Cvd Equipment Corp 10-Q for FY2023 Q3
Cvd Equipment Corp (CVV)
About this 10-Q
Cvd Equipment Corp filed this 10-Q on November 14, 2023, covering the quarter ended September 30, 2023 (FY2023 Q3).
Headline figures
Quarter ended September 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $6.23M
- down 23.2% from $8.12M a year earlier
- Net loss
- $753K
- compared with net income of $63K a year earlier
- Diluted EPS
- -$0.11
- compared with $0.01 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
| (Mark One) | |
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For
the quarterly period ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from ____ to _____
Commission
file number:
(Name of Registrant in Its Charter)
State
or Other Jurisdiction of |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices)
(
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | ||
| Smaller
reporting company |
Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: shares of Common Stock, $0.01 par value at November 13, 2023.
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
Index
| 2 |
PART 1 – FINANCIAL INFORMATION
Item 1 – Financial Statements
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
(Unaudited)
| September 30, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Contract assets | ||||||||
| Inventories, net | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Employee retention credit receivable | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current maturities of long-term debt | ||||||||
| Deposits from purchaser of MesoScribe assets – note 11 | ||||||||
| Contract liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, net of current portion | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock - $ par value – shares authorized; issued and outstanding at September 30, 2023 and at December 31, 2022 | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings (accumulated deficit) | ( | ) | ||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 3 |
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except per share and share amounts)
(Unaudited)
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | ||||||||||||||||
| Selling | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Loss on disposition of Tantaline | ||||||||||||||||
| Impairment charge | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Foreign exchange income (expense) | ( | ) | ( | ) | ||||||||||||
| Other income | ||||||||||||||||
| Total other income (expense), net | ( | ) | ( | ) | ||||||||||||
| Income (loss) before income tax | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax expense | ||||||||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Income (loss) per common share - basic | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Income (loss) per common share - diluted | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Weighted average common shares | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 4 |
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except share amounts)
(Unaudited)
Three months ended September 30, 2023 and 2022
| Shares | Par Value | Capital | Earnings | Total | ||||||||||||||||
| Common stock | Additional paid-in | Retained | ||||||||||||||||||
| Shares | Par Value | Capital | Earnings | Total | ||||||||||||||||
| Balance at July 1, 2023 | $ | $ | $ | $ | ||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Exercise of stock options and issuance of shares | ||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balance at July 1, 2022 | $ | $ | $ | $ | ||||||||||||||||
| Net income | - | |||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ||||||||||||||||
Nine months ended September 30, 2023 and 2022
| Shares | Par Value |
Capital | Earnings | Total | ||||||||||||||||
| Common stock | Additional paid-in | Retained | ||||||||||||||||||
| Shares | Par Value |
Capital | Earnings | Total | ||||||||||||||||
| Balance at January 1, 2023 | $ | $ | $ | $ | ||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Exercise of stock options and issuance of shares | ||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | $ | ||||||||||||||||
| Balance | 6,723,438 | $ | $ | $ | $ | |||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ||||||||||||||||
| Balance | $ | $ | $ | $ | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 5 |
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
| 2023 | 2022 | |||||||
| Nine months ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Loss on disposition of Tantaline | ||||||||
| Impairment charge | ||||||||
| Stock-based compensation | ||||||||
| Depreciation and amortization | ||||||||
| Changes in assets and liabilities, net of effects of disposition of Tantaline: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Contract assets | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Tax receivable | ||||||||
| Employee retention credit receivable | ||||||||
| Other current assets | ( | ) | ( | ) | ||||
| Accounts payable | ||||||||
| Accrued expenses | ( | ) | ||||||
| Contract liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Net cash used in connection with disposition of Tantaline | ( | ) | ||||||
| Deposits from purchaser of MesoScribe assets | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Capitalized patents costs | ( | ) | ||||||
| Net proceeds from sale of assets | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Payments of long-term debt | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Income taxes paid | $ | $ | ||||||
| Interest paid | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Loan obtained for new equipment | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 6 |
CVD EQUIPMENT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements for CVD Equipment Corporation and Subsidiaries (collectively “the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. They do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary in order to make the interim financials not misleading have been included and all such adjustments are of a normal recurring nature. The operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that can be expected for the year ending December 31, 2023.
The condensed consolidated balance sheet as of December 31, 2022 has been derived from the audited consolidated financial statements at such date, as filed on Form 10-K with the SEC on March 27, 2023, but does not contain all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with that report.
All material intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the prior period condensed consolidated financial statements to conform to the current period presentation. These reclassifications had no effect on net income (loss).
Liquidity
At
September 30, 2023, the Company had $
| 7 |
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
In accordance with FASB ASC 606 - Revenue from Contracts with Customers (“ASC 606”), the Company records revenue in an amount that reflects the consideration to which the Company expects to be entitled in exchange for goods or services promised to its customers. Under ASC 606, the Company follows a five-step model to: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price for the contract; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue using one of the following two methods:
Over time
The Company designs, manufactures and sells custom chemical vapor deposition, thermal process equipment and other equipment through contractual agreements. These system sales require the Company to deliver functioning equipment that is generally completed within two to eighteen months from commencement of order acceptance. For systems sales that meet the criteria to recognize revenue over time, the Company recognizes revenue over time by using an input method based on costs incurred as it depicts the Company’s progress toward satisfaction of the performance obligation. For system sales that do not meet the criteria to recognize revenue over time based on the contract provisions, the Company recognize revenue based on point in time.
Under
the over time 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 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, and installed, as required
by the project’s engineering design. Cost based input methods of revenue recognition require the Company 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, the Company recognizes the entire estimated loss in the period the loss becomes known and can be reasonably
estimated. There were
The timing of revenue recognition, billings and collections results in accounts receivables, unbilled receivables or contract assets and contract liabilities on our consolidated balance sheet. Under typical payment terms for our contracts accounted for over time, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones.
| 8 |
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Under ASC 606, payments received from customers in excess of revenue recognized to-date results in a contract liability. These contract liabilities are not considered to represent a significant financing component of the contract because we believe these cash advances and deposits are generally used to meet working capital demands which can be higher in the earlier stages of a contract. Also, advanced payments and deposits provide us with some measure of assurance that the customer will perform on its obligations under the contract.
Contract assets include unbilled amounts typically resulting from system sales under contracts and represents revenue recognized that exceeds the amount billed to the customer.
Contract liabilities include advance payments and billings in excess of revenue recognized. The Company typically receives down payments upon receipt of order and progress payments as the system is manufactured.
Contract assets and contract liabilities are classified as current as these contracts in progress are expected to be substantially completed within the next twelve months.
Point in time
For non-system sales of products and services, revenue is recognized at the point in time when control of the promised products or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products or services (the transaction price). A performance obligation is a promise in a contract to transfer a distinct product or service to a customer and is the unit of account under ASC 606, “Revenue from Contracts with Customers.”
For
any system equipment sales where the equipment would have an alternative use or where the contract provisions of the contract
preclude the use of over time revenue recognition, revenue is recognized at the point in time when control of the equipment is
transferred to the customer. For the three and nine months ended September 30, 2023 and 2022, all system equipment sales were
recorded over time by using an input method. There was one system equipment contract in 2023 where the revenue was to be recognized
at the point in time when the equipment is transferred to the customer. This contract was modified during the three months ended
September 30, 2023 such that the revenue under this contract will now be recognized over time using an input method based on the revised contract provisions and the fact that the equipment does not have an alternative use. Revenues for
the three months ended September 30, 2023 includes $
Inventories
Inventories are valued at the lower of cost (determined on the first-in, first-out method) or net realizable value.
| 9 |
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Product Warranty
The
Company typically provides standard warranty coverage on its systems for
Recent Accounting Standards
In June 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326), which require that financial assets measured at amortized cost be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the increase or decrease of expected credit losses that have taken place during the period. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. On November 15, 2019, the FASB delayed the effective date for smaller reporting companies. The amendments in this update are effective for fiscal years beginning after December 15, 2022 and interim periods within those annual periods. The adoption of the ASU 2016-3 as of January 1, 2023 did not have a material impact on the Company’s financial position.
The Company believes there is no additional new accounting guidance adopted, but not yet effective that is relevant to the readers of its financial statements. However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on our financial reporting.
NOTE 3: CONCENTRATION OF CREDIT RISK
Cash and cash equivalents
The
Company had cash and cash equivalents of $
| 10 |
NOTE 3: CONCENTRATION OF CREDIT RISK (continued)
The
Company places most of its temporary cash investments in the United States with financial institutions, which from time to time may exceed
the Federal Deposit Insurance Corporation limit. The amount at risk at September 30, 2023 and December 31, 2022 was $
Account receivable
The Company sells products and services to various companies across several industries in the ordinary course of business. The Company performs ongoing credit evaluations to assess the probability of accounts receivable collection based on a number of factors, including past transaction experience, evaluation of their credit history and review of the invoicing terms of the contract to determine the financial strength of its customers.
Accounts
receivable are presented net of an allowance for doubtful accounts of approximately $
At
September 30, 2023, the accounts receivable balance included amounts from three customers that totaled
Sales concentration
Revenue
from a single customer in any one period can exceed 10% of our total revenues. During the three months ended September 30, 2023, two
customers represented
During
the three months ended September 30, 2022, one customer represented
| 11 |
NOTE 4: REVENUE RECOGNITION
The following table represents a disaggregation of revenue for the three and nine months ended September 30, 2023 and 2022 (in thousands):
SCHEDULE OF DISAGGREGATION OF REVENUE
| Over time | Point in time | Total | ||||||||||
| Three months ended September 30, 2023 | ||||||||||||
| Over time | Point in time | Total | ||||||||||
| Energy | $ | $ | $ | |||||||||
| Aerospace | ||||||||||||
| Industrial | ||||||||||||
| Research | ||||||||||||
| Total | $ | $ | $ | |||||||||
| Over time | Point in time | Total | ||||||||||
| Three months ended September 30, 2022 | ||||||||||||
| Over time | Point in time | Total | ||||||||||
| Energy | $ | $ | $ | |||||||||
| Aerospace | ||||||||||||
| Industrial | ||||||||||||
| Research | ||||||||||||
| Total | $ | $ | $ | |||||||||
| Over time | Point in time | Total | ||||||||||
| Nine months ended September 30, 2023 | ||||||||||||
| Over time | Point in time | Total | ||||||||||
| Energy | $ | $ | $ | |||||||||
| Aerospace | ||||||||||||
| Industrial | ||||||||||||
| Research | ||||||||||||
| Total | $ | $ | $ | |||||||||
| Over time | Point in time | Total | ||||||||||
| Nine months ended September 30, 2022 | ||||||||||||
| Over time | Point in time | Total | ||||||||||
| Energy | $ | $ | $ | |||||||||
| Aerospace | ||||||||||||
| Industrial | ||||||||||||
| Research | ||||||||||||
| Total | $ | $ | $ | |||||||||
| 12 |
NOTE 4: REVENUE RECOGNITION (continued)
The energy market includes customers involved in the manufacture of silicon carbide wafers and batteries. Aerospace market includes customers that manufacture aircraft engines. Industrial end market consists of various end customers in diverse industries. Research market principally represents customers that are universities and other research institutions.
The
Company has unrecognized contract revenue of approximately $
Judgment is required to evaluate assumptions including the amount of net contract revenues and the total estimated costs to determine our progress towards contract completion and to calculate the corresponding amount of revenue to recognize.
Changes in estimates for sales of systems may occur for a variety of reasons, including but not limited to (i) build accelerations or delays, (ii) product cost forecast changes, (iii) cost related change orders or add-ons, or (iv) changes in other information used to estimate costs. Changes in estimates may have a material effect on the Company’s condensed consolidated statements of operations.
Contract assets and liabilities
Contract assets and contract liabilities on input method type contracts in progress are summarized as follows as of September 30, 2023 (in thousands):
SCHEDULE OF COST AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS
| Costs incurred on contracts in progress | $ | |||
| Estimated earnings | ||||
| Costs and estimated earnings on uncompleted contracts | ||||
| Billings to date | ( | ) | ||
| Net cost in excess of billings | ( | ) | ||
| Deferred revenue related to non-system contracts | ( | ) | ||
| Contract liability in excess of contract assets | $ | ( | ) | |
| Included in accompanying condensed consolidated balance sheet as of September 30, 2023 under the following captions (in thousands): | ||||
| Contract assets | $ | |||
| Contract liabilities | $ | ( | ) |
| 13 |
NOTE 4: REVENUE RECOGNITION (continued)
Of
the contract liability balances at December 31, 2022 and 2021 of $
NOTE 5: INVENTORIES, NET
Inventories consist of:
SCHEDULE OF INVENTORIES NET
| September 30, 2023 | December 31, 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Total | $ | $ | ||||||
NOTE 6: LONG-TERM DEBT
In
September 2022, the Company entered into a loan agreement to fund the acquisition of machinery. The loan amount of $
SCHEDULE OF BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Basic weighted average common shares outstanding | ||||||||||||||||
| Dilutive effect of options and unvested restricted stock | ||||||||||||||||
| Diluted weighted average shares outstanding | ||||||||||||||||
At September 30, 2023, stock options to purchase shares of common stock were outstanding and were exercisable. At September 30, 2022, stock options to purchase shares of common stock were outstanding and were exercisable.
Except for the three months ended September 30, 2022, all stock options were excluded in the computation of diluted earnings per share because their effect was antidilutive.
| 14 |
SCHEDULE OF STOCK BASED COMPENSATION
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Cost of revenue | $ | $ | $ | $ | ||||||||||||
| Research and development | ||||||||||||||||
| Selling | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Stock-based compensation expense in three-month periods ended September 30, 2023 and 2022 included approximately $ and $, respectively, related to restricted stock awards that directors are entitled to receive pursuant to the Director Compensation plan. Stock-based compensation expense in both nine-month periods ended September 30, 2023 and 2022 included approximately $ million related to restricted stock awards that directors are entitled to receive pursuant to the Director Compensation plan. Under this plan each of the independent directors is entitled to an Annual Equity Retainer in the amount of $, to be granted on the date of the Company’s annual meeting of shareholders or upon appointment to the board of directors and vest quarterly over the following year.
SCHEDULE OF RESTRICTED STOCK AWARDS
| Weighted | ||||||||
| Restricted | Average | |||||||
| Awards | Exercise | |||||||
| (in shares) | Price | |||||||
| Unvested restricted stock awards at January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Exercised | ( | ) | ||||||
| Forfeited | ||||||||
| Unvested restricted stock awards at September 30, 2023 | ||||||||
For the nine months ended September 30, 2023, the Company granted stock options, vesting per year over , with a life. The Company determined the weighted average fair value of stock options granted was $ and is based upon weighted average assumptions below.
| Stock price | $ | |||
| Exercise price | $ | |||
| Dividend yield | % | |||
| Expected volatility | % | |||
| Risk-free interest rate | % | |||
| Expected life (in years) |
| 15 |
NOTE 8: STOCK-BASED COMPENSATION EXPENSE (continued)
SCHEDULE OF STOCK OPTIONS AWARDS
| Weighted | ||||||||
| Stock Option | Average | |||||||
| Awards | Exercise | |||||||
| (in shares) | Price | |||||||
| Outstanding at January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Exercised | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Outstanding at September 30, 2023 | ||||||||
SCHEDULE OF OUTSTANDING AND EXERCISABLE OPTIONS RANGES OF EXERCISE PRICES
Options Outstanding | Options Exercisable | |||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Exercise | Number | Remaining | Exercise | Intrinsic | Number | Exercise | Intrinsic | |||||||||||||||||
| Price Range | Outstanding | Contractual | Price | Value | Exercisable | Price | Value | |||||||||||||||||
| $ | - | $ | $ | $ | $ | |||||||||||||||||||
| $ | - | $ | $ | $ | $ | |||||||||||||||||||
| $ | - | $ | $ | $ | $ | |||||||||||||||||||
| $ | - | $ | $ | $ | ||||||||||||||||||||
As of September 30, 2023, there was $ million of unrecognized compensation costs related to stock options expected to be recognized over a weighted average period of years.
NOTE 9: INCOME TAXES
As of September 30, 2023 and December 31, 2022, the Company has provided a full valuation allowance against its net deferred tax assets. This was based on management’s assessment, including the last four years of operating losses, that it is more likely than not that the net deferred tax assets may not be realized in the future. Management continues to evaluate for potential utilization of the Company’s net deferred tax asset, which has been fully reserved for, on a quarterly basis, reviewing our economic models, including projections of future operating results.
| 16 |
NOTE 10: SEGMENT REPORTING
The
Company operates through
The Company’s corporate administration activities are reported in the “Corporate” column. These activities primarily include expenses related to certain corporate officers and support staff, expenses related to the Company’s Board of Directors, stock option expense for options and shares of restricted stock granted to corporate administration employees, certain consulting expenses, investor and shareholder relations activities, and all of the Company’s legal, auditing and professional fees.
Elimination
entries included in the “Eliminations” column represent intersegment revenues and cost of revenues that are eliminated in
consolidation. Intersegment sales by the SDC segment to the CVD Equipment segment for the three months ended September 30, 2023 and 2022
were $
| 17 |
NOTE 10: SEGMENT REPORTING (continued)
The following table presents certain information regarding the Company’s segments as of and for the three months ended September 30, 2023 and 2022 (in thousands):
SCHEDULE OF SEGMENTS
2023 | ||||||||||||||||||||||||
| CVD Equipment | SDC | CVD Materials |
Eliminations |
Corporate |
Consolidated | |||||||||||||||||||
| Assets | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| Revenue | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| Operating (loss) income | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Pretax (loss) income | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Purchase of property, plant
& equipment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| 2022 | ||||||||||||||||||||||||
| CVD Equipment | SDC | CVD Materials | Eliminations | Corporate | Consolidated | |||||||||||||||||||
| Assets | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Revenue | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| Operating (loss) income | ( | ) | ( | ) | ||||||||||||||||||||
| Pretax (loss) income | ( | ) | ( | ) | ||||||||||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Purchase of property, plant & equipment ** | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| ** |
| 18 |
NOTE 10: SEGMENT REPORTING (continued)
The following table presents certain information regarding the Company’s segments as of and for the nine months ended September 30, 2023 and 2022 (in thousands):
| 2023 | ||||||||||||||||||||||||
| CVD Equipment |
SDC | CVD Materials |
Eliminations |
Corporate |
Consolidated | |||||||||||||||||||
| Revenue | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| Operating (loss) income | ( | ) | ( | )* | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Pretax (loss) income | ( | ) | ( | )* | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Purchase of property, plant
& equipment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
2022 | ||||||||||||||||||||||||
| CVD Equipment |
SDC | CVD Materials |
Eliminations |
Corporate |
Consolidated | |||||||||||||||||||
| Revenue | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| Operating (loss) income | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Pretax (loss) income | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Purchase of property, plant & equipment ** | $ | $ | $ | $ | $ | $ | | |||||||||||||||||
| * |
| ** |
| 19 |
NOTE 11: CVD MATERIALS – TANTALINE AND MESOCRIBE SUBSIDIAIRES
Tantaline Subsidiary
On
May 26, 2023, the Company sold its Tantaline subsidiary located in Nordborg, Denmark in exchange for a nominal amount at closing and
an earn-out provision based on any net income that Tantaline may earn during the five-year period ending December 31, 2027. The Company
recorded a loss of $
The decision to sell Tantaline was based on the Company’s ongoing strategy to focus on the equipment business consisting of the CVD Equipment and SDC segments and reduce its focus on the non-core CVD Materials business.
Including
the loss on disposition of $
MesoScribe Subsidiary
On
August 8, 2023, the Company entered into a Purchase and License Agreement (the “Agreement”) with a third-party. Pursuant
to the Agreement, the Company will sell certain proprietary assets relating to its plasma spray technology and material deposition system
and grant a non-exclusive license to use certain of the Company’s related intellectual property as more fully described in the
Agreement, for an aggregate purchase price of $
The
Company will continue to fulfill remaining orders for MesoScribe products through the end of 2024 at which time it plans to cease
the remaining operations of MesoScribe and dispose of any remaining equipment. During the three and nine months ended September 30,
2023, the Company recorded an impairment charge of none and $
During
the three months ended September 30, 2023, the Company received payments under the Agreement in the amount of $
The
revenues and net loss of MesoScribe were $
| 20 |
NOTE 11: CVD MATERIALS – TANTALINE AND MESOCRIBE SUBSIDIAIRES (continued)
The
total assets and total liabilities of the MesoScribe subsidiary were $
NOTE 12: RISKS AND UNCERTAINTIES
The Company currently operates in a challenging economic environment as the global economy continues to confront the impacts from the pandemic, geopolitical conflicts, inflationary pressures and adverse supply chain disruptions. The specific impacts on the Company have included:
| Significant geopolitical developments across Europe and Asia (including the war in Ukraine) have and may continue to restrict the Company’s ability to procure raw materials and components such as nickel, graphite and integrated circuits, as well as impact the Company’s ability to sell its products into China, Russia and other Eastern European and Asian regions. | |
| Supply chain disruptions have led to much longer lead times to acquire raw materials for production and has led to inflationary pressures in both materials and labor. These supply chain disruptions have impacted the Company’s ability to recognize revenue more timely as it delays the Company’s manufacturing processes. |
While management has initiated actions to mitigate the potential negative impacts to its revenue and profitability, the Company is unable to predict the impact that the above uncertainties will have on its future results of operations and cash flows.
| 21 |
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:
| ● | competition in our existing and potential future product lines of business, including our PVT150 / PVT 200 systems; | |
| ● | our ability to attract and retain key personnel and employees; | |
| ● | our ability to obtain financing on acceptable terms if and when needed; | |
| ● | uncertainty as to our ability to develop new products for the high power electronics market including our plan to launch a PVT200 system to grow silicon carbide crystals for 200mm wafers and our plan to develop epitaxy equipment for silicon carbide wafers; | |
| ● | uncertainty as to our future growth and profitability; and | |
| ● | uncertainty as to our ability to adequately obtain raw materials and components for production from foreign markets in light of geopolitical developments and due to supply chain disruptions. |
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.
| 22 |
Executive Summary
We have served the advanced materials markets with chemical vapor and thermal process equipment for over 40 years. CVD designs, develops, and manufactures a broad range of chemical vapor deposition, thermal process, gas control, and other state-of-the-art equipment and process solutions used to develop and manufacture materials and coatings for industrial applications and research. To learn more about CVD’s systems and offerings, visit www.cvdequipment.com.
Business Update
Our core strategy is to focus on growth market applications in end-user markets related to the “electrification of everything” and aerospace. The phrase “electrification of everything” refers to the shift from fossil fuels to the use of electricity to power devices, buildings, electric vehicles or EVs, and many other applications. With respect to aerospace, our systems are being used by our customers to produce ceramic matrix composite materials or CMCs that could be used in next generation jet engines with the objective of reducing jet fuel consumption and contributing to the decarbonization of that industry.
During 2021 and 2022, we received the 30 initial orders for our PVT150 system that is used by our customer to grow silicon carbide crystals. These crystals are then further processed into silicon carbide wafers by our customer. Integrated circuits and devices based on silicon carbide have been shown to reduce energy consumption in EVs and reduce the need for additional cooling elements. We also launched our marketing campaign for the PVT150 system to the broader customer market in the first quarter of 2023 as we seek orders from other potential customers.
We have been engaged in discussions with several potential customers. There were no PVT150 system orders received in the first nine months of 2023. The uncertainty as to the receipt and timing of orders for our PVT product line contributes to the overall quarter to quarter fluctuation in such orders.
During 2022, we completed the production of a PowderCoat 1100 system for a customer that grows silicon nanowires onto powders used in silicon-graphite anodes that has the objective of increasing EV battery performance while lowering cost.
During 2022 and 2023, we received orders from a major aerospace company for the production of chemical vapor infiltration systems to be used to manufacture CMCs. In prior years, we had sold tow-coating systems to manufacture CMCs to another major jet engine manufacturer and have an installed base of such systems at that customer.
| 23 |
During the nine months ended September 30, 2023, new order bookings approximated $19.9 million, representing a decrease of approximately $4.1 million or 17.1% as compared to bookings of $24.0 million in the nine months ended September 30, 2022. CVD Equipment segment’s orders in the first nine months of 2023 reflected demand in two of our three strategic markets. Aerospace orders were approximately $10.6 million consisting of multiple systems orders that expect to ship over the next 12 months. Order bookings in 2023 included a battery nanomaterial production system of approximately $1.8 million that is expected to be completed in 2023.
Our backlog decreased from $17.8 million at December 31, 2022 to $16.6 million at September 30, 2023 as orders were less than revenues by approximately $0.1 million. In addition, the backlog was reduced by $0.5 million related to the sale of Tantaline and $0.6 million related to the planned wind down of MesoScribe.
Historically, our orders have fluctuated based on end user market conditions, adoption of our new products, acceptance of our products and our customers’ ability to raise capital financing. 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. In addition, any system revenue that will be recognized based on point in time will result in fluctuations as revenue is recognized at the point in time when control of the promised products or services is transferred to our customers.
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, 2023 and 2022
The following table presents revenue and expense line items reported in our condensed consolidated statements of operations for the three and nine months ended September 30, 2023 and 2022 and the period-over-period dollar and percentage changes for those line items (in thousands, except percentages).
| Three months ended September 30 | ||||||||||||||||
| 2023 | 2022 | Change | Percent | |||||||||||||
| Revenue | $ | 6,234 | $ | 8,119 | $ | (1,885 | ) | (23.2 | )% | |||||||
| Cost of revenue | 4,636 | 5,699 | (1,063 | ) | (18.7 | )% | ||||||||||
| Gross profit | 1,598 | 2,420 | (822 | ) | (34.0 | )% | ||||||||||
| Gross profit percentage | 25.6 | % | 29.8 | % | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | 704 | 518 | 186 | 35.9 | % | |||||||||||
| Selling | 434 | 290 | 144 | 49.7 | % | |||||||||||
| General and administrative | 1,450 | 1,490 | (40 | ) | (2.7 | )% | ||||||||||
| Total operating expenses | 2,588 | 2,298 | 290 | 12.6 | % | |||||||||||
| Operating income (loss) | (990 | ) | 122 | (1,112 | ) | * | ||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 173 | 43 | 130 | * | ||||||||||||
| Interest expense | (6 | ) | - | (6 | ) | * | ||||||||||
| Foreign exchange income (expense) | - | (107 | ) | 107 | * | |||||||||||
| Other income | 70 | 5 | 65 | * | ||||||||||||
| Total other income (expense), net | 237 | (59 | ) | 296 | * | |||||||||||
| Income (loss) before income taxes | (753 | ) | 63 | (816 | ) | * | ||||||||||
| Income tax expense | - | - | - | * | ||||||||||||
| Net income (loss) | $ | (753 | ) | $ | 63 | $ | (816 | ) | * | |||||||
| * Not meaningful | ||||||||||||||||
| Revenue (net of intersegment sales) | ||||||||||||||||
| CVD Equipment | $ | 4,756 | $ | 5,718 | $ | (962 | ) | (16.8 | )% | |||||||
| SDC | 1,388 | 1,592 | (204 | ) | (12.8 | )% | ||||||||||
| CVD Materials | 90 | 809 | (719 | ) | (88.9 | )% | ||||||||||
| Total | $ | 6,234 | $ | 8,119 | $ | (1,885 | ) | (23.2 | )% | |||||||
| 25 |
Revenue
Our revenue for the three months ended September 30, 2023 was $6.2 million compared to $8.1 million for the three months ended September 30, 2022, a decrease of 23.2%.
The decrease in our revenue versus the prior year period was primarily attributable to lower revenue of $1.0 million from the CVD Equipment segment related to lower equipment revenue, a $0.2 million decrease in revenue from our SDC segment and a $0.7 million decrease from the CVD Materials segment. The decrease in revenue in the period was principally the result of lower PVT150 system revenues at CVD Equipment partially offset by an increase in aerospace revenues in the CVD Equipment segment and lower revenues in the CVD Materials segment due to the sale of our Tantaline subsidiary and the wind down of our MesoScribe subsidiary. One customer represented 40.3% of our revenue for the three months ended September 30, 2023 and this customer is expected to continue to represent a significant portion of our revenue through June 30, 2024.
There were certain customer contracts in 2023 where the revenue was to be recognized at the point in time when the equipment is transferred to the customer based on contract terms. These contracts were modified during the three months ended September 30, 2023 such that the revenue under these contracts is now being recognized over time using the input method. Company and CVD Equipment segment revenues for the three months ended September 30, 2023 include $0.8 million of revenue that was deferred as of June 30, 2023 and recognized on the date of the contract modification.
Our order backlog at September 30, 2023 was approximately $16.6 million as compared to $17.8 million at December 31, 2022. Our backlog at September 30, 2023 consists of $15.5 million related to remaining performance obligations of contracts in progress and not yet started, and $1.1 million represents non-system orders received from customers. 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. In addition, any system revenue that will be recognized based on point in time will result in fluctuations in revenue recognized at the point in time when control of the promised products or services is transferred to our customers. Accordingly, orders received from customers and revenue recognized may fluctuate from quarter to quarter.
Revenue contributed by the CVD Equipment segment for the three months ended September 30, 2023 of $4.8 million represented 76.3% of overall revenue as compared to $5.7 million or 70.4% of overall revenue for the three months ended September 30, 2022. The decrease in revenues of $1.0 million or 16.8% resulted principally from less PVT150 system revenues in the current quarter as compared to the prior year quarter that was offset by an increase in aerospace revenues.
Revenue contributed by the SDC segment for the three months ended September 30, 2023 of $1.4 million represented 22.3% of overall revenue as compared to $1.6 million or 19.6% ended September 30, 2022. Revenue for our SDC segment decreased $0.2 million or 12.8% due to lower bookings as compared to the prior year. The demand and related bookings for SDC’s products are subject to fluctuation depending on changes in market demand.
Revenue contributed by the CVD Materials segment for the three months ended September 30, 2023 of $90,000 represented 1.4% of our overall revenue as compared to $0.8 million or 9.7% of overall revenue for the three months ended September 30, 2022. The decline was principally due to the sale of our Tantaline subsidiary in May 2023 and the wind down of MesoScribe’s operations.
| 26 |
Gross Profit
Gross profit for the three months ended September 30, 2023 was $1.6 million, with a gross profit margin of 25.6%, compared to a gross profit of $2.4 million and a gross profit margin of 29.8% for the three months ended September 30, 2022. The decrease in gross profit of $0.8 million was primarily due to changes in contract mix, increases in certain component costs and higher compensation costs and lower gross profit due to the sale of our Tantaline subsidiary and the wind down of MesoScribe’s operations.
Research and Development
For the three months ended September 30, 2023, research and development expenses were $0.7 million, or 11.3% of revenue as compared to $0.5 million, or 6.4% for the three months ended September 30, 2022. The increase in 2023 was the result of increased personnel and employee related costs to develop new products for key growth markets partially offset by a decrease in bonus expenses.
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 $0.4 million or 7.0% of the revenue for the three months ended September 30, 2023 as compared to $0.3 million or 3.6% for the three months ended September 30, 2022. The increase in 2023 was primarily the result of increased personnel and employee-related costs and an increase in trade shows as well as other marketing expenses to support increased marketing efforts. New personnel included a director of marketing and a sales director dedicated to the silicon carbide market.
General and Administrative
General and administrative expenses for the three months ended September 30, 2023 were $1.5 million or 23.3% of revenue compared to $1.5 million or 18.4% of revenue for the three months ended September 30, 2022. Increase in professional fees were offset by lower compensation costs. In addition, the prior period included a severance charge of $0.1 million.
Other Income (Expense), Net
Other income (expense), net was $0.2 million for the three months ended September 30, 2023 as compared to other income (expense), net of ($59,000) for the three months ended September 30, 2022. The change was principally due to an increase in interest income due to higher interest rates and increased amounts invested in U.S. treasury bills, additional amounts received for employee retention credits and a reduction in the foreign exchange loss.
Income Taxes
Our provision for income taxes consists solely of state income taxes. Our deferred tax asset has been fully reserved.
| 27 |
Nine Months Ended September 30, 2023 versus September 30, 2022
The following table presents revenue and expense line items reported in our condensed consolidated statements of operations for the nine months ended September 30, 2023 and 2022 and the period-over-period dollar and percentage changes for those line items (in thousands, except percentages).
| Nine months ended September 30 | ||||||||||||||||
| 2023 | 2022 | Change | Percent | |||||||||||||
| Revenue | $ | 19,998 | $ | 18,579 | $ | 1,419 | 7.6 | % | ||||||||
| Cost of revenue | 14,579 | 13,952 | 627 | 4.5 | % | |||||||||||
| Gross profit | 5,419 | 4,627 | 792 | 17.1 | % | |||||||||||
| Gross profit percentage | 27.1 | % | 24.9 | % | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | 1,865 | 1,397 | 468 | 33.5 | % | |||||||||||
| Selling | 1,281 | 895 | 386 | 43.1 | % | |||||||||||
| General and administrative | 4,410 | 3,937 | 473 | 12.0 | % | |||||||||||
| Loss on disposition of Tantaline | 162 | - | 162 | * | ||||||||||||
| Impairment charge | 111 | - | 111 | * | ||||||||||||
| Total operating expenses | 7,829 | 6,229 | 1,600 | 25.7 | % | |||||||||||
| Operating loss | (2,410 | ) | (1,602 | ) | (808 | ) | (50.4 | )% | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 400 | 74 | 326 | * | ||||||||||||
| Interest expense | (18 | ) | (5 | ) | (13 | ) | * | |||||||||
| Foreign exchange income (expense) | 42 | (250 | ) | 292 | * | |||||||||||
| Other income | 91 | 11 | 80 | * | ||||||||||||
| Total other income (expense), net | 515 | (170 | ) | 685 | * | |||||||||||
| Loss before income taxes | (1,895 | ) | (1,772 | ) | (123 | ) | (6.9 | )% | ||||||||
| Income tax expense | 11 | 1 | 10 | * | ||||||||||||
| Net loss | $ | (1,906 | ) | $ | (1,773 | ) | $ | (133 | ) | (7.5 | )% | |||||
| * Not meaningful | ||||||||||||||||
| Revenue (net of intersegment sales) | ||||||||||||||||
| CVD Equipment | $ | 13,670 | $ | 12,324 | $ | 1,346 | 10.9 | % | ||||||||
| SDC | 5,229 | 4,172 | 1,057 | 25.3 | % | |||||||||||
| CVD Materials | 1,099 | 2,083 | (984 | ) | (47.2 | )% | ||||||||||
| Total | $ | 19,998 | $ | 18,579 | $ | 1,419 | 7.6 | % | ||||||||
| 28 |
Revenue
Our revenue for the nine months ended September 30, 2023 was $20.0 million compared to $18.6 million for the nine months ended September 30, 2022, an increase of 7.6%.
The increase in revenue versus the prior year period was primarily attributable to increased revenue of $1.3 million from the CVD Equipment segment related to equipment sales and spare parts, a $1.1 million increase in revenue from our SDC segment and a $1.0 million decrease from the CVD Materials segment. The increase in revenue in the period was principally the result higher aerospace revenues in the CVD Equipment segment, higher revenues in our SDC segment due to increased orders, and lower revenues in the CVD Materials segment due to the sale of the Tantaline subsidiary and the wind down of our MesoScribe subsidiary.
Revenue contributed by the CVD Equipment segment for the nine months ended September 30, 2023 of $13.7 million represented 68.4% of overall revenue as compared to $12.3 million or 66.3% of overall revenue for the nine months ended September 30, 2022. The increase in revenues of $1.3 million or 10.9% represents increase in equipment orders in our aerospace, industrial and research markets offset by lower PVT150 system revenues.
Revenue related to PVT150 systems sold to one customer represented 15.9% of our total revenues and 23.1% of CVD Equipment segment revenues during the nine months ended September 30, 2023. We recognized revenue on this contract as we construct the equipment for our customer.
Revenue contributed by the SDC segment for the nine months ended September 30, 2023 of $5.2 million represented 26.1% of overall revenue as compared to $4.2 million or 22.5% of overall revenue for the nine months ended September 30, 2022. Revenue for our SDC segment increased $1.1 million or 25.3% due to increased orders and strong demand for the SDC’s gas and chemical delivery system products as compared to the prior year. The demand and related bookings for SDC’s products are subject to fluctuation depending on market demand.
Revenue contributed by the CVD Materials segment for the nine months ended September 30, 2023 of $1.1 million represented 5.5% of our overall revenue as compared to $2.1 million or 11.2% of overall revenue for the nine months ended September 30, 2022. The decrease in revenue was principally due to the sale of Tantaline in May 2023 and the wind down of our MesoScribe subsidiary.
Gross Profit
Gross profit for the nine months ended September 30, 2023 was $5.4 million, with a gross profit margin of 27.1%, compared to a gross profit of $4.6 million and a gross profit margin of 24.9% for the nine months ended September 30, 2022. The increase in gross profit of $0.8 million was primarily the result of leveraging fixed costs on higher sales levels and an improved contract mix offset by certain component cost increases and higher compensation costs and lower gross profit due to the sale of our Tantaline subsidiary and the wind down of MesoScribe’s operations.
| 29 |
Research and Development
For the nine months ended September 30, 2023, research and development expenses were $1.9 million, or 9.3% of revenue as compared to $1.4 million, or 7.5% for the nine months ended September 30, 2022. The increase in 2023 was the result of increased personnel and employee-related costs to develop new products for key growth markets offset by lower bonus expense.
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 $1.3 million or 6.4% of the revenue for the nine months ended September 30, 2023 as compared to $0.9 million or 4.8% for the nine months ended September 30, 2022. The increase in 2023 was the result of increased personnel and employee-related costs and an increase in trade shows and other marketing expenses to support increased marketing efforts.
General and Administrative
General and administrative expenses for the nine months ended September 30, 2023 were $4.4 million or 22.1% of revenue compared to $3.9 million or 21.2% of revenue for the nine months ended September 30, 2022, an increase of $0.5 million. The increase in expenses was principally due to increases in personnel and employee-related costs of $0.5 million to support the growth of our business, higher professional fees of $0.3 million partially offset by lower consulting expenses of $0.1 million. In addition, the prior period included a severance charge of $0.1 million.
Loss on disposition of Tantaline
This item represents the net loss on the sale of our Tantaline subsidiary including professional fees.
Impairment Charge
This item represents the loss on the impairment of certain assets of MesoScribe based on the decision to wind down its operations.
Other Income (Expense), Net
Other income, net was $0.5 million for the nine months ended September 30, 2023 as compared to other (expense), net of ($0.2 million) for the nine months ended September 30, 2022. The change was principally due to an increase in interest income due to higher interest rates and increased amounts invested in U.S. treasury bills, additional amounts received for employee retention credits and a reduction in the foreign exchange loss.
Income Taxes
Our provision for income taxes consists solely of state income taxes. Our deferred tax asset has been fully reserved.
| 30 |
Liquidity and Capital Resources
As of September 30, 2023, aggregate working capital was $16.2 million as compared to aggregate working capital of $15.5 million at December 31, 2022. Cash and cash equivalents at September 30, 2023 and December 31, 2022 were $14.3 million and $14.4 million, respectively.
Net cash used in operating activities for the nine months ended September 30, 2023 was $0.1 million. This decrease was principally due to a net loss of $1.9 million, increases in contract assets of $0.7 million, increase in inventories of $1.8 million, decrease in accrued expenses of $0.7 million (primarily due to payment of 2022 bonus) offset by a decrease in accounts receivable of $1.2 million, collection of employee retention credit receivable of $1.5 million, an increase in contract liabilities of $0.8 million and non-cash items of $1.5 million. The increase in inventory was related to the production of PVT150 systems in anticipation of potential future orders.
Capital expenditures for the nine months ended September 30, 2023 were $0.3 million related to purchases of manufacturing equipment and building improvements. The disposition of Tantaline resulted in a cash outflow of $0.3 million based on the terms of the agreement. We received $0.6 million of deposits from the purchaser of certain MesoScribe equipment as described below.
Cash flows from financing activities for the nine months ended September 30, 2023 included $0.1 million of proceeds from the exercise of employee stock options.
On August 4, 2023, we entered into a Purchase and License Agreement (the “Agreement”) with the third-party. Pursuant to the Agreement, we will sell certain proprietary assets relating to its plasma spray technology and material deposition system and grant a non-exclusive license to use certain of our related intellectual property as more fully described in the Agreement, for an aggregate purchase price of $0.9 million. The purchase price is payable in several installments and contingent upon certain performance metrics and other milestones.
During the three months ended September 30, 2023, we received payments under the Agreement in the amount of $0.6 million which is reflected as deposits from purchaser in the accompanying condensed consolidated balance sheet as of September 30, 2023. We expect the transaction to be completed during the next three months with the shipment of the equipment to the purchaser.
We expect to continue to fulfill remaining backorders for MesoScribe products through the end of 2024 at which time it plans to cease the remaining operations of MesoScribe and dispose of any remaining equipment.
We believe that our cash and cash equivalent positions and our projected cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months from the filing of this Form 10-Q. We will continue to assess our operations and take actions anticipated to maintain our operating cash to support the working capital needs.
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Critical Accounting Policies and Estimates
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our critical estimates include accounting for certain items such as revenues on long-term contracts recognized on the input method, and the recoverable value of our long-lived assets.
We consider the following significant accounting policies to be critical because of their complexity and the high degree of judgment involved in maintaining them.
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. For systems sales that meet the criteria to recognize revenue over time, 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. For system sales that to not meet the criteria to recognize revenue over time based on the contract provisions, we recognize revenue based on point in time.
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 are 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.
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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 its carrying value over its fair value. Assets to be disposed of are reported at the lower of their carrying value or net realizable value.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 13d-15(e) under the Exchange Act of 1934, as amended, (the “Exchange Act”)). As required by Rule 13a-15(b) under the Exchange Act, our management, under the direction of our Chief Executive Officer and Chief Financial Officer, reviewed and performed an evaluation of the effectiveness of design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on that review and evaluation, our Chief Executive Officer and Chief Financial Officer, along with others in our management, have determined that as of the end of the period covered by this Quarterly Report on Form 10-Q the disclosure controls and procedures were effective to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding disclosures.
Changes in Internal Controls
There were no changes in our internal controls over financial reporting as defined in Rule 13a-15(f) or Rule 15d-15(f) under the Exchange Act that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the internal controls over financial reporting.
Limitations on the Effectiveness of Controls
We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
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CVD EQUIPMENT CORPORATION
PART II
OTHER INFORMATION
| Item 1. | Legal Proceedings. |
| None. | |
| Item 1A. | Risk Factors. |
| There have been no other material changes to the risk factors disclosed in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 27, 2023. | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
| None. | |
| Item 3. | Defaults Upon Senior Securities. |
| None. | |
| Item 4. | Mine Safety Disclosures. |
| Not applicable. | |
| Item 5. | Other Information. |
| None. |
| 34 |
| Item 6. | Exhibits |
| 31.1* | Certification of Emmanuel Lakios, Chief Executive Officer, dated November 14, 2023 |
| 31.2* | Certification of Richard Catalano, Chief Financial Officer, dated November 14, 2023 |
| 32.1* | Certification of Emmanuel Lakios, Chief Executive Officer, dated November 14, 2023, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2* | Certification of Richard Catalano, Chief Financial Officer, dated November 14, 2023, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.1** | Inline XBRL Instance. |
| 101.SCH** | Inline XBRL Taxonomy Extension Schema. |
| 101.CAL** | Inline XBRL Taxonomy Extension Calculation. |
| 101.DEF** | Inline XBRL Taxonomy Extension Definition. |
| 101.LAB** | Inline XBRL Taxonomy Extension Labels. |
| 101.PRE** | Inline XBRL Taxonomy Extension Presentation. |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* Filed herewith.
** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not to be filed or part of a registration statement of prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 14th day of November 2023.
| CVD EQUIPMENT CORPORATION | ||
| By: | /s/ Emmanuel Lakios | |
| Emmanuel Lakios | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| By: | /s/ Richard Catalano | |
| Richard Catalano | ||
| Executive Vice President and | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) |
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Exhibit 31.1
Certifications of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Emmanuel Lakios, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of CVD Equipment Corporation; | |
| 2. | Based upon my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based upon my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b. | Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrants’ board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: November 14, 2023 | |
| /s/ Emmanuel Lakios | |
| President and Chief Executive Officer |
Exhibit 31.2
Certifications of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Richard Catalano, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of CVD Equipment Corporation; | |
| 2. | Based upon my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based upon my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. | |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b. | Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrants’ board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. |
Dated: November 14, 2023
| /s/ Richard Catalano | |
| Richard Catalano | |
| Executive Vice President and | |
| Chief Financial Officer | |
| (Principal Financial Officer) |
Exhibit 32.1
Certification of Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
I, Emmanuel Lakios, President and Chief Executive Officer of CVD Equipment Corporation, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge, the quarterly report on Form 10-Q for the period ending September 30, 2023 of CVD Equipment Corporation (the “Form 10-Q”) fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of CVD Equipment Corporation.
| Dated: November 14, 2023 | /s/ Emmanuel Lakios |
| Emmanuel Lakios | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) |
Exhibit 32.2
Certification of Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
I, Richard Catalano, Chief Financial Officer of CVD Equipment Corporation, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge, the quarterly report on Form 10-Q for the period ending September 30, 2023 of CVD Equipment Corporation (the “Form 10-Q”) fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of CVD Equipment Corporation.
| Dated: November 14, 2023 | /s/ Richard Catalano |
| Richard Catalano | |
| Executive Vice President and | |
| Chief Financial Officer | |
| (Principal Financial Officer) |