cvv20200930_10q.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

Form 10-Q

(Mark One)

	☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
		For the quarterly period ended September 30, 2020
	☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
		For the transition period from ____ to _____

Commission file number: 1-16525

CVD EQUIPMENT CORPORATION

(Name of Registrant in Its Charter)

New York	11-2621692

State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

355 South Technology Drive Central Islip, New York 11722

(Address of principal executive offices)

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

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	CVV	NASDAQ Capital Market

Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No☐

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act).

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☑	Smaller reporting company ☑	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 6,648,498 shares of Common Stock, $0.01 par value at November 9, 2020.

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

Index

Part I - Financial Information
Item 1 – Condensed Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets at September 30, 2020 and December 31, 2019	3

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019	4

Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019	5

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019	6

Notes to Condensed Consolidated Financial Statements	7

Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3 – Quantitative and Qualitative Disclosures About Market Risk	27
Item 4 – Controls and Procedures	27

Part II - Other Information

Item 1 – Legal Proceedings	29
Item 1A-Risk Factors	29
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3 – Defaults Upon Senior Securities	30
Item 4 – Mine Safety Disclosures	30
Item 5 – Other Information	30
Item 6 – Exhibits	31

Signatures	32

Exhibit Index	33

	(Unaudited)
	September 30, 2020		December 31, 2019
ASSETS
Current Assets
Cash and cash equivalents	$	8,187,497	$	8,664,253
Accounts receivable, net		1,672,914		2,545,537
Contract assets		993,841		512,952
Inventories, net		1,444,735		1,709,713
Taxes Receivable		713,027		-
Other current assets		417,688		733,337
Total Current Assets		13,429,702		14,165,792

Property, plant and equipment, net		32,363,977		32,102,335

Other assets		13,748		13,748
Intangible assets, net		358,677		441,177
Total Assets	$	46,166,104	$	46,723,052


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	440,400	$	535,394
Accrued expenses		1,505,312		1,902,858
Current maturities of long-term debt		681,222		674,593
Contract Liabilities		85,734		845,653
Deferred revenue		777,924		1,429,583
Total Current Liabilities		3,490,592		5,388,081


Long-term debt, net of current portion		13,285,144		11,377,126
Total Long-Term Liabilities		13,285,144		11,377,126

Total Liabilities		16,775,736		16,765,207

Commitments and contingencies (see note 12)

Stockholders’ Equity:
Common stock - $0.01 par value – 20,000,000 shares authorized; issued and outstanding 6,640,935 at September 30, 2020 and 6,623,793 at December 31, 2019		66,409		66,237
Additional paid-in capital		26,919,496		26,719,554
Retained earnings		2,404,463		3,172,054
Total Stockholders’ Equity		29,390,368		29,957,845

Total Liabilities and Stockholders’ Equity	$	46,166,104	$	46,723,052

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019

Revenue	$	3,993,204		$	5,704,882		$	13,748,448		$	14,100,261

Cost of revenue		3,557,413			4,305,059			10,775,618			12,595,340

Gross profit		435,791			1,399,823			2,972,830			1,504,921

Operating expenses
Research and development		90,227			112,724			300,162			453,724
Selling and shipping		142,306			175,760			439,346			680,183
General and administrative		1,595,911			1,359,910			4,650,067			4,728,021

Total operating expenses		1,828,444			1,648,394			5,389,575			5,861,928

Operating loss		(1,392,653	)		(248,571	)		(2,416,745	)		(4,357,007	)

Other income (expense):
Interest income		30,348			26,774			60,728			115,643
Interest expense		(104,041	)		(124,449	)		(336,107	)		(365,255	)
Other Income		174,705			207,237			394,938			207,237
Total other income (expense), net		101,012			109,562			119,559			(42,375	)

Loss before income tax		(1,291,641	)		(139,009	)		(2,297,186	)		(4,399,382	)

Income tax benefit		-			(1,000	)		(1,529,595	)		(691,697	)

Net loss	$	(1,291,641	)	$	(138,009	)	$	(767,591	)	$	(3,707,685	)


Basic loss per common share	$	(0.19	)	$	(0.02	)	$	(0.12	)	$	(0.57	)
Diluted loss per common share	$	(0.19	)	$	(0.02	)	$	(0.12	)	$	(0.57	)

Weighted average common shares Outstanding-basic		6,640,228			6,556,767			6,633,694			6,550,279

Weighted average common shares Outstanding-diluted		6,640,228			6,556,767			6,633,694			6,550,279

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

Three months ended September 30, 2020 and 2019
	Common stock
	Shares		Par Value		Additional paid-in Capital		Retained Earnings			Total

Balance at July 1, 2020		6,639,685	$	66,396	$	26,860,747	$	3,696,104		$	30,623,247
Net loss		-		-		-		(1,291,641	)		(1,291,641	)
Share-Based Compensation		1,250		13		58,749		-			58,762
Balance at September 30, 2020		6,640,935	$	66,409	$	26,919,496	$	2,404,463		$	29,390,368


Balance at July 1, 2019		6,555,150	$	65,551	$	26,525,521	$	5,930,036		$	32,521,108
Net loss		-		-		-		(138,009	)		(138,009	)
Share-Based Compensation		9,416		94		98,905		-			98,999
Balance at September 30, 2019		6,564,566	$	65,645	$	26,624,426	$	5,792,027		$	32,482,098

Nine months ended September 30, 2020 and 2019
	Common stock
	Shares		Par Value		Additional paid-in Capital		Retained Earnings			Total

Balance at January 1, 2020		6,623,793	$	66,237	$	26,719,554	$	3,172,054		$	29,957,845
Net loss		-		-		-		(767,591	)		(767,591	)
Share-Based Compensation		17,142		172		199,942		-			200,114
Balance at September 30, 2020		6,640,935	$	66,409	$	26,919,496	$	2,404,463		$	29,390,368

Balance at January 1, 2019		6,535,888	$	65,358	$	26,148,256	$	9,499,712		$	35,713,326
Net loss		-		-		-		(3,707,685	)		(3,707,685	)
Share-Based Compensation		28,678		287		476,170		-			476,457
Balance at September 30, 2019		6,564,566	$	65,645	$	26,624,426	$	5,792,027		$	32,482,098

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

	Nine Months Ended
	September 30,
	2020			2019
Cash flows from operating activities:
Net loss	$	(767,591	)	$	(3,707,685	)
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation		200,114			476,458
Depreciation and amortization		1,023,757			798,206
Deferred income tax benefit		-			(699,000	)
Recovery on contingent earnout		-			(200,000	)
Bad debt expense		120,160			-
(Increase)/decrease in operating assets
Accounts receivable		752,463			993,042
Contract assets		(480,889	)		(1,229,987	)
Inventories		264,978			92,658
Tax receivable		(713,027	)		-
Other current assets		315,649			411,690
Other assets		-			29,635
Increase/(decrease) in operating liabilities
Accounts payable		(94,994	)		317,881
Accrued expenses		(397,546	)		203,205
Contract liabilities		(759,919	)		(393,191	)
Deferred revenue		(651,659	)		814,126
Total adjustments		(420,913	)		1,614,723
Net cash used in operating activities		(1,188,504	)		(2,092,962	)

Cash flows from investing activities:
Capital expenditures		(1,202,899	)		(2,115,733	)
Net cash used in investing activities		(1,202,899	)		(2,115,733	)

Cash flows from financing activities
Proceeds from Payroll Protection Plan Loan		2,415,970			-
Payments of long-term debt		(501,323	)		(491,601	)
Net cash provided by (used) in financing activities		1,914,647			(491,601	)

Net decrease in cash and cash equivalents		(476,756	)		(4,700,296	)

Cash and cash equivalents at beginning of period		8,664,253			11,439,361

Cash and cash equivalents at end of period	$	8,187,497		$	6,739,065

Supplemental disclosure of cash flow information:
Income taxes paid	$	-		$	-
Interest paid	$	336,107		$	365,255

Supplemental disclosure of non-cash investing and financing activities:
Capitalization of right to use Asset	$	-		$	103,937

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

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements for CVD Equipment Corporation and Subsidiaries (collectively “the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. They do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary in order to make the interim financials not misleading have been included and all such adjustments are of a normal recurring nature. The operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that can be expected for the year ending December 31, 2020.

The condensed consolidated balance sheet as of December 31, 2019 has been derived from the audited consolidated financial statements at such date, but does not contain all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, please refer to the consolidated financial statements and notes thereto included in the Company’ Annual Report on Form 10-K for the year ended December 31, 2019, including the accounting policies followed by the Company as set forth in Note 2 to the consolidated financial statements contained therein.

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

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

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

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue Recognition (continued)

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, and installed, as required by the project’s engineering design. Cost based input methods of revenue recognition require the Company to make estimates of costs to complete the projects. In making such estimates, significant judgment is required to evaluate assumptions related to the costs to complete the projects, including materials, labor and other system costs. If the estimated total costs on any contract are greater than the net contract revenues, the Company recognizes the entire estimated loss in the period the loss becomes known and can be reasonably estimated.

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

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

For outright sales of products, revenue is recognized when control of the promised products or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services (the transaction price). A performance obligation is a promise in a contract to transfer a distinct product or service to a customer and is the unit of account under ASC 606, “Revenue from Contracts with Customers”.

Recent Accounting Standards

In June 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326), which require that financial assets measured at amortized cost be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the increase or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. On November 15, 2019, the FASB delayed the effective date for smaller reporting companies. The amendments in this update are now effective for fiscal years beginning after December 15, 2022 and interim periods within those annual periods. Early adoption for fiscal years beginning after December 15, 2018 is permitted. We are currently evaluating the effect of this update on our consolidated financial statements.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Standards (continued)

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which is intended to enhance and simplify various aspects of the accounting for income taxes. The amendments in this update remove certain exceptions to the general principles in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and amends existing guidance to improve consistent application of the accounting for franchise taxes, enacted changes in tax laws or rates and transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for annual and interim periods beginning after December 15, 2020, with early adoption permitted in any interim period. We are evaluating the effect of ASU 2019-12 on our consolidated financial statements.

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

NOTE 3: CONCENTRATION OF CREDIT RISK

Cash and cash equivalents

The Company had cash and cash equivalents of $8.2 million and $8.7 million at September 30, 2020 and December 31, 2019, respectively. The Company invests excess cash in U.S. treasury bills, certificates of deposit or money market accounts, all with original maturities of less than three months. Cash equivalents were $1.0 million and $2.1 million, at September 30, 2020 and December 31, 2019, respectively.

The Company places most of its temporary cash investments with financial institutions, which from time to time may exceed the Federal Deposit Insurance Corporation limit. The amount at risk at September 30, 2020 and December 31, 2019 was $6,570,000 and $5,198,000, respectively.

NOTE 3: CONCENTRATION OF CREDIT RISK (continued)

Sales concentration

Revenue from a single customer in any one period can exceed 10% of our total revenues. During the three months ended September 30, 2020, two customers exceeded 10%, and represented 13.5% and 12.5% revenues, and during the nine months ended September 30, 2020 three customers represented 21.0%, 12.8% and 12.0% of revenues. During the three and nine months ended September 30, 2019, two customers represented 42.8% and 28.1% of revenues, respectively.

Accounts receivable

The Company sells products and services to various companies across several industries in the ordinary course of business. The Company performs ongoing credit evaluations to assess the probability of accounts receivable collection based on a number of factors, including past transaction experience, evaluation of their credit history and review of the invoicing terms of the contract to determine the financial strength of its customers. The Company also maintains allowances for anticipated losses. At September 30, 2020, two customers exceeded 10% of the accounts receivable balance, representing 25.7% in total, and at December 31, 2019 three customers represented approximately 61% of the accounts receivable balance.

NOTE 4: REVENUE DISAGGREGATION

The following table represents a disaggregation of revenue for the three and nine months ended September 30, 2020 and 2019 (in thousands):

	Three Months Ending September 30, 2020

	Over time		Point in time		Total
Aerospace	$	181	$	1,252	$	1,433
Industrial	$	217	$	1,451	$	1,668
Research	$	571	$	321	$	892
Total	$	969	$	3,024	$	3,993

	Three Months ending September 30, 2019

	Over time		Point in time		Total
Aerospace	$	1,080	$	1,426	$	2,506
Industrial	$	476	$	1,387	$	1,863
Research	$	493	$	843	$	1,336
Total	$	2,049	$	3,656	$	5,705

	Nine Months Ending September 30, 2020

	Over time		Point in time		Total
Aerospace	$	1,502	$	5,246	$	6,748
Industrial	$	741	$	2,592	$	3,333
Research	$	2,566	$	1,101	$	3,667
Total	$	4,809	$	8,939	$	13,748

	Nine Months ending September 30, 2019

	Over time		Point in time		Total
Aerospace	$	1,880	$	2,529	$	4,409
Industrial	$	1,741	$	3,989	$	5,730
Research	$	1,685	$	2,276	$	3,961
Total	$	5,306	$	8,794	$	14,100

NOTE 4: REVENUE DISAGGREGATION (continued)

The Company has unrecognized contract revenue of approximately $2.7 million at September 30, 2020, which it expects to recognize as revenue within the next twelve months.

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

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

Contract Assets and Liabilities

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

During the nine months ended September 30, 2020 and 2019, the increase in contract assets of approximately $.5 million and $1.2 million, respectively, was the result of work performed in excess of billings which are based upon project milestones. During the nine months ended September 30, 2020 and 2019, the decrease in contract liabilities of ($.8 million) and ($.4 million), respectively, was primarily due to timing of invoicing for those projects.

NOTE 7: LONG-TERM DEBT

The Company has a loan agreement with HSBC which is secured by a mortgage against our Central Islip, NY headquarters. The loan is payable in 120 consecutive equal monthly installments of $25,000 in principal plus interest and a final balloon payment upon maturity in March 2022. The balances as of September 30, 2020 and December 31, 2019 were approximately $2.1 million and $2.4 million respectively. Interest accrues on the loan, at our option, at the variable rate of LIBOR plus 1.75% or Prime less 0.5% (1.90% and 3.49% at September 30, 2020 and December 31, 2019, respectively).

On November 30, 2017, the Company purchased the premises located at 555 North Research Place, Central Islip, NY. The purchase price of the building was $13,850,000 exclusive of closing costs. The Company’s wholly-owned subsidiary, 555 N Research Corporation (the “Assignee”) and the Islip IDA, entered into a Fee and Leasehold Mortgage and Security Agreement (the ”Loan”) with HSBC in the amount of $10,387,500, which was used to finance a portion of the purchase price to acquire the premises located at 555 North Research Place, Central Islip, New York. The Loan was evidenced by the certain note, dated November 30, 2017 (the “Note”), by and between Assignee and the Bank, and secured by a certain Fee and Leasehold Mortgage and Security Agreement (the “Mortgage”), dated November 30, 2017, as well as a collateral Assignment of Leases and Rents.

The Note is payable in 60 consecutive equal monthly installments of $62,481 including interest and a final balloon payment upon maturity in December 2022. The balance outstanding as of September 30, 2020 and December 31, 2019 were approximately $9.4 million and $9.7 million respectively. The Note bears interest for each Interest Period (as defined in the Note), at the fixed rate of 3.9148%. As a condition of the Bank making the Loan, the Company was required to guaranty Assignee’s obligations under the Loan pursuant that certain Unlimited Guaranty, dated November 30, 2017 (the “Guaranty”).

On May 31, 2019, the Company entered into two sublease agreements for a portion of the CVD Materials facility, located at 555 North Research Place. On October 30, 2019, the Tenant exercised its right to terminate the eastside Lease, which termination was effective as of December 31, 2019 (the “Termination”). On June 12, 2020 the same Tenant signed a new short-term lease for the six-month period July 1, 2020 to December 31, 2020. During the three and nine months ended September 30, 2020 the Company recognized $175,000 and $395,000, respectively, of rental income which commenced in June 2019. The Tenant has exercised its first option to renew the westside lease for a term of one year beginning July 1, 2020 and ending June 30, 2021.

NOTE 7: LONG-TERM DEBT (continued)

On August 5, 2019, the Company entered into a Mortgage Modification Agreement which replaced the former covenant with a Minimum Liquid Assets (“MLC”) covenant, and on October 22, 2020, the Company entered into a Second Mortgage Modification Agreement modifying certain MLC balances. The Company is in compliance with its financial covenant under the mortgage at September 30, 2020.

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

The PPP loan, the obligation of which is represented by a note issued by the Company, matures on April 21, 2022 and bears interest at a rate of 1% per annum. The note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Under the terms of the PPP, all or a portion of the Loan may be forgiven, based upon payments made in the first twenty-four weeks following receipt of the proceeds, related to payroll costs, continue group health care benefits, utilities and mortgage interest on other debt obligations incurred before February 15, 2020.

NOTE 10: EARNINGS PER SHARE

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

Stock options to purchase 417,000 shares of common stock were outstanding and 292,000 were exercisable during the three and nine months ended September 30, 2020. Stock options to purchase 447,930 shares were outstanding and 267,930 were exercisable during the three and nine months ended September 30, 2019. For the three and nine months ended September 30, 2020, 417,000 stock options, and for the three and nine months ended September 30, 2019, 447,930 stock options were not included in the computation of diluted earnings per share as their effect would have been anti-dilutive.

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

NOTE 11: SEGMENT REPORTING

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

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

NOTE 11: SEGMENT REPORTING (continued)

Three Months Ended September 30,

(In thousands)

										Eliminations* and
2020	CVD			SDC			Materials			Unallocated			Consolidated
Assets	$	34,888		$	6,202		$	5,076		$	-		$	46,166

Revenue		2,308			826			990			(131	)		3,993
Operating loss		(283	)		(111	)		(261	)		(738	)		(1,393	)
Pretax loss		(267	)		(111	)		(176	)		(738	)		(1,292	)

2019
Assets	$	36,389		$	6,689		$	6,465		$	(9	)	$	49,534

Revenue		4,376			1,100			404			(175	)		5,705
Operating income/(loss)		231			254			(137	)		(597	)		(249	)
Pretax income/(loss)		226			260			(28	)		(597	)		(139	)

Nine Months Ended September 30,

(In thousands)

									Eliminations* and
2020	CVD			SDC		Materials			Unallocated			Consolidated

Revenue		8,686			3,661		1,791			(390	)		13,748
Operating income/(loss)		10			556		(754	)		(2,229	)		(2,417	)
Pretax income/(loss)		10			564		(642	)		(2,229	)		(2,297	)

2019

Revenue		9,588			3,778		1,375			(641	)		14,100
Operating income/(loss)		(2,328	)		936		(464	)		(2,501	)		(4,357	)
Pretax income/(loss)		(2,297	)		951		(552	)		(2,501	)		(4,399	)

*All elimination entries represent intersegment revenues eliminated in consolidation for external financial reporting.

NOTE 12: SIGNIFICANT EVENTS- CORONAVIRUS (COVID-19)

The Company has been actively monitoring the coronavirus (COVID-19) outbreak and resulting pandemic and its impact on both the global economic and operating environment and specifically on its impact to the Company, its employees, its operations and its financial condition. In March 2020, the World Health Organization recognized the COVID-19 outbreak as a pandemic based on the global spread of the disease, the severity of illnesses it causes and its effects on society. In response to the COVID-19 outbreak, the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations, including complete or partial government shutdowns of many schools and businesses, including our Company, and advising or requiring individuals to limit or forego their time outside of their homes. Accordingly, the COVID-19 outbreak has severely restricted the level of economic activity in many countries, including the United States, and continues to materially and adversely impact global economic activity. In particular, the aerospace sector, for which we rely on a significant part of our business, has been faced with significant reductions to its business due to lack of air travel. The Company’s new order levels during the first nine months of 2020 and into the fourth quarter of 2020 have seen substantial reductions which have materially and adversely affected revenues commencing in our second quarter of 2020, and is anticipated to continue towards the end of 2020. While the financial results for the Company’s first quarter of 2020 reflected the initial impact of COVID-19, and the nine months ended September 30, 2020 reflected a substantial adverse effect, we are unable to predict the extent of the impact the pandemic will have on our financial position and operating results for the remainder of 2020 and into 2021 due to numerous uncertainties, but the impact could be material during any future period affected either directly or indirectly by this pandemic. The Company intends to continue to evaluate the various government sponsored plans and programs put in place in response to the COVID-19 pandemic and further plans to take advantage of any such government benefits reasonably available to it. Moreover, the Company will continue to monitor developments in that area as new government initiatives are passed.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Except for historical information contained herein, this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, as amended. These statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Important assumptions and other factors that could cause actual results to differ materially from those in the forward-looking statements, include but are not limited to: competition in the Company’s existing and potential future product lines of business; the Company’s ability to obtain financing on acceptable terms if and when needed; uncertainty as to the Company’s future profitability, uncertainty as to the future profitability of acquired businesses or product lines, uncertainty as to any future expansion of the Company and the effect of the novel coronavirus (COVID-19) on our business and operations, and those of our customers, suppliers and other third parties. Other factors and assumptions not identified above were also involved in the derivation of these forward-looking statements and the failure of such assumptions to be realized as well as other factors may also cause actual results to differ materially from those projected. The Company assumes no obligation to update these forward looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements. Past results are no guaranty of future performance. You should not place undue reliance on any forward-looking statements, which speak only as of the dates they are made. When used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “plans,” “intends,” “will” and similar expressions are intended to identify forward-looking statements.

The Company has been actively monitoring the coronavirus ("COVID-19") outbreak and its impact globally. The Company’s primary focus to this point has been to ensure the health and safety of its employees. To that end, the Company has adopted social distancing where appropriate, implemented travel restrictions, and has taken actions to ensure that locations and facilities are cleaned and sanitized regularly. These are novel and challenging times and the magnitude of this crisis is requiring the Company to consider all options to promote the safety of employees, including, where appropriate, or where required to comply with foreign, national, state or local governmental authority recommendations, guidelines, and/or mandates, the temporary suspension of work at certain of the Company’s locations and production facilities to protect employees and curb the spread of the coronavirus. All of these actions may adversely impact the Company’s operating results. In particular, the aerospace sector, for which we rely on a significant part of our business, has been faced with significant reductions to its business due to lack of air travel. Due to the timing of the COVID-19 outbreak, the Company’s new order levels during the first nine months of 2020 and into the fourth quarter of 2020 have seen substantial reductions which have materially and adversely affected revenues commencing in our second quarter of 2020, and is anticipated to continue towards the end of 2020. While the financial results for the Company’s first quarter of 2020 reflected the initial impact of COVID-19, and the nine months ended September 30, 2020 reflected a substantial adverse effect, we are unable to predict the extent of the impact the pandemic will have on our financial position and operating results for the remainder of 2020 and into 2021 due to numerous uncertainties, but the impact could be material during any future period affected either directly or indirectly by this pandemic. The longer-term impacts from the outbreak are highly uncertain and cannot be predicted.

Our revenue for the three months ended September 30, 2020 was $4.0 million compared to $5.7 million for the three months ended September 30, 2019, a decrease of $1.7 million or 30.0%. This was primarily attributable to decreased revenue of $2.1 million from our CVD Equipment segment related to spare parts and equipment sales and $.1 million decrease in our SDC segment, offset, in part by, an increase of $.5 million in our CVD Materials segment.

The revenue contributed for the three months ended September 30, 2020 by the CVD Equipment segment of $2.3 million, which totaled 57.8% of our overall revenue, was (47.2%) or ($2.1 million) lower than the segment’s $4.4 million contribution made in the prior year, which totaled 76.7% of our overall revenue. This revenue decrease is the result of decreases of $1.0 million and $1.1 million, from spare parts and equipment sales, respectively.

Revenue for our SDC segment was $.8 million in three months ended September 30, 2020 as compared to $.9 million in three months ended September 30, 2019, a decrease of $.1 million.

Revenues for our CVD Materials segment were $.9 million in the three months ended September 30, 2020 as compared to $.4 million for the three months ended September 30, 2019. This increase of $.5 million was the result of increased Tantaline® related revenue of $.4 million and $.1 million in MesoScribe product revenue.

Gross profit for the three months ended September 30, 2020 amounted to $.4 million, with a gross profit margin of 10.9%, compared to a gross profit of $1.4 million and a gross profit margin of 24.5% for the three months ended September 30, 2019. The reduction in gross profit and gross profit margin, was the result of the impact of $1.7 million in decreased sales, while costs overall remained at levels to support increased sales, as well as the mix of product sales.

Due to the technical development required on our custom orders, our research and development team and their expenses are charged to costs of goods sold when they are working directly on a customer project. When they are not working on a customer project, they work in our Application Laboratory and their costs are charged to research and development. For the three months ended September 30, 2020, our research and development expenses totaled $90,000 compared to $113,000 for the three months ended September 30, 2019, a decrease of $23,000.

Selling expenses were $.1 million or 3.6 % of the revenue for the three months ended September 30, 2020 as compared to $.2 million or 3.1% for the three months ended September 30, 2019. The decrease was primarily the result of reduced employee and employee related costs, during the three months ended September 30, 2020.

General and administrative expenses for the three months ended September 30, 2020 were $1.6 million or 39.9% of revenue compared to $1.4 million or 23.8% for the three months ended September 30, 2019, an increase of $.2 million. The increase in these expenses is primarily the result of increased depreciation of its 555 facility in the amount of $86,000 and a $40,000 bad debt provision related to one customer.

As a result of reduced gross profit margins and increased general and administrative expenses, our operating loss was ($1.4 million) in the three months ended September 30 2020, compared with an operating loss of ($.3 million) in the three months ended September 30, 2019.

Other income (expenses) were $101,012 and $109,562 for the three months ended September 30, 2020 and 2019, respectively. Other income was $174,705 and $207,237 for the three months ended September 30, 2020 and 2019, respectively, from subleasing a portion of our CVD Materials facility. The decrease of $32,532 was the result of lower rent in 2020. Interest income of $30,348 for the three months ended September 30, 2020, included interest income of $28,000 related to the income tax refund received during the quarter. As a result of lower interest rates, interest income (excluding the amount related to the income tax refund) decreased $24,426, to $2,348 for the three months ended September 30, 2020 as compared to $26,774 in 2019. In addition, Interest expense decreased $20,408 to $104,041 in the three months ended September 30, 2020, as compared to $124,449 in 2019.

For the three months ended September 30, 2020, there was no income tax expense as compared to an income tax benefit of $1,000 for the three months ended September 30, 2019. As of September 30, 2020 and December 31, 2019, we have provided a full valuation allowance against all of the net deferred tax assets. This was based on management’s assessment, including the last two years of operating losses, that it is more likely than not that the net deferred tax assets may not be realized in the future. We continue to evaluate for potential utilization of our deferred tax asset, which has been fully reserved for, on a quarterly basis, reviewing our economic models, including projections and timing of orders, the commencement of operations of our CVD Materials segment and cost containment measures. For the three months ended September 30, 2019 our tax rate was primarily affected by permanent differences resulting in an effective tax rate of .7%.

As a result of the foregoing factors, we reported a net loss of ($1.3 million), or ($0.19) per basic and diluted share, for the three months ended September 30, 2020, as compared to a net loss of ($.1 million), or ($0.02) per basic and diluted share for the three months ended September 30, 2019.

Nine Months Ended September 30, 2020 vs. September 30, 2019

Our revenue for the nine months ended September 30, 2020 was $13.8 million compared to $14.1 million for the nine months ended September 30, 2019, a decrease of $.3 million or 2.5%. This was primarily attributable to decreased revenue of $.9 million from our CVD Equipment segment related to spare parts and equipment sales, offset, in part by, increased sales of $.2 million in our SDC segment and $.4 million in our CVD Materials segment.

The revenue contributed for the nine months ended September 30, 2020, by the CVD Equipment segment, of $8.7 million, which totaled 63.2% of our overall revenue, was 9.4% or $.9 million less than the segment’s $9.6 million contribution made in the prior year, which totaled 68.0% of our overall revenue. This revenue decrease is the result of an increase in revenues from spare parts of $1.5 million, offset by a decrease of $2.4 million, in equipment sales.

Revenue for our SDC segment was $3.5 million in the nine months ended September 30, 2020 as compared to $3.3 million in the nine months ended September 30, 2019, an increase of $.2 million.

Revenues for our CVD Materials segment were $1.6 million in the nine months ended September 30, 2020 as compared to $1.3 million for the nine months ended September 30, 2019, an increase of $.4 million primarily the result of increased Tantaline® related revenue.

Gross profit for the nine months ended September 30, 2020 amounted to $3.0 million, with a gross profit margin of 21.6%, compared to a gross profit of $1.5 million and a gross profit margin of 10.7% for the nine months ended September 30, 2019. The increase in our gross profit and gross profit margin was the result of improvements in our operating efficiencies with certain repeat orders, as well as lowered costs mostly due to the effects of certain furloughed employees during the period, as a result of Coronavirus mandates imposed, and achieved improved mix of product revenues resulting in our gross profit margin percentage improvement.

Due to the technical development required on our custom orders, our research and development team and their expenses are charged to costs of goods sold when they are working directly on a customer project. When they are not working on a customer project, they work in our Application Laboratory and their costs are charged to research and development. For the nine months ended September 30, 2020, our research and development expenses totaled $300,000 compared to $454,000 for the nine months ended September 30, 2019, primarily due to the effects of employee furloughs during the nine months ended September 30, 2020, as a result of Coronavirus mandates imposed.

Selling expenses were $.4 million or 3.2 % of the revenue for the nine months ended September 30, 2020 as compared to $.7 million or 4.8% for the nine months ended September 30, 2019. The decrease was primarily the result of reduced employee related costs, including the effects of employee furloughs during the nine months ended September 30, 2020, as a result of Coronavirus mandates imposed, and lower trade show expenses.

General and administrative expenses for the nine months ended September 30, 2020 were $4.7 million or 33.8% of revenue compared to $4.7 million or 33.5% for the nine months ended September 30, 2019. While stock compensation costs decreased by $270,000, due to less equity grants, and outside systems and finance consulting costs decreased by $152,000, due to the completion of the Company’s system migration and finance consulting costs in 2019, these decreases were offset primarily by depreciation of our 555 facility in the amount of $252,000 and a $120,000 bad debt provision related to one customer.

As a result of the improved gross profit margins and reduced expenses, we recorded an operating loss of ($2.4 million) for the nine months ended September 30, 2020 as compared to an operating loss of ($4.4 million) for the nine months ended September 30, 2019.

Other income (expenses) were $119,559 and ($42,375) for the nine months ended September 30, 2020 and 2019, respectively. Net other income was $394,938 and $207,237 for the nine months ended September 30, 2020 and 2019, respectively, from subleasing a portion of our CVD Materials facility. The increase of $187,701 was the result of approximately four months of rental in 2019 (commencing June 2019) as compared to nine months in 2020. Interest income of $60,728 for the nine months ended September 30, 2020, included interest income of $28,000 related to the income tax refund received during the quarter. As a result of lower interest rates, interest income decreased $82,915, to $32,728 for the nine months ended September 30, 2020 as compared to $115,643 in 2019. In addition, interest expense decreased $29,148 to $336,107 in the nine months ended September 30, 2020, as compared to $365,255 in 2019.

For the nine months ended September 30, 2020, we recorded an income tax benefit of $1.5 million as compared to $692,000 for the nine months ended September 30, 2019. The income tax benefit recorded during the nine months ended September 30, 2020 was the result of a change in the tax laws pursuant to the CARES Act. The Company recorded the deferred tax benefit as a discrete item on March 27, 2020, the date the CARES Act was signed into law. As of September 30, 2020 and December 31, 2019, the Company has provided a full valuation allowance against all of the net deferred tax assets. This was based on management’s assessment, including the last two years of operating losses, that it is more likely than not that the net deferred tax assets may not be realized in the future. As a result of the enactment of the CARES Act, net operating losses (“NOL’s”) can now be carried back for five years and resulted in the Company recognizing approximately a $1.5 million income tax benefit, of which $.8 million was a receivable at September 30, 2020. We continue to evaluate for potential utilization of the Company’s deferred tax asset, which has been fully reserved for, on a quarterly basis, reviewing our economic models, including projections and timing of orders, the commencement of operations of the CVD Materials segment and cost containment measures. For the nine months ended September 30, 2019 our tax rate was primarily affected by permanent differences resulting in an effective tax rate of 15.7%.

As a result of the foregoing factors, we reported a net loss of ($.8 million), or ($0.12) per basic and diluted share, for the nine months ended September 30, 2020, as compared to a net loss of ($3.7 million), or ($0.57) per basic and diluted share for the nine months ended September 30, 2019.

As of September 30, 2020, we had aggregate working capital of $9.9 million compared to aggregate working capital of $8.8 million at December 31, 2019. Our cash and cash equivalents at September 30, 2020 and December 31, 2019 were $8.2 million and $8.7 million, respectively.

Net cash used in operating activities was ($1.2 million). This is the result of net loss, adjusted for non-cash items, of $.6 million, a decrease in accounts receivable of $.8 million due to timing of collections, decreased other current assets of $.3 million and decreased inventory of $.3 million. These amounts were reduced by an increase in taxes receivable of $.7 million as a result of the March 27, 2020 CARES Act enactment allowing the carryback of NOL’s five years resulting in a receivable of $1.5 million, of which $.8 million was collected in the nine months ended September 30, 2020. In addition, contract assets increased $.5 million, contract liabilities decreased $.8 million, accrued expenses decreased $.4 million related to the payment of vacation and other accrued expenses, and a $.7 million decrease in deferred revenue, as well as decreased accounts payable of $.1 million.

Long term debt increased by $1.9 million, the result of a new loan from the Paycheck Protection Program of $2.4 million and a ($.5 million) decrease from principal payments on the mortgages related to our two facilities in Central Islip, NY, including our investment in the CVD Materials building purchased on November 30, 2017. We have continued to invest in activities primarily related to preparing CVD Materials for larger scale operations. Our total capital invested in the nine months ended September 30, 2020 was $1.2 million, primarily related to building improvements and machinery, and during the nine months ended September 30, 2020 we received rental income of approximately $395,000.

We have a loan agreement with HSBC USA, N.A. (the “HSBC”) which is secured by a mortgage on our Central Islip headquarters at 355 South Technology Drive. The loan is payable in 120 consecutive equal monthly installments of $25,000 in principal plus interest and a final balloon payment upon maturity in March 2022. The balances as of September 30, 2020 and December 31, 2019 were approximately $2.1 million and $2.4 million respectively. Interest accrues on the loan, at our option, at the variable rate of LIBOR plus 1.75% or Prime less 0.5% (1.90% and 3.49% at September 30, 2020 and December 31, 2019, respectively).

On November 30, 2017, we purchased the premises located at 555 North Research Place, Central Islip, NY which is intended to house the CVD Materials segment. The purchase price of the land and the building was $13,850,000 exclusive of closing costs.

As part of the acquisition, our newly formed wholly-owned subsidiary, 555 N Research Corporation (the” Assignee”) and the Islip IDA, entered into a Fee and Leasehold Mortgage and Security Agreement (the ”Loan”) with HSBC in the amount of $10,387,500, which was used to finance a portion of the purchase price to acquire the premises located at 555 North Research Place, Central Islip, New York (the ”Premises”). The Loan was evidenced by the certain note, dated November 30, 2017 (the ”Note”), by and between Assignee and the Bank, and secured by a certain Fee and Leasehold Mortgage and Security Agreement, dated November 30, 2017 (the “Mortgage”), as well as a collateral Assignment of Leases and Rents (“Assignment of Leases”).

The Note is payable in 60 consecutive equal monthly installments of $62,481, including interest. The balances as of September 30, 2020 and December 31, 2019 were approximately $9.4 million and $9.7 million respectively. The Note bears interest for each Interest Period (as defined in the Note), at the fixed rate of 3.9148%. The maturity date for the Note is December 1, 2022. As a condition of the Bank making the Loan, we were required to guaranty Assignee’s obligations under the Loan.

The Company has been actively monitoring the coronavirus ("COVID-19") outbreak and its impact globally. The Company’s primary focus to this point has been to ensure the health and safety of its employees. To that end, the Company has adopted social distancing where appropriate, implemented travel restrictions, and has taken actions to ensure that locations and facilities are cleaned and sanitized regularly. These are novel and challenging times and the magnitude of this crisis is requiring the Company to consider all options to promote the safety of employees, including, where appropriate, or where required to comply with foreign, national, state or local governmental authority recommendations, guidelines, and/or mandates, the temporary suspension of work at certain of the Company’s locations and production facilities to protect employees and curb the spread of the coronavirus. All of these actions may adversely impact the Company’s operating results. In particular, the aerospace sector, for which we rely on a significant part of our business, has been faced with significant reductions to its business due to lack of air travel. Due to the timing of the COVID-19 outbreak, the Company’s new order levels during the first nine months of 2020 and into the fourth quarter of 2020 have seen substantial reductions which have materially and adversely affected revenues commencing in our second quarter of 2020, and is anticipated to continue towards the end of 2020. While the financial results for the Company’s first quarter of 2020 reflected the initial impact of COVID-19, and the nine months ended September 30, 2020 reflected a substantial adverse effect, we are unable to predict the extent of the impact the pandemic will have on our financial position and operating results for the remainder of 2020 and into 2021 due to numerous uncertainties, but the impact could be material and adverse during any future period affected either directly or indirectly by this pandemic. The longer-term impacts from the outbreak are highly uncertain and cannot be predicted.

At December 31, 2019 we had reduced our employee headcount by 13% to 172 as compared to December 31, 2018. Since March 16, 2020, as a result of Coronavirus mandates imposed, we have furloughed a substantial portion of our work force reducing to levels deemed to support essential services, and continue to assess this on a weekly basis. During these unprecedented times we are continuing to evaluate our staffing levels to support the continued operations, including the level of current and expected orders. As of September 30, 2020, our active employee headcount has been reduced to approximately 125, a 28% reduction as compared to December 31, 2019.

As a result of the March 27, 2020 CARES Act enactment allowing the carryback of NOL’s five years, the Company recognized a $1.5 million tax benefit. The Company has collected $.8 million in the third quarter ended September 30, 2020 and anticipates receiving the balance of $.7 million during its fourth quarter ended December 31, 2020.

Due to the timing of the COVID-19 outbreak, our new orders during the first nine months of 2020, and into the beginning of the fourth quarter 2020 have decreased substantially which have resulted in substantial reductions in revenues resulting in operating losses commencing in our second quarter of 2020. The ongoing impact that COVID-19 has had on our business has made the conditions to operate very challenging. In particular, the aerospace sector, for which we rely on a significant part of our business, has been faced with significant reductions to its business due to lack of air travel. While we continue to monitor and take action to reduce our expenses, we have secured a $2.4 million loan under PPP and have recognized a $1.5 million tax receivable from the NOL 5 year carryback. We believe that our cash and cash equivalent positions and cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months of the filing of this Form 10-Q. Should the current environment continue longer or worsen, we will continue to assess our operations and take actions anticipated to maintain our operating cash to support the working capital needs, as well as compliance with our loan covenant.

We maintain a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 13d-15(e) under the Exchange Act of 1934, as amended, (the “Exchange Act”)). As required by Rule 13a-15(b) under the Exchange Act, our management, under the direction of our Chief Executive Officer and Chief Financial Officer, reviewed and performed an evaluation of the effectiveness of design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Report”).

Based on that review and evaluation, our Chief Executive Officer and Chief Financial Officer, along with others in our management, have determined that as of the end of the period covered by this Report on Form 10-Q the disclosure controls and procedures were effective to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding disclosures.

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.

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.

The following risk factor is in addition to the risk factors previously disclosed in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 30, 2020. The risk factor set forth below should be read in conjunction with the risk factors section and the Management's Discussion and Analysis section included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 30, 2020.

A pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide may adversely affect our business.

Our operations expose us to risks associated with pandemics, epidemics or other public health emergencies, such as the recent outbreak of coronavirus disease (COVID-19) which has spread from China to the rest of the world. Outbreaks such as these have resulted, and can continue to result, in governments around the world implementing increasingly stringent measures to help control the spread, including quarantines, "shelter in place" and "stay at home" orders, travel restrictions, business curtailments, school closures, and other measures. These actions with respect to the COVID-19 outbreak have negatively impacted, and could continue to have negative impacts on, our operations, supply chain, transportation networks, customers and employees. The COVID-19 outbreak has materially and adversely affected, and any continuing economic downturn as a result of this pandemic could continue to adversely affect, demand for our products, and negatively impact our business or results of operations through the temporary closure of our operating locations or those of our customers or suppliers. In particular, the aerospace sector, for which we rely on a significant part of our business, has been faced with significant reductions to its business due to lack of air travel.

Since the end of our first quarter 2020, we have begun to see the impacts of COVID-19 on our markets and operations, including significant decreases in demand, supply chain disruptions, and logistics constraints. Given government mandates and concerns over employee safety, some of our production facilities were closed or significantly slowed production during the end of the first quarter 2020 and into the second quarter 2020. The extent to which COVID-19 may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects. While we expect this matter to materially and adversely impact our financial results, the current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial impact cannot be reasonably estimated at this time.

Except as noted above, there have been no other material changes to the risk factors disclosed in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 30, 2020.

** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not to be filed or part of a registration statement of prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 12^th day of November 2020.

Inventories consist of:
	September 30, 2020		December 31, 2019

Raw materials	$	1,150,339	$	1,281,250
Work-in-process		294,396		428,463
Inventories	$	1,444,735	$	1,709,713

Item 1.	Legal Proceedings.

	None.

Item 1A.	Risk Factors.

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.

	None.

Item 3.	Defaults Upon Senior Securities.

	None.

Item 4.	Mine Safety Disclosures.

	Not applicable.

Item 5.	Other Information.

	None.

Item 6.	Exhibits

10.1	Second Mortgage Modification Agreement, dated October 22, 2020 (Incorporated by reference to the Company’s Current Report on Form 8-K, filed on October 27, 2020).

10.2	Reaffirmation of Unlimited Continuing Guaranty, dated October 22, 2020 (Incorporated by reference to the Company’s Current Report on Form 8-K, filed on October 27, 2020).

31.1*	Certification of Leonard A. Rosenbaum, Chief Executive Officer, dated November 12, 2020

101.1**	XBRL Instance.

101.SCH**	XBRL Taxonomy Extension Schema.

	CVD EQUIPMENT CORPORATION

	By:	/s/ Leonard A. Rosenbaum
		Leonard A. Rosenbaum
		Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Thomas McNeill
		Thomas McNeill
		Chief Financial Officer
		(Principal Financial and
		Accounting Officer)