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 the future growth and return to consistent profitability; ● uncertainty as to our ability to execute on our transformation strategy; ● uncertainty as to the general state of the silicon carbide wafer end market; ● competition in our existing and potential future product lines of business, including our aerospace equipment and 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; ● uncertainty as to changes to international trade policies including the imposition of tariffs; ● uncertainty as to the impact of the current U.S. Government shutdown; 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. 21 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. Executive Summary CVD has served the advanced materials markets with chemical vapor deposition, physical vapor transport and thermal process equipment for over 40 years. We are headquartered in Central Islip, New York with our SDC division located in Saugerties, New York. We design, develop, and manufacture a broad range of equipment used to develop and produce materials and coatings for the aerospace, compound semiconductor, semiconductor, aerospace, battery energy storage markets as well as advanced industrial applications including nuclear, and research. We conduct our business through three reportable segments: (i) CVD Equipment that designs and manufactures chemical vapor deposition, physical vapor transport and thermal process equipment; (ii) SDC that designs and manufactures ultra-high purity gas and chemical delivery control systems; and (iii) MesoScribe that provided products related to advanced materials and coatings. The operations of MesoScribe were ceased during 2024. During the three months ended September 30, 2025 and 2024: ● Revenue decreased by $0.8 million or 9.6% as compared to the third quarter of 2024 due principally to lower MesoScribe revenue of $0.7 million which ceased operations in 2024. ● Gross profit increased by $0.7 million or 37.2% due to more profitable contract mix at CVD Equipment segment partially offset by lower MesoScribe revenues. ● Total bookings for the third quarter of 2025 were approximately $2.2 million as compared to bookings of $4.1 million in the third quarter of 2024. ● Total bookings for the nine months ended September 30, 2025 were approximately $9.5 million as compared to bookings of $21.0 million in the nine months ended September 30, 2024. ● Backlog declined from $13.2 million at June 30, 2025 to $8.0 million at September 30, 2025 due principally to lower orders in our CVD Equipment segment. ● Cash and cash equivalents at September 30, 2025 were $8.4 million as compared to $12.6 million at December 31, 2024. This decrease was principally due to the net loss during the period of $0.3 million, an increase in accounts receivable of $0.5 million, an increase in contract assets of $2.7 million, and a decrease in contract liabilities of $2.4 million which was partially offset by non-cash expenses of $1.2 million. 22 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. On November 6, 2025, our Board of Directors approved a comprehensive strategy to transform our Company in response to the continued fluctuations in our order rates and the recent decline in the bookings of our CVD Equipment division. As part of this strategy, we intend to transition the operating model for our CVD Equipment business from vertically integrated fabrication to outsourced fabrication of certain components. These actions are expected to reduce our fixed operating costs. Key initiatives of the plan include a reduction in the CVD Equipment division’s workforce, expected to reduce annual operating costs by approximately $2.0 million; outsourcing of the fabrication operations for certain components; and implementation of a revised sales strategy utilizing distributors and outside sales representatives to supplement internal sales efforts. Our SDC division will not be impacted by these actions. The transformation strategy also includes the exploration of strategic alternatives for businesses and product lines, including the potential sale or divestiture of assets or business lines. We expect to complete the workforce reduction plan during the fourth quarter of 2025 and anticipate incurring approximately $0.1 million in severance and other charges. In connection with the transformation plan, we may incur non-cash impairment charges in future periods with respect to certain of our long-lived assets to the extent that any such assets are disposed of for amounts less than their book values. In October 2025, we received an order for two PVT150™ Physical Vapor Transport Systems (PVT) from Stony Brook University (SBU) for their new semiconductor research center - onsemi Silicon Carbide Crystal Growth Center. The recently launched research center will enable SBU faculty, scientists, and students to conduct research on silicon carbide crystal growth and other wide band gap (WBG) materials and device-enabling technologies critical to improving energy efficiency in power semiconductors and foster the next generation of skilled professionals in this field. Our PVT reactor design and control system architecture allows for precise process and temperature control enabling run-to-run repeatability and system-to-system matching. The PVT system platform is also being considered to process other WBG materials such as aluminum nitride (AlN) to support the development of emerging, high performance semiconductor materials. 23 Our PVT systems may provide us with standard product offerings to continue to support the EV focused market as well as energy storage, power conversion and power transmission. In addition, SiC semiconductors specifically help address the need for high energy efficiency and power density in the AC-DC stage in power supply units for AI data centers. We plan to evaluate the market conditions and opportunities to expand our product offerings in the power electronics market. In February 2024, we received an order from a customer for our PVT200 system used to grow silicon carbide crystals for the manufacture of 200 mm wafers. We shipped this unit to the customer in the third quarter of 2024 and it continues to be evaluated. 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. The global economy continues to confront the impacts of recent executive orders by the U.S. federal administration regarding tariffs on imports from various countries including the European Union, Canada, Mexico, and China and the potential impact of actions taken by other countries in response to the announced tariffs. Tariffs may make our products less cost competitive and reduce gross margins. The impact on our business related to these or any other tariffs that may be imposed, is uncertain and depends on multiple factors, including the duration and expansion of current tariffs, future changes to tariff rates, scope or enforcement, retaliatory measures by impacted trade partners, and related inflationary effects. On September 30, 2025, the continuing resolution (CR) allowing U.S. government departments and agencies to operate through the end of the government fiscal year expired and the U.S. government shut down most of its operations. As a result of the U.S. government shutdown, our business and results of operations may be impacted by the disruptions to federal government offices, workers, and operations, including disruptions relating to the funding of research activities to both universities and companies that may result in delays in new orders or the loss of orders. We may also experience similar impacts in the event of a series of short-term continuing resolutions rather than full-year fiscal year 2026 appropriations. Generally, the significance of these impacts will primarily be based on the length of the shutdown and timing of passage of a new CR or a full budget. On July 4, 2025, “An Act to Provide for Reconciliation Pursuant to Title II of the H. Con. Res. 14” (the Act) was enacted. The Act provides for several corporate tax changes including, but not limited to, restoring full expensing of domestic research and development costs, restoring immediate deductibility of certain capital expenditures, and changes in the computations of U.S. taxation on international earnings. Historically, our orders have fluctuated based on end user market conditions, adoption of our new products and acceptance of our products. The current economic uncertainty regarding tariffs may potentially affect our future order rate. The order rate as well as other factors in our manufacturing process ultimately impacts on 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. 24 Results of Operations Three Months Ended September 30, 2025 and 2024 The following table presents revenue and expense line items reported in our condensed consolidated statements of operations for the three months ended September 30, 2025 and 2024 and the period-over-period dollar and percentage changes for those line items (in thousands, except percentages). Three months ended September 30 2025 2024 Change Percent Revenue $ 7,408 $ 8,194 $ (786 ) (9.6 )% Cost of revenue 4,987 6,430 (1,443 ) (22.4 )% Gross profit 2,421 1,764 657 37.2 % Gross margin 32.7 % 21.5 % Operating expenses: Research and development 594 644 (50 ) (7.8 )% Selling 328 423 (95 ) (22.5 )% General and administrative 1,191 1,245 (54 ) (4.3 )% Gain on sale of equipment - (625 ) 625 100.0 % Total operating expenses 2,113 1,687 426 25.3 % Operating income 308 77 231 300.0 % Other income (expense): Interest income 79 136 (57 ) (41.9 )% Interest expense (3 ) (5 ) 2 40.0 % Total other income, net 76 131 (55 ) (42.0 )% Income before income taxes 384 208 176 84.6 % Income tax expense - 5 (5 ) 100.0 % Net income $ 384 $ 203 $ 181 89.2 % 25 Three months ended September 30 2025 2024 Change Percent Revenues CVD Equipment $ 5,677 $ 5,684 $ (7 ) (0.1 )% SDC 1,858 2,005 (147 ) (7.3 )% MesoScribe 6 661 (655 ) (99.1 )% Intersegment sales elimination (133 ) (156 ) 23 14.7 % Total $ 7,408 $ 8,194 $ (786 ) (9.6 )% Revenue Our revenue for the three months ended September 30, 2025 was $7.4 million compared to $8.2 million for the three months ended September 30, 2024, a decrease of $0.8 million or 9.6%. The decrease in revenue versus the prior year period was primarily attributable to lower revenue of $0.7 million from our MesoScribe segment which ceased operations in 2024. Revenue from three customers for the quarter ended September 30, 2025 represented 22.7%, 19.1% and 13.6%, respectively, of our total revenues and 29.7%, 24.9%, and 17.5%, respectively, of CVD Equipment segment revenues. The revenue contributed by our CVD Equipment segment for the quarter ended September 30, 2025 of $5.7 million (net of intersegment revenue of $2,000) represented 76.6% of overall revenue as compared to $5.7 million (net of intersegment revenue of $5,000) or 69.3% of overall revenue for the quarter ended September 30, 2024. Lower revenues from system contracts in progress were offset by revenue recognized on one contract that was modified during the third quarter of 2025 to allow revenue to be recognized over time. Revenue recognized from this contract was approximately $1.0 million during the third quarter ended September 30, 2025. The revenue contributed by our SDC segment for the quarter ended September 30, 2025 of $1.7 million (net of intersegment sales of $130,000) represented 23.3% of overall revenue as compared to $1.9 million (net of intersegment sales of $151,000) or 22.6% of overall revenue for the quarter ended September 30, 2024. SDC segment revenue decreased by $0.1 million or 7.3% due to less contracts in progress during the quarter. Our order backlog at September 30, 2025 was approximately $8.0 million as compared to $13.2 million at June 30, 2025. Our order backlog at September 30, 2025 consists of approximately $6.8 million related to remaining performance obligations of contracts in progress and not yet started and the balance of approximately $1.2 million represents non-system orders received from customers. As of September 30, 2025, one industrial customer represented 23.8% of our backlog and one aerospace customer represented 24.7% 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 impact on the timing of revenue recognition. Accordingly, orders received from customers and revenue recognized may fluctuate from quarter to quarter. 26 Gross Profit Gross profit for the three months ended September 30, 2025 was $2.4 million, with a gross margin of 32.7%, compared to a gross profit of $1.8 million and a gross margin of 21.5% for the three months ended September 30, 2024. The increase in gross profit of $0.7 million was principally due to more profitable contract mix at CVD Equipment segment partially offset by lower MesoScribe revenues. The gross profit of our CVD Equipment segment includes $0.6 million related to the revenue recognized as the result of a contract modification. The gross profit of our SDC segment was negatively impacted by $0.1 million of non-recurring equipment certification costs. Research and Development For the three months ended September 30, 2025, research and development expenses were $0.6 million, or 8.0% of revenue as compared to $0.6 million, or 7.9% of revenue for the three months ended September 30, 2024, a decrease of $50,000 or 7.8%. The decrease in 2025 was the result of a reduction in personnel partially offset by less hours being charged to cost of revenue for 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 goods sold when work is performed directly on a customer order. Selling Selling expenses were $0.3 million or 4.4% of the revenue for the three months ended September 30, 2025 as compared to $0.4 million or 5.2% of revenue for the three months ended September 30, 2024, a decrease of $0.1 million or 22.5%. The decrease was the result of a reduction in personnel. General and Administrative General and administrative expenses for the three months ended September 30, 2025 were $1.2 million or 16.1% of revenue compared to $1.2 million or 15.2% of revenue for the three months ended September 30, 2024, a decrease of $0.1 million or 4.3%. There were no significant changes in general and administrative expenses. 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. 27 Other Income (Expense), Net Other income (expense) consists principally of interest income on U.S. treasury securities and was lower than the prior year quarter due to less funds available for investment and lower interest rates. Income Taxes We continue to evaluate the potential utilization of our net deferred tax asset, which has been fully reserved for, on a quarterly basis, by reviewing our economic models, including projections of future operating results. Nine Months Ended September 30, 2025 versus September 30, 2024 The following table presents revenue and expense line items reported in our condensed consolidated statements of operations for the nine months ended September 30, 2025 and 2024 and the period-over-period dollar and percentage changes for those line items (in thousands, except percentages). Nine months ended September 30 2025 2024 Change Percent Revenue $ 20,836 $ 19,462 $ 1,374 7.1 % Cost of revenue 14,646 15,371 (725 ) (4.7 )% Gross profit 6,190 4,091 2,099 51.3 % Gross margin 29.7 % 21.0 % Operating expenses: Research and development 2,061 2,055 6 0.3 % Selling 1,097 1,268 (171 ) (13.5 )% General and administrative 3,595 3,844 (249 ) (6.5 )% Gain on sale of equipment - (625 ) 625 100.0 % Total operating expenses 6,753 6,542 211 3.2 % Operating loss (563 ) (2,451 ) 1,888 (77.0 )% Other income (expense): Interest income 272 438 (166 ) (37.9 )% Interest expense (10 ) (14 ) 4 (28.6 )% Other income - 2 (2 ) (100.0 )% Total other income, net 262 426 (164 ) (38.5 )% Loss before income taxes (301 ) (2,025 ) 1,724 85.1 % Income tax expense 16 5 11 220.0 % Net loss $ (317 ) $ (2,030 ) $ 1,713 84.4 % 28 Nine months ended September 30 2025 2024 Change Percent Revenue CVD Equipment $ 15,396 $ 12,738 $ 2,658 20.9 % SDC 5,734 6,252 (518 ) (8.3 )% MesoScribe 36 775 (739 ) (95.4 )% Intersegment sales elimination (330 ) (303 ) (27 ) (8.9 )% Total $ 20,836 $ 19,462 $ 1,374 7.1 % Revenue Our revenue for the nine months ended September 30, 2025 was $20.8 million compared to $19.5 million for the nine months ended September 30, 2024, an increase of $1.4 million or 7.1%. The increase in revenue versus the prior year period was primarily attributable to higher revenues of $2.7 million from our CVD Equipment segment offset by lower revenues of $0.7 million from our MesoScribe segment and $0.5 million from our SDC segment. Revenue from two customers for the nine months ended September 30, 2025 represented 30.2% and 16.7%, respectively, of our total revenues and 41.0% and 22.7%, respectively, of CVD Equipment segment revenues. The revenue contributed by the CVD Equipment segment for the nine months ended September 30, 2025 of $15.4 million (net of intersegment revenue of $13,000) represented 73.6% of overall revenue as compared to $12.7 million (net of intersegment revenue of $5,000) or 65.4% of overall revenue for the nine months ended September 30, 2024. The increase in revenues of $2.7 million or 20.9% was principally due to higher contract revenues from contracts in progress of $1.6 million and higher non-system revenues of $1.0 million. The revenue contributed by the SDC segment for the nine months ended September 30, 2025 of $5.4 million (net of intersegment revenue of $0.3 million) represented 26.0% of overall revenue as compared to $5.9 million (net of intersegment revenue of $0.3 million) or 30.6% of overall revenue for the nine months ended September 30, 2024. Revenue for our SDC segment decreased by $0.5 million or 8.3% due to less contracts in progress during the period. Gross Profit Gross profit for the nine months ended September 30, 2025 was $6.2 million, with a gross margin of 29.7%, compared to a gross profit of $4.1 million and a gross margin of 21.0% for the nine months ended September 30, 2024. The increase in gross profit of $2.1 million was principally due to higher system and non-system revenues in our CVD Equipment segment offset by lower revenues in our SDC and MesoScribe segments. The gross profit of our CVD Equipment segment includes $0.6 million related to the revenue recognized as the result of a contract modification. The gross profit of our SDC segment was negatively impacted by $0.1 million of non-recurring equipment certification costs. 29 Research and Development For the nine months ended September 30, 2025, research and development expenses were $2.1 million, or 9.9% of revenue as compared to $2.1 million, or 10.6% of revenue for the nine months ended September 30, 2024, an increase of $6,000 or 0.3%. Reductions in personnel was offset by less hours being charged to cost of revenue for 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 goods sold when work is performed directly on a customer order. Selling Selling expenses were $1.1 million or 5.3% of revenue for the nine months ended September 30, 2025 as compared to $1.3 million or 6.5% of revenue for the nine months ended September 30, 2024, a decrease of $0.1 million or 13.5%. The decrease was the result of a reduction in personnel. General and Administrative General and administrative expenses for the nine months ended September 30, 2025 were $3.6 million or 17.3% of revenue compared to $3.8 million or 19.8% of revenue for the nine months ended September 30, 2024, a decrease of $0.2 million or 6.5%. The decrease in expenses was principally due to lower professional fees, lower bonus accrual and the cessation of MesoScribe’s operations. Gain on Sale of Equipment During the nine 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) consists principally of interest income on U.S. treasury securities and was lower than the prior year period due to less funds available for investment and lower interest rates. Income Taxes We continue to evaluate the potential utilization of our net deferred tax asset, which has been fully reserved for, on a quarterly basis, by reviewing our economic models, including projections of future operating results. 30 Liquidity and Capital Resources As of September 30, 2025, aggregate working capital was $14.6 million as compared to aggregate working capital of $13.8 million at December 31, 2024. Cash and cash equivalents at September 30, 2025 and December 31, 2024 were $8.4 million and $12.6 million, respectively. Net cash used in operating activities for the nine months ended September 30, 2025 was $4.1 million. This decrease was principally due to the net loss of $0.3 million, an increase in accounts receivable of $0.5 million, an increase in contract assets of $2.7 million and a decrease in contract liabilities of $2.4 million which was partially offset by non-cash expenses of $1.2 million. Net cash used in investing activities for the nine months ended September 30, 2025 consisted of capital expenditures of $49,000 related to purchases of property and equipment and investment in a captive insurance company related to our self-insured health benefits program of $51,000. Net cash used in financing activities for the nine months ended September 30, 2025 consisted of repayments of $65,000 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 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 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, we base our 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 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. 31 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. 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. 32 Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.