PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

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

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

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

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

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

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

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

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

NOTE 1:         

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements for CVD Equipment Corporation and Subsidiaries (collectively “the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. They do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary in order to make the interim financials not misleading have been included and all such adjustments are of a normal recurring nature. The operating results for the three and ninemonths ended September 30, 2021March 31, 2022 are not necessarily indicative of the results that can be expected for the year ending December 31, 2021.2022.

The condensed consolidated balance sheet as of December 31, 20202021 has been derived from the audited consolidated financial statements at such date, as filed on Form 10-K with the SEC on March 31, 2021,2022, 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. In addition, certain reclassifications have been made to the prior period condensed consolidated financial statements to conform to the current period presentation. These reclassifications had no effect on net income.

BUSINESS DEVELOPMENTS

In January 2021, the Company’s Board of Directors concluded that a change in the Company’s business strategy and direction was necessary and appointed Emmanuel Lakios as President and Chief Executive Officer (previously our Vice-President- Sales and Marketing) to, among other things, evaluate the Company’s business strategy and operations. Based on this evaluation, due to the continuing losses and significant investments required to continue in the Materials business, the Board concluded that our primary focus should be on the core equipment business and that the Materials Business strategy should be revised, with some of its current element’s potentially minimized or ceased.  Based upon an analysis, including forecasted continued losses and negative cash flows for the Tantaline product line, the Company has implemented plans to eliminate further investment in our Tantaline product line. In addition, we recorded an impairment charge of $3.6 million during the fourth quarter and year ended December 31, 2020, related to Tantaline long lived assets. Further, the Company continues to monitor its costs and has and will continue to take actions to mitigate expenses in the future to align them with anticipated revenue levels.

NOTE 1: (continued)

During February 2021, in order to increase the Company’s liquidity and to provide necessary working capital to support the Company’s on-going business and operations, the Board decided to sell its facility located at 555 North Research Place, Central Islip, NY (the “555 Building”). Management determined the 555 Building was not needed for its on-going business operations and concluded that any remaining elements of the Materials Business could be consolidated into its remaining facility in Central Islip (the “355 Building”), which it believes can accommodate any needs for its growth for the foreseeable future. In April 2021, the Company completed the move of its United States Tantaline equipment to the 355 Building, while the MesoScribe consolidation into the 355 Building was completed during Q32021. All functions of the Tantaline product line have been consolidated into the Denmark facility and, the expenses related to Tantaline operations in the United States have ceased.

On March 29, 2021, the Company entered into an agreement with Steel K, LLC for the sale of the 555 Building, and on July 26, 2021 the Company closed on the sale of the 555 Building. The sale price was $24,360,000, subject to adjustment for apportionments, adjustments and credits. A portion of the sale proceeds were used to satisfy the existing mortgage debt on the 555 Building, including interest and fees, in the amount of $9,352,719, as well as various costs related to the closing of the transaction. The Company recognized a gain on the sale of the building in the amount of $6,894,109 and received approximately $14,000,000 in net proceeds (see Note 13).

NOTE 2:         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

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, typically within three months to eighteen months.

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.

NOTE 2:         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue Recognition (continued)

“Contract assets,” include unbilled amounts typically resulting from system sales under contracts 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. The Company typically receives down payments upon receipt of order and progress payments during the manufacturing cycle. 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 outrightnon-system sales of products, the point in time revenue is recognized when control of the promised products or services is transferred to ourthe Company’s customers, in an amount that reflects the consideration we expectthe 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”.

Recent Accounting Standards

In June 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326), which require that financial assets measured at amortized cost be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the increase or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. On November 15, 2019, the FASB delayed the effective date for smaller reporting companies. The amendments in this update are now effective for fiscal years beginning after December 15, 2022 and interim periods within those annual periods. Management is currently evaluating the effect of this update on the Company’s consolidated financial statements and currently believes it willshould not have a material impact.

NOTE 2:         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Standards (continued)

The Company believes there is no additional new accounting guidance adopted, but not yet effective that is relevant to the readers of its financial statements. However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on our financial reporting.

NOTE 3:         CONCENTRATION OF CREDIT RISK

Cash and cash equivalents

The Company had cash and cash equivalents of $17.4$13.3 million and $7.7$16.7 million at September 30, 2021March 31, 2022 and December 31, 2020,2021, respectively. The Company invests excess cash in U.S. treasury bills, certificates of deposit or money marketdeposit accounts, all with original maturities of less than three months. Cash equivalents were $7.0 million at September 30, 2021March 31, 2022 and December 31, 2020,2021, 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 September 30, 2021March 31, 2022 and December 31, 20202021 was $9,294,000$5,411,000 and $5,822,000,$8,613,000, respectively.

Sales concentration

Revenue from a single customer in any one period can exceed 10% of our total revenues. During the three months ended September 30, 2021,March 31, 2022, 2three customers exceeded 10% of revenues, representing 15.6%14.3%, 13.3% and 11.8%11.6% of revenues, and during the ninethree months ended September 30,March 31, 2021 2 customersone customer exceeded 10%, representing 12.0% and 11.7%30.7% of revenues. During the three months ended September 30, 2020, 2 customers exceeded 10%, representing 13.5% and 12.5% of revenues, and during the nine months ended September 30, 2020, 3 customers exceeded 10% of revenues, representing 21.0%, 12.8% and 12.0% of revenues.

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. At September 30, 2021,March 31, 2022, 1 customer exceeded 10% of the accounts receivable balance representing 28.7%, and at December 31, 2020 2four customers exceeded 10% of the accounts receivable balance representing 35.0%58.1%, and at December 31, 2021 two customers exceeded 10% of the accounts receivable balance, representing 50.0% of the accounts receivable balance.

NOTE 4:         REVENUE DISAGGREGATION

The following table represents a disaggregation of revenue for the three and ninemonths ended September 30, 2021March 31, 2022 and 20202021 (in thousands):

NOTE 4:         REVENUE DISAGGREGATION (continued)

The Company has unrecognized contract revenue of approximately $5.7$6.2 million at September 30, 2021,March 31, 2022, which it expects to recognize as revenue within the next twelve months.

Judgment is required to evaluate assumptions including the amount of net contract revenues and the total estimated costs to determine our progress towards contract completion and to calculate the corresponding amount of revenue to recognize.

Changes in estimates for sales of systems occur for a variety of reasons, including but not limited to (i) build accelerations or delays, (ii) product cost forecast changes, (iii) cost related change orders or add-ons, or (iv) changes in other information used to estimate costs. Changes in estimates may have a material effect on the Company’s consolidated statements of operations.

NOTE 4:         REVENUE DISAGGREGATION (continued)

Contract Assets and Liabilities

Contract assets consist of (i) retainage which representrepresents the earned, but unbilled, portion for which payment is deferred by the customer until certain contractual milestones are met; and (ii) unbilled receivables which represent revenue that has been recognized in advance of billing the customer, which is common for long-term contracts. Contract liabilities consist of customer advances and billings in excess of revenue recognized.

During the ninethree months ended September 30, 2021March 31, 2022 and 2020,2021, the increase in contract assets of approximately $1.1$.2 million and $.5 million, respectively, was the result of work performed in excess of billings which are based upon project milestones.

Contract assets and contract liabilities on input method type contracts in progress are summarized as follows:

NOTE 5:          INVENTORIES, NET

Inventories consist of:

NOTE 6:         ACCOUNTS RECEIVABLE, NET

Accounts receivable are presented net of an allowance for doubtful accounts of approximately $59,000$36,000 and $164,000$59,000 as of September 30, 2021March 31, 2022 and December 31, 2020,2021, respectively. 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:         LONG-TERM DEBT

The Company hashad a loan agreement with HSBC which iswas secured by a mortgage against its Central Islip, NY headquarters.Headquarters. The loan iswas payable in 120 consecutive equal monthly installments of $25,000 in principal plus interest and a final balloon payment upon maturity inon March 1, 2022. The balancesbalance as of September 30,December 31, 2021 and December 31, 2020 werewas approximately $1.8 million and $2.1 million respectively.million. Interest accruesaccrued on the loan,Loan, at ourthe Company’s option, at the variable rate of LIBOR plus 1.75% or Prime less 0.5% (1.85% and 1.89%(1.86% atSeptember 30, 2021 and December 31, 2020,2021). respectively). The Company is in compliance with its financial covenant under the mortgage at September 30, 2021.

On November 30, 2017, the Company purchased the premises located at 555 North Research Place, Central Islip, NY (the “555 Building”). The purchase price of the building was $13,850,000 exclusive of closing costs. The Company’s 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 usedAccording to finance a portion of the purchase price to acquire the premises located at 555 North Research Place, Central Islip, New York. On July 26, 2021, the Company closed on the sale of the 555 Building and satisfied the loan. (see Note 13)

NOTE 7:         LONG-TERM DEBT (continued)

On April 21, 2020, the Company entered into a loan agreement (the “Loan Agreement”) with HSBC Bank USA, National Association pursuant to which the Company was granted a loan in the principal amount of $2,415,970, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted by the United States Congress on March 27, 2020.

The PPP loan, the obligation of which is represented by a note issued by the Company, was to mature on April 21, 2022 and bore interest at a rate of 1% per annum. The note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Under the terms of the PPP, all or a portion ofagreement the Loan may be forgiven, based upon payments made in the firsttwenty-four weeks following receipt of the proceeds, related to payroll costs, continue group health care benefits, utilities and mortgage interest on other debt obligations incurred before February 15, 2020. The Company filed an application for forgiveness in April 2021 andloan was satisfied on June 14, 2021 March 1, 2022.the Company received a notification from its lender that on June 10, 2021 the SBA approved the Company’s PPP Loan forgiveness application and remitted payment to the lender for the entire principal amount of the PPP Loan and accrued interest. As a result, the Company has recognized in the nine months ended September 30, 2021 Gain on Debt Extinguishment in the amount of $2,443,418.

NOTE 8:         STOCK-BASED COMPENSATION EXPENSE

The Company recorded as part of general$97,110 and administrative expense, $81,000 and $193,000$50,373 during the three and ninemonths ended September 30, 2021,March 31, 2022 respectively, and during the threeand nine2021, months ended September 30, 2020, $65,000 and $206,000, 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. The following table summarizes the compensation expense recorded for the three months ended March 31, 2022 and 2021 related to stock-based compensation.

NOTE 8:         STOCK-BASED COMPENSATION EXPENSE (continued)

A summary of the stock option activity related to the 2001 Stock Option Plans, the 2007 Share Incentive Plan and the 2016 Share Incentive Plan for the period from January 1, 20212022 through September 30, 2021March 31, 2022 are as follows:

For the ninethree months ended September 30, 2021,March 31, 2022, the Company granted 328,50012,500 stock options, vesting 25% per year over four years, with a ten-year life. The Company determined the fair value of stock options granted during the ninethree months ended September 30, 2021March 31, 2022 is based upon weighted average assumptions as provided below.

The Company has a total of 628,500 outstanding stock options, of which 285,000 were exercisable under the two plans at March 31, 2022.

NOTE 8:         STOCK-BASED COMPENSATION EXPENSE (continued)

The Company has a total of 738,500 outstanding stock options, of which 390,000 were exercisable under the three plans at September 30, 2021.

The following table summarizes information about the outstanding and exercisable options at September 30, 2021.March 31, 2022.

NaN options were exercised during the ninethree months ended September 30, 2021.March 31, 2022. As of September 30, 2021,March 31, 2022, there was $772,000$693,000 of unrecognized compensation costs related to stock options expected to be recognized over a weighted average period of 3.63.3 years.

Restricted Stock Awards

The following table summarizesThere were 0 unvested shares of restricted stock awards forat March 31, 2022 and December 31, 2021. During the ninethree months ended September 30, 2021:March 31, 2022

there were 0 grants of restricted stock.

The fair valuePursuant to the director compensation plan approved on October 11, 2021, each director is entitled to Director Compensation for an Annual Equity Retainer in the amount of $40,000, to be automatically granted on the date of the outstandingCompany’s annual meeting of shareholders (directors may elect to receive payment in restricted stock, awards will be recorded as stock compensation expense over the vesting period. As of September 30, 2021, there was $37,000 of total unrecognized compensation costs related to restricted stock awards, which is expected to be recognized overoptions or a weighted-average period of .25 years.combination thereof).

NOTE 8:         STOCK-BASED COMPENSATION EXPENSE (continued)

Restricted Stock Units

The following table summarizes activity related to outstanding restricted stock units for the ninethree months ended September 30, 2021:March 31, 2022:

The total fair value of vested restricted stock units was $29,700$3,458 for the ninethree months ended September 30, 2021.March 31, 2022.

The fair value of the outstanding restricted stock units will be recorded as stock compensation expense over the vesting period. As of September 30, 2021,March 31, 2022, there was $10,000 of total0 unrecognized compensation costs related to restricted stock units, which is expected to be recognized over a weighted-average period of .4 years.units.

NOTE 9:         INCOME TAXES

As of September 30, 2021March 31, 2022 and December 31, 2020,2021, the Company has provided a full valuation allowance against all of the net deferred tax assets. This was based on management’s assessment, including the last threetwo years of operating losses, that it is more likely than not that the net deferred tax assets may not be realized in the future.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted by the United States Congress. As a result of the enactment of the CARES Act, net operating losses (“NOL’s”) generated in 2018-2020 can now be carried back for five years and resulted in the Company recognizing approximately $1.5 million of a tax benefit, of which $.7$.7 million iswas a receivable at September 30, 2021 and December 31, 2020.2021. This tax receivable was collected in the three months ended March 31, 2022. Management continues to evaluate for potential utilization of the Company’s deferred tax asset, which has been fully reserved for, on a quarterly basis, reviewing our economic models, including projections and timing of orders, and cost containment measures.

NOTE 10:         EARNINGS PER SHARE

Basic earnings per share is computed by dividing net earnings available to common shareholders (the numerator) by the weighted average number of common shares outstanding (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.

A reconciliation of basic to diluted shares used in the earnings per share calculation is as follows:

NOTE 10:         EARNINGS PER SHARE (continued)

The following table represents common stock equivalents that were excluded from the computation of diluted earnings per share for the three and ninemonths ended September 30, 2021March 31, 2022 and 2020,2021, because the effect of their inclusion would be anti-dilutive.

Stock options to purchase 738,500628,500 shares of common stock were outstanding and 390,000285,000 were exercisable during the three and ninemonths ended September 30, 2021.March 31, 2022.

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

NOTE 11:          SEGMENT REPORTING

The Company operates through 3three (3) segments: CVD Equipment (“CVD”), Stainless Design Concepts (“SDC”) and CVD Materials (“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. The Materials segment was established to provide 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.

NOTE 11:          SEGMENT REPORTING (continued)

The Company’s corporate administration activities are reported in the Eliminations 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 expense for shares granted to corporate administration employees, certain consulting expenses, investor and shareholder relations activities, and all of the Company’s legal, auditing and professional fees, and interest expense.

Three Months Ended September 30,March 31,

(In thousands)

NOTE 11:          SEGMENT REPORTING (continued)