CVD EQUIPMENT CORP 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors discussed in this report and those discussed in other documents we file with the SEC. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions as of the date of this report. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Past performance does not guarantee future results. 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. During 2024: ● Revenue increased by $2.8 million or 11.5% as compared to the prior year due to increases in revenues from aerospace and industrial contracts in progress and our SDC segment that was partially offset by lower revenues of spare parts and lower revenues from Tantaline that was sold in May 2023. ● Gross margin increased by $1.3 million or 24.8% as compared to the prior year due to higher revenues and improved margins on contracts in process offset by a $1.3 million non-cash charge to reduce certain PVT inventory to net realizable value. ● Total bookings for 2024 were approximately $28.1 million as compared to $25.8 million in 2023, an increase of $2.3 million or 8.9%. ● 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 2024 also included a $3.5 million order from a major aerospace company for the production of CVI systems. This is the fifth system purchased by this customer that will be used by our customer to manufacture CMCs for their gas turbine jet engines. ● Our backlog increased from $18.4 million to $19.4 million, an increase of $0.8 million or 4.9%. ● Cash balance at December 31, 2024 was $12.6 million as compared to $14.0 million at December 31, 2023 31 Business Update Our core strategy is to focus on growth end markets in applications related to aerospace, microelectronics including markets related to 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. 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 planned to use our systems to manufacture 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 sales which may reduce demand for silicon carbide and impact sales of our PVT systems. In addition, the current 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. 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 from the same aerospace company 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 and the units are expected to be delivered over 18 to 24 months period. 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. 32 Results of Operations Years Ended December 31, 2024 and 2023 The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for the years ended December 31, 2024, and 2023 and the period-over-period dollar and percentage changes for those line items (in thousands, except percentages). December 31, 2024 December 31, 2023 Change Percent Revenue $ 26,876 $ 24,109 $ 2,767 11.5 % Cost of revenue 20,545 19,038 1,507 7.9 % Gross profit 6,331 5,071 1,260 24.8 % Operating expenses Research and development 2,627 2,596 31 1.2 % Selling 1,656 1,632 24 1.5 % General and administrative 5,181 5,451 (270 ) (5.0 %) Gain on sales of equipment (717 ) - (717 ) * Loss on disposition of Tantaline - 162 (162 ) * Impairment charge - 111 (111 ) * Total operating expenses 8,747 9,952 (1,205 ) (12.1 %) Operating loss (2,416 ) (4,881 ) 2,465 50.5 % Other income (expense): Interest income 559 577 (18 ) (3.1 %) Interest expense (19 ) (23 ) 4 (17.4 %) Foreign exchange income - 42 (42 ) * Other income 2 91 (89 ) * Total other income, net 542 687 (145 ) (21.1 %) Loss before income tax (1,874 ) (4,194 ) 2,320 (55.3 %) Income tax expense (benefit) 24 (14 ) 38 * Net loss $ (1,898 ) $ (4,180 ) $ 2,282 54.6 % * Not meaningful 33 Revenue December 31, 2024 December 31, 2023 Change Percent CVD Equipment $ 18,288 $ 16,334 $ 1,954 12.0 % SDC 8,444 7,139 1,305 18.3 % MesoScribe 778 722 56 7.8 % Tantaline - 462 (462 ) (100.0 %) Intersegment sales elimination (634 ) (548 ) (86 ) 15.7 % Total $ 26,876 $ 24,109 $ 2,767 11.5 % Our revenue for the year ended December 31, 2024 was $26.9 million compared to $24.1 million for the year ended December 31, 2023, an increase of $2.8 million or 11.5%. The increase in revenue versus the prior year period was primarily attributable to higher revenue of $1.9 million from our CVD Equipment segment and a $1.3 million increase in revenue from our SDC segment, offset by lower Tantaline revenues of $0.5 million that was sold in May 2023. Revenue from one aerospace customer for the year ended December 31, 2024 represented 29.5% of our total revenues and 43.4% of CVD Equipment segment revenues. The revenue contributed by our CVD Equipment segment for the year ended December 31, 2024 of $18.3 million represented 68.1% of overall revenue as compared to $16.2 million (net of intersegment sales of $0.1 million) or 67.8% of overall revenue for the year ended December 31, 2023. The increase in external revenues of $2.1 million or 11.3% resulted principally from increases in revenues from aerospace and industrial contracts in progress offset in part by lower revenue for PVT150/200 systems and spare parts. The revenue contributed by our SDC segment for the year ended December 31, 2024 of $7.8 million (net of intersegment sales of $0.6 million) represented 29.1% of overall revenue as compared to $6.7 million (net of intersegment sales of $0.4 million) or 27.8% of overall revenue for the year ended December 31, 2023. External revenue for our SDC segment increased by $1.1 million or 16.4% due to higher demand for gas delivery system products as compared to the prior period. The revenue contributed by our MesoScribe segment for the year ended December 31, 2024 of $0.8 represented 2.9% of our overall revenue as compared to $0.7 million or 3.0% of overall revenue for the year ended December 31, 2023. MesoScribe fulfilled its final orders during 2024 and ceased operations. Our order backlog at December 31, 2024 was approximately $19.4 million as compared to December 31, 2023 of $18.4 million. Our order backlog at December 31, 2024 consists of approximately $17.4 million related to remaining performance obligations of contracts in progress and not yet started and the balance of approximately $1.9 million represents other orders received from customers. As of December 31, 2024, one industrial customer represented 41.8% of our backlog and one aerospace customer represented 27.1% of our backlog. Historically, our revenues and orders have fluctuated based on changes in order rate as well as other factors in our manufacturing process that impacts the timing of revenue recognition. Accordingly, orders received from customers and revenue recognized may fluctuate from quarter to quarter. 34 Gross Profit Gross profit for the year ended December 31, 2024 amounted to $6.3 million, with a gross profit margin of 23.6%, compared to a gross profit of $5.1 million and a gross profit margin of 21.0% for the year ended December 31, 2023. The increase in gross profit of $1.3 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 $1.3 million non-cash charge to reduce certain PVT inventory to net realizable value. Research and Development For the year ended December 31, 2024, research and development expenses were $2.6 million, or 9.8% of revenue as compared to $2.6 million, or 10.8% for the year ended December 31, 2023. There were no significant changes in research and development expenses as compared to the prior year. General engineering support and expenses related to the development of more standard 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 $1.7 million or 6.2% of the revenue for the year ended December 31, 2024 as compared to $1.6 million or 6.8% for the year ended December 31, 2023. There were no significant changes in selling expenses as compared to the prior year. General and Administrative General and administrative expenses for the year ended December 31, 2024 were $5.2 million or 19.3% of revenue compared to $5.4 million or 22.6% of revenue for the year ended December 31, 2023, a decrease of $0.3 million. The decrease in 2024 was due to lower employee compensation and lower professional fees. Gain on Sales of Equipment During 2024, we recognized a gain of $0.6 million on the sale of equipment related to MesoScribe representing the sale price of $0.8 million less the costs of the equipment sold of $0.2 million. We also recognized a gain of $42,000 on the sale of equipment by our CVD Equipment. 35 Loss on Disposition of Tantaline This expense of $162,000 represents the net loss on the sale of our Tantaline subsidiary including professional fees. This disposition was completed in 2023. Impairment Charge This expense represents the loss on the impairment of certain assets of MesoScribe based on the decision to wind down its operations made in 2023. Other Income, Net Other income, net was $0.5 million for the year ended December 31, 2024 as compared to other income, net of $0.7 million for the year ended December 31, 2023. Other income is principally interest income on treasury bills. Income Taxes Income tax expense (benefit) for the years ended December 31, 2024 and 2023, was $24,000 and $(14,000) respectively. We continue to evaluate for 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. Inflation and Supply Chain Matters We experienced increased costs on certain materials and components as well as delays in supply chain delivery, which may also impact our ability to recognize revenue and reduce our gross profit margins, as well as extend our manufacturing lead times and reduce our manufacturing efficiencies. We have commenced placing orders with more lead time to help mitigate the manufacturing delays, as well as assessing other suppliers or components to attempt to mitigate the potential cost impacts. In addition, we are utilizing our in-house flexible manufacturing to attempt to further mitigate both potential schedule delivery delays and material cost increase. While we have initiated actions to mitigate the potential negative impacts to our revenue and profitability, there can be no assurance of the ultimate impact and the length of time that the supply chain factors may impact our revenues and profitability. Inflation has also had an impact on salaries and compensation. To remain competitive in the acquisition and retention of our employees, we have reviewed and adjusted salaries and implemented bonus incentives to mitigate the potential negative impacts of inflation on our employees. Any significant increases in tariffs on goods that we purchase could negatively affect our business and results of operations by increasing the cost to manufacture our products. 36 Liquidity and Capital Resources As of December 31, 2024, we had aggregate working capital of $13.9 million compared to aggregate working capital of $14.3 million at December 31, 2023. Our cash and cash equivalents at December 31, 2024 and 2023 were $12.6 million and $14.0 million, respectively. Net cash used in operating activities during 2024 was $1.5 million and was principally due to the net loss of $1.9 million and reductions in contract assets and liabilities of $2.4 million, offset by a reduction in inventory of $0.6 million, and non-cash items of $2.6 million including a provision for excess and obsolete inventory of $1.6 million. Net cash provided by investing activities for the year ended December 31, 2024 consisted of proceeds from the sales of equipment of $0.2 million offset by capital expenditures of $0.1 million. Net cash used in financing activities for the year ended December 31, 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-K. 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 Use of 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. 37 We consider the following estimates within our significant accounting policies to be critical because of their complexity and the high degree of judgment involved in maintaining them. See Note 2 – “Summary of Significant Accounting Policies” of our Consolidated Financial Statements for additional information regarding our accounting policies 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. We have been engaged in the production and delivery of goods on a continual basis under contractual arrangements for many years. Historically, we have demonstrated an ability to accurately estimate total revenues and total expenses relating to our long-term contracts. However, 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. 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. It is not possible for us to predict the likelihood of any possible future impairments or, if such an impairment were to occur, the magnitude of any impairment. 38 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable. Item 8. Financial Statements and Supplementary Data. The consolidated financial statements required by this item are included in this Annual Report on Form 10-K beginning on page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.