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 receipt of and timing of future orders for our equipment; ● uncertainty as to our future growth and return to consistent profitability; ● 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; 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 guarantee 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. Executive Summary CVD Equipment Corporation (“CVD” or the “Company”) 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. 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 transitioned our operating model for our CVD Equipment business from vertically integrated fabrication to outsourced fabrication of certain components to reduce our fixed operating costs. 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. 18 On March 23, 2026, we entered into an asset purchase agreement with a third party to sell our SDC business division (“SDC”). The purchase price was approximately $16.9 million in cash, subject to customary purchase price adjustments. The transaction closed on April 1, 2026. The net cash proceeds from the sale of SDC we received in April 2026, after payment of transaction costs and employee related liabilities, were $14.8 million. Following the sale of SDC, CVD Equipment has approximately $23 million in cash and no long-term debt. We expect to use the proceeds from the transaction to enhance financial flexibility and support initiatives aimed at creating shareholder value. We retained ownership of our Saugerties, New York facility, which will be leased to the acquiring company for an initial term of two years. With the sale of our SDC business and the cessation of our MesoScribe business in 2024, we have one reportable segment consisting of our CVD Equipment division that manufactures chemical vapor deposition, physical vapor transport and thermal process equipment. We design, develop, and manufacture a broad range of equipment used to develop and produce materials and coatings for the aerospace, compound semiconductor, semiconductor, battery energy storage markets as well as advanced industrial applications, and research. Results from continuing operations during the quarter ended March 31, 2026 included: ● Revenue decreased by $4.5 million or 70.9% as compared to the prior period quarter due lower systems revenue due to reduced system bookings. ● Gross margin decreased by $1.6 million or 91.5% as compared to the prior period quarter due to the lower system revenues and lower absorption of fixed manufacturing costs. ● Decreases in revenue and gross margin for the quarter ended March 31, 2026 from lower system bookings were partially offset by a $0.3 million benefit from a contract modification. ● Total bookings for the first quarter of 2026 were approximately $1.8 million as compared to bookings of $0.8 million in the first quarter of 2025 due to higher non-system orders for spare parts. ● Backlog was $4.7 million at both December 31, 2025 and March 31, 2026. ● Cash and cash equivalents at March 31, 2026 were $8.2 million. Income from discontinued operations before transaction costs of our SDC business division declined from $0.6 million in the prior year quarter to $0.5 million in the current year quarter due to lower gross margins on higher revenues. Transaction costs associated with the sale of SDC consisted of legal and investment banking fees of $0.4 million for the quarter ended March 31, 2026. The total income from discontinued operations was $63,000 for the quarter ended March 31, 2026 as compared to $0.6 million for the prior year quarter due principally to the transaction costs incurred in connection with the sale of SDC. The Company filed a Form 8-K on April 7, 2026 that included pro forma financial information. Business Update As of December 31, 2025, we classified certain manufacturing equipment as held for sale with a fair value of $0.5 million based on an agreement we entered into in January 2026 with a third-party to sell the equipment for this amount. We received the proceeds from the sale in the first quarter of 2026 and also sold additional equipment for $46,000 that was no longer necessary for our business. Our core strategy remains focused on serving key markets related to aerospace, microelectronics/power electronics and industrial applications. 19 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. In microelectronics/power electronics, 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. In October 2025, we sold two PVT150™ units to 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 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, silicon carbide (“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. A potentially emerging market for our business is the nuclear energy industry. We are currently focused on two potential applications within this market. The first involves SiC chemical vapor infiltration systems used in the production of SiC tubing intended to replace traditional zirconium alloy fuel cladding. The second involves coating systems used to apply protective coatings to nuclear fuel pellets. We believe demand for both applications is being driven primarily by the development and deployment of small modular reactors. We intend to continue to focus on leading customers and strategic opportunities within this evolving market. 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. We operate in a challenging and uncertain global economic environment. Recent and potential actions by the U.S. federal administration, including changes in trade policy, export controls, and tariffs on imports from various countries and regions, as well as retaliatory or responsive actions by other governments, may adversely affect our supply chain, costs, demand for our products, receipt of orders and results of operations. In addition, we face ongoing risks related to geopolitical instability, including conflicts and tensions in Europe, the Middle East, and Asia, which may further disrupt global economic conditions and financial markets. Other factors contributing to economic uncertainty include inflationary pressures, elevated interest rates, disruptions in global logistics, labor market challenges, and potential changes in fiscal, tax, or regulatory policies. These conditions may impact customer spending decisions, order rates, project timing, and the availability and cost of materials and components used in our products. While our management continuously evaluates these conditions and has taken, and may take, actions intended to mitigate the potential adverse effects on our business, there can be no assurance that such actions will be successful. We are unable to predict the ultimate impact of these risks and uncertainties on our future results of our operations, financial position, or cash flows. 20 Results of Operations Quarters Ended March 31, 2026 and 2025 The following table presents revenue and expense line items reported in our condensed consolidated statements of operations for the quarters ended March 31, 2026 and 2025 and the period-over-period dollar and percentage changes for those line items (in thousands, except percentages). Unless otherwise specified, our discussion below reflects continuing operations only. Prior period financial information related to discontinued operations has been reclassified and separately presented in the condensed consolidated financial statements and accompanying notes to conform to the current period presentation. March 31 2026 2025 Change Percent Revenue $ 1,844 $ 6,332 $ (4,488 ) (70.9 )% Cost of revenue 1,697 4,598 (2,901 ) (63.1 )% Gross profit 147 1,734 (1,587 ) (91.5 )% Gross profit percentage 8.0 % 27.4 % Operating expenses: Research and development 727 734 (7 ) (1.0 )% Selling 240 367 (127 ) (34.6 )% General and administrative 1,022 953 69 7.2 % Gain on sale of equipment (46 ) - (46 ) 100.0 % Total operating expenses 1,943 2,054 (111 ) (5.4 )% Operating loss from continuing operations (1,796 ) (320 ) (1,476 ) 461.3 % Other income (expense): Interest income 71 110 (39 ) (35.5 )% Interest expense (1 ) (3 ) 2 (66.7 )% Total other income, net 70 107 (37 ) (34.6 )% Loss from continuing operations before income taxes (1,726 ) (213 ) (1,513 ) 710.3 % Income tax expense - 16 16 * Net loss from continuing operations (1,726 ) (229 ) (1,497 ) 653.7 % Discontinued operations: Income from discontinued operations 499 589 (90 ) (15.3 )% Transaction costs on disposal of discontinued operations (436 ) - (436 ) (100.0 )% Income from discontinued operations, net of taxes 63 589 (526 ) (89.3 )% Net income (loss) $ (1,663 ) $ 360 (2,023 ) * * Not meaningful 21 Revenue Our revenue for the quarter ended March 31, 2026, was $1.8 million compared to $6.3 million for the quarter ended March 31, 2025, a decrease of 70.9%. The decrease in revenue versus the prior year period was primarily attributable to lower system revenue due to lower bookings. The decrease was partially offset by $0.3 million benefit from a contract modification during the quarter. Revenue from three customers represented 227.2%, 21.7% and 17.3%, respectively, of our total revenues. Our order backlog at March 31, 2026, was approximately $4.7 million as compared to December 31, 2025, of $4.7 million. Our order backlog at March 31, 2026, consists of approximately $2.6 million related to remaining performance obligations of contracts in progress and not yet started and the balance of approximately $2.0 million represents other orders received from customers. As of March 31, 2026, one industrial customer represented 14.7% of our backlog and one aerospace customer represented 32.8% 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. Gross Profit Gross profit for the quarter ended March 31, 2026, was $0.1 million, with a gross profit margin of 8.0%, compared to a gross profit of $1.7 million and a gross profit margin of 27.4% for the quarter ended March 31, 2025. The decrease in gross profit of $1.6 million was primarily the result of lower system revenue and lower absorption of fixed manufacturing costs. Gross profit during the quarter ended March 31, 2026, benefited by $0.3 million from a contract modification. Research and Development For the quarter ended March 31, 2026, research and development expenses were $0.7 million, or 39.4% of revenue as compared to $0.7 million, or 11.6% of revenue for the quarter ended March 31, 2025. During the current quarter there was less time charged to contracts in progress that was offset by lower personnel costs. General engineering support and expenses related to the development of more standardized products and value-added development of existing products are reflected as part of research and development expense. General engineering support and expenses are charged to cost of revenue when work is performed directly on a customer order. Selling Selling expenses were $0.2 million or 13.0% of revenue for the quarter ended March 31, 2026 as compared to $0.4 million or 5.8% of revenue for the quarter ended March 31, 2025. The decrease was primarily due to lower personnel costs. General and Administrative General and administrative expenses were $1.0 million or 55.4% of revenue for the quarter ended March 31, 2026 as compared to $1.0 million or 15.1% of revenue for the quarter ended March 31, 2025. The increase was due to higher personnel and building maintenance costs. Gain on Sales of Equipment During the quarter ended March 31, 2026, we recognized a gain of $46,000 on the sale of equipment that was no longer necessary for our business. 22 Other Income, Net Other income, net was $70,000 for the quarter ended March 31, 2026, as compared to other income, net of $107,000 for the quarter ended March 31, 2025. Other income consists principally of interest earned on amounts invested in U.S. treasury securities and was lower than the prior period quarter due to less funds available for investment. 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. Discontinued Operations – SDC Income from discontinued operations before transaction costs of our SDC business division was $0.5 million in the current quarter as compared to $0.6 million for the quarter ended March 31, 2025. This decrease was primarily due to lower gross margins on higher revenues. Transaction costs associated with the sale of SDC consisted of legal and investment banking fees of $0.4 million for the quarter ended March 31, 2026. The total income from discontinued operations was $63,000 for the quarter ended March 31, 2026 as compared to $0.6 million for the quarter ended March 31, 2025 due principally to the transaction costs incurred in connection with the sale of SDC. Liquidity and Capital Resources As of March 31, 2026, aggregate working capital was $12.8 million. Cash and cash equivalents at March 31, 2026 were $8.2 million. The net cash proceeds from the sale of SDC received by us in April 2026, after payment of transaction costs and employee related liabilities, were $14.8 million, increasing our cash balance at the time to approximately $23 million. Net cash used in operating activities for the quarter ended March 31, 2026 was $0.9 million. This decrease was principally due to net loss of $1.6 million and a $0.3 million increase in contract assets due to revenue recognized on contracts in progress. These decreases were partially offset by non-cash expense items of $0.3 million, decrease in inventory of $0.3 million, a decrease in accounts receivable of $0.2 million and an increase of $0.3 million in accrued expenses. Net cash provided by investing activities for the quarter ended March 31, 2026 consisted of proceeds from the sale of assets held for sale and other equipment of $0.6 million partially offset by capital expenditures of $13,000 and an investment in a captive insurance company related to our health insurance program of $48,000. Net cash used in financing activities for the quarter ended March 31, 2026 consisted of the full repayment of an equipment loan in the amount of $181,000. As of March 31, 2026, we have no outstanding debt. 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. 23 Critical Accounting Estimates Use of Estimates This discussion and analysis of our financial condition and results of operations is based on our 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 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 3 – “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. 24 Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.