UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| (Mark One) | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
| For the quarterly period ended March 31, 2024 | |
| ☐ | 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: 1-16525
CVD EQUIPMENT CORPORATION
(Name of Registrant in Its Charter)
| New York | 11-2621692 | |
State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
355 South Technology Drive
Central Islip, New York 11722
(Address of principal executive offices)
(631) 981-7081
(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 | ||
| Common Stock | CVV | NASDAQ Capital Market |
Indicate by check 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. Yes ☒ No ☐
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). Yes ☒ No ☐
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 ☐ | ||
| Non-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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
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 May 10, 2024.
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)
| March 31, 2024 | December 31, 2023 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 11,893 | $ | 14,025 | ||||
| Accounts receivable, net of allowance for credit losses | 2,971 | 1,906 | ||||||
| Contract assets | 2,689 | 1,604 | ||||||
| Inventories | 4,925 | 4,454 | ||||||
| Other current assets | 858 | 852 | ||||||
| Total current assets | 23,336 | 22,841 | ||||||
| Property, plant and equipment, net | 12,089 | 12,166 | ||||||
| Other assets | 18 | 18 | ||||||
| Total assets | $ | 35,443 | $ | 35,025 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,798 | $ | 1,203 | ||||
| Accrued expenses | 1,690 | 1,765 | ||||||
| Current maturities of long-term debt | 83 | 81 | ||||||
| Deposit from purchaser of MesoScribe assets-Note 11 | 597 | 597 | ||||||
| Contract liabilities | 6,030 | 4,908 | ||||||
| Total current liabilities | 10,198 | 8,554 | ||||||
| Long-term debt, net of current portion | 247 | 268 | ||||||
| Total liabilities | 10,445 | 8,822 | ||||||
| Contingencies – Note 12 | - | - | ||||||
| Stockholders’ equity: | ||||||||
| Common stock - $ par value – shares authorized; issued and outstanding at March 31, 2024 and December 31, 2023 | 68 | 68 | ||||||
| Additional paid-in capital | 28,962 | 28,695 | ||||||
| Accumulated deficit | (4,032 | ) | (2,560 | ) | ||||
| Total stockholders’ equity | 24,998 | 26,203 | ||||||
| Total liabilities and stockholders’ equity | $ | 35,443 | $ | 35,025 | ||||
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)
| 2024 | 2023 | |||||||
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Revenue | $ | 4,922 | $ | 8,695 | ||||
| Cost of revenue | 4,063 | 6,261 | ||||||
| Gross profit | 859 | 2,434 | ||||||
| Operating expenses: | ||||||||
| Research and development | 746 | 602 | ||||||
| Selling | 419 | 419 | ||||||
| General and administrative | 1,317 | 1,600 | ||||||
| Total operating expenses | 2,482 | 2,621 | ||||||
| Operating loss | (1,623 | ) | (187 | ) | ||||
| Other income (expense): | ||||||||
| Interest income | 157 | 120 | ||||||
| Interest expense | (6 | ) | (6 | ) | ||||
| Foreign exchange income | - | 27 | ||||||
| Other income | - | 8 | ||||||
| Total other income, net | 151 | 149 | ||||||
| Loss before income taxes | (1,472 | ) | (38 | ) | ||||
| Income tax expense | - | 2 | ||||||
| Net loss | $ | (1,472 | ) | $ | (40 | ) | ||
| Loss per common share - basic | $ | (0.22 | ) | $ | (0.01 | ) | ||
| Loss per common share - diluted | $ | (0.22 | ) | $ | (0.01 | ) | ||
| Weighted average common shares outstanding: | ||||||||
| Basic | 6,809,283 | 6,773,285 | ||||||
| Diluted | 6,809,283 | 6,773,285 | ||||||
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 March 31, 2024 and 2023
| Shares | Par Value | Capital | Earnings | Total | ||||||||||||||||
| (Accumulated | ||||||||||||||||||||
| Common stock | Additional paid-in | Deficit) Retained | ||||||||||||||||||
| Shares | Par Value | Capital | Earnings | Total | ||||||||||||||||
| Balance at January 1, 2024 | 6,824,511 | $ | 68 | $ | 28,695 | $ | (2,560 | ) | $ | 26,203 | ||||||||||
| Net loss | - | - | - | (1,472 | ) | (1,472 | ) | |||||||||||||
| Stock-based compensation | - | - | 267 | - | 267 | |||||||||||||||
| Balance at March 31, 2024 | 6,824,511 | $ | 68 | $ | 28,962 | $ | (4,032 | ) | $ | 24,998 | ||||||||||
| Balance at January 1, 2023 | 6,760,938 | $ | 67 | $ | 27,712 | $ | 1,620 | $ | 29,399 | |||||||||||
| Balance | 6,760,938 | $ | 67 | $ | 27,712 | $ | 1,620 | $ | 29,399 | |||||||||||
| Net loss | - | - | - | (40 | ) | (40 | ) | |||||||||||||
| Stock-based compensation | - | - | 135 | - | 135 | |||||||||||||||
| Exercise of stock options and issuance of shares | 17,500 | - | 73 | - | 73 | |||||||||||||||
| Balance at March 31, 2023 | 6,778,438 | $ | 67 | $ | 27,920 | $ | 1,580 | $ | 29,567 | |||||||||||
| Balance | 6,778,438 | $ | 67 | $ | 27,920 | $ | 1,580 | $ | 29,567 | |||||||||||
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)
| 2024 | 2023 | |||||||
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (1,472 | ) | $ | (40 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock-based compensation | 267 | 135 | ||||||
| Depreciation and amortization | 153 | 166 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (1,065 | ) | 1,420 | |||||
| Contract assets | (1,085 | ) | (1,537 | ) | ||||
| Inventories | (471 | ) | (262 | ) | ||||
| Other current assets | (28 | ) | 119 | |||||
| Accounts payable | 611 | (25 | ) | |||||
| Accrued expenses | (75 | ) | (467 | ) | ||||
| Contract liabilities | 1,122 | (2,781 | ) | |||||
| Net cash used in operating activities | (2,043 | ) | (3,272 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (70 | ) | (146 | ) | ||||
| Net cash used in investing activities | (70 | ) | (146 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Repayments of long-term debt | (19 | ) | (19 | ) | ||||
| Proceeds from exercise of stock options | - | 73 | ||||||
| Net cash (used in) provided by financing activities | (19 | ) | 54 | |||||
| Net decrease in cash and cash equivalents | (2,132 | ) | (3,364 | ) | ||||
| Cash and cash equivalents at beginning of period | 14,025 | 14,365 | ||||||
| Cash and cash equivalents at end of period | $ | 11,893 | $ | 11,001 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Income taxes paid | $ | - | $ | 8 | ||||
| Interest paid | $ | 6 | $ | 6 | ||||
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 months ended March 31, 2024 are not necessarily indicative of the results that can be expected for the year ending December 31, 2024.
The condensed consolidated balance sheet as of December 31, 2023 has been derived from the audited consolidated financial statements at such date, as filed on Form 10-K with the SEC on March 28, 2024, 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 loss. .
Liquidity
At March 31, 2024, the Company had $11.9 million in cash and cash equivalents. The Company anticipates that the existing cash and cash equivalents balance together with potential 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 these condensed consolidated financial statements..
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NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 recognizes 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 no material impairment losses recognized on contract assets during the three months ended March 31, 2024 and 2023.
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 months ended March 31, 2024 and 2023, all system equipment sales were recorded over time by using an input method.
Inventories
Inventories (raw materials, work-in-process and finished goods) are valued at the lower of cost (determined on the first-in, first-out method) or net realizable value. Work-in-process and finished goods inventory reflect all accumulated production costs, which are comprised of direct production costs and overhead, and is reduced by amounts recorded in cost of sales as the related revenue is recognized. Indirect costs relating to long-term contracts, which include expenses such as general and administrative, are charged to expense as incurred and are not included in our cost of sales or work-in-process and finished goods inventory.
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NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its estimated net realizable value if less than cost. The Company evaluates usage requirements by analyzing historical usage, anticipated demand, alternative uses of materials, and other qualitative factors. Unanticipated changes in demand for the Company’s products may require a write down of inventory, which would be reflected in cost of sales in the period the revision is made.
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 December 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which requires public business entities to disclose additional information in specified categories with respect to the reconciliation of the effective tax rate to the statutory rate for federal, state, and foreign income taxes. It also requires greater detail about individual reconciling items in the rate reconciliation to the extent the impact of those items exceeds a specified threshold. In addition to new disclosures associated with the rate reconciliation, the ASU requires information pertaining to taxes paid (net of refunds received) to be disaggregated for federal, state, and foreign taxes and further disaggregated for specific jurisdictions to the extent the related amounts exceed a quantitative threshold. The ASU also describes items that need to be disaggregated based on their nature, which is determined by reference to the item’s fundamental or essential characteristics, such as the transaction or event that triggered the establishment of the reconciling item and the activity with which the reconciling item is associated. The ASU eliminates the historic requirement that entities disclose information concerning unrecognized tax benefits having a reasonable possibility of significantly increasing or decreasing in the 12 months following the reporting date. This ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. This ASU should be applied on a prospective basis; however, retrospective application is permitted. We are currently evaluating the impact that ASU 2023 – 09 may have on our consolidated financial statements.
| 10 |
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segments,” which aims to improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more decision-useful financial analyses. Currently, Topic 280 requires that a public entity disclose certain information about its reportable segments. For example, a public entity is required to report a measure of segment profit or loss that the CODM uses to assess segment performance and make decisions about allocating resources. Topic 280 also requires other specified segment items and amounts, such as depreciation, amortization, and depletion expense, to be disclosed under certain circumstances. The amendments in this ASU do not change or remove those disclosure requirements and do not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. We are currently evaluating the impact that ASU 2023 – 07 may have on our consolidated financial statements.
The Company believes there is no additional new accounting guidance adopted, but not yet effective that is relevant to the readers of our 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 $11.9 million and $14.0 million at March 31, 2024 and December 31, 2023, 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 $11.1 million and $12.1 million at March 31, 2024 and December 31, 2023, respectively.
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, 2024 and December 31, 2023 was $0.3 million and $1.5 million, respectively.
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NOTE 3: CONCENTRATION OF CREDIT RISK (continued)
Accounts receivable
The Company routinely assesses the financial strength of its customers. In accordance with the “expected credit loss” model, the carrying amount of accounts receivable is reduced by a valuation allowance that reflects the best estimate of the amounts the Company does not expect to collect. In addition to reviewing delinquent accounts receivable, the Company consider many factors in estimating our reserve, including types of customers and their credit worthiness, experience and historical data adjusted for current conditions and reasonable supportable forecasts. The Company records an allowance for credit losses based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are provided based upon the collection history, current economic trends and reasonable supportable forecasts.
Accounts receivable is presented net of an allowance for credit losses of $36,000 as of both March 31, 2024 and December 31, 2023. The allowance is based on prior experience and management’s evaluation of future economic conditions. 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, 2024, the accounts receivable balance included an amount from one customer that totaled 67.2% of total accounts receivable. As of December 31, 2023, the accounts receivable balance includes amounts from three customers that represented 37.6%, 13.0% and 12.8% 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, 2024, two customers exceeded 10% of revenues, representing 29.6% and 13.1% of revenues, and during the three months ended March 31, 2023, three customers exceeded 10%, representing 28.3%, 15.9% and 10.6% of revenues.
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NOTE 4: REVENUE RECOGNITION
The following table represents a disaggregation of revenue for the three months ended March 31, 2024 and 2023 (in thousands):
Schedule of Disaggregation of Revenue
| Over time | Point in time | Total | ||||||||||
| Three months ended March 31, 2024 | ||||||||||||
| Over time | Point in time | Total | ||||||||||
| Energy | $ | - | $ | 18 | $ | 18 | ||||||
| Aerospace | 1,802 | 332 | 2,134 | |||||||||
| Industrial | 1,259 | 483 | 1,742 | |||||||||
| Research | 861 | 167 | 1,028 | |||||||||
| Total | $ | 3,922 | $ | 1,000 | $ | 4,922 | ||||||
| Over time | Point in time | Total | ||||||||||
| Three months ended March 31, 2023 | ||||||||||||
| Over time | Point in time | Total | ||||||||||
| Energy | $ | 2,516 | $ | 14 | $ | 2,530 | ||||||
| Aerospace | 264 | 251 | 515 | |||||||||
| Industrial | 3,670 | 213 | 3,883 | |||||||||
| Research | 1,272 | 495 | 1,767 | |||||||||
| Total | $ | 7,722 | $ | 973 | $ | 8,695 | ||||||
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. The research market principally represents customers that are universities and other research institutions.
The Company has unrecognized contract revenue of approximately $24.8 million at March 31, 2024, which it expects to substantially recognize as revenue within the next eighteen 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.
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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, 2024 (in thousands):
Schedule of Cost and Estimated Earnings in Excess of Billings
| Costs incurred on contracts in progress | $ | 10,024 | ||
| Estimated earnings | 4,582 | |||
| Costs and estimated earnings on uncompleted contracts | $ | 14,606 | ||
| Billings to date | (17,649 | ) | ||
| Net cost in excess of billings | (3,043 | ) | ||
Deferred revenue related to non-system contracts and a system contract to be recognized at point in time | (298 | ) | ||
| Contract liability in excess of contract assets | $ | (3,341 | ) | |
Included in accompanying condensed consolidated balance sheets under the following captions (in thousands): | ||||
| Contract assets | $ | 2,689 | ||
| Contract liabilities | $ | 6,030 |
Of the contract liability balances at December 31, 2023 and 2022 of $4.6 million and $4.1 million, respectively, $1.3 million and $2.9 million was recognized as revenue during the three months ended March 31, 2024 and 2023, respectively.
NOTE 5: INVENTORIES, NET
Schedule of Inventories, Net
| Inventories consist of: | ||||||||
| March 31, 2024 | December 31, 2023 | |||||||
| Raw materials | $ | 2,507 | $ | 2,351 | ||||
| Work-in-process | 1,563 | 1,248 | ||||||
| Finished goods | 855 | 855 | ||||||
| Total | $ | 4,925 | $ | 4,454 | ||||
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%.
| 14 |
Schedule of Basic and Diluted Weighted Average Common Shares Outstanding
| 2024 | 2023 | |||||||
| Three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Basic weighted average common shares outstanding | 6,809,283 | 6,773,285 | ||||||
| Effect of potentially dilutive share-based awards | - | - | ||||||
| Diluted weighted average shares outstanding | 6,809,283 | 6,773,285 | ||||||
At March 31, 2024, stock options to purchase shares of common stock were outstanding and were exercisable. At March 31, 2023, stock options to purchase shares of common stock were outstanding and were exercisable.
For the three months ended March 31, 2024 and 2023, and of stock options, respectively, were not included in the computation of diluted earnings per share because their effect was antidilutive.
The Company recorded stock-based compensation for the three months ended March 31, 2024 and 2023, respectively, that were included in the following line items in our condensed consolidated statements of operations (in thousands):
| 2024 | 2023 | |||||||
| Three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Cost of revenue | $ | 38 | $ | 19 | ||||
| Research and development | 47 | 20 | ||||||
| Selling | 27 | 11 | ||||||
| General and administrative | 155 | 85 | ||||||
| Total | $ | 267 | $ | 135 | ||||
| 15 |
NOTE 8: STOCK-BASED COMPENSATION EXPENSE (continued)
Stock-based compensation expense included $ and $ for the three months ended March 31, 2024 and 2023, respectively, related to restricted stock awards that directors elected to receive pursuant to the Director Compensation plan. Under this plan, each of the five 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.
For the three months ended March 31, 2024, 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 | $ | 4.75 | ||
| Exercise price | $ | 4.75 | ||
| Dividend yield | % | |||
| Expected volatility | % | |||
| Risk-free interest rate | % | |||
| Expected life (in years) |
Schedule of Stock Options Awards
| Weighted | ||||||||
| Stock Option | Average | |||||||
| Awards | Exercise | |||||||
| (in shares) | Price | |||||||
| Outstanding at January 1, 2024 | 846,875 | $ | 8.20 | |||||
| Granted | 5,000 | 4.75 | ||||||
| Forfeited | (10,000 | ) | 8.01 | |||||
| Outstanding at March 31, 2024 | 841,875 | 8.18 | ||||||
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 | ||||||||||||||||||||||
| $ | - | 462,125 | $ | 4.55 | $ | 144,275 | 194,750 | $ | 4.48 | $ | 68,931 | ||||||||||||||||||
| $ | - | 20,000 | $ | 8.07 | $ | - | 20,000 | $ | 8.07 | $ | - | ||||||||||||||||||
| $ | - | 130,000 | $ | 10.62 | $ | - | 122,500 | $ | 10.55 | $ | - | ||||||||||||||||||
| $ | - | 229,750 | $ | 14.11 | $ | - | 58,375 | $ | 14.11 | $ | - | ||||||||||||||||||
| 16 |
NOTE 8: STOCK-BASED COMPENSATION EXPENSE (continued)
As of March 31, 2024, 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 March 31, 2024 and December 31, 2023, the Company has provided a full valuation allowance against its net deferred tax assets. This was based on management’s assessment, including operating losses in recent years, 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 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 and board members, 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, 2024 and 2023 by the SDC segment to the CVD Equipment segment were $15,000 and $129,000, respectively.
| 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 March 31, 2024 and 2023 (in thousands):
Schedule of Segments
| CVD Equipment | SDC | CVD Materials | Eliminations | Corporate | Consolidated | |||||||||||||||||||
| 2024 | ||||||||||||||||||||||||
| CVD Equipment | SDC | CVD Materials | Eliminations | Corporate | Consolidated | |||||||||||||||||||
| Assets | $ | 31,412 | $ | 3,882 | $ | 183 | $ | (34 | ) | $ | - | $ | 35,443 | |||||||||||
| Revenue | $ | 2,947 | $ | 1,931 | $ | 59 | $ | (15 | ) | $ | - | $ | 4,922 | |||||||||||
| Operating (loss) income | (1,405 | ) | 632 | (25 | ) | - | (825 | ) | (1,623 | ) | ||||||||||||||
| Pretax (loss) income | (1,411 | ) | 632 | (25 | ) | - | (668 | ) | (1,472 | ) | ||||||||||||||
| Depreciation and amortization | $ | 141 | $ | 12 | $ | - | $ | - | $ | - | $ | 153 | ||||||||||||
| Purchase of property, plant & equipment | $ | 76 | $ | - | $ | - | $ | - | $ | - | $ | 76 | ||||||||||||
| CVD Equipment | SDC | CVD Materials | Eliminations | Corporate | Consolidated | |||||||||||||||||||
| 2023 | ||||||||||||||||||||||||
| CVD Equipment | SDC | CVD Materials | Eliminations | Corporate | Consolidated | |||||||||||||||||||
| Assets | $ | 28,509 | $ | 4,467 | $ | 1,783 | $ | 25 | $ | - | $ | 34,784 | ||||||||||||
| Revenue | $ | 5,845 | $ | 2,312 | $ | 667 | $ | (129 | ) | $ | - | $ | 8,695 | |||||||||||
| Operating (loss) income | (95 | ) | 631 | 81 | - | (804 | ) | (187 | ) | |||||||||||||||
| Pretax (loss) income | (93 | ) | 631 | 108 | - | (684 | ) | (38 | ) | |||||||||||||||
| Depreciation and amortization | $ | 131 | $ | 12 | $ | 23 | $ | - | $ | - | $ | 166 | ||||||||||||
| Purchase of property, plant & equipment | $ | 136 | $ | 10 | $ | - | $ | - | $ | - | $ | 146 | ||||||||||||
| 18 |
NOTE 11: 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 $0.9 million. The purchase price is payable in several installments and contingent upon certain performance metrics and other milestones.
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.
The Company received payments under the Agreement in the amount of $0.6 million which has been reflected as “deposit from purchaser” in the accompanying consolidated balance sheet as of March 31, 2024 and December 31, 2023. The Company expects the transaction to be completed in 2024 with the acceptance of the equipment by the purchaser.
The revenues and net loss of MesoScribe were $59,000 and ($25,000) for the three months ended March 31, 2024.
The total assets and total liabilities of the MesoScribe subsidiary were $0.2 million and $0.7 million, respectively, as of March 31, 2024 and $0.2 million and $0.7 million, respectively, as of 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 remaining 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 timelier 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 may have on its future results of operations and cash flows.
| 19 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Except for historical information contained herein, this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward–looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. These statements involve known and unknown risks and uncertainties that may cause our actual results or outcomes to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements are based on various factors and are derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Important assumptions and other factors that could cause actual results to differ materially from those in the forward-looking statements, include, but are not limited to:
| ● | uncertainty as to our future profitability; | |
| ● | competition in our existing and potential future product lines of business, including our PVT150 / PVT200 systems; | |
| ● | uncertainty as to our ability to develop new products for the high power electronics market including our plan to develop a PVT200 to grow silicon carbide crystals for 200 mm wafers; | |
| ● | our ability to obtain financing on acceptable terms if and when needed; | |
| ● | our ability to attract and retain key personnel and employees; and | |
| ● | uncertainty as to our ability to adequately obtain raw materials and on commercially reasonable terms. |
Other factors and assumptions not identified above were also involved in the derivation of these forward-looking statements and the failure of such assumptions to be realized as well as other factors may also cause actual results to differ materially from those projected. We assume no obligation to update these forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting such forward-looking statements. Past performance is no guaranty of future results.
You should not place undue reliance on any forward-looking statements, which speak only as of the dates they are made. When used with this Report, the words “believes”, “anticipates”, “expects”, “estimates”, “plans”, “intends”, “will” and similar expressions are intended to identify forward-looking statements.
| 20 |
Executive Summary
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.cvdequipment.com.
During the three months ended March 31, 2024:
| ● | Revenue declined by $3.8 million or 43.4% as the first quarter of 2023 benefited from a large PVT150 order. | |
| ● | Gross margin declined by $1.6 million or 64.7% due to lower gross profit margins on contracts in progress and overall lower revenues as compared to the prior period quarter. | |
| ● | Total bookings for the first quarter of 2024 were approximately $13.6 million compared to bookings of $2.9 million in the first quarter of 2023. | |
| ● | Bookings in 2024 included a $10.0 million multisystem order from an industrial customer that will be used to deposit a silicon carbide protective coating on OEM components. | |
| ● | During the first quarter of 2024, we received an order from an additional customer for our new PVT200 system that will be used to grow silicon carbide crystals for the manufacture of 200 mm wafers. | |
| ● | Increased our backlog from $18.4 million at December 31, 2023 to $27.1 million. | |
| ● | Cash balance at March 31, 2024 was $11.9 million. |
Business Update
Our core strategy is to focus on growth market applications in end markets related to the “electrification of everything,” aerospace and industrial applications. The phrase “electrification of everything” refers to the shift from fossil fuels to the use of electricity to power devices, buildings, electric vehicles (“EVs”), and many other applications. With respect to aerospace, our systems are being used by our customers to produce ceramic matrix composite materials (“CMCs”) that will be used in next generation gas turbine jet engines with the objective of reducing jet fuel consumption and contributing to the decarbonization of that industry.
Our current strategy yielded multisystem orders of PVT150 equipment that was delivered to one company that manufactures silicon carbide wafers in 2023 and 2022.
In February 2024, we received an order from an additional customer for our new PVT200 system used to grow silicon carbide crystals for the manufacture of 200 mm wafers. This represents our second customer for our PVT equipment. This customer plans to evaluate our equipment for potential additional purchases of PVT equipment. We have also received orders from OneD Battery Materials in 2023, a company that is engaged in providing battery nanomaterials.
| 21 |
Both technologies are essential for the support of the EV market. These systems should provide us with standard product offering to continue to support the EV focused market as well as energy storage, power conversion and power transmission. We plan to expand our product offerings in the power electronics market to build off the introduction of the PVT150 and PVT200 systems. We are also evaluating our ability to provide other equipment used in the manufacturing process of silicon carbide wafers.
During 2022, we also received an order from an aerospace company for a production chemical vapor infiltration (CVI) system that will be used to manufacture CMCs for gas turbine jet engines. In 2023, we received an order from the same aerospace company for an additional three CVI systems.
In February 2024, we received a multisystem order from an industrial customer for approximately $10 million that will be used for depositing a silicon carbide protective coating on OEM components.
We have generally gained new customers through our industry reputation, as well as limited print advertising and trade show attendance. We have increased the number of trade shows and industry conferences. In addition, we added to our sales and marketing team in 2022 and expanded our sales team in early 2023.
During the three months ended March 31, 2024, new order bookings approximated $13.6 million, representing an increase of $10.7 million as compared to bookings of $2.9 million in three months ended March 31, 2023. Our backlog increased from $18.4 million at December 31, 2023 to $27.1 million at March 31, 2024 as revenues were in excess of orders by approximately $8.7 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.
| 22 |
Results of Operations
Three Months Ended March 31, 2024 and 2023
The following table presents revenue and expense line items reported in our condensed consolidated statements of operations for the three months ended March 31, 2024 and 2023 and the period-over-period dollar and percentage changes for those line items (in thousands, except percentages).
| March 31 | ||||||||||||||||
| 2024 | 2023 | Change | Percent | |||||||||||||
| Revenue | $ | 4,922 | $ | 8,695 | $ | (3,773 | ) | (43 | )% | |||||||
| Cost of revenue | 4,063 | 6,261 | (2,198 | ) | (35 | )% | ||||||||||
| Gross profit | 859 | 2,434 | (1,575 | ) | (65 | )% | ||||||||||
| Gross profit percentage | 17.5 | % | 28.0 | % | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | 746 | 602 | 144 | 24 | % | |||||||||||
| Selling | 419 | 419 | - | 0 | % | |||||||||||
| General and administrative | 1,317 | 1,600 | (283 | ) | (18 | )% | ||||||||||
| Total operating expenses | 2,482 | 2,621 | (139 | ) | (5 | )% | ||||||||||
| Operating loss | (1,623 | ) | (187 | ) | (1,438 | ) | (769 | )% | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 157 | 120 | 37 | 31 | % | |||||||||||
| Interest expense | (6 | ) | (6 | ) | - | - | ||||||||||
| Foreign exchange income | - | 27 | (27 | ) | * | |||||||||||
| Other income | - | 8 | (8 | ) | * | |||||||||||
| Total other income, net | 151 | 149 | 2 | 1 | % | |||||||||||
| Loss before income taxes | (1,472 | ) | (38 | ) | (1,434 | ) | * | |||||||||
| Income tax expense | - | 2 | 2 | * | ||||||||||||
| Net loss | $ | (1,472 | ) | $ | (40 | ) | $ | (1,432 | ) | * | ||||||
| Revenue | ||||||||||||||||
| CVD Equipment | $ | 2,947 | $ | 5,845 | $ | (2,898 | ) | (50 | )% | |||||||
| SDC | 1,931 | 2,312 | (381 | ) | (16 | )% | ||||||||||
| CVD Materials | 59 | 667 | (608 | ) | (91 | )% | ||||||||||
| Intersegment sales elimination | (15 | ) | (129 | ) | 114 | * | ||||||||||
| Total | $ | 4,922 | $ | 8,695 | $ | (3,773 | ) | (43 | )% | |||||||
* Not meaningful
| 23 |
Revenue
Our revenue for the three months ended March 31, 2024 was $4.9 million compared to $8.7 million for the three months ended March 31, 2023, a decrease of 43%.
The decrease in revenue versus the prior year period was primarily attributable to lower revenue of $2.9 million from the CVD Equipment segment, a $0.3 million decrease in revenue from our SDC segment and a $0.6 million decrease from the CVD Materials segment due to the disposition of Tantaline in May 2023 and the wind down of MesoScribe’s operations. The decrease in CVD Equipment revenue in the period was principally the result of the recognition of revenue associated with our PVT150 systems in the prior period as compared to no such revenue in the current period. Revenue related to PVT150 systems sold to one customer for the three months ended March 31, 2023 represented 28.3% of our total revenues and 42.2% of CVD Equipment segment revenues. Revenue from one aerospace customer for the three months ended March 31, 2024 represented 29.6% of our total revenues and 49.5% of CVD Equipment segment revenues.
The revenue contributed by the CVD Equipment segment for the three months ended March 31, 2024 of $2.9 million represented 60% of overall revenue as compared to $5.8 million or 67% of overall revenue for the three months ended March 31, 2023. The decrease in revenues of $2.9 million or 50% resulted principally due to a contract for PVT150 systems which was completed in 2023.
The revenue contributed by the SDC segment for the three months ended March 31, 2024 of $1.9 million represented 40% of overall revenue as compared to $2.2 million or 25% of overall revenue for the three months ended March 31, 2023. Revenue for our SDC segment decreased by $0.3 million or 12% due to lower orders of SDC’s gas and chemical delivery system products as compared to the prior period.
The revenue contributed by the CVD Materials segment for the three months ended March 31, 2024 of $59,000 represented 1% of our overall revenue as compared to $0.7 million or 8% of overall revenue for the three months ended March 31, 2023. The decrease of $0.6 million was principally due to the disposition of Tantaline in May 2023 and the wind down of MesoScribe’s operations.
Our order backlog at March 31, 2024 was approximately $27.1 million as compared to December 31, 2023 of $18.4 million. Our backlog at March 31, 2024 consists of approximately $24.8 million related to remaining performance obligations of contracts in progress and not yet started that will be recognized over time with the balance of approximately $2.3 million representing 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 impact the timing of revenue recognition. Accordingly, orders received from customers and revenue recognized may fluctuate from quarter to quarter.
| 24 |
Gross Profit
Gross profit for the three months ended March 31, 2024 was $0.9 million, with a gross profit margin of 17.5%, compared to a gross profit of $2.4 million and a gross profit margin of 28.0% for the three months ended March 31, 2023. The decrease in gross profit of $1.6 million was primarily the result of lower gross profit margins on contracts in progress during the current period as compared to the first quarter of 2023 which benefited from contracts with higher gross margins. In addition, lower CVD Equipment segment revenues reduced the Company’s ability to spread its fixed costs.
Research and Development
For the three months ended March 31, 2024, research and development expenses were $0.7 million, or 15.2% of revenue as compared to $0.6 million, or 6.9% for the three months ended March 31, 2023. The increase in 2024 was the result of less amounts charged to cost of goods sold as a result of lower revenues offset by reductions in personnel costs.
General engineering support and expenses related to the development of more standardized products and value-added development of existing products are reflected as part of research and development expense. General engineering support and expenses are charged to costs of goods sold when work is performed directly on a customer order.
Selling
Selling expenses were $0.4 million or 8.5% of the revenue for the three months ended March 31, 2024 as compared to $0.4 million or 4.8% for the three months ended March 31, 2023. Increase in marketing costs were offset by lower personnel costs.
General and Administrative
General and administrative expenses for the three months ended March 31, 2024 were $1.3 million or 26.8% of revenue compared to $1.6 million or 18.4% of revenue for the three months ended March 31, 2023, a decrease of $0.3 million. The decrease in expenses was principally due to lower personnel costs of $0.2 million due to a reduction of bonus accruals.
Other Income, Net
Other income, net was $151,000 for the three months ended March 31, 2024 as compared to other income, net of $149,000 for the three months ended March 31, 2023. Other income consists principally of interest earned on amounts 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.
| 25 |
Liquidity and Capital Resources
As of March 31, 2024, aggregate working capital was $13.1 million as compared to aggregate working capital of $14.3 million at December 31, 2023. Cash and cash equivalents at March 31, 2024 and December 31, 2023 were $11.9 million and $14.0 million, respectively.
Net cash used in operating activities for the three months ended March 31, 2024 was $2.0 million. This decrease was principally due to the net loss of $1.5 million, increase in contract assets of $1.1 million, increase in accounts receivable of $1.1 million, increase in inventories of $0.5 million, offset by an increase in contract liabilities of $1.1 million and non-cash items of $0.4 million.
Net cash used in investing activities for the three months ended March 31, 2024 consisted of capital expenditures of $70,000 related to purchases of equipment, building improvements and software.
Net cash used in financing activities for the three months ended March 31, 2024 consisted of repayments of an equipment loan.
We believe that our cash and cash equivalent positions and our projected cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months .from the filing of these condensed consolidated financial statements included in this Form 10-Q. We will continue to assess our operations and take actions anticipated to maintain our operating cash to support the working capital needs.
Critical Accounting Estimates
This discussion and analysis of the Company’s financial condition and results of operations is based on the Company’s consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. In accordance with U.S. GAAP, the Company bases its estimates on historical experience and on various other assumptions the Company believes are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.
| 26 |
We believe that of our significant accounting policies, which are described in the notes to the consolidated financial statements, the following accounting policies involve a greater degree of judgments, estimates and assumptions and are considered critical accounting estimates.
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.
There exist many inherent risks and uncertainties in estimating revenues, expenses and progress toward completion, particularly on larger or longer-term contracts. If we do not estimate the total sales, related costs, and progress toward completion on such contracts, the estimated gross margins may be significantly impacted, or losses may need to be recognized in future periods. Any such resulting changes in margins or contract losses could be material to our results of operations and financial condition.
| 27 |
Inventory Valuation
Inventories (raw materials, work-in-process and finished goods) are valued at the lower of cost (determined on the first-in, first-out method) or net realizable value. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its estimated net realizable value if less than cost. The Company evaluates usage requirements by analyzing historical usage, anticipated demand, alternative uses of materials, and other qualitative factors. Unanticipated changes in demand for the Company’s products may require a write down of inventory, which would be reflected in cost of sales in the period the revision is made. Any such charge could be material to our results of operations and financial condition.
Long-Lived Assets
Long-lived assets consist primarily of property, plant and equipment. Long-lived assets are reviewed for impairment whenever events or circumstances indicate their carrying value may not be recoverable. When such events or circumstances arise, an estimate of the future undiscounted cash flows produced by the asset, or the appropriate grouping of assets, is compared to the asset’s carrying value to determine if impairment exists pursuant to the requirements of ASC 360-10-35, “Impairment or Disposal of Long-Lived Assets.” If the asset is determined to be impaired, the impairment loss is measured on the excess of it carrying value over its fair value. Assets to be disposed of are reported at the lower of their carrying value or net realizable value. In the future, if we determine that our long-lived assets are impaired, we would be required to recognize a charge in our financial statements at the time of such determination. Any such charge could be material to our results of operations and financial condition.
| 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.
| 28 |
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 28, 2024.
| 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.
| Item 6. | Exhibits |
| 31.1* | Certification of Emmanuel Lakios, Chief Executive Officer, dated May 13, 2024 |
| 31.2* | Certification of Richard Catalano, Chief Financial Officer, dated May 13, 2024 |
| 32.1* | Certification of Emmanuel Lakios, Chief Executive Officer, dated May 13, 2024, 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 May 13, 2024, 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 133h day of May 2024.
| CVD EQUIPMENT CORPORATION | ||
| By: | /s/ Emmanuel Lakios | |
| Emmanuel Lakios | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| By: | /s/ Richard Catalano | |
| Richard Catalano | ||
| Vice President and Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
| 30 |