $ - $ - $ - $ 476 Purchase of property, plant & equipment $ 209 $ 10 $ - $ - $ - $ 219 2023 CVD Equipment SDC CVD Materials Eliminations Corporate Consolidated Revenue $ 13,774 $ 5,679 $ 1,009 $ ( 554 ) $ - $ 19,998 Operating (loss) income ( 581 ) 1,430 *** ( 178 ) ( 104 ) ( 2,977 ) ( 2,410 ) Pretax (loss) Income ( 518 ) 1,430 *** ( 126 ) ( 104 ) ( 2,577 ) ( 1,895 ) Depreciation and amortization $ 404 $ 36 $ 105 $ - $ - $ 545 Purchase of property, plant & equipment $ 298 $ 10 $ - $ - $ - $ 308 * Includes a $ 1.0 million non-cash charge to reduce certain inventory to net realizable value – see Note 5. ** Includes gain on sale of equipment of $ 0.6 million related to MesoScribe – see Note 11. *** Includes loss on sale of Tantaline of $ 0.2 million and impairment charge related to MesoScribe fixed assets of $ 0.1 million – see Note 11. 19 CVD EQUIPMENT CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 11: MESOSCRIBE SUBSIDIARY On August 8, 2023, the Company entered into a Purchase and License Agreement (the “Agreement”) with a third-party. Pursuant to the Agreement, the Company would sell certain proprietary assets relating to its plasma spray technology and material deposition system and grant a non-exclusive license to use certain of the Company’s related intellectual property as more fully described in the Agreement, for an aggregate purchase price of $ 0.9 million. The purchase price was payable in several installments and contingent upon certain performance metrics and other milestones. The Company received payments under the Agreement in the amount of $ 0.6 million which had been reflected as “deposit from purchaser” in the accompanying consolidated balance sheet as of December 31, 2023. During the three months ended September 30, 2024, the Company and the purchaser amended the agreement to reduce the purchase price to $ 0.8 million and the purchaser accepted the equipment. The Company recorded a net gain of sale of equipment of $ 0.6 million for the three and nine months ended September 30, 2024 representing the purchase price less the net book value of the assets sold. The Company fulfilled its final orders for MesoScribe products during the three months ended September 30, 2024 and recorded revenues of $ 0.7 million. The Company has ceased operations of MesoScribe as of September 30, 2024. The revenue and net income (loss) of MesoScribe were $ 0.7 million and $ 1.1 million, respectively, for the three months ended September 30, 2024 (includes final sales and gain on sale of equipment) and $ 0.8 million and $ 1.0 million, respectively, for the nine months ended September 30, 2024. The total assets and total liabilities of the MesoScribe subsidiary were $ 0.8 million and $ 0.1 million, respectively, as of September 30, 2024 and $ 0.2 million and $ 0.7 million as of December 31, 2023. During the nine months ended September 30, 2023, the Company recorded an impairment charge of $ 0.1 million for certain equipment of MesoScribe based on its decision to cease the remaining operations in 2024. 20