CVD EQUIPMENT CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Except for historical information contained herein, this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward – looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. These statements involve known and unknown risks and uncertainties that may cause our actual results or outcomes to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements are based on various factors and are derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Important assumptions and other factors that could cause actual results to differ materially from those in the forward-looking statements, include, but are not limited to: ● uncertainty as to our future 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 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. 20 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, 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. During the quarter ended March 31, 2025: ● Revenue increased by $3.3 million or 69.0% as the first quarter of 2025 benefited from revenues from aerospace and industrial contracts in progress and from our SDC segment. ● Gross margin increased by $1.8 million or 238.1% due to overall higher revenues, improved absorption of overhead and improved margins on contracts in progress. ● Total bookings for the first quarter of 2025 were approximately $2.8 million as compared to bookings of $13.6 million in the first quarter of 2024. ● Bookings in the first quarter of 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. ● Backlog declined from $19.4 million at December 31, 2024 to $13.8 million at March 31, 2025 due to lower orders in our CVD Equipment segment. In early April 2025, we received a $1.2 million semiconductor system order. ● Cash and cash equivalents at March 31, 2025 was $10.2 million. 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. 21 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. 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. PVT150 / PVT200 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. We plan to evaluate the market conditions and opportunities to expand our product offerings in the power electronics market. 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. In November 2024, we received a follow-on order from an aerospace company for an additional CVI 3500 system that will be used by our customer to produce ceramic matrix composite materials. 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. 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 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. 22 Results of Operations Quarters Ended March 31, 2025 and 2024 The following table presents revenue and expense line items reported in our condensed consolidated statements of operations for the quarters ended March 31, 2025 and 2024 and the period-over-period dollar and percentage changes for those line items (in thousands, except percentages). March 31 2025 2024 Change Percent Revenue $ 8,316 $ 4,922 $ 3,394 69.0 % Cost of revenue 5,621 4,125 1,496 36.3 % Gross profit 2,695 797 1,898 238.1 % Gross profit percentage 32.4 % 16.2 % Operating expenses: Research and development 781 746 35 4.7 % Selling 420 419 1 0.2 % General and administrative 1,225 1,255 (30 ) (2.4 %) Total operating expenses 2,426 2,420 6 0.2 % Operating income (loss) 269 (1,623 ) 1,892 * Other income (expense): Interest income 110 157 (47 ) (29.9 %) Interest expense (3 ) (6 ) 3 (50.0 %) Total other income, net 107 151 (44 ) (29.1 %) Income before income taxes 376 (1,472 ) 1,848 * Income tax expense 16 - 16 100.0 % Net income (loss) $ 360 $ (1,472 ) $ 1,832 * * Not meaningful Revenue CVD Equipment $ 6,314 $ 2,947 $ 3,367 114.3 % SDC 2,142 1,931 211 10.9 % MesoScribe 22 59 (37 ) (62.7 %) Intersegment sales elimination (162 ) (15 ) (147 ) * Total $ 8,316 $ 4,922 $ 3,394 69.0 % * Not meaningful 23 Revenue Our revenue for the quarter ended March 31, 2025 was $8.3 million compared to $4.9 million for the quarter ended March 31, 2024, an increase of 69.0%. The increase in revenue versus the prior year period was primarily attributable to higher revenue of $3.4 million from the CVD Equipment segment. Revenue from one industrial customer for the quarter ended March 31, 2025 represented 41.1% of our total revenues and 54.1% of CVD Equipment segment revenues. Revenue from one aerospace customer for the quarter ended March 31, 2025 represented 14.0% of our total revenues and 18.5% of CVD Equipment segment revenues. The revenue contributed by our CVD Equipment segment for the quarter ended March 31, 2025 of $6.3 million (net of intersegment sales of $4,000) represented 75.9% of overall revenue as compared to $2.9 million or 59.9% of overall revenue for the quarter ended March 31, 2024. The increase in external revenues of $3.4 million or 114.1% resulted principally from increases in revenues from aerospace and industrial contracts in progress and from the sales of parts and spares. The revenue contributed by our SDC segment for the quarter ended March 31, 2025 of $2.0 million (net of intersegment sales of $0.2 million) represented 23.9% of overall revenue as compared to $1.9 million (net of intersegment sales of $15,000) or 38.9% of overall revenue for the year quarter ended March 31, 2024. External revenue for our SDC segment increased by $0.1 million or 3.5% as customer demand for gas delivery system products was consistent with the prior year quarter. Our order backlog at March 31, 2025 was approximately $13.8 million as compared to December 31, 2024 of $19.4 million. Our order backlog at March 31, 2025 consists of approximately $12.3 million related to remaining performance obligations of contracts in progress and not yet started and the balance of approximately $1.5 million represents other orders received from customers. As of March 31, 2025, one industrial customer represented 32.7% of our backlog and one aerospace customer represented 30.1% 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. Gross Profit Gross profit for the quarter ended March 31, 2025 was $2.7 million, with a gross profit margin of 32.4%, compared to a gross profit of $0.8 million and a gross profit margin of 16.2% for the quarter ended March 31, 2024. The increase in gross profit of $1.9 million was primarily the result of higher overall revenues, improved absorption of overhead as well as improved margins on contracts in progress as compared to contracts in progress in the prior year quarter. 24 Research and Development For the quarter ended March 31, 2025, research and development expenses were $0.8 million, or 9.4% of revenue as compared to $0.7 million, or 15.2% for the quarter ended March 31, 2024. The increase in 2025 of 4.7% was the result of less amounts charged to cost of revenue during the quarter. 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 $0.4 million or 5.1% of revenue for the quarter ended March 31, 2025 was consistent with such expenses of $0.4 million or 8.5% of revenue for the quarter ended March 31, 2024. General and Administrative General and administrative expenses were $1.2 million or 14.7% of revenue for the quarter ended March 31, 2025 was consistent with such expenses of $1.3 million or 25.5% of revenue for the quarter ended March 31, 2024. Other Income, Net Other income, net was $107,000 for the quarter ended March 31, 2025 as compared to other income, net of $151,000 for the quarter ended March 31, 2024. Other income consists principally of interest earned on amounts invested in U.S. treasury securities and was lower than the prior period 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. Liquidity and Capital Resources As of March 31, 2025, aggregate working capital was $14.5 million as compared to aggregate working capital of $13.8 million at December 31, 2024. Cash and cash equivalents at March 31, 2025 and December 31, 2024 were $10.2 million and $12.6 million, respectively. 25 Net cash used in operating activities for the quarter ended March 31, 2025 was $2.3 million. This decrease was principally due to the increase in contract assets of $3.0 million and a decrease in contract liabilities of $1.3 million due to revenue recognized on contracts in progress. These decreases were offset by net income of $0.4 million, non-cash expense items of $0.4 million and a decrease in accounts receivable of $0.7 million. Net cash used in investing activities for the quarter ended March 31, 2025 consisted of capital expenditures of $29,000 related to purchases of property and equipment and investment in a captive insurance company related to our health insurance program of $51,000. Net cash used in financing activities for the quarter ended March 31, 2025 consisted of repayments of 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, 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 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. 26 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable. 27