UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

Form 10-Q

Commission file number: 1-16525

CVD EQUIPMENT CORPORATION

(Name of Registrant in Its Charter)

(631) 981-7081
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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,”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 Act.                                                     ☐

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: 6,507,5146,555,570 shares of Common Stock, $0.01 par value at November 3, 2018.August 5, 2019.

CVD EQUIPMENTEQUIPMENT CORPORATION AND SUBSIDIARYSUBSIDIARIES

Index

The accompanying unaudited consolidated financial statements for CVD Equipment Corporation and subsidiariesSubsidiaries (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 disclosuresfootnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary in order to make the interim financials not misleading have been included and all such adjustments are of a normal recurring nature. The operating results for the three and ninesix months ended SeptemberJune 30, 20182019 are not necessarily indicative of the results that can be expected for the year ending December 31, 2018.2019.

The consolidated balance sheet as of December 31, 20172018 has been derived from the audited consolidated financial statements at such date, 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. For further information, please refer to the consolidated financial statements and notes thereto included in the Company’sCompany’ Annual Report on Form 10-K for the year ended December 31, 2017,2018, including the accounting policies followed by the Company as set forth in Note 2 to the consolidated financial statements contained therein.

All material intercompany transactions have been eliminated in consolidation. In addition, certain reclassifications have been made to prior period consolidated financial statements to conform to the current year presentation.

Revenue Recognition

On January 1, 2018, we adopted accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments using the modified retrospective method for all customer contracts not yet completed as of the adoption date. Results for reporting periods beginning January 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted.

The adoption of ASC 606 did not have a significant impact on our Consolidated Financial Statements as of and for the three and nine-monthsix month periods ended SeptemberJune 30, 2018 and, as a result, comparisons of revenues and operating profits performance between periods are not affected by the adoption of this ASU.

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

Revenue Recognition (continued)

The Company designs, manufactures and sells custom chemical vapor deposition equipment through contractual agreements. These system sales require the Company to deliver functioning equipment that is generally completed within three to eighteen months from commencement of order acceptance. 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. 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 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.

“Contract assets,” include unbilled amounts typically resulting from sales under contracts when revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. The amount may not exceed their estimated net realizable value. Contract assets are classified as current based on our contract operating cycle.

“Contract liabilities,” include advance payments and billings in excess of revenue recognized. Contract liabilities are classified as current based on our contract operating cycle and reported on a contract-by-contract basis, net of revenue recognized, at the end of each reporting period.

For outright sales of products, revenue is recognized when control of the promised products or services is transferred to our customers, in an amount that reflects the consideration we expect 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.

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

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

NOTE 2:     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue Recognition

Impact to Previously Reported Results

Research and Development

Research and development costs are expensed as incurred. Due to the highly technical nature of our projects, we use our technical staff in a dual role, and based on their contribution to the customer or research and development projects, their costs are charged accordingly to either cost of goods sold or research and development.

Recent Accounting Pronouncements

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU permits companies to elect a reclassification of disproportionate tax effects in accumulated other comprehensive income (AOCI) caused by the Tax Cuts and Jobs Act of 2017 to retained earnings. The ASU also requires additional disclosures. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the effect of this ASU on our consolidated financial statements.

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

NOTE 2:     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, FinancialFinancial 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. The amendments in this update are effective for fiscal years beginning after December 15, 2019 and interim periods within those annual periods. Early adoption for fiscal years beginning after December 15, 2018 is permitted. We are currently evaluating the effect of this update on our consolidated financial statements.

NOTE 2:     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

RecentRecently Adopted Accounting Pronouncements

In February 2016 the FASB issued ASU No. 2016-02, Leases"Leases (Topic 842), which supersedes ASC 840, Leases," (ASU 2016-02). The primary difference between previous GAAP and createsASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The guidance requires a new topic, ASC 842, Leases. This update establisheslessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use (“ROU”) model that requires lesseesasset representing its right to recognizeuse the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, liabilitya lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease assets and a lease asset for all leases, including operatingliabilities only if the lessee is reasonably certain to exercise that purchase option. For leases with a term greater thanof 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on its balance sheet. The update also expandsa straight-line basis over the required quantitative and qualitative disclosures surrounding leases. The accounting for lessors does not fundamentally change except for changes to conform and align guidance to the lessee guidance as well as to the new revenue recognition guidance inlease term. ASU 2014-09. This update2016-02 is effective for fiscal years beginning after December 15, 20182018. Lessees and interim periods within those fiscal years. This update will be applied using a modified retrospective transition approach forlessors are required to recognize and measure leases existing at or entered into after, the beginning of the earliest comparative period presented in the financial statements. Weusing a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply.

The accompanying notes are currently evaluating the effectan integral part of this update on ourthese consolidated financial statements however we do not expect ASC

An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. In addition, FASB has amended Topic 842 prior to haveit becoming effective. The effective date and transition requirements for these amendments to Topic 842 are the same as ASU 2016-02. The Company has one lease at its Denmark facility which currently expires at December 31, 2020 and has recognized a material effect on either our consolidated statementlease liability and a right-of-use asset representing its right to use the underlying asset for the lease term in the amount of operations or consolidated statement of cash flow.$129,000.

We believe 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.

Cash and cash equivalents

Financial instruments that potentially subject theThe Company to concentrations of credit risk consist ofhad cash and cash equivalents of $8.6 million and $11.4 million at June 30, 2019 and December 31, 2018, respectively. The Company invests excess cash in U.S. treasury bills, certificates of deposit or money market accounts, receivable. all with maturities of less than three months. Cash equivalents were $7.5 million and $8.9 million at June 30, 2019 and December 31, 2018, respectively.

The Company places most of its temporary cash equivalentsinvestments with high credit-quality financial institutions, and invests its excess cash primarily in savings accounts and money market instruments. Cash and cash equivalents at September 30, 2018 and December 31, 2017, exceededwhich from time to time may exceed the Federal Deposit Insurance Corporation (“FDIC”) limits by approximately $12,593,000limit. The amount at risk at June 30, 2019 and $12,198,000,December 31, 2018 was $6,824,000 and $6,920,000, respectively.

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

NOTE 3:     CONCENTRATION OF CREDIT RISK (continued)

Sales concentration

Revenue tofrom a single customer in any one period can exceed 10% of our total sales.revenues. During the three and six months ended SeptemberJune 30, 2018 and September 30 2017,2019, one customer represented approximately 26%13% and 59%, respectively,10% of our revenues. DuringFor the ninethree and six months ended SeptemberJune 30, 2018, and September 30, 2017 that samea different customer represented 40%approximately 37% and 65%, respectively,43% of our revenues.

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

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. The Company also maintains allowances for anticipated losses. TheAt June 30, 2019 two customers each exceeded 10% of the accounts receivable balance, as of September 30,representing 24% in total, and at December 31, 2018 includes amounts from two customers that each exceed 10%represented approximately 42% of the total. The accounts receivable balance as of September 30, 2017 includes amounts from three customers, each of which exceed 10% of the total. These balances are from five different customers.balance.

The following table represents a disaggregation of revenue from contracts with customers for the three and ninesix months ended SeptemberJune 30, 20182019 and September 30, 2017:2018:

(in Thousands)

Inventories consist of:

Accounts receivable are presented net of an allowance for doubtful accounts of approximately $4,000$24,000 as of SeptemberJune 30, 20182019 and December 31, 2017, respectively.2018. The allowance is based on prior experience and management’s evaluation of the collectability of accounts receivable. Management believes the allowance is adequate. However, future estimates may change based on changes in future economic conditions.

NOTE 7:     DEFERRED REVENUE

Deferred revenue of $890,000 at September 30, 2018 and $292,000 at December 31, 2017 represents amounts billed, other than deposits, in excess of the revenue than can be recognized at the balance sheet date.

NOTE 8:     LONG-TERM DEBT

The Company’saccompanying notes are an integral part of these consolidated financial statements

The Company had a revolving credit facility with HSBC Bank, USA, N.A. (“HSBC”) providing up to $7 million, although the Company had never utilized this facility. This credit facility expired by its terms on September 1, 2018. The Company elected not to renew its credit line at this time because (a) renewal terms were not acceptable to it; (b) the Company has not borrowed against this facility in the past ten years, and (c) the Company has determined that it has sufficient cash and cash equivalents to meet its working capital cand capital expenditure requirements over the next twelve months. The Company is continuing to have discussions with HSBC about securing a new revolving credit facility on mutually acceptable terms; however, there can be no assurance that the Company and HSBC will be able to reach an agreement.

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

NOTE 8:     LONG-TERM DEBT (continued)

The Company has a loan agreement with HSBC which is secured by a mortgage againston our facility at 355 South Technology Drive, Central Islip, NY.NY headquarters. The loan is payable in 120 consecutive equal monthly installments of $25,000 in principal of $25,000 plus interest thereon and a final balloon payment upon maturity in March 2022. The balances on the mortgage at Septemberas of June 30, 20182019 and December 31, 20172018 were approximately $2.7$2.5 million and $3.0$2.7 million respectively. Interest accrues on the loan,Loan, at our option, at the variable rate of LIBOR plus 1.75%, or Prime less 0.5%.

On November 30, 2017, the Company purchased the premises located at 555 North Research Place, Central Islip, NY. The purchase price of the building was $13,850,000 exclusive of closing costs. The Company’s newly formed wholly-owned subsidiary, 555 N Research Corporation (the “Assignee”) and the Islip IDA, entered into a Fee and Leasehold Mortgage and Security Agreement (the ”Loan”) with HSBC in the amount of $10,387,500, which was 4.01% and 3.31% at September 30, 2018 and December 31, 2017, respectively. At September 30, 2018, the Company was not in compliance with oneused to finance a portion of the financial covenants and has received a waiver from HSBC until October 1, 2019.

The Company has an additional loan agreement with HSBC which is secured by a mortgage against our facilitypurchase price to acquire the premises located at 555 North Research Place, Central Islip, New York. The loanLoan was evidenced by the certain Note, dated November 30, 2017 (the “Note”), by and between Assignee and the Bank, and secured by a certain Fee and Leasehold Mortgage and Security Agreement (the “Mortgage”), dated November 30, 2017, as well as a collateral Assignment of Leases and Rents.

The Loan is payable in 60 consecutive equal monthly installments of $62,481 including interest and final balloon payment upon maturity in December 2022. The balance outstanding as of June 30, 2019 and December 31, 2018 were approximately $63,000 including interest.$9.9 million and $10.0 million respectively. The Loan bears interest for each Interest accrues onPeriod (as defined in the loanNote), at the fixed rate of 3.91%3.9148%. The maturity date for the Note is December 1, 2022. The outstanding principal balances asAs a condition of Septemberthe Bank making the Loan, the Company was required to guaranty Assignee’s obligations under the Loan pursuant that certain Unlimited Guaranty, dated November 30, 2018 and2017 (the “Guaranty”). On May 31, 2019, the Company entered into two sublease agreements for a portion of the CVD Materials facility. During the quarter ended June 30, 2019, the Company recognized $36,000 of rental income which commenced June 1, 2019. Commencing July 2019, the monthly rental income will increase to approximately $67,000 per month or approximately $800,000 per annum.

At December 31, 2017 were approximately $10.1 million and $10.4 million, respectively. At September 30, 2018, the Company was not in compliance with the one offinancial covenant (fixed charge coverage ratio) contained in the financial covenants and hasMortgage. On March 26, 2019 the Company received a waiver from HSBC until OctoberApril 1, 2020. On August 5, 2019, the Company entered into a Mortgage Modification Agreement which replaced the former covenant with a Minimum Liquid Assets covenant. The Company is in compliance with its obligations under the mortgage at June 30, 2019.

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

During the three and nine months ended September 30, 2018 and September 30, 2017, theThe Company recorded compensation expense as part of selling and general administrative expense of approximately $280,000$179,000 and $242,000$378,000 during the three and $704,000six months ended June 30, 2019, respectively, and $678,000,during the three and six months ended June 30, 2018, $201,000 and $424,000, respectively, for the cost of employee and director services received in exchange for equity instruments based on the grant-date fair value of those instruments. This expense was recorded based upon the guidance of ASC 718, “Compensation-Stock Compensation.”

NOTE 10:     INCOME TAXES and resulted in the loss of our ability to take the domestic production activities deduction which has been repealed and requires us to remeasure our deferred tax assets and liabilities.

The provision for income taxes includes the following:

In accordance with ASC 260, basicBasic earnings per share areis computed by dividing net earnings available to common shareholders (the numerator) by the weighted average number of common shares (the denominator) for the period presented. The computation of diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.

Stock options to purchase 387,930467,930 shares of common stock were outstanding and 227,930 were exercisable during the three and ninesix months ended SeptemberJune 30, 2018 as no options were issued during the three and nine months ended September 30, 2018.2019. Stock options to purchase 381,930387,930 shares were outstanding and 196,930227,930 were exercisable during the three and ninesix months ended SeptemberJune 30, 2017.2018. For the three and ninesix months ended September 30,June 31, 2019 and 2018, none of the outstanding optionsno shares were included in the diluted earnings per share calculation as their effect would have been anti-dilutive. For the three and nine months ended September 30, 2017, options to purchase 34,410 and 33,748 shares were included in the diluted earnings per share calculation respectively.

The potentially dilutive potential common shares fromon warrants and options areis calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all warrants and options are used to repurchase common stock at market value. The amount of shares remaining after the proceeds are exhausted represents the potential dilutive effect of the securities.

The Company operates through three (3) segments,segments: CVD Equipment Corporation (“CVD”), Stainless Design Concepts (“SDC”) and CVD Materials Corporation (“Materials”). The CVD segment is utilized for chemical vapor deposition equipment manufacturing. SDC is the Company’s ultra-high purity manufacturing division in Saugerties, New York for gas control systems. Materials is our new segment based on recent acquisitions, for providing materialsquartzware and material coatings for aerospace, medical, electronic and other applications. The Company evaluates performance based on several factors, of which the primary financial measure is income or (loss) before taxes.

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

The Company’s corporate administration activities are reported in the CorporateEliminations and Unallocated column. These activities primarily include intercompany profit, expenses related to certain corporate officers and support staff, expenses related to the Company’s Board of Directors, stock option expensesexpense for shares granted to corporate administration employees, certain consulting expenses, investor and shareholder relations activities, interest on mortgages and all of the Company’s legal, auditing and professional fee expenses.fees, and interest expense.

Three Months Ended June 30,

Ended September 30,

(In thousands)thousands)