CVD Equipment Corp: Form 10-K for the period ended Dec 31, 2022

Definitions

The use of the words “CVD,” “we,” “us” or “our” refers to CVD Equipment Corporation, a New York corporation incorporated on October 13, 1982, and its wholly owned subsidiaries, CVD Materials Corporation (including its wholly owned subsidiaries CVD Tantaline ApS, and CVD MesoScribe Technologies Corporation) collectively “CVD Materials”), FAE Holdings 411519R LLC and 555 N Research Corporation except where the context otherwise requires.

Overview

CVD has served the advanced materials markets with chemical vapor deposition, physical vapor transport and thermal process equipment for over 40 years. We are headquartered in Central Islip, New York with other locations in Saugerties, New York and Nordborg, Denmark.

We design, develop, and manufacture a broad range of equipment to develop and manufacture materials and coatings for the compound semiconductor, semiconductor, aerospace, battery energy storage markets as well as advanced industrial applications, and research.

We conduct our business through three reportable operating segments: i) CVD Equipment that supplies chemical vapor deposition, physical vapor transport and thermal process equipment; ii) SDC that designs and manufactures ultra-high purity gas and chemical delivery control systems; and iii) CVD Materials that provide products related to advanced materials and coatings.

In January 2021, our Board of Directors appointed Emmanuel Lakios as President and Chief Executive Officer and directed him to evaluate our overall business strategy and operations to improve sales growth and return the Company to profitability. We continue to monitor the results of our growth and profitability initiatives, and we have taken actions as required to improve our results in line with anticipated revenue levels.

Key Company Strengths

Based on more than 40 years of equipment experience, we use our capabilities in process development, engineering, and vertical manufacturing to transform emerging applications into mainstream manufacturing solutions.

We have built a library of design expertise, know-how and innovative solutions to assist our customers in developing these intricate processes and to accelerate their production and commercialization. This library of equipment design solutions, along with our manufacturing and systems integration facilities, allows us to provide application-specific design, process, and manufacturing solutions to our customers.

Our core competencies in equipment and software design, manufacturing and process development are used to engineer our finished products and to accelerate the commercialization path of our customer base. Our proprietary real-time software allows for rapid configuration, and provides our customers with enabling tools to understand, optimize and repeatedly control their processes. These factors reduce cost, improve quality, and reduce the time it takes between customers’ orders and the shipment of our products. Our Application Laboratory allows customers the option to bring their process tools to our laboratory and to work collaboratively with our scientists and engineers to optimize process performance.

To expand our presence into our major target markets, we are developing a line of proprietary standard use products to complement our customized legacy systems. Historically, we manufactured products for research and development on an application-specific basis to meet an individual customer’s specific research and production requirements. Our proprietary systems leverage the technological expertise that we have developed through designing these custom systems into a broader standardized product line. The standard product line can be configured from a wide range of available options to meet diverse product and budgetary requirements. Manufacturing these standardized systems in higher volumes may provide us the flexibility to reduce both the cost and delivery time of our systems. These systems, which we market and sell under the CVD, FirstNano and EasyTube® product names, are sold to commercial companies, universities, research laboratories, in the United States and throughout the world.

Sales of our proprietary standard systems, custom systems and process solutions have been driven by our installed customer base, which includes many Fortune 500 companies. The performance and success of our products has historically driven repeat orders from existing customers as well as generated business from new customers. Furthermore, with our proprietary solutions and expanded focus on “*enabling tomorrow’s technologies”*TM we have been developing a new customer base in addition to growing with our existing customers.

Key Growth Strategies

Our core strategy is to focus on growth market applications in end markets related to the “electrification of everything” and aerospace. The phrase “electrification of everything” refers to the shift from fossil fuels to the use of electricity to power devices, buildings, electric vehicles (“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 has yielded multisystem orders to one company that manufactures silicon carbide wafers and a single system to another company that is working on battery nanomaterials. Both technologies are essential for the support of the EV market. These systems should provide us with standard product 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 success of recently introduced PVT150 system that is used to produce silicon carbide crystals for 150mm silicon carbide wafers. This planned expansion includes the development of the PVT200 system that would be used to produce silicon carbide crystals for the manufacture of 200mm wafers. Other products under development include an annealing furnace and epitaxy system, both of which are used in the manufacturing process of silicon carbide wafers.

Also during 2022, we 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.

We have generally gained new customers through our industry reputation, as well as limited print advertising and trade show attendance which had been impacted by the COVID-19 pandemic. We began attending trade shows in 2022 and expect to expand our attendance at trade shows in 2023. In addition, we added to our sales and marketing team in 2022 and expanded our sales team in early 2023.

Major Target Markets

Our major target markets are high power electronics, EV battery materials / energy storage and aerospace and defense – all of which have the objective of improving energy efficiency.

High Power Electronics

Demand for silicon carbide wafers to support high power electronics for energy storage and transmission/charging resulted in a multi-system order from a US-based, silicon carbide wafer manufacturer. Through December 31, 2022, we have received orders for 30 of our PVT150 physical vapor transport systems from a customer, which uses our systems to grow silicon carbide crystals that are made into 150mm silicon carbide wafers for use in power electronics. During the second half of 2022, we initiated the marketing launch of the PVT150 on our website and at a leading trade show. We plan to expand our marketing and future product development for the PVT product line as well as expand our product offerings to manufacturers of silicon carbide wafers.

EV Battery Materials / Energy Storage

We have experienced increased interest and demand for nanotechnology materials including carbon nanotubes (CNTs), graphene and silicon nanowires (Si-NWs) to support the development and manufacturing for battery materials used in electric vehicles. We received two system orders in 2021 to deposit coatings onto powders used in silicon-graphite anodes, including a production system and a second for research and material development. Both systems were completed in 2022.

Aerospace & Defense

CVD is a leading manufacturer of CVI and tow-coating systems to manufacture CMCs for aerospace gas turbine jet engine applications. Our customers include two of the leaders in aerospace gas turbine engines. While the aerospace industry has been impacted by the COVID-19 pandemic, according to industry forecasts, the demand for CMCs for jet engines is expected to grow in the future. Recently, there were announcements of airlines ordering airplanes that use CMCs in the gas turbine engines.

We continue to engage customers in the aerospace market in what we believe will be an eventual recovery in gas turbine jet engine demand. We believe that this will drive demand for CMCs for which we provide production solutions and have an installed base of systems. During 2022, we received an order for a production CVI system valued at approximately $3.7 million. The system will be used to manufacture CMCs for aerospace gas turbine jet engines. We believe this order may reflect the beginnings of a recovery in aircraft manufacturing as well as the need of jet engine manufacturers to develop more fuel-efficient engines.

We believe our future growth will be derived from production applications in our major target markets. Our legacy product line continues to provide advanced equipment and subsystems to enable development of emerging technology and research applications.

Our major targeted markets are further described as follows (the term “legacy product” refers to products and systems within our product offer that we have produced in our history) :

7

8

Our wholly owned subsidiary, CVD Materials Corporation, includes our Tantaline and MesoScribe product lines. Our MesoScribe product line supports the aerospace and defense markets with novel robust direct write instrumentation. Our CVD Tantaline product line consists of chemical-resistant coating services to many industrial applications. Neither product line is considered as a core business.

Bookings

During 2022, bookings of new orders from customers was approximately $33.1 million, representing an increase of approximately 56.6% compared to 2021 bookings of $21.1 million. We have achieved order growth in all segments, including a 100% growth in the CVD Equipment segment of our business, with 33 system orders in 2022 of which 24 orders were for PVT150 systems. Our bookings increased in the SDC segment but declined in our CVD Materials segment which includes the Tantaline and MesoScribe product lines.

Segments

CVD Equipment segment supplies state-of-the-art chemical vapor deposition and thermal process equipment targeting growth production markets as well as systems for use in research, development. This includes systems marketed under the FirstNano product brand. Utilizing our 40 years of expertise in the design and manufacture of chemical vapor deposition and thermal process equipment, we provide material processing capability and control at a competitive cost of ownership.

The targeted growth production markets include high power electronics (both silicon carbide (SiC) and gallium nitride (GaN), aerospace advanced materials primarily for gas turbine jet engines, and nanomaterials used in batteries. The product group also consists of legacy products serving the production and R&D applications such as semiconductors, LEDs, carbon nanotubes, nanowires, solar cells and a number of other industrial & research applications.

Our developments and opportunities for the carbon composite business come from achievements in our Applications Laboratory. The Applications Laboratory, along with the sales and marketing team continue to explore carbon-based products and applications that can be made from our CNT, infiltrated carbon/CVI and carbon nano fiber technology (CNF). Some applications include CNT and infiltrated carbon/CVI based battery material and CNF capacitors for 5G technology.

To support new emerging applications, the Company provides equipment to and collaborates with laboratory scientists to bring state-of-the-art processes from the research laboratory into production. CVD equipment group provide process development value through our Application Laboratory where our personnel interact directly with the scientists and engineers of our customer base to develop solutions to tomorrow’s challenges today. CVD Equipment segment operates from our 135,000 sq. ft. facility in Central Islip, New York.

SDC segment designs and manufactures ultra-high purity gas and chemical delivery control systems for state-of-the-art semiconductor fabrication processes, aerospace, solar cells, LEDs, carbon nanotubes, nanowires, and a number of industrial applications. Our SDC products are sold on a stand-alone basis and are also integrated into certain CVD equipment. This internal supply of chemical and gas delivery systems and components provide a competitive advantage for our CVD Equipment group over its competition. SDC operates from a 22,000 square foot facility fitted with a clean room manufacturing space located in Saugerties, New York.

CVD Materials segment continues to be a non-core business with several elements and product groups. It consists of the Tantaline® corrosion resistant surface treatment and MesoScribe’s direct write printed electronics business. The end markets for both entities are considered limited and not core to our business. Management continues to evaluate options for both businesses.

Tantaline® treatment is a diffusion bonded protective layer of tantalum formed by chemical vapor deposition on the surface of common materials. Since early 2021, all sales and technical support has been consolidated into our European facility located in Nordborg, Denmark.

MesoScribe Technologies provides MesoPlasma™ printing services and products (heaters, antennas, and sensors) to aerospace, satellite, power generation, defense, and other markets requiring high performance. MesoScribe operations are located at our main facility in Central Islip, New York.

Intellectual Property

Our success is dependent, in part upon the development and protection of our proprietary technology and other proprietary rights. We have historically and continue to protect our proprietary information and intellectual property such as design specifications, blueprints, technical processes, and employee know-how through the use of patents and non-disclosure agreements. In the area of patents, we believe there is value in having protected intellectual property and will continue to file for patent protection of our proprietary technology that we believe has the potential to be incorporated into our products and sold to multiple customers. We also maintain certain trademarks relating to certain of our products and product lines and claim copyright protection for certain proprietary software and documentation.

While patent, copyright and trademark protections for our intellectual property are important to different degrees for our various products and solutions, we believe our future success in highly dynamic markets is most dependent upon the technical competence and creative skills of our personnel and our ability to accelerate the commercialization of next generation intellectual properties. We attempt to protect our trade secrets and other proprietary information through non-disclosure agreements with our customers, suppliers, employees and consultants and other security measures.

Research and Development

We develop new products based on market analysis or by customer request. The technology included in our product development includes mechanical hardware, software and controls systems and overall configuration. We have conducted research and development over the last 40 years and have a wealth of technology from which systems and solutions can be derived from and productized. Together with a number of leading universities and startup companies with whom we partner from time to time, we conduct research on SiC growth, the growth and infiltration of carbon nanotubes, graphene and nanowires as well as on selected aerospace manufacturing processes. Our intention is that together with customers and universities, we will leverage our collective expertise in this field, which we believe will allow us to capitalize on commercial opportunities in the future.

Products and Technology

Chemical Vapor Deposition/Infiltration – A method of coating or growing material through a chemical recombination at elevated temperatures onto or within pours of a substrate material. A single or collection of gases or vapor introduced on to the surface or into pores of a substrate material that is heated to such a degree that the gases decompose and deposits a desired layer onto and or into a substrate material. Chemical vapor deposition is the process of depositing or growing on a substrate and the process of depositing or growing material into the pours of materials. Both processes are accomplished by combining appropriate gases in a reaction chamber, of the kind we manufacture, at elevated temperatures (typically 500 to 2,500° Celsius). Our chemical vapor deposition systems are complete and include all necessary heating techniques, precise control instrumentation, gas delivery and abatement subsystems and components and include state-of-the-art proprietary process control software. We provide both standard and emerging applications specified products. Some of the standard systems we offer are for SiC, GaN, Aluminum Nitride (AlN), CMCs, silicon (Si), CNT, graphene, silicon nanowires. The systems are sold under the CVD and FirstNano product brands.

Physical Vapor Transport (PVT) – While the PVT150 was officially launched for production in 2022, we have sold PVT systems in prior years and have pioneered both resistive heating and more effectively inductively heated PVT systems. The PVT150 system was specifically designed to address the SiC crystal growth market for 150mm substrates or wafers. It is at present our flagship product for the SiC market. Designed to provide enhanced process parameter control it allows existing and future customers the ability to tightly control and monitor the crystal growth process for 150mm substrates. A 200mm version is under development and planned for launch in 2023. The crystal growth technique utilized a high temperature furnace to vaporize from seed granular material of SiC and further deposit out in an ordered crystal structure onto substrate wafer. The process takes days to over a week to complete and yield a SiC crystal ready for further processing into wafers.

Rapid Thermal Processing (“RTP”) – Used to heat semiconductor materials to elevated temperatures of up to 1,200° Celsius at rapid rates of up to 200° Celsius per second. Our RTP systems are offered for implant activation, oxidation, silicide formation and many other processes. We offer systems that can operate both at atmospheric and reduced pressures.

Annealing, Diffusion and Low-Pressure Chemical Vapor Deposition (LPCVD) Furnaces – These furnaces are used for dislocation removal in crystals, dopant diffusion, oxidation, for SiC, Si, SiOx and other applications. The systems are normally operated at atmospheric and/or reduced pressure with gaseous atmospheres related to the process. An optional feature of the system allows for the heating element to be moved away from the process chamber allowing the wafers to rapidly cool or be heated in a controlled environment. Our temperature control system enables more precise control of the wafers. The systems are equipped with an automatic process controller, permitting automatic process sequencing and monitoring with safety alarm provisions.

Ultra-High Purity Gas and Liquid Control Systems - Our standard and custom designed gas and liquid control systems, which encompass gas cylinder storage cabinets, custom gas and chemical delivery systems, gas and liquid valve manifold boxes and gas isolation boxes, provide safe storage and handling of pressurized gases and chemicals. Our system design allows for automatic or manual control from both a local and remote location. These subsystems and components are provided to the general market as well support the CVD Equipment segment.

Quartzware: The majority of our process equipment solutions, utilize quartz components which we partially manufacturer internally. In addition, the equipment typically requires routine maintenance, consumable and spare parts. One such spare part and consumable which is core to our technology offering is quartz hardware. We provide standard and custom fabricated quartzware used in our equipment and to a lesser extent for other customer tools.

Tantaline® Corrosion Resistant Coating - Tantaline® treatment is provided as part of either a finished product or as a service applied to customer sourced components. These include valves, fittings, fasteners, vessels, bellows, and a wide range of custom designed items. The Tantaline® treatment improves the corrosion resistance of these base stainless-steel parts extending the service life and increasing value in a wide range of applications.

MesoPlasma™ Direct Write Printing - A materials deposition process that provides robust direct write high-definition instrumentation, fine feature patterns, and coatings onto conformal components. The technique involves powder material that is injected into a thermal plasma where it is rapidly heated and deposited onto the substrate or component. The versatility of the process enables a wide range of materials to be deposited including ceramic dielectrics, nickel-based sensor alloys, metallic conductors, precious metals, and protective coatings. Products include temperature sensors, heaters, antennas and patterns per customer specifications. Since the acquisition of the MesoPlasma technology, the business has primarily been funded by external defense, government and private contracts.

Markets and Marketing

We serve multiple emerging and mature global markets including compound semiconductor high power electronics, aerospace, defense, battery energy storage, silicon and other microelectronic and micromechanical devices, semiconductor, universities, and research centers. Due to the highly technical nature of our products, we believe it is essential to engage with customers directly through our sales personnel, our network of domestic and international independent sales representatives, and distributors specializing in the type of equipment, products, and services that we sell. Our primary marketing activities include direct sales engagement, participation in trade associations and trade shows (that were impacted by the COVID-19 pandemic in 2020 and 2021) and our internet websites. The Company plans to expand its market activities in 2023 including attendance at key tradeshows and online marketing.

Customers

Our systems and products are used in both production applications and advanced materials research. We market and sell primarily to companies that are the engaged in producing compound semiconductor wafers, aerospace gas turbine jet engine component material, defense, battery energy storage, silicon and other microelectronic and micromechanical devices, semiconductor, universities and research centers. We have both a domestic and international customer base.

Given the complexity and magnitude of the systems we sell, revenue from a single customer in any one year can exceed 10% of our total sales. During the year ended December 31, 2022, one customer represented 29.2% of our revenues, while no customers exceeded 10% of revenue during the year ended December 31, 2021. While we believe that our relationships with these customers are generally positive, the loss of a large customer would have to be replaced by others, and our inability to do so could have a material adverse effect on our business and financial condition.

For the year ended December 31, 2022, approximately $4.4 million or 17% of our revenues were generated by sales to customers outside the U.S., compared to approximately $4.3 million or 26% for the year ended December 31, 2021.

Competition

We can experience intense direct competition from both domestic and international competitors in all our product segments. Our CVD Equipment product lines including FirstNano, target multiple markets and both production and research customers. Competition is substantial in both the production applications and research. In production application, competition comes from larger companies offering enhanced services, in research applications, the competition comes from small companies that compete with us mostly on price. We are aware of other competitors that offer a substantial number of products and services comparable to ours. Many of our competitors (including customers who may elect to manufacture systems for internal use) have financial, marketing and other resources greater than our own. To date, we believe that each of our product and service segments has been able to compete favorably in markets that include these competitors, primarily based on know-how, technical performance, quality, delivery, price and aftermarket support. We continue to focus on products, which serve markets that are growing and where we have a technical and commercially competitive advantage.

CVD Equipment competes with companies located in Asia, Europe, and the US in in both the production and research market. In the production and research markets, we also compete with in customer in house-built equipment. Additionally, there are large, established companies who compete with us and pose a competitive risk in the market. Due to budgetary and funding constraints, many customers are price sensitive. We believe that our systems are among the most advanced available for the targeted market and coupled with our vertical integration in engineering and manufacturing, we believe that we can compete effectively.

SDC’s gas management and chemical delivery control systems are among the most advanced available. We further believe that SDC is differentiated from our competitors through our deep understanding of how the systems in which our products are incorporated are used in field applications. We have gained this understanding as a result of having designed and built complex process gas systems for our CVD Equipment group as well as for a number of the world’s leading semiconductor, aerospace, medical, solar manufacturers, research laboratories and universities.

CVD Materials consists of our Tantaline and MesoScribe subsidiaries. Tantaline has few competitors for a tantalum deposition corrosion coating due to the limited size of the market. There is no viable direct competitor for the MesoScribe services. There are technology competitors in the direct write applications and other additive manufacturing technologies competing for the same contracts and business opportunity.

Sources of Supply

Many of the components used in producing our products are purchased from unrelated suppliers. We have OEM status with our suppliers, but we are not obligated to purchase a pre-determined quantity. We are not dependent on a principal or major supplier and alternate suppliers are available. Historically, subject to lead times, the components and raw materials we used in manufacturing our products were readily obtainable. Presently, many of our suppliers have been adversely impacted by the ongoing supply chain disruptions due to the remaining effects of the COVID-19 pandemic and geopolitical developments across Europe and Asia. This has led to longer lead times for purchasing materials and increases in the costs of many components.

We maintain a fully equipped machine shop that we use to fabricate a significant portion of our metal components in-house, including the most intricately designed parts of our equipment. We expanded our machine shop in 2022 to allow us to expand our ability to fabricate parts. Our quartz fabrication capability is currently sufficient to meet our quartzware needs. We believe our vertical manufacturing integration is a competitive advantage.

Materials procured from suppliers and/or manufactured internally undergo a rigorous quality control process to ensure that the parts meet or exceed our requirements and those of our customers. Upon final assembly, all equipment undergoes a final series of complete testing to ensure maximum product performance.

Backlog

As of December 31, 2022, our backlog was approximately $17.8 million, compared to $10.4 million as of December 31, 2021, an increase of $7.4 million. Our backlog at December 31, 2022 consists of approximately $16.2 million remaining performance obligations for contracts in progress and the balance of approximately $1.6 million represents orders received from customers. We continue to work at diversifying our customer base away from any one customer as we focus on new opportunities with new and existing customers within our existing marketplaces and in new applications. The timing for completion of backlog varies depending on the product mix and can be as long as two years or as short as 30-60 days.

There can be no assurance that our backlog will result in actual revenue in any particular period, or at all, or that any contract included in backlog will be profitable. The actual amount and timing of any revenue is subject to various contingencies, many of which are beyond our control, such as cancellations and delays. As a result of these contingencies, we may adjust our backlog if we determine that such orders are no longer firm. In addition to adjustments from these types of contingencies, variations in backlog from time to time are attributable, in part, to changes in sales mix, the timing of contract proposals, the timing of contract awards, delivery schedules on specific contracts. As a result, we believe our backlog and orders, at any point in time, are not necessarily indicative of the total sales anticipated for any future period.

Government Regulations

We are subject to a variety of federal, state and local government regulations, such as environmental, labor and export control regulations. We believe that we have obtained all necessary permits to operate our business and that we are in material compliance with all laws and regulations applicable to us. These regulations change on an ongoing basis and the effect of these changes could materially impact our business in certain technology areas and regions.

Utilizing our in-house safety team, engineering expertise and consultants as required, we continue to monitor and comply with applicable Environmental Health and Safety regulations at our facilities as well as the installation of equipment at our customer facilities.

With respect to our sales to customers located in China or elsewhere outside the United States, products which (i) are manufactured in the United States, (ii) incorporate controlled U.S. origin parts, technology, or software, or (iii) are based on U.S. technology, are subject to the U.S. Export Administration Regulations (“EAR”). We continue to monitor, review, and maintain ongoing compliance with EAR with respect to our export sales.

Product Liability

Our products are used in our customers’ manufacturing processes, which in some cases contain explosive, flammable, corrosive, and toxic gases. There are potential exposures to personal injury as well as property damage, particularly if operated without regard to the design limits of the systems and components. Additionally, the end products of some of our customers are used in areas such as aerospace and high-tech devices where safety is of great concern. Management reviews its insurance coverage on an annual basis or more frequently, if appropriate, and we believe we have the types and amounts of insurance coverage that are sufficient for our business.

Human Capital

We consider our employees a vital asset to our business and strive to ensure we foster a work environment of respect, communication, objective orientation, and personal life balance. We believe this results in a higher level of employee satisfaction and hence improved performance and employment longevity. On December 31, 2022, we had 136 employees. We had 69 employees in manufacturing, 34 in engineering (including research and development and efforts related to product improvement) 4 in field service, 10 in sales and marketing and 19 in general management, maintenance and administration, compared to 111 employees as of December 31, 2021. None of our employees were subject to a collective bargaining agreement.

The implementation of our business strategy depends on our ability to hire, train, and retain qualified and diverse professionals, and we must emphasize employee development and training in order to do so. We are committed to identifying and developing the talents of our next generation of managers and intend to establish a strong succession-planning program for our critical positions, including internships for technical and engineering resources from local universities. Moreover, a key strategic focus of our management team is to foster and maintain a strong and healthy culture, where collaboration to achieve results and focus on the success of our customers and shareholders is paramount.

Employee Safety

The health and safety of our employees and partners is our highest priority, and this is consistent with our operating philosophy. We maintain strong environmental, health and safety protocols that focus on implementing policies and training programs, as well as performing self-audits to ensure our colleagues and partners leave the workplace safely on a daily basis.

Our highest priorities throughout the pandemic were, and continue to be, the health and well-being of our employees, customers, suppliers, and stakeholders. From the beginning of the pandemic, we have taken precautions to protect our employees, visitors, and customers while minimizing disruption to our business.

Employee Compensation

Management continues to review our employee compensation programs to better align the compensation of our employees with our objectives, performance, and personal performance, and to provide the proper short-term and long-term incentives to attract, retain and motivate them to achieve superior results. We believe we must offer wages that are competitive and consistent with employee positions, skill levels, experience, and knowledge, and in order to do so we may work with a nationally recognized outside compensation and benefits consulting firm to independently evaluate the effectiveness of our executive and non-executive compensation and benefit programs and to provide benchmarking against our peers within our industry.

Diversity and Inclusion

We are committed to building and sustaining a culture of diversity encourage all of our employees to reach their full potential. Our CVD team, like the technologies we enable, is a rich combination of diverse individuals coming together to make a material difference for our people, our customers, and the world. As a company that enables tomorrow’s technologies, we recognize that a diverse employee population makes CVD a stronger, more innovative, and a more engaging place to work. We are always striving to attract talented individuals from a diverse candidate pool.

Available Information

Our website address is www.cvdequipment.com (http://www.cvdequipment.com) and the contents of our website, including our investor relations website, is not incorporated by reference into this filing or any other report we file with or furnish to the SEC. We have no duty to update or revise any forward-looking statements in this Annual Report or in other reports filed with the SEC, whether as a result of new information, future events or otherwise, unless we are required to do so by law. The SEC maintains a website (www.sec.gov (http://www.sec.gov)) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

In addition to the other information set forth in this Annual Report on Form 10-K, our shareholders should carefully consider the risk factors described below. The risks set forth below may not be the only risk factors relating to the Company. Any of these factors, many of which are beyond our control, could materially adversely affect our business, financial condition, operating results, cash flow and stock price.

Risk categories:

• Risks related to sales and product development
• Risks related to manufacturing and supply chain
• Risks related to cybersecurity, intellectual property and regulatory compliance
• Risks related to financial and accounting matters
• Risks related to product liability
• Risks related to our stock
• General risk factors

Risks related to sales and product development

Historically, we have maintained a highly concentrated customer base so that changes in ordering patterns, delays or order cancellations could have a material adverse effect on our business and results of operations.

During 2022, one customer accounted for 29.2% of our total revenues. The loss of a major customer would have to be replaced by others, and our inability to do so may have a material adverse effect on our business and financial condition. We expect that contracts or orders from a relatively limited number of customers will, at times, continue to account for a substantial portion of our business. The mix and type of customers, and sales to any single customer, may vary significantly from quarter to quarter and from year to year. If any major customer did not place orders, or if they substantially reduced, delayed, or cancelled orders, we may not be able to replace the business in a timely manner or at all, which can and has had a material adverse effect on our results of operations and financial condition. Major customers may also seek, and on occasion receive, pricing, payment, intellectual property-related, or other commercial terms that are less favorable to us and can hurt our competitive position.

Our lengthy and variable sales cycle makes it difficult to predict our financial results.

The marketing, sale and manufacture of our products, often requires a lengthy sales cycle ranging from several months to over one year before we can complete production and delivery. The lengthy sales cycle makes forecasting the volume and timing of sales difficult and raises additional risks that customers may cancel or decide not to enter into contracts. The length of the sales cycle depends on the size and complexity of the project, the customer’s in-depth evaluation of our products, and, in some cases, the protracted nature of a bidding process.

Because a significant portion of our operating expenses are fixed, we have and may continue to incur substantial expense before we earn associated revenue. If customer cancellations occur, they could result in the loss of anticipated sales without allowing us sufficient time to reduce our operating expenses.

If any of our customers cancel or fail to accept a large system order, our financial position and results of operations could be materially and adversely affected.

Our backlog includes of orders customized systems including our chemical vapor deposition equipment and annealing and diffusion furnaces which are built to client specifications. These customized systems can have prices up to several million dollars, depending on the configuration, specific options included and any specific requirements of the customer. Because our orders are subject to cancellation or delay by the customer, our backlog at any point in time is not necessarily representative of actual sales for succeeding periods, nor does our backlog provide any assurance of achievement of revenues or that we will realize a profit from completing these orders. Our financial position and results of operations could be materially and adversely affected should any large system order be cancelled prior to shipment, or not be accepted by the customer due to alleged non-conformity with product specifications or otherwise. Likewise, a significant change in the liquidity or financial position of any of our customers that purchase large systems, could have a material impact on the collectability of our accounts receivable and our future operating results. Our backlog does not provide any assurance that we will realize a profit from those orders or indicate in which period revenue will be recognized.

If demand declines for chemical vapor deposition, physical vapor transport, gas control and related equipment, or for carbon nanotube and nanowire deposition systems, our financial position and results of operations could be materially adversely affected.

Our products are utilized to develop and manufacture materials and coatings for industrial and research applications that are used in numerous markets including but not limited to power electronics, battery materials, aerospace, nano and advanced electronic components. A significant part of our growth strategy involves continued expansion of the sales of our products for industrial as well as research and development purposes by companies, universities, and government-funded research laboratories. The availability of funds for these purposes may be subject to budgetary and political restrictions, as well as cost-cutting measures by manufacturers in the markets in which we operate.

If the availability of funds or the demand for capital equipment in the markets in which we operate declines, the demand for our products would also decline and our financial position and results of operations could be harmed.

The demand for our products and the profitability of our products can change significantly from period to period because of numerous factors.

The industries in which we operate are characterized by ongoing factors, including:

• global and regional economic developments and conditions including in Europe and Asia;
• governmental budgetary and political constraints;
• changes in the capacity utilization and production volume for research and industrial applications in the markets in which we operate;
• the profitability and capital resources of manufacturers in the markets in which we operate; changes in technology;
• the availability of funds for research and development;
• the effects of the COVID-19 pandemic; and
• the effects of supply chain disruptions.

For these and other reasons, our results of operations for past periods may not necessarily be indicative of future operating results.

Our business might be adversely affected by our dependence on foreign business.

Because a portion of our revenues are derived from international customers, our operating results could be negatively affected by a decline in the economies of any of the countries or regions in which we do business. Each region can exhibit unique characteristics, which can cause capital equipment investment patterns to vary significantly from period to period. Periodic local or international economic downturns, trade balance issues and political instability, as well as fluctuations in interest and currency exchange rates, could negatively affect our business and results of operations.

The majority of our sales to date have been primarily priced in U.S. dollars. While our business has not been materially affected in the past by currency fluctuations, there is a risk that it may be materially adversely affected in the future. Such risks include possible losses due to both currency exchange rate fluctuations and from possible social and political instability.

Our reputation and operating performance may be negatively affected if our products are not timely delivered.

We provide complex products that often require substantial lead-time for design, ordering parts and materials, and for assembly and installation. The time required to design, order parts and materials and to manufacture, assemble and install our products, may in turn lead to delays or shortages in the availability of some products. If a product is delayed or is the subject of shortage because of problems with our ability to design, manufacture or assemble the product on a timely basis, obtain necessary materials and components, or if a product or software otherwise fails to meet performance criteria, we may lose revenue opportunities entirely, or experience delays in revenue recognition associated with a product or service. In addition, we may incur higher operating expenses during the period required to correct the problem.

We may not be able to keep pace with the rapid change in the technology we use in our products.

We believe that our continued success in the markets in which we operate depends, in part, on our ability to continually improve existing technologies and to develop and manufacture new products and product enhancements on a timely and cost-effective basis. We must be able to introduce these products and product enhancements into the market in a timely manner, in response to customer’s demands for higher-performance research and assembly equipment, customized to address rapid technological advances in capital equipment designs.

Technological innovations are inherently complex and require long development cycles and appropriate professional staffing. Our future business success depends on our ability to develop and introduce new products, or new uses for existing products, that successfully address changing customer needs. Our success also depends on our ability to achieve market acceptance of our new products. To maintain our success in the marketplace, we may have to substantially increase our expenditures on research and development. If we do not develop and introduce new products, technologies or uses for existing products in a timely manner and continually find ways to reduce the cost of developing and producing them in response to changing market conditions or customer requirements, our business could be seriously harmed.

We face significant competition, and we are relatively small in size and have fewer resources in comparison with many of our competitors.

We face significant competition throughout the world, which may increase as certain markets in which we operate continue to evolve. Our future performance depends, in part, upon our ability to continue to compete successfully worldwide. Some of our competitors are diversified companies that have substantially greater financial resources and more extensive research, engineering, manufacturing, marketing and customer service and support capabilities than we can provide. We face competition from companies whose strategy is to provide a broad array of products, some of which compete with the products and services that we offer, as well as companies, universities and research laboratories that have the capacity to design and build their own equipment internally. These competitors may bundle their products and services in a manner that may discourage customers from purchasing our products. In addition, we face competition from smaller emerging processing equipment companies, whose strategy is to provide a portion of the products and services that we offer at often lower prices than ours, using innovative technology to sell products into specialized markets. Loss of competitive position could impair our prices, customer orders, revenue, gross margin, and market share, any of which would negatively affect our financial position and results of operations. Our failure to compete successfully with these other companies would seriously harm our business. There is a risk that larger, better financed competitors will develop and market more advanced products than those we currently offer, or that competitors with greater financial resources may decrease prices, thereby putting us under financial pressure.

Risks related to manufacturing and our supply chain

Manufacturing interruptions or delays could affect our ability to meet customer demand and lead to higher costs, while the failure to estimate customer demand accurately could result in excess or obsolete inventory.

Our business depends on timely supply of equipment, services and related products that meet the rapidly changing technical and volume requirements of our customers. Some key parts to our products are subject to long lead-times and/or obtainable only from a single supplier or limited group of suppliers. Cyclical industry conditions and the volatility of demand for manufacturing equipment increase capital, technical, operational and other risks for us and for companies throughout our supply chain. Further, these conditions may cause some suppliers to scale back operations, exit businesses, merge with other companies, or file for bankruptcy protection and possibly cease operations. We have also experienced and continue to experience significant disruptions in our supply chain, resulting in delays and higher costs to procure certain components and materials that we utilize in our business.

We may also experience significant interruptions of our manufacturing operations, delays in our ability to deliver products or services, increased costs or customer order cancellations as a result of:

• The failure or inability of suppliers to timely deliver sufficient quantities of quality parts on a cost-effective basis;
• Volatility in the availability and cost of materials, including rare earth elements;
• Difficulties or delays in obtaining required import or export approvals;
• Information technology or infrastructure failures;
• Natural disasters or other events beyond our control (such as earthquakes, floods or storms, regional economic downturns, pandemics, social unrest, political instability, terrorism, or acts of war); and
• The effects of the COVID-19 pandemic on our employees, suppliers and other third-parties upon which we rely.

If a supplier fails to meet our requirements concerning quality, cost, or other performance factors, we may transfer our business to alternative sources, which could entail manufacturing delays, additional costs, or other difficulties. In addition, if we need to rapidly increase our business and manufacturing capacity to meet increases in demand or expedited shipment schedules, this may exacerbate any interruptions in our manufacturing operations and supply chain and the associated effect on our working capital.

We are presently experiencing supply chain delays and cost increases that may adversely affect our business.

The COVID-19 pandemic adversely impacted worldwide supply chains and our ability to obtain component parts. Subsequent geopolitical developments across Europe and Asia have and may continue to restrict our ability to procure raw materials and components such as nickel and integrated circuits. Furthermore, disruptions and delays in the ability of our third-party freight carriers to transport these items to our manufacturing facility also continues to be a challenge. In 2022, we experienced increased costs on certain components as well as delays in supply chain delivery, which may also impact our ability to recognize revenue and reduce our gross profit margins, as well as extend our manufacturing lead times and reduce our manufacturing efficiencies. We have begun placing orders with more lead time to help mitigate the manufacturing delays, as well as assessing other suppliers or components to attempt to mitigate the potential cost impacts. In addition, we are utilizing our in-house flexible manufacturing to attempt to further mitigate both potential schedule delivery delays and material cost increase, as well as increasing sales prices. While we have initiated actions to mitigate the potential negative impacts to our revenue and profitability, there can be no assurance of the ultimate impact and the length of time that the supply chain factors may impact our revenues and profitability.

Inflation has and may continue to adversely affect our business, financial condition, and results of operations.

Recent global inflation has adversely affected our costs, including the cost of materials, production, and labor. As such, we have had to implement measures to mitigate the negative impacts of inflation on our costs. As the selling prices in our customer contracts are fixed, any increase in the cost of materials, labor and other costs as we manufacture any system would negatively impact our gross margins and results of operations. Longstanding or increased periods of inflation could perpetuate these material adverse effects on our business, financial condition and results of operations.

If our critical suppliers fail to deliver enough quality materials and components in a timely and cost-effective manner, it could negatively affect our business.

We do not manufacture many components used in the production of our products, and consequently, we use numerous unrelated suppliers of materials and components. Due to the impact of the COVID-19 pandemic and geopolitical developments across Europe and Asia, we are experiencing reduced availability of raw materials and components. In turn, any reduction in the availability of these materials and components may reduce our ability to obtain sufficient amounts in a cost-effective manner. We generally do not have guaranteed supply arrangements with our suppliers. Because of the variability and uniqueness of our customer’s orders, we try to avoid maintaining an extensive inventory of materials and components for manufacturing. While we are not dependent on any principal or major supplier for most of our material and component needs, switching to an alternative supplier may take significant amounts of time and added expense, which could result in a disruption of our operations and adversely affect our business. It is not always practical or even possible to ensure that component parts are available from multiple suppliers; accordingly, we procure some key parts from a single supplier or a limited group of suppliers. At certain times, increases in demand for capital equipment can result in longer lead-times for many important system components, which may cause delays in meeting shipments to our customers. The delay in the shipment of even a few systems could cause significant variations in our quarterly revenue, operating results and the market value of our common stock.

Our manufacturing facilities are in Central Islip, New York, Saugerties, New York and Nordborg, Denmark and could be affected due to multiple weather risks, including risks to our Central Islip facility from hurricanes and similar phenomena.

Our manufacturing facilities are located in Central Islip, New York, Saugerties, New York and Nordborg, Denmark and could be affected by multiple weather risks, most notably hurricanes for our Central Islip facility which located on Long Island, New York. Although we carry property and casualty insurance and business interruption insurance, future possible disruptions of operations or damage to property, plant and equipment due to hurricanes or other weather risks could result in impaired production and affect our ability to meet our commitments to our customers and impair important business relationships, the loss of which could adversely affect our operations and profitability. We do, however, maintain a backup power source at our Central Islip facility, are working to establish deeper redundancies between our New York facilities to help mitigate this risk.

Risks related to cybersecurity, intellectual property and regulatory compliance

If we are subject to cyberattacks, we could incur substantial costs and, if such attacks are successful, we could incur significant liabilities, reputational harm, and disruption to our operations.

We manage, store, and transmit proprietary information and sensitive data relating to our operations. We may be subject to breaches of the information technology systems we use for these purposes. Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate and/or compromise our confidential information (and or third-party confidential information), create system disruptions, or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our systems or our products, or that otherwise exploit any security vulnerabilities.

While we have an active security training program for all employees during the year, utilize intrusion prevention and detection systems, as well as hardware firewall and virus security, the costs to address the foregoing security problems and security vulnerabilities before or after a cyber-incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays, or cessation of service, and loss of existing or potential customers, impeding our sales, manufacturing, distribution, or other critical functions. In addition, breaches of our security measures and the unapproved dissemination of proprietary information or sensitive data about us, our customer, or other third parties, could expose us, our customers, or other third parties to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our reputation, or otherwise harm our business.

Our financial position and results of operations may be materially harmed if we are unable to recoup our investment in research and development.

The rapid change in technology in our industry requires that we continue to make substantial investments in research and development and selective acquisitions of technologies and products, to enhance the performance and functionality of our product line, to keep pace with competitive products and to satisfy customer demands for improved performance, features and functionality. There can be no assurance that revenue from future products or enhancements will be sufficient to recover the development costs associated with such products, enhancements, or acquisitions, or that we will be able to secure the financial resources necessary to fund future research and development or acquisitions. Research and development costs are typically incurred before we confirm the technical feasibility and commercial viability of a product, and not all development activities result in commercially viable products. In addition, we cannot ensure that products or enhancements will receive market acceptance, or that we will be able to sell these products at prices that are favorable to us. Our business could be seriously harmed if we are unable to sell our products at favorable prices, or if our products are not accepted by the markets in which we operate.

We have made investments in our proprietary technologies. If third parties violate our proprietary rights, or accuse us of infringing upon their proprietary rights, such events could result in a loss of value of some of our intellectual property or costly litigation.

We attempt to protect certain of our intellectual property rights by obtaining patent and trademark protection where we believe it is appropriate to do so. While patent, copyright and trademark protection for our intellectual property may be important, we believe our future success in highly dynamic markets is most dependent upon the technical competence and creative skills of our personnel. We may also attempt to protect our trade secrets and other proprietary information through confidentiality agreements with our customers, suppliers, employees, and consultants, and through other internal security measures. However, these employees, consultants and third parties may breach these agreements, and we may not have adequate remedies for wrongdoing. In addition, the laws of certain territories in which we sell our products may not protect our intellectual property rights to the same extent as do the laws of the United States.

Occasionally, we may receive communications from other parties asserting the existence of patent rights or other intellectual property rights that they believe cover certain of our products, processes, technologies, or information. In addition, it is possible we could have a dispute with a customer concerning the use of intellectual property utilized in their equipment. If such cases arise, we will evaluate our position and consider the available alternatives, which may include seeking licenses to use the technology in question on commercially reasonable terms, developing new alternative technology or defending our position. Nevertheless, we cannot ensure that we will be able to obtain licenses, or, if we are able to obtain licenses, which related terms will be acceptable, or that litigation or other administrative proceedings will not occur. Defending our intellectual property rights through litigation could be very costly. If we are not able to negotiate the necessary licenses on commercially reasonable terms or successfully defend our position, our ability to utilize such intellectual property could substantially inhibit our access to certain markets and our ability to compete in these markets which could have a material adverse effect on our financial position and results of operations.

We may be unable to obtain required export licenses for the sale of our products.

Whether with respect to sales to customers located in China or otherwise, products which (i) are manufactured in the United States, (ii) incorporate controlled U.S. origin parts, technology, or software, or (iii) are based on U.S. technology, are subject to the U.S. Export Administration Regulations (“EAR”) when exported to and re-exported from international jurisdictions, in addition to the local jurisdiction’s export regulations applicable to individual shipments. Licenses or proper license exceptions may be required for the shipment of our products to certain customers or countries. Obtaining an export license or determining whether an export license exception exists often requires considerable effort by us and cooperation from the customer, which can add time to the order fulfillment process. We may be unable to obtain required export licenses or qualify for export license exceptions and, as a result, we may be unable to export products to our customers and/or meet their servicing needs. Non-compliance with the EAR or other applicable export regulations could result in a wide range of penalties including the denial of export privileges, fines, criminal penalties, and the seizure of commodities. If an export regulatory body determines that any of our shipments violate applicable export regulations, we could be fined significant sums and our export capabilities could be restricted, which could have a material adverse impact on our business.

Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. We have agreements with third parties and make sales in countries known to experience corruption, extortion, bribery, pay-offs, theft, and other fraudulent practices. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition, and results of operations.

We are subject to environmental regulations, and our inability or failure to comply with these regulations could adversely affect our business.

We are subject to environmental regulations in connection with our business operations, including regulations related to the development and manufacture of our products and our customers’ use of our products. Our failure or inability to comply with existing or future environmental regulations could result in significant remediation liabilities, the imposition of fines or the suspension or termination of development, manufacturing, or use of certain of our products, or affect the operation of our facilities, use or value of our real property, each of which could damage our financial position and results of operations.

Regulations related to conflict minerals will force us to incur additional expenses, may make our supply chains more complex, and may result in damage to our relationships with customers.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, the SEC adopted requirements for companies that manufacture products that contain certain minerals and metals known as “conflict minerals”. These rules require public companies to perform diligence and to report annually to the SEC whether such minerals originate from the Democratic Republic of Congo and adjoining countries. The implementation of these requirements could adversely affect the sourcing, availability, and pricing of minerals we use in the manufacture of our products. In addition, we have incurred and will continue to incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals used in our products. Given the complexity of our supply chain, we may not be able to ascertain the origins of these minerals used in our products through the due diligence procedures that we implement, which may harm our reputation. We may also face difficulties in satisfying customers who may require that our products be certified as conflict mineral free, which could harm our relationships with these customers and lead to a loss of revenue. These requirements could limit the pool of suppliers that can provide conflict-free minerals, and we may be unable to obtain conflict-free minerals at competitive prices, which could increase our costs and adversely affect our manufacturing operations and our profitability.

Risks related to financial and accounting matters

We might require additional financing.

Our continuing operating losses may make it difficult for us to obtain financing on commercially reasonable terms, if at all. If adequate financing is not available when required on commercially reasonable terms, if at all, our business and operations may be materially and adversely affected. In addition, we could issue additional common stock, to fund our growth initiatives and operations which could materially dilute the ownership interests of the then existing shareholders.

We may, in the future, identify deficiencies in controls over financial reporting.

While we have concluded that, as of December 31, 2022, our disclosure and reporting controls were effective as included in Part II, Item 9A, there can be no assurance that material weaknesses will not be identified in the future. If we do identify material weaknesses in our internal controls over financial reporting in the future, our ability to analyze, record and report financial information free of material misstatements, and to prepare our financial statements within the time periods specified by the rules and forms of the SEC, may likely be adversely affected.

We have and may continue to be required to take impairment charges on assets.

We are required to assess our long-lived assets, including acquired intangible assets and property, plant and equipment, for recoverability and impairment whenever there are indicators or impairment, such as an adverse change in business climate.

As part of our long-term strategy, we have pursued acquisitions of other companies or assets, and may pursue future acquisitions of other companies or assets which could potentially increase our assets. Adverse changes in business conditions could materially impact our estimates of future operations and result in impairment charges to these assets. If our assets were impaired, our financial condition and results of operations could be materially and adversely affected.

Acquisitions can result in an increase in our operating costs, divert management’s attention away from other operational matters and expose us to other associated risks.

We evaluate potential acquisitions of businesses and technologies, and we consider targeted acquisitions that expand our core competencies to be an important part of our future growth strategy. In the past, we have made acquisitions of other businesses with synergistic products, services and technologies, and plan to continue to do so in the future.

Acquisitions involve numerous risks, which include but are not limited to:

• difficulties and increased costs in connection with the integration of the personnel, operations, technologies, services and products of the acquired companies into our existing facilities and operations;
• diversion of management’s attention from other operational matters;
• failure to commercialize the acquired technology;
• the potential loss of key employees of the acquired companies;
• lack of synergy, or inability to realize expected synergies, resulting from the acquisitions;
• the risk that the issuance of our common stock, if any, in an acquisition or merger could be dilutive to our shareholders;
• the inability to obtain and protect intellectual property rights in key technologies and
• the acquired assets becoming impaired as a result of technological advancements or worse-than-expected performance of the acquired assets.

Cyclical demand for our products may make it difficult for us to accurately budget our expense levels, which are based in part on our projections of future revenues.

Historically, demand for our equipment and related consumable products have been volatile because of changes in supply and demand, and other factors in the manufacturing process. Our orders tend to be more volatile than our revenue, as any change in demand is reflected immediately in orders booked, which are net of cancellations, while revenue, tends to be recognized over multiple quarters because of procurement and production lead times, and the deferral of certain revenue under our revenue recognition policies. The fiscal period in which we can recognize revenue is also at times subject to the length of time that our customers require to evaluate the performance of our equipment. This could cause our quarterly operating results to fluctuate.

When cyclical fluctuations result in lower-than-expected revenue levels, operating results have been and may continue to be materially adversely affected and cost reduction measures have been and may continue to be necessary for us to remain competitive and financially sound. During a down cycle, we must be able to make timely adjustments to our cost and expense structure to correspond to the prevailing market conditions. In addition, during periods of rapid growth, we must be able to increase manufacturing capacity and the number of our personnel to meet customer demand, which may require additional liquidity. We can provide no assurance, that these objectives can be met in a timely manner in response to changes within the industry cycles in which we operate. If we fail to respond to these cyclical changes, our business could be seriously harmed.

We do not have long-term volume production contracts with our customers, and we do not control the timing or volume of orders placed by our customers. Whether and to what extent our customers place orders for any specific products, and the mix and quantities of products included in those orders are factors beyond our control. Insufficient orders would result in under-utilization of our manufacturing facilities and infrastructure and will negatively affect our financial position and results of operations.

Risks related to product liability

We face the risk of product liability claims.

The manufacture and sale of our products, which in operation sometimes involve the use of toxic materials and extreme temperatures and could result in product liability claims. For example, our rapid thermal processing systems used to heat semiconductor materials to temperatures more than 1000º Celsius have certain inherent risks. A failure of our products at a customer site could also result in losses due to interruption of the business operations of our customer. While we regularly evaluate the nature and limits of our insurance coverages, there can be no assurance that our existing policies of insurance will be adequate to protect us from all liabilities that we might incur in connection with the manufacture and sale of our products in the event of a successful product liability claim or series of successful claims against us.

The health and environmental effects of nanotechnology are unknown, and this uncertainty could adversely affect the expansion of our business.

The health and environmental effects of nanotechnology are unknown. There is no scientific agreement on the health effects of nanomaterials in general and carbon nanotubes but some scientists believe that in some cases, nanomaterials may be hazardous to an individual’s health or to the environment.

The science of nanotechnology is based on arranging atoms in such a way as to modify or build materials not made in nature; therefore, the effects are unknown. Future research into the effects of nanomaterials in general, and carbon nanotubes, on health and environmental issues, may have an adverse effect on products incorporating nanotechnology. Since part of our growth strategy is based on sales of research equipment to produce carbon nanotubes and the sale of such materials, the determination that these materials are harmful could adversely affect the expansion of our business.

Risk related to our stock

The price of our common shares is volatile and could decline significantly.

The stock market in general and the market for technology stocks has experienced volatility. If those industry-based market fluctuations continue, the trading price of our common shares could decline significantly independent of the overall market, and shareholders could lose all or a substantial part of their investment. The market price of our common shares could fluctuate significantly in response to several factors, including, among others:

• difficult macroeconomic conditions, unfavorable geopolitical events, and general stock market uncertainties, such as those occasioned by a global liquidity crisis and a failure of large financial institutions;
• an offering of our common shares to raise capital;
• receipt of large orders or cancellations of orders for our products;
• issues associated with the performance and reliability of our products;
• actual or anticipated variations in our results of operations;
• announcements of financial developments or technological innovations;
• changes in recommendations and/or financial estimates by investment research analysis;
• strategic transactions, such as acquisitions, divestitures, or spin-offs;
• offerings of our securities;
• the occurrence of major catastrophic events; and
• volatile trading volumes.

Significant price and value fluctuations have occurred with respect to our publicly traded securities and those of technology companies generally. The price of our common shares is likely to be volatile in the future. In the past, securities class action litigation often has been brought against a company following periods of volatility in the market price of its securities. If similar litigation were pursued against us, it could result in substantial costs and a diversion of management’s attention and resources, which could materially and adversely affect our financial condition, results of operations, and liquidity.

General risks

Our success is highly dependent on the technical, sales, marketing and managerial contributions of key individuals, including our Chief Executive Officer and President, and we may be unable to retain these individuals or recruit others.

We depend on our senior executives including our Chief Executive Officer and President, and certain key managers as well as, engineering, research and development, sales, marketing and manufacturing personnel, who are critical to our business. Except for our Chief Executive Officer and President, we do not have employment agreements with our key employees. Furthermore, the current labor market remains very competitive and challenging for the acquisition and retention of key employees. Larger competitors may be able to offer more generous compensation packages to our executives and key employees, and therefore we risk losing key personnel to those competitors. If we were to lose the services of any of our key personnel, our engineering, product development, manufacturing and sales efforts could be slowed. We may also incur increased operating expenses and be required to divert the attention of our senior executives to search for their replacements. The integration of any new personnel could disrupt our ongoing operations.

We may not be able to hire or retain the number of qualified personnel, particularly engineering personnel, required for our business, which would harm the development and sales of our products and limit our ability to grow.

Competition in our industry for senior management, technical, sales, marketing and other key personnel is intense and has been made even more challenging in the current labor market. If we are unable to retain our existing personnel, or attract and train additional qualified personnel, our growth may be limited due to a lack of capacity to develop and market our products.

We have, from time to time, had trouble in hiring and retaining skilled engineers with appropriate qualifications to support our growth strategy. Our success depends on our ability to identify, hire, train and retain qualified engineering personnel with experience in equipment design. Specifically, we need to continue to attract and retain mechanical, electrical, software and field service engineers to work with our direct sales force to technically qualify and perform on new sales opportunities and orders, and to demonstrate our products.

A pandemic, epidemic or outbreak of an infectious disease such as COVID-19 in the United States or worldwide has adversely affected our business.

Although we expect conditions relating to COVID-19 will continue to improve, the COVID-19 pandemic has had and if conditions deteriorate again, could continue to have an adverse effect on the United States and global economies, as well as on aspects of our business, operations, and financial condition and those of third parties on whom we rely.

We previously experienced some decreases in product demand in certain of our other businesses. If conditions related to the pandemic were to deteriorate, we expect that parts of our business could again suffer negative impacts from the pandemic.

On the supply side, we are experiencing continued but moderating challenges with the supply of raw materials and components used in the production of our products. There are currently industry wide supply shortages of certain raw materials and electronic components. We have experienced raw material cost increases because of the COVID-19 pandemic, which will likely continue. In addition, while logistics capacity constraints are improving, we continue to experience freight surcharges and expect these to continue at least for the near term.

With respect to our personnel, although we adhere to government mandated and Environmental, Health and Safety protocols, an outbreak of COVID-19 at one or more of our facilities could cause shutdowns of facilities and a reduction in our workforce, which could dramatically affect our ability to operate our business and our financial results.

The duration of the COVID-19 pandemic is unknown, and it is difficult to predict the full extent of potential impacts the pandemic could have in the future on our business, operations, and financial results, or on our customers, suppliers, logistics providers, or on the global economy.

Our corporate headquarters, research and development, manufacturing and process coating facilities as of December 31, 2022 are as follows:

(1) The lease term expires the later of 9/30/22 or upon four months written notice by CVD or landlord.

You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors discussed in this report and those discussed in other documents we file with the SEC. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions as of the date of this report. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Past performance does not guarantee future results.

Executive Summary

We have served the advanced materials markets with chemical vapor and thermal process equipment for over 40 years. CVD designs, develops, and manufactures a broad range of chemical vapor deposition, gas control, and other state-of-the-art equipment and process solutions used to develop and manufacture materials and coatings for industrial applications and research. To learn more about CVD’s systems and offerings, visit www.cvdequipement.com (http://www.cvdequipement.com).

During 2022, the CVD team accomplished a number of milestones, including:

• Overall 57% revenue growth, led by sales of our PVT150 system that is used to grow silicon carbide crystals;
• Received orders for 24 of our PVT150 systems in 2022 and a cumulative total orders of 30 PVT150 systems in 2021 and 2022. We commenced marketing of our PVT150 system to other potential customers during the latter part of 2022.
• Received a $3.7 million order from a major aerospace company for the production of a CVI system. The system will be used by our customer to manufacture CMCs) for their gas turbine jet engines.
• Total bookings for 2022 were approximately $33.1 million, an increase of $11.9 million or 56.6% as compared to 2021.
• Increased our backlog by $7.4 million to $17.8 million.
• Expanded our facilities to enhance our manufacturing capabilities.

Business Update

Since early 2021, we have focused on bolstering our core business of equipment manufacturing. This has resulted in the rationalization of our CVD Materials business, including the consolidation of our Tantaline business into our Nordborg, Denmark facility.

Our core strategy is to focus on growth market applications end-user markets related to the “electrification of everything” and aerospace. The phrase “electrification of everything” refers to the shift from fossil fuels to the use of electricity to power devices, buildings, electric vehicles or EVs, and many other applications. With respect to aerospace, our systems are being used by our customers to produce ceramic matrix composite materials or CMCs that will be used in next generation jet engines with the objective of reducing jet fuel consumption and contributing to the decarbonization of that industry.

During 2021, we received the first six (6) orders for our PVT150 system that is used by our customer to grow silicon carbide crystals. These crystals are than further processed into silicon carbide wafters by our customer and later processed into integrated circuits and other devices. Devices based on silicon carbide have been shown to reduce energy consumption in EVs and reduce the need for additional cooling elements. During 2022, we received an additional 24 orders from the same customer. We also launched our marketing campaign for the PVT150 in the latter part of 2022 as we seek orders from other potential customers.

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

We believe that the receipt of a $3.7 million order from a major aerospace company in 2022 for the production of chemical vapor infiltration system reflects the beginnings of a revival in aircraft manufacturing. In prior years, we had sold Tow-Coating Systems to manufacture CMCs to another major jet engine manufacturer and have an installed base of such systems at that customer.

During 2022, new order bookings approximated $33.1 million, representing an increase of approximately 56.6% compared to bookings of $21.1 million in 2021. We have achieved order growth in all segments, including a 100% growth in the CVD equipment portion of the business, with 33 system orders in 2022, that included the 24 PVT150 systems, as compared to a total of 23 systems booked in 2021.

Results of Operations

Years Ended December 31, 2022 and 2021

The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for the years ended December 31, 2022 and 2021 and the period-over-period dollar and percentage changes for those line items (in thousands, except percentages).

* Not meaningful

Revenue

* Not meaningful

Our revenue for the year ended December 31, 2022 was $25.8 million compared to $16.4 million for the year ended December 31, 2021, an increase of 57%.

The increase in revenue versus the prior year period was primarily attributable to increased revenue of $8.1 million from the CVD Equipment segment related to equipment sales and spare parts, a $1.7 million increase in revenue from our SDC segment, offset, in part by, decreased revenue of $0.2 million from the CVD Materials segment. The increase in revenue in the period was principally the result of the recognition of revenue associated with our PVT150 systems. Sales of PVT150 systems were made to one customer in 2022 and represented 29.2% of our total revenues and 46% of CVD Equipment segment revenues.

Our order backlog at December 31, 2022 was approximately $17.8 million as compared to December 31, 2021 of $10.4 million. Our backlog at December 31, 2022 consists of approximately $16.2 million related to remaining performance obligations of contracts in progress and the balance of approximately $1.6 million represents orders received from customers. Historically, our revenues and orders have fluctuated based on changes in order rate as well as other factors in our manufacturing process that impacts the timing of revenue recognition. Accordingly, orders received from customers and revenue recognized may fluctuate from quarter to quarter.

The revenue contributed by the CVD Equipment segment for the year ended December 31, 2022 represented 65% of overall revenue as compared to 52% of overall revenue for the year ended December 31, 2021. The increase in revenues of $8.1 million or 94% resulted from an increase in orders in 2022 over 2021 due to increased demand for our products, principally for our PVT150 systems.

The revenue contributed by the SDC segment for the year ended December 31, 2022 represented 25% of overall revenue as compared to 29% of overall revenue for the year ended December 31, 2021 Revenue for our SDC segment increased $1.7 million or 35% due to increased orders and demand for the SDC’s products during 2022 as compared to the prior year.

The revenue contributed by the CVD Materials segment for the year ended December 31, 2022 represented 12% of our overall revenue as compared to 20% of overall revenue for the year ended December 31, 2021 The decrease of $0.2 million was principally due to lower demand for coating services by our Tantaline subsidiary during 2022 as compared to 2021.

Gross Profit

Gross profit for the year ended December 31, 2022 amounted to $6.6 million, with a gross profit margin of 26%, compared to a gross profit of $3.1 million and a gross profit margin of 19% for the year ended December 31, 2021. The increase in gross profit of $3.6 million was primarily the result of leveraging fixed costs on higher sales levels and improved product mix, which offset certain component cost increases and higher compensation costs.

Research and Development

For the year ended December 31, 2022, research and development expenses were $1.9 million, or 7.4% of revenue as compared to $1.8 million, or 11% for the year ended December 31, 2021. The increase in 2022 was the result of increased personnel and employee-related costs to develop new products for key growth markets.

General engineering support and expenses related to the development of more standard products and value-added development of existing products are reflected as part of research and development expense. General engineering support and expenses are charged to costs of goods sold when work is performed directly on a customer order.

Selling

Selling expenses were $1.2 million or 4.7% of the revenue for the year ended December 31, 2022 as compared to $0.9 million or 5.3% for the year ended December 31, 2021. The increase in 2022 was primarily the result of increased personnel and employee-related costs during to support increased marketing efforts.

General and Administrative

General and administrative expenses for the year ended December 31, 2022 were $5.3 million or 21% of revenue compared to $5.1 million or 31% of revenue for the year ended December 31, 2021, an increase of $0.2 million. The increase in expenses was principally due to increases in personnel and employee-related costs of approximately $0,6 million to support the growth of our business, a severance charge of $0.1 million, a bad debt recovery in the prior year of $0.1 million and other increases of $0.3 million. Offsetting these increases were lower professional fees of approximately $0.3 million, decreased building-related costs of associated with the 555 Building that was sold in July 2021 of approximately $0.6 million.

Other Income, Net

Other income, net was $1.6 million for the year ended December 31, 2022 as compared to other income, net of $9.4 million for the year ended December 31, 2021.

During 2022, we conducted an analysis to determine if we were entitled to employee retention credit (“ERC”) under the Coronavirus Aid, Relief, and Economic Security Act as amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Plan Act of 2021. Based in our analysis, we determined that we are entitled to an ERC of approximately $1.5 million related to payroll paid in the first and third quarters of 2021 under the applicable Internal Revenue Service regulations related to ERCs. Accordingly, the Company has recognized other income of $1.5 million for the year ended December 31, 2022.

The gain on debt extinguishment in 2021 was the result of the forgiveness of the Company’s PPP loan in the amount of $2.4 million. The gain on the sale of the building of $6.9 million in 2021 was the result of the sale of our 555 Building. Other income from subleasing a portion of our 555 Building (which was sold on July 26, 2021) was $500,000 for the year ended December 31, 2021. The foreign exchange losses in both 2022 and 2021 are related to an intercompany loan between CVD and its Tantaline subsidiary in Denmark.

As a result of our increased cash position from the sale of the 555 Building in July 2021 and higher interest rates, interest income increased from $6,000 in 2021 to $162,000 in 2022. In addition, interest expense decreased principally due to the satisfaction of the mortgage loans on our 555 Building on July 26, 2021 and on our 355 Building on March 1, 2022.

Income Taxes

Income tax expense for the years ended December 31, 2022 and 2021, was $4,000 and $28,000, respectively, related to minimum state taxes. We continue to evaluate for 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.

Inflation and Supply Chain Matters

We experienced increased costs on certain materials and components as well as delays in supply chain delivery, which may also impact our ability to recognize revenue and reduce our gross profit margins, as well as extend our manufacturing lead times and reduce our manufacturing efficiencies. We have commenced placing orders with more lead time to help mitigate the manufacturing delays, as well as assessing other suppliers or components to attempt to mitigate the potential cost impacts. In addition, we are utilizing our in-house flexible manufacturing to attempt to further mitigate both potential schedule delivery delays and material cost increase. While we have initiated actions to mitigate the potential negative impacts to our revenue and profitability, there can be no assurance of the ultimate impact and the length of time that the supply chain factors may impact our revenues and profitability.

Inflation has also had an impact on salaries and compensation. To remain competitive in the acquisition and retention of our employees, we have reviewed and adjusted salaries and implemented bonus incentives to mitigate the potential negative impacts of inflation on our employees.

Liquidity and Capital Resources

As of December 31, 2022, we had aggregate working capital of $15.5 million compared to aggregate working capital of $16.7 million at December 31, 2021. Our cash and cash equivalents at December 31, 2022 and 2021 were $14.4 million and $16.7 million, respectively.

Net cash provided by operating activities during 2022 was $194,000. This is the result of the net loss of $224,000 as adjusted for non-cash expenses of depreciation and amortization and stock-based compensation of $1.3 million. Cash from operations decreased due to increases in a) accounts receivables of $2.3 million due to increases in our revenues, b) inventories of $1.3 million due to longer lead times and additional orders, and c) other receivables as we recorded a receivable of $1.5 million for ERC credits offset by an increase in contract liabilities of $2.4 million related to advance payments from customers in excess of costs incurred and from an increase of $1.0 million in accounts payable and accrued expenses.

Capital expenditures in the year ended December 31, 2022 were $0.7 million related to purchases of manufacturing equipment to allow for more efficient manufacturing and improved control of our supply chain. In September 2022, we entered into a loan agreement to acquire equipment in the amount of $0.4 million. This loan is secured by the equipment and is payable in 60 equal monthly installments of $8,352 with an interest rate of 6%.

We had a loan agreement with a bank that was secured by a mortgage on our Central Islip headquarters at 355 South Technology Drive. On March 1, 2022, according to the terms of the agreement, the loan amount outstanding of approximately $1.8 million was satisfied.

We believe that our cash and cash equivalent positions and our projected cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months from the filing of this Form 10-K. We will continue to assess our operations and take actions anticipated to maintain our operating cash to support the working capital needs.

Critical Accounting Policies and Estimates

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our critical estimates include accounting for certain items such as revenues on long-term contracts recognized on the input method; and the recoverable value of our long-lived assets.

We consider the following significant accounting policies to be critical because of their complexity and the high degree of judgment involved in maintaining them.

Revenue Recognition

We design, manufacture, and sell custom chemical vapor deposition equipment through contractual agreements. These system sales require us to deliver functioning equipment that is generally completed within three to eighteen months from commencement of order acceptance. We recognize revenue over time by using an input method based on costs incurred as it depicts our progress toward satisfaction of the performance obligation. Under this method, revenue arising from fixed price contracts is recognized as work is performed based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligations.

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

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

Long-Lived Assets

Long-lived assets consist primarily of property, plant and equipment. Long-lived assets are reviewed for impairment whenever events or circumstances indicate their carrying value may not be recoverable. When such events or circumstances arise, an estimate of the future undiscounted cash flows produced by the asset, or the appropriate grouping of assets, is compared to the asset’s carrying value to determine if impairment exists pursuant to the requirements of ASC 360-10-35, “Impairment or Disposal of Long-Lived Assets.” If the asset is determined to be impaired, the impairment loss is measured on the excess of its carrying value over its fair value. Assets to be disposed of are reported at the lower of their carrying value or net realizable value.

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, management of the Company, 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 December 31, 2022.

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-K, 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.

Management’s Annual Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rule 13a – 15(f) of the Exchange Act). There are inherent limitations to the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time. We have assessed the effectiveness of our internal controls over financial reporting (as defined in Rule 13a -15(f) of the Exchange Act) as of December 31, 2022. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control – Integrated Framework (2013)”. Management concluded that, as of December 31, 2022, our internal control over financial reporting was effective based on the criteria established by the COSO Internal Control Framework.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.