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 the acceptance of our equipment launched in 2024 and 2025; ● 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 PVT 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 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. 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. 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 and continued 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. 18 The transformation strategy also includes the exploration of strategic alternatives for remaining business and product lines, including the potential sale, divestiture or acquisition of assets or business lines. 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 $17.4 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 $15.7 million. The Company expects to pay approximately $0.7 million in estimated income taxes related to the gain on the sale of SDC in the third quarter of 2026. Following the sale of SDC, the Company has $23.5 million in cash and no long-term debt as of June 30, 2026. We expect to use the proceeds from the transaction to enhance our financial flexibility as we continue to evaluate strategic opportunities for the CVD Equipment business, its product lines, and our facilities and possible acquisition of other product lines or businesses We retained ownership of our Saugerties, New York facility following the sale of SDC, which is leased to the acquiring company for an initial term of two years at fair market value. 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 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. During the quarter ended June 30, 2026 (from continuing operations): ● Revenue decreased by $1.4 million or 42.6% as compared to the second quarter of 2025 from lower systems revenue due to reduced system bookings. ● Gross profit decreased by $0.2 million or 31.6% as compared to the second quarter of 2025 due to the lower system revenues. ● Total bookings for the second quarter of 2026 were approximately $1.2 million as compared to bookings of $1.5 million in the second quarter of 2025. Bookings for the second quarter of 2026 included one system order for $0.8 million with the balance consisting of non-system orders. ● Total bookings for the first half of 2026 were approximately $2.9 million as compared to bookings of $2.3 million in the first half of 2025. ● Backlog declined from $4.6 million at March 31, 2026 to $3.9 million at June 30, 2026 due to lower system orders. ● Cash and cash equivalents at June 30, 2026 were $23.5 million as compared to $8.7 million at December 31, 2025 as a result of the receipt of proceeds from the divestiture of SDC in April 2026. Subsequent to quarter-end, the customer that placed the approximately $0.8 million system order filed a prepackaged Chapter 11 bankruptcy proceeding. The customer’s public disclosures indicate that general unsecured trade creditors are expected to be unimpaired under the proposed plan of reorganization; however, there can be no assurance that the customer will proceed with the purchase as originally contemplated or that the bankruptcy process will not adversely affect the order. The Company will be monitoring the proceedings and evaluating the potential impact, if any, on its backlog, financial position, results of operations, and cash flows. 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 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. We have generally gained new customers through our industry reputation, as well as trade show attendance, digital marketing and print advertising. We have increased the number of trade shows and industry conferences we attend. We continue to 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 Three Months Ended June 30, 2026 and 2025 The following table presents revenue and expense line items reported in our condensed consolidated statements of operations for the three months ended June 30, 2026 and 2025 and the period-over-period dollar and percentage changes for those line items (in thousands, except percentages). Three months ended June 30 2026 2025 Change Percent Revenue $ 1,953 $ 3,404 $ (1,451 ) (42.6 )% Cost of revenue 1,624 2,923 (1,299 ) (44.4 )% Gross profit 329 481 (152 ) (31.6 )% Gross margin 16.8 % 14.1 % Operating expenses: Research and development 685 639 46 7.2 % Selling 232 282 (50 ) (17.7 )% General and administrative 971 931 40 4.3 % Total operating expenses 1,888 1,852 36 1.9 % Operating loss from continuing operations (1,559 ) (1,371 ) (188 ) 13.7 % Other income (expense): Interest income 190 82 108 131.7 % Interest expense - (3 ) 3 * Rental income, net of expenses (3 ) - (3 ) * Total other income, net 187 79 108 136.7 % Loss from continuing operations before income taxes (1,372 ) (1,292 ) (80 ) 6.2 % Income tax expense - - - * Net loss from continuing operations (1,372 ) (1,292 ) (80 ) 6.2 % Income from discontinued operations, net of income taxes 13,937 231 13,706 * Net income (loss) $ 12,565 $ (1,061 ) $ 13,626 * * Not meaningful Revenue Our revenue for the three months ended June 30, 2026 was $2.0 million compared to $3.4 million for the three months ended June 30, 2025, a decrease of $1.4 million or 42.6%. 21 The decrease in revenue versus the prior year period was primarily attributable to lower system revenue due to lower bookings being partially offset by an increase in non-system revenues. Revenue from two customers represented 50.9% and 24.3% of our revenues, respectively. Our order backlog at June 30, 2026 was approximately $3.9 million as compared to $4.6 million at March 31, 2026. Our order backlog at June 30, 2026 consists of approximately $2.7 million related to remaining performance obligations of contracts in progress and the balance of approximately $1.1 million represents other orders received from customers. As of June 30, 2026, one aerospace customer represented 36.0% 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 three months ended June 30, 2026 was $0.3 million, with a gross margin of 16.8%, compared to a gross profit of $0.5 million and a gross margin of 14.1% for the three months ended June 30, 2025. The decrease in gross profit of $0.2 million was principally due to lower system revenues partially offset by an increase in non-system revenues. Research and Development For the three months ended June 30, 2026, research and development expenses were $0.7 million, or 35.1% of revenue as compared to $0.6 million, or 18.8% of revenue for the three months ended June 30, 2025, an increase of $46,000 or 7.2%. The increase in 2026 was the result of less hours being charged to cost of revenue for contracts in progress partially offset by a reduction in personnel. 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 $0.2 million or 11.9% of the revenue for the three months ended June 30, 2026 as compared to $0.3 million or 8.4% of revenue for the three months ended June 30, 2025, a decrease of $50,000 or 17.7%. The decrease was the result of a reduction in personnel. General and Administrative General and administrative expenses for the three months ended June 30, 2026 were $1.0 million or 49.7% of revenue compared to $0.9 million or 27.4% of revenue for the three months ended June 30, 2025, an increase of $40,000 or 4.3%. The increase in 2026 was due principally to higher professional fees. Other Income (Expense), Net Other income (expense) consists principally of interest income on U.S. treasury securities and increased as the result of investment of the proceeds from the divestiture of SDC. 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. 22 Discontinued Operations – SDC Income from discontinued operations for the second quarter consists solely of the gain on the divestiture of the SDC of $13.9 million, net of income tax expense of $0.7 million. We incurred $0.4 million of transaction costs in the first quarter of 2026 resulting in a total net gain of $13.5 million on the divestiture of SDC. Six Months Ended June 30, 2026 versus June 30, 2025 The following table presents revenue and expense line items reported in our condensed consolidated statements of operations for the six months ended June 30, 2025 and 2024 and the period-over-period dollar and percentage changes for those line items (in thousands, except percentages). Six months ended June 30 2026 2025 Change Percent Revenue $ 3,798 $ 9,737 $ (5,939 ) (61.0 )% Cost of revenue 3,321 7,451 (4,130 ) (55.4 )% Gross profit 477 2,286 1,809 (79.1 )% Gross margin 12.6 % 23.5 % Operating expenses: Research and development 1,413 1,373 40 2.9 % Selling 472 649 (177 ) (27.3 )% General and administrative 1,992 1,954 38 1.9 % Gain on sale of equipment (46 ) - (46 ) * Total operating expenses 3,831 3,976 (145 ) (3.6 )% Operating loss from continuing operations (3,354 ) (1,690 ) (1,664 ) 98.5 % Other income (expense): Interest income 261 192 69 35.9 % Interest expense (1 ) (7 ) 6 (85.7 )% Rental income, net of expenses (3 ) - (3 ) * Total other income, net 257 185 72 38.9 % Loss from continuing operations before income taxes (3,097 ) (1,505 ) (1,592 ) 105.8 % Income tax expense - 16 (16 ) * Net loss from continuing operations (3,097 ) (1,521 ) (1,576 ) 103.6 % Income from discontinued operations, net of income taxes 13,999 820 13,179 * Net income (loss) $ 10,902 $ (701 ) $ 11,603 * * Not meaningful 23 Revenue Our revenue for the six months ended June 30, 2026 was $3.8 million compared to $9.7 million for the six months ended June 30, 2025, a decrease of $5.9 million or 61.0%. The decrease was partially offset by $0.3 million benefit from a contract modification during the six months ended June 30, 2026. The decrease in revenue versus the prior year period was primarily attributable to lower system revenue due to lower bookings. Revenue from three customers represented 39.4%, 20.9% and 14.3% of our revenues, respectively. Gross Profit Gross profit for the six months ended June 30, 2026 was $0.5 million, with a gross margin of 12.6%, compared to a gross profit of $2.3 million and a gross margin of 23.5% for the six months ended June 30, 2025. The decrease in gross profit of $1.8 million was principally due to lower system revenues. Research and Development For the six months ended June 30, 2026, research and development expenses were $1.4 million, or 37.2% of revenue as compared to $1.4 million, or 14.1% of revenue for the six months ended June 30, 2025, an increase of $40,000 or 2.9%. The increase in 2026 was the result of less hours being charged to cost of revenue for contracts in progress being partially offset by a reduction in personnel. 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 $0.5 million or 12.4% of the revenue for the six months ended June 30, 2026 as compared to $0.6 million or 6.7% of revenue for the six months ended June 30, 2025, a decrease of $0.2 million or 27.3%. The decrease was the result of a reduction in personnel. General and Administrative General and administrative expenses for the six months ended June 30, 2026 were $2.0 million or 52.4% of revenue compared to $2.0 million or 20.1% of revenue for the six months ended June 30, 2025, an increase of $38,000 or 1.9%. The increase was principally due to higher professional fees. Gain on Sales of Equipment We recognized a gain of $46,000 on the sale of equipment that was no longer necessary for our business during the first quarter of 2026. Other Income (Expense), Net Other income (expense) consists principally of interest income on U.S. treasury securities and increased as the result of investment of the proceeds from the divestiture of SDC. 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. 24 Discontinued Operations – SDC Income from discontinued operations consists of $0.5 million from the operations of SDC during the first quarter of 2026 and the gain on the sale of the divestiture of SDC of $13.5 million. The gain is net of related income tax expense of $0.7 million. Liquidity and Capital Resources As of June 30, 2026, aggregate working capital was $25.8 million as compared to aggregate working capital of $14.1 million at December 31, 2025. Cash and cash equivalents at June 30, 2026 and December 31, 2025 were $23.5 million and $8.7 million, respectively. Net cash used in operating activities for the six months ended June 30, 2026 was $1.3 million. This use of net cash was principally due to the net loss from continuing operations of $3.1 million, a $0.9 million increase in accounts receivable and a $0.3 million reduction in accounts payable. These decreases were partially offset by non-cash expense items of $0.7 million, decrease in contract assets of $1.7 million, and a decrease in inventory of $0.4 million. Net cash provided by investing activities for the six months ended June 30, 2026 principally consisted of net proceeds from the divestiture of SDC of $15.6 million and proceeds from the sale of assets held for sale and equipment of $0.6 million. The Company expects to pay approximately $0.7 million in estimated income taxes related to the gain on the sale of SDC in the third quarter of 2026. Net cash used in financing activities for the six months ended June 30, 2026 consisted of the full repayment of an equipment loan in the amount of $181,000. As of June 30, 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 financial 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 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 3 – “Summary of Significant Accounting Policies” of our Consolidated Financial Statements for additional information regarding our accounting policies. 25 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.