CVD Equipment (CVV) 10-Q2023 Q1 Quarterly report

PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(in thousands, except per share and share amounts)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(in thousands, except share amounts)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements

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 months ended March 31, 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 March 31, 2023, the Company had $11.0 million in cash and cash equivalents. The Company anticipates that the existing cash and cash equivalents balance together with future income from operations, collections of existing accounts receivable, revenue from its existing backlog of products as of this filing date, the sale of inventory on hand, deposits and down payments against significant orders will be adequate to meet its working capital and capital equipment requirements, and its anticipated cash needs over the next 12 months from the date of issuance of the accompanying Form 10-Q.

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 specialized chemical vapor deposition equipment through contractual agreements. These system sales require the Company to deliver functioning equipment that is generally completed within two to eighteen months from order acceptance. The Company recognizes revenue from system sales over time by using an input method based on costs incurred as it depicts the Company’s progress toward satisfaction of the performance obligation. Under this method, revenue arising from fixed price contracts is recognized as work is performed based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligations. Incurred costs include all direct material and labor costs and those indirect costs related to contract performance, such as 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 no material impairment losses recognized on contract assets during the three months ended March 31, 2023 and 2022.

The timing of revenue recognition, billings and collections results in receivables, unbilled receivables (referred to as 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.

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, revenue would be recognized at the point in time when control of the equipment is transferred to the customer. For the three months ended March 31, 2023 and 2022, all system equipment sales were recorded over time by using an input method.

Inventories

Inventories are valued at the lower of cost (determined on the first-in, first-out method) or net realizable value.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Product Warranty

The Company typically provides standard warranty coverage on its systems for one year from the date of final acceptance or fifteen months from the date of shipment by providing labor and parts necessary to repair the systems during the warranty period. The Company records the estimated warranty cost when revenue is recognized on the related system. Warranty cost is included in “Cost of revenue” in the condensed consolidated statements of operations. The estimated warranty cost is based on the Company’s historical cost. The Company updates its warranty estimates based on actual costs incurred.

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 decreases 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 $11.0 million and $14.4 million at March 31, 2023 and December 31, 2022, respectively. The Company invests excess cash in U.S. treasury bills, certificates of deposit or deposit accounts, all with maturities of less than three months. Cash equivalents were $9.2 million and $11.7 million at March 31, 2023 and December 31, 2022, respectively.

NOTE 3: CONCENTRATION OF CREDIT RISK (continued)

The Company places most of its temporary cash investments with financial institutions, which from time to time may exceed the Federal Deposit Insurance Corporation limit. The amount at risk at March 31, 2023 and December 31, 2022 was $0.9 million and $1.5 million, respectively. The Company’s cash balance in our Denmark subsidiary exceeded the government guarantee limit by approximately $0.6 million and $0.5 million as March 31, 2023 and December 31, 2022, respectively.

Accounts 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 $36,000 at both March 31, 2023 and December 31, 2022. The allowance is based on prior experience and management’s evaluation of the collectability of accounts receivable. Measurement of credit losses requires consideration of historical loss experience, including the need to adjust for changing business conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and the financial health of specific customers. Future changes to the estimated allowance for doubtful accounts could be material to our results of operations and financial condition.

At March 31, 2023, the accounts receivable balance included amounts from two customers that totaled 33.8% of total accounts receivable and at December 31, 2022, the accounts receivable balance included amounts from two customers that totaled 66% of total accounts receivable.

Sales concentration

Revenue from a single customer in any one period can exceed 10% of our total revenues. During the three months ended March 31, 2023, three customers exceeded 10% of revenues, representing 28.3%, 15.9% and 10.6% of revenues, and during the three months ended March 31, 2022, three customers exceeded 10%, representing 14.3%, 13.3% and 11.6% of revenues.

NOTE 4: REVENUE RECOGNITION

The following table represents a disaggregation of revenue for the three months ended March 31, 2023 and 2022 (in thousands):

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 $10.1 million at March 31, 2023, which it expects to substantially recognize as revenue within the next twelve months.

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 consolidated statements of operations.

NOTE 4: REVENUE RECOGNITION (continued)

Contract assets and liabilities

Contract assets and contract liabilities on input method type contracts in progress are summarized as follows as of March 31, 2023 (in thousands):

Of the contract liability balances at December 31, 2022 and 2021 of $4.1 million and $1.7 million, respectively, $2.9 million and $1.2 million was recognized as revenue during the three months ended March 31, 2023 and 2022, respectively.

NOTE 5:        INVENTORIES, NET

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 $432,000, is payable in 60 equal monthly installments of $8,352 and secured by equipment. The interest rate is 6%.

NOTE 7:        EARNINGS PER SHARE

The calculation of basic and diluted weighted average common shares outstanding for the three months ended March 31, 2023 and 2022 is as follows:

At March 31, 2023, stock options to purchase 899,500 shares of common stock were outstanding and 252,375 were exercisable. At March 31, 2022, stock options to purchase 628,500 shares of common stock were outstanding and 285,000 were exercisable.

For the three months ended March 31, 2023 and 2022, 899,500 and 628,500 of stock options, respectively, were not included in the computation of diluted earnings per share because their effect was antidilutive.

NOTE 8: STOCK-BASED COMPENSATION EXPENSE

The Company recorded stock-based compensation for the three months ended March 31, 2023 and 2022, respectively, that were included in the following line items in our Consolidated Statements of Operations (in thousands):

NOTE 8: STOCK-BASED COMPENSATION EXPENSE (continued)

Stock-based compensation expense in both periods included approximately $40,000 related to restricted stock awards that directors elected to receive pursuant to the Director Compensation plan. Under this plan each of the four independent directors is entitled to an Annual Equity Retainer in the amount of $40,000, to be granted on the date of the Company’s annual meeting of shareholders.

For the three months ended March 31, 2023, the Company granted 244,000 stock options, vesting 25% per year over four years, with a ten-year life. The Company determined the weighted average fair value of stock options granted was $9.33 and is based upon weighted average assumptions below.

The following table summarizes stock options awards for the three months ended March 31, 2023:

The following table summarizes information about the outstanding and exercisable options at March 31, 2023 by ranges of exercise prices:

As of March 31, 2023, there was $3.2 million of unrecognized compensation costs related to stock options expected to be recognized over a weighted average period of 3.2 years.

NOTE 9: INCOME TAXES

As of March 31, 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.

NOTE 10:         SEGMENT REPORTING

The Company operates through three segments: CVD Equipment, Stainless Design Concepts (“SDC”) and CVD Materials. The CVD Equipment segment manufactures and sells chemical vapor deposition, physical vapor transport and similar equipment. The SDC segment designs and manufactures ultra-high purity gas and chemical delivery control systems. The CVD Materials segment that provides material coatings for aerospace, medical, electronic and other applications and is not considered a core business of the Company. The Company evaluates performance based on several factors, of which the primary financial measure is income (loss) before taxes.

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 for the three months ended March 31, 2023 and 2022 by the SDC segment to the CVD Equipment segment were $129,000 and $44,000, respectively.

NOTE 10:         SEGMENT REPORTING (continued)

The following table presents certain information regarding the Company’s segments as of and for the three months ended March 31, 2023 and 2022 (in thousands):

NOTE 11: CVD MATERIALS UPDATE

Management is evaluating options for the disposal of its Tantaline subsidiary located in Nordborg, Denmark based on the Company’s current 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. The revenues and net income of the Tantaline subsidiary were $0.4 million and $0.1 million, respectively, for the three months ended March 31, 2023. The total assets and total liabilities of the Tantaline subsidiary were $1.1 million and $0.2 million as of March 31, 2023, respectively. The disposition of Tantaline subsidiary may result in a financial charge of up to $500,000 during the year ending December 31, 2023.

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 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.

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:

Other factors and assumptions not identified above were also involved in the derivation of these forward-looking statements and the failure of such assumptions to be realized as well as other factors may also cause actual results to differ materially from those projected. We assume no obligation to update these forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting such forward-looking statements. Past performance is no guaranty of future results.

You should not place undue reliance on any forward-looking statements, which speak only as of the dates they are made. When used with this Report, the words “believes”, “anticipates”, “expects”, “estimates”, “plans”, “intends”, “will” and similar expressions are intended to identify forward-looking statements.

Executive Summary

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, 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.cvdequipement.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 will 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, we received the first six (6) 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 wafters by our customer and later processed into integrated circuits and other devices. Devices based on silicon carbide have been shown to reduce energy consumption in EVs and reduce the need for additional cooling elements. During 2022, we received an additional 24 orders from the same customer. We also launched our marketing campaign for the PVT150 in the latter part of 2022 as we seek orders from other potential customers.

During 2022, we completed the production of a system for a customer that deposits coatings onto powders used in silicon-graphite anodes that has the objective of increasing EV battery performance while lowering cost.

We believe that the receipt of a $3.7 million order from a major aerospace company in 2022 for the production of chemical vapor infiltration system reflects the beginnings of a revival in aircraft manufacturing. 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.

During the three months ended March 31, 2023, new order bookings approximated $2.9 million, representing a decrease of approximately 30% compared to bookings of $4.1 million in three months ended March 31, 2022. Our backlog declined from $17.8 million at December 31, 2022 to $12.0 million at March 31, 2023 as revenues were in excess of orders by approximately $5.8 million.

Historically, our orders have fluctuated based on end user market conditions, adoption of our new products and acceptance of our products. 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.

Our PVT150 system which was launched in 2022 with an initial 20 systems shipped in 2022, a follow-on order of 10 systems to the same customer is scheduled for shipment in the second quarter of 2023. In the first quarter of 2023, the PVT150 system was launched to the broader customer market and we are engaged in discussions with several potential customers. The timing of orders for our PVT-150 system contributes to the overall quarter to quarter fluctuation in orders.

During the first quarter of 2023, our aerospace customers continued their evaluation of market conditions related to their capacity demand and ordering of additional systems to meet the capacity demand. We continue to engage in discussions with them regarding timing and potential orders.

Results of Operations

Three Months Ended March 31, 2023 and 2022

The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022 and the period-over-period dollar and percentage changes for those line items (in thousands, except percentages).

* Not meaningful

Revenue

Our revenue for the three months ended March 31, 2023 was $8.7 million compared to $4.7 million for the three months ended March 31, 2022, an increase of 87%.

The increase in revenue versus the prior year period was primarily attributable to increased revenue of $3.0 million from the CVD Equipment segment related to equipment sales and spare parts, a $0.9 million increase in revenue from our SDC segment and a $0.2 million increase from the CVD Materials segment. The increase in revenue in the period was principally the result of the recognition of revenue associated with our PVT150 systems. Revenue related to PVT150 systems sold to one customer in 2023 represented 28.3% of our total revenues and 42.2% of CVD Equipment segment revenues. We recognized revenue on this contract as we construct the equipment for our customer.

Our order backlog at March 31, 2023 was approximately $12.0 million as compared to December 31, 2022 of $17.8 million. Our backlog at March 31, 2023 consists of approximately $10.1 million related to remaining performance obligations of contracts in progress and not yet started with the balance of approximately $1.9 million represents other 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. Accordingly, orders received from customers and revenue recognized may fluctuate from quarter to quarter.

The revenue contributed by the CVD Equipment segment for the three months ended March 31, 2023 of $5.8 million represented 67% of overall revenue as compared to $2.8 million or 61% of overall revenue for the three months ended March 31, 2022. The increase in revenues of $3.0 million or 107% resulted principally related revenue associated with a contract for PVT150 systems.

The revenue contributed by the SDC segment for the three months ended March 31, 2023 of $2.3 million represented 25% of overall revenue as compared to $1.4 million or 29% of overall revenue for the three months ended March 31, 2022. Revenue for our SDC segment increased $0.9 million or 63% due to increased orders and strong demand for the SDC’s gas and chemical delivery system products as compared to the prior year.

The revenue contributed by the CVD Materials segment for the three months ended March 31, 2023 of $0.7 million represented 8% of our overall revenue as compared to $0.5 million or 10% of overall revenue for the three months ended March 31, 2022

Gross Profit

Gross profit for the three months ended March 31, 2023 was $2.4 million, with a gross profit margin of 28.0%, compared to a gross profit of $0.8 million and a gross profit margin of 16.5% for the three months ended March 31, 2022. The increase in gross profit of $1.6 million was primarily the result of leveraging fixed costs on higher sales levels which offset certain component cost increases and higher compensation costs.

Research and Development

For the three months ended March 31, 2023, research and development expenses were $0.6 million, or 6.9% of revenue as compared to $0.3 million, or 6.7% for the three months ended March 31, 2022. The increase in 2023 was the result of increased personnel and employee-related costs to develop new products for key growth markets.

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 4.8% of the revenue for the three months ended March 31, 2023 as compared to $0.3 million or 5.9% for the three months ended March 31, 2022. The increase in 2023 was primarily the result of increased personnel and employee-related costs during to support increased marketing efforts as well as increase in trade shows and other marketing expenses.

General and Administrative

General and administrative expenses for the three months ended March 31, 2023 were $1.6 million or 18.4% of revenue compared to $1.2 million or 25.8% of revenue for the three months ended March 31, 2022, an increase of $0.4 million. The increase in expenses was principally due to increases in personnel and employee-related costs of approximately $0.2 million to support the growth of our business and higher professional fees of $0.1 million.

Other Income (Expense), Net

Other income (expense), net was $149,000 for the three months ended March 31, 2023 as compared to other income (expense), net of ($27,000) for the three months ended March 31, 2022. The change was principally due to an increase in interest income due to higher interest rates and increased amounts in invested in U.S. treasury securities.

Income Taxes

We continue to evaluate the potential utilization of our deferred tax asset, which has been fully reserved for, on a quarterly basis, by reviewing our economic models, including projections of future operating results.

Liquidity and Capital Resources

As of March 31, 2023, aggregate working capital was $15.7 million as compared to aggregate working capital of $15.5 million at December 31, 2022. Cash and cash equivalents at March 31, 2023 and December 31, 2022 were $11.0 million and $14.4 million, respectively.

Net cash used in operating activities for the three months ended March 31, 2023 was $3.3 million. This decrease was principally due to increases in contract assets of $1.5 million, decrease in contract liabilities of $2.8 million, increase in inventories of $0.3 million, decrease in accrued expenses of $0.5 million (primarily due to payment of 2022 bonus) offset by reduction in accounts receivable of $1.4 million and non-cash items of $0.3 million.

Capital expenditures for the three months ended March 31, 2023 were $146,000 related to purchases of manufacturing equipment and building improvements.

Cash flows from financing activities for the three months ended March 31, 2022 included $73,000 of proceeds from the exercise of employee stock options.

Management is evaluating options for the disposal of its Tantaline subsidiary located in Nordborg, Denmark based on the Company’s current 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. . The revenues and net income of the Tantaline subsidiary were $0.4 million and $0.1 million, respectively, for the three months ended March 31, 2023.  The total assets and total liabilities of the Tantaline subsidiary were $1.1 million and $0.2 million as of March 31, 2023, respectively.  The disposition of Tantaline subsidiary may result in a financial charge of up to $500,000 during the year ending December 31, 2023.

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.

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. We recognize revenue over time by using an input method based on costs incurred as it depicts our progress toward satisfaction of the performance obligation. Under this method, revenue arising from fixed price contracts is recognized as work is performed based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligations.

Incurred costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Contract material costs are included in incurred costs when the project materials have been purchased or moved to work in process as required by the project’s engineering design. Cost based input methods of revenue recognition require us to make estimates of costs to complete the projects. In making such estimates, significant judgment is required to evaluate assumptions related to the costs to complete the projects, including materials, labor, and other system costs. If the estimated total costs on any contract are greater than the net contract revenues, we recognize the entire estimated loss in the period the loss becomes known and can be reasonably estimated.

We have been engaged in the production and delivery of goods on a continual basis under contractual arrangements for many years. Historically, we have demonstrated an ability to accurately estimate total revenues and total expenses relating to our long-term contracts. However, there 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.

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 (the “Report”).

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 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.

CVD EQUIPMENT CORPORATION

PART II

OTHER INFORMATION

None.

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.

None.

None.

Not applicable.         

None.

* 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.

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 15^th day of May 2023.