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; ● uncertainty as to the general state of the silicon carbibe wafer end market; ● competition in our existing and potential future product lines of business, including our PVT150 / PVT200 systems; ● uncertainty as to our ability to identify and develop new products for growth markets; ● 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. 21 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, produce and grow materials and coatings for commercial applications and research. To learn more about CVD’s systems and offerings, visit www.cvdequipment.com. During the three and nine months ended September 30, 2024 and 2023: ●· Revenue increased by $2.0 million or 31.4% for the third quarter as compared to the prior year period due to increases in revenues from aerospace contracts in progress, our SDC segment and final sales by our MesoScribe subsidiary partially offset by lower revenues of spare parts. ● Gross margin increased by $0.2 million or 14.8% in the third quarter as compared to the prior period quarter due to higher revenues and improved margins on contracts in process offset by a $1.0 million non-cash charge to reduce certain PVT inventory to net realizable value. ● Total bookings for the third quarter of 2024 were approximately $4.1 million as compared to $4.4 million in the prior year period. ● Total bookings for the nine months ended September 30, 2024 were $21.0 million as compared to $15.8 million in the prior year period. ● 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. ● Bookings in 2023 included $8.7 million of multiple systems orders from an aerospace customer and a battery nanomaterial production system of $1.8 million. ● 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. This unit was shipped to the customer in the third quarter of 2024. ● Our backlog increased from $18.4 million at December 31, 2023 to $19.8 million at September 30, 2024. ● Cash balance at September 30, 2024 was $10.0 million as compared to $14.0 million at December 31, 2023 Business Update Our core strategy is to focus on growth end markets in applications related to aerospace, the “electrification of everything,” and industrial 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 to produce specialty coatings for advanced high temperature environments. 22 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. Our current strategy yielded multisystem orders of PVT150 equipment in 2023 and 2022 that were delivered to one company that manufactures silicon carbide wafers. Although we continue to invest in our vision for the “electrification of everything,” we have observed lower-than-anticipated industrywide electric vehicle adoption rates which may reduce demand for silicon carbide and impact sales of our PVT systems. In addition, the recent global over capacity of 150 mm silicon carbide wafers has reduced the market for 150 mm silicon carbide growth systems. 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 shipped this unit to the customer in the third quarter of 2024. We have also received orders from OneD Battery Materials in 2023, a company that is engaged in providing battery nanomaterials. Both technologies are essential for the support of the EV market. These systems should provide us with standard product offerings to continue to support the EV focused market as well as energy storage, power conversion and power transmission. We plan to evaluate opportunities 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 and in November 2024 we received an order for an additional CVI system. In February 2024, we received a multisystem order from an industrial customer for approximately $10.0 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 print advertising and trade show attendance. We have increased the number of trade shows and industry conferences we attend. 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. 23 Results of Operations Three Months Ended September 30, 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 September 30, 2024 and 2023 and the period-over-period dollar and percentage changes for those line items (in thousands, except percentages). Three months ended September 30 2024 2023 Change Percent Revenue $ 8,194 $ 6,234 $ 1,960 31.4 % Cost of revenue 6,359 4,636 1,723 37.2 % Gross profit 1,835 1,598 237 14.8 % Gross profit percentage 22.4 % 25.6 % Operating expenses: Research and development 644 704 (60 ) (8.5 %) Selling 423 434 (11 ) (2.5 %) General and administrative 1,316 1,450 (134 ) (9.2 %) Gain on sale of equipment (625 ) - (625 ) * Total operating expenses 1,758 2,588 (830 ) (32.1 %) Operating income (loss) 77 (990 ) 1,067 * Other income (expense): Interest income 136 173 (37 ) (21.4 %) Interest expense (5 ) (6 ) 1 (16.7 %) Other income - 70 (70 ) * Total other income, net 131 237 (106 ) (44.7 %) Income (loss) before income taxes 208 (753 ) 961 * Income tax expense 5 - 5 * Net income (loss) $ 203 $ (753 ) $ 956 * * Not meaningful 24 Three months ended September 30 2024 2023 Change Percent Revenues CVD Equipment $ 5,684 $ 4,795 $ 889 18.5 % SDC 2,005 1,572 433 27.5 % CVD Materials 661 90 571 634.4 % Intersegment sales elimination (156 ) (223 ) 67 * Total $ 8,194 $ 6,234 $ 1,960 31.4 % * Not meaningful Revenue Our revenue for the three months ended September 30, 2024 was $8.2 million compared to $6.2 million for the three months ended September 30, 2023, an increase of 31.4%. The increase in revenue versus the prior year period was primarily attributable to higher revenue of $0.9 million from our CVD Equipment segment, a $0.4 million increase in revenue from our SDC segment, and a $0.6 million increase from our CVD Materials segment. Revenue from one aerospace customer for the three months ended September 30, 2024 represented 29.1% of our total revenues and 42.0% of CVD Equipment segment revenues. The revenue contributed by the CVD Equipment segment for the three months ended September 30, 2024 of $5.7 million represented 69.3% of overall revenue as compared to $4.8 million or 76.3% of overall revenue for the three months ended September 30, 2023. The increase in revenues of $0.9 million or 18.5% resulted principally from increases in revenues from aerospace contracts in progress offset in part by lower revenue for PVT150/200 systems and spare parts. There were certain customer contracts in 2023 where the revenue was to be recognized at the point in time when the equipment is transferred to the customer based on contract terms. These contracts were modified during the three months ended September 30, 2023 such that the revenue under these contracts is now being recognized over time using the input method. The Company and CVD Equipment segment revenues for the three months ended September 30, 2023 include $0.8 million of revenue that was deferred as of June 30, 2023 and recognized on the date of the contract modification. The revenue contributed by the SDC segment for the three months ended September 30, 2024 of $2.0 million represented 22.6% of overall revenue as compared to $1.6 million or 22.3% of overall revenue for the three months ended September 30, 2023. Revenue for our SDC segment increased by $0.4 million or 27.5% due to higher demand for gas delivery system products as compared to the prior period. 25 The revenue contributed by the CVD Materials segment for the three months ended September 30, 2024 of $0.6 represented 8.1% of our overall revenue as compared to $0.1 million or 1.4% of overall revenue for the three months ended September 30, 2023. The increase of $0.6 million was due to the final sales to an aerospace company and MesoScribe ceased operations as of September 30, 2024. Our order backlog at September 30, 2024 was approximately $19.8 million as compared to December 31, 2023 of $18.4 million. Our backlog at September 30, 2024 consists of approximately $17.0 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 $2.8 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. Gross Profit Gross profit for the three months ended September 30, 2024 was $1.8 million, with a gross profit margin of 22.4%, compared to a gross profit of $1.6 million and a gross profit margin of 25.6% for the three months ended September 30, 2023. The increase in gross profit of $0.2 million was primarily due to higher revenues as well as improved margins on CVD contracts in progress and final MesoScribe sales that was partially offset by a $1.0 million non-cash charge to reduce certain PVT inventory to net realizable value. Research and Development For the three months ended September 30, 2024, research and development expenses were $0.6 million, or 7.9% of revenue as compared to $0.7 million, or 11.3% of revenue for the three months ended September 30, 2023, a decrease of $0.1 million or 8.5%. The decrease in 2024 was due to more engineering time being charged to cost of revenue based on contracts in progress. 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 revenue when work is performed directly on a customer order. Selling Selling expenses were $0.4 million or 5.2% of the revenue for the three months ended September 30, 2024 as compared to $0.4 million or 7.0% for the three months ended September 30, 2023. There were no significant changes in selling expenses as compared to the prior period quarter. 26 General and Administrative General and administrative expenses for the three months ended September 30, 2024 were $1.3 million or 16.1% of revenue compared to $1.4 million or 23.3% of revenue for the three months ended September 30, 2023. The decrease in 2024 was due principally to a reduction of employee compensation and lower professional fees as compared to the prior year quarter. Gain on Sale of Equipment During the three months ended September 30, 2024, we recognized a gain of $0.6 million on the sale of equipment related to our MesoScribe subsidiary representing the sale price of $0.8 million less the costs of the equipment sold of $0.2 million. Other Income (Expense), Net Other income (expense), net was $0.1 million and $0.2 million for three months ended September 30, 2024 and 2023, respectively. Other income is principally interest income on treasury bills. Interest income was lower than the prior period due to less amounts invested and lower interest rates. 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. 27 Nine Months Ended September 30, 2024 versus September 30, 2023 The following table presents revenue and expense line items reported in our condensed consolidated statements of operations for the nine months ended September 30, 2024 and 2023 and the period-over-period dollar and percentage changes for those line items (in thousands, except percentages). Nine months ended September 30 2024 2023 Change Percent Revenue $ 19,462 $ 19,998 $ (536 ) (2.7 %) Cost of revenue 15,158 14,579 579 4.0 % Gross profit 4,304 5,419 (1,115 ) (20.6 %) Gross profit percentage 22.1 % 27.1 % Operating expenses: Research and development 2,055 1,865 190 10.2 % Selling 1,268 1,281 (13 ) (1.0 %) General and administrative 4,057 4,410 (353 ) (8.0 %) Gain on sale of equipment (625 ) - (625 ) * Loss on disposition of Tantaline - 162 (162 ) (100.0 %) Impairment charge - 111 (111 ) (100.0 %) Total operating expenses 6,755 7,829 (1,074 ) (13.7 %) Operating loss (2,451 ) (2,410 ) (41 ) 1.7 % Other income (expense): Interest income 438 400 38 9.5 % Interest expense (14 ) (18 ) 4 (22.2 %) Foreign exchange income - 42 (42 ) (100.0 %) Other income 2 91 (89 ) (97.8 %) Total other income, net 426 515 (89 ) (17.3 %) Loss before income taxes (2,025 ) (1,895 ) (130 ) 6.9 % Income tax expense 5 11 (6 ) (54.5 %) Net loss $ (2,030 ) $ (1,906 ) $ (124 ) 6.5 % * Not meaningful 28 Nine months ended September 30 2024 2023 Change Percent Revenue CVD Equipment $ 12,738 $ 13,774 $ (1.036 ) (7.5 %) SDC 6,252 5,679 573 10.1 % CVD Materials 775 1,099 (324 ) (29.5 %) Intersegment sales elimination (303 ) (554 ) 251 * Total $ 19,462 $ 19,998 $ (536 ) (2.7 %) * Not meaningful Revenue Our revenue for the nine months ended September 30, 2024 was $19.5 million compared to $20.0 million for the nine months ended September 30, 2023, a decrease of 2.7%. The decrease in revenue versus the prior year period was primarily attributable to lower revenues of $1.0 million from our CVD Equipment segment and $0.3 million from our CVD Materials segment, offset in part by a $0.6 million increase in revenue from our SDC segment. Revenue from one aerospace customer for the nine months ended September 30, 2024 represented 31.2% of our total revenues and 47.7% of CVD Equipment segment revenues. The revenue contributed by the CVD Equipment segment for the nine months ended September 30, 2024 of $12.7 million represented 65.2% of overall revenue as compared to $13.8 million or 68.4% of overall revenue for the nine months ended September 30, 2023. The decrease in revenues of $1.0 million or 7.5% resulted principally from lower PVT150 systems and revenue from spares and parts offset by increases in revenues from aerospace contracts in progress. The revenue contributed by the SDC segment for the nine months ended September 30, 2024 of $6.3 million represented 30.6% of overall revenue as compared to $5.7 million or 26.1% of overall revenue for the nine months ended September 30, 2023. Revenue for our SDC segment increased by $0.6 million or 10.1% due to higher demand for gas delivery system products as compared to the prior period. The revenue contributed by the CVD Materials segment for the nine months ended September 30, 2024 of $0.8 million represented 4.0% of our overall revenue as compared to $1.1 million or 5.5% of overall revenue for the nine months ended September 30, 2023. The decrease of $0.3 million was principally due to the disposition of Tantaline in May 2023 and the wind down of MesoScribe’s operations. 29 Gross Profit Gross profit for the nine months ended September 30, 2024 was $4.3 million, with a gross profit margin of 22.1%, compared to a gross profit of $5.4 million and a gross profit margin of 27.1% for the nine months ended September 30, 2023. The decrease in gross profit of $1.1 million was primarily the result of lower revenue and lower gross margins on CVD Equipment contracts and a $1.0 million non-cash charge to reduce certain PVT inventory to net realizable value partially offset by improved in gross margins on SDC revenues and final MesoScribe sales. Research and Development For the nine months ended September 30, 2024, research and development expenses were $2.1 million, or 10.6% of revenue as compared to $1.9 million, or 9.3% for the nine months ended September 30, 2023, an increase of $0.2 million or 10.2%. The increase in 2024 was the result of lower costs allocated to cost of revenue and a recruitment fee for engineering staff. 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 $1.3 million or 6.5% of revenue for the nine months ended September 30, 2024 as compared to $1.3 million or 6.4% for the nine months ended September 30, 2023. There were no significant changes in selling expenses as compared to the prior period. General and Administrative General and administrative expenses for the nine months ended September 30, 2024 were $4.1 million or 20.8% of revenue compared to $4.4 million or 22.1% of revenue for the nine months ended September 30, 2023, a decrease of $0.4 million. The decrease in expenses was principally due to lower salaries of $0.1 million due to sale of Tantaline, lower bonuses and commissions of $0.1 million and lower professional fees of $0.1 million, offset by higher stock-based compensation expense of $0.1 million. Gain on Sale of Equipment During the three months ended September 30, 2024, we recognized a gain of $0.6 million on the sale of equipment related to our MesoScribe subsidiary representing the sale price of $0.8 million less the costs of the equipment sold of $0.2 million. Loss on disposition of Tantaline This item represents the net loss on the sale of our Tantaline subsidiary including professional fees. 30 Impairment Charge This item represents the loss on the impairment of certain assets of MesoScribe based on the decision to dispose of the subsidiary. Other Income (Expense), Net Other income (expense), net was $0.4 million and $0.5 million for the nine month periods ended September 30, 2024 and 2023, respectively. Other income is principally interest income on treasury bills. The reduction in other income, net was due to foreign exchange gain recorded and interest income on the employee retention credit received in 2023. 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. Liquidity and Capital Resources As of September 30, 2024, aggregate working capital was $13.3 million as compared to aggregate working capital of $14.3 million at December 31, 2023. Cash and cash equivalents at September 30, 2024 and December 31, 2023 were $10.0 million and $14.0 million, respectively. Net cash used in operating activities for the nine months ended September 30, 2024 was $3.7 million. This decrease was principally due to the net loss of $2.0 million, an increase in accounts receivable of $3.2 million, reduction in contract liabilities of $1.6 million offset by a reduction in inventory of $0.6 million and non-cash items of $2.5 million including a provision for excess and obsolete inventory of $1.0 million.. Net cash used in investing activities for the three months ended September 30, 2024 consisted of capital expenditures of $0.2 million related to purchases of equipment, building improvements and software. Net cash used in financing activities for the three months ended September 30, 2024 consisted of repayments of $0.1 million for 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 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. 31 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. 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. 32 There exist many inherent risks and uncertainties in estimating revenues, expenses and progress toward completion, particularly on larger or longer-term contracts. Changes in estimates of the total sales, related costs, and progress toward completion on such contracts may significantly impact the estimated gross margins, 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. 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.