cvv20210930_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, 2021

☐	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: 6,687,438 shares of Common Stock, $0.01 par value at November 8, 2021.

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

Index

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

Condensed Consolidated Balance Sheets at September 30, 2021 and December 31, 2020	3

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020	4

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020	5

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020	6

Notes to Condensed Consolidated Financial Statements	7

Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3 – Quantitative and Qualitative Disclosures About Market Risk	32
Item 4 – Controls and Procedures	32

Part II - Other Information

Item 1 – Legal Proceedings	33
Item 1A-Risk Factors	33
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3 – Defaults Upon Senior Securities	34
Item 4 – Mine Safety Disclosures	34
Item 5 – Other Information	34
Item 6 – Exhibits	34

Signatures	35

Exhibit Index	36

PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

	(Unaudited)
	September 30, 2021		December 31, 2020
ASSETS
Current Assets
Cash and cash equivalents	$	17,446,404	$	7,699,335
Accounts receivable, net		1,891,913		1,047,728
Contract assets		1,628,168		494,281
Inventories, net		1,465,744		1,123,839
Taxes Receivable		715,599		715,599
Other current assets		207,841		709,175

Total Current Assets		23,355,669		11,789,957

Property, plant and equipment, net		12,368,838		28,843,563
Intangible assets, net		209,851		288,657
Other assets		23,318		13,748
Total Assets	$	35,957,676	$	40,935,925


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	854,159	$	817,933
Accrued expenses		1,476,871		1,409,039
Current maturities of long-term debt		1,840,508		690,667
Contract Liabilities		1,504,345		786,657
Total Current Liabilities		5,675,883		3,704,296

Long-term debt, net of current portion		-		13,106,057

Total Liabilities		5,675,883		16,810,353

Commitments and contingencies (see note 12)

Stockholders’ Equity:
Common stock - $0.01 par value – 20,000,000 shares authorized; issued and outstanding 6,687,438 at September 30, 2021 and 6,678,698 at December 31, 2020		66,874		66,786
Additional paid-in capital		27,179,538		26,961,684
Retained earnings (accumulated deficit)		3,035,381		(2,902,898	)
Total Stockholders’ Equity		30,281,793		24,125,572

Total Liabilities and Stockholders’ Equity	$	35,957,676	$	40,935,925

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

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020

Revenue	$	4,329,459		$	3,993,204		$	11,729,727		$	13,748,448

Cost of revenue		3,595,244			3,557,413			9,831,270			10,775,618

Gross profit		734,215			435,791			1,898,457			2,972,830

Operating expenses
Research and development		138,064			90,227			367,008			300,162
Selling and shipping		220,745			142,306			574,476			439,346
General and administrative		1,297,730			1,595,911			4,581,008			4,650,067

Total operating expenses		1,656,539			1,828,444			5,522,492			5,389,575

Operating loss		(922,324	)		(1,392,653	)		(3,624,035	)		(2,416,745	)

Other income (expense):
Interest income		1,776			30,348			3,402			60,728
Interest expense		(35,973	)		(104,041	)		(250,194	)		(336,107	)
Gain on Sale of Building		6,894,109			-			6,894,109			-
Gain on Debt Extinguishment		-			-			2,443,418			-
Other Income		63,143			174,705			499,970			394,938
Total other income, net		6,923,055			101,012			9,590,705			119,559

Income (loss) before income tax		6,000,731			(1,291,641	)		5,966,670			(2,297,186	)

Income tax expense (benefit)		27,327			-			28,391			(1,529,595	)

Net income (loss)	$	5,973,404		$	(1,291,641	)	$	5,938,279		$	(767,591	)


Basic income (loss) per common share	$	0.89		$	(0.19	)	$	0.89		$	(0.12	)
Diluted income (loss) per common share	$	0.89		$	(0.19	)	$	0.89		$	(0.12	)

Weighted average common shares
Outstanding-basic		6,685,599			6,640,228			6,683,407			6,633,694

Weighted average common shares
Outstanding-diluted		6,707,883			6,640,228			6,691,813			6,633,694

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

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

Three months ended September 30, 2021 and 2020
	Common stock
	Shares		Par Value		Additional paid-in Capital		Retained Earnings/ (Accumulated deficit)			Total

Balance at July 1, 2021		6,684,281	$	66,842	$	27,074,079	$	(2,938,023	)	$	24,202,898
Net income		-		-		-		5,973,404			5,973,404
Share-Based Compensation		3,157		32		105,459		-			105,491
Balance at September 30, 2021		6,687,438	$	66,874	$	27,179,538	$	3,035,381		$	30,281,793

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

Nine months ended September 30, 2021 and 2020
	Common stock
	Shares		Par Value		Additional paid-in Capital		Retained Earnings/ (Accumulated deficit)			Total

Balance at January 1, 2021		6,678,698	$	66,786	$	26,961,684	$	(2,902,898	)	$	24,125,572
Net income		-		-		-		5,938,279			5,938,279
Share-Based Compensation		8,740		88		217,854		-			217,942
Balance at September 30, 2021		6,687,438	$	66,874	$	27,179,538	$	3,035,381		$	30,281,793

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

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

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended
	September 30,
	2021			2020
Cash flows from operating activities:
Net income (loss)	$	5,938,279		$	(767,591	)
Adjustments to reconcile net income (loss) to net cash (used in) operating activities
Gain on sale of building		(6,894,109	)		-
Gain on Debt Extinguishment		(2,443,418	)		-
Stock-based compensation		217,942			200,114
Depreciation and amortization		585,082			1,023,757
Bad debt expense		-			120,160
(Increase)/decrease in operating assets
Accounts receivable		(844,185	)		752,463
Contract assets		(1,133,887	)		(480,889	)
Inventories		(341,905	)		264,978
Tax receivable		-			(713,027	)
Other current assets		491,764			315,649
Increase/(decrease) in operating liabilities
Accounts payable		36,226			(94,994	)
Accrued expenses		95,281			(397,546	)
Contract liabilities		717,688			(1,411,578	)

Total adjustments		(9,513,521	)		(420,913	)
Net cash used in operating activities		(3,575,242	)		(1,188,504	)

Cash flows from investing activities:
Net proceeds from sale of building		23,075,477			-
Capital expenditures		(212,920	)		(1,202,899	)
Net cash provided by (used in) investing activities		22,862,557			(1,202,899	)

Cash flows from financing activities
Proceeds from Payroll Protection Plan Loan		-			2,415,970
Payments of long-term debt		(9,540,246	)		(501,323	)
Net cash (used in) provided by financing activities		(9,540,246	)		1,914,647

Net increase (decrease) in cash and cash equivalents		9,747,069			(476,756	)

Cash and cash equivalents at beginning of period		7,699,335			8,664,253

Cash and cash equivalents at end of period	$	17,446,404		$	8,187,497

Supplemental disclosure of cash flow information:
Income taxes paid	$	28,391		$	-
Interest paid	$	250,194		$	336,107

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

CVD EQUIPMENT CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

NOTE 1:

BASIS OF PRESENTATION

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

The condensed consolidated balance sheet as of December 31, 2020 has been derived from the audited consolidated financial statements at such date, as filed on Form 10-K with the SEC on March 31, 2021, but does not contain all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with that report.

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

BUSINESS DEVELOPMENTS

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

NOTE 1: (continued)

During February 2021, in order to increase the Company’s liquidity and to provide necessary working capital to support the Company’s on-going business and operations, the Board decided to sell its facility located at 555 North Research Place, Central Islip, NY (the “555 Building”). Management determined the 555 Building was not needed for its on-going business operations and concluded that any remaining elements of the Materials Business could be consolidated into its remaining facility in Central Islip (the “355 Building”), which it believes can accommodate any needs for its growth for the foreseeable future. In April 2021, the Company completed the move of its United States Tantaline equipment to the 355 Building, while the MesoScribe consolidation into the 355 Building was completed during Q3 2021. All functions of the Tantaline product line have been consolidated into the Denmark facility and, the expenses related to Tantaline operations in the United States have ceased.

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

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

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

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

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue Recognition (continued)

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

“Contract liabilities,” include advance payments and billings in excess of revenue recognized. The Company typically receives down payments upon receipt of order and progress payments during the manufacturing cycle. Contract liabilities are classified as current based on our contract operating cycle and reported on a contract-by-contract basis, net of revenue recognized, at the end of each reporting period.

For 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. Management is currently evaluating the effect of this update on the Company’s consolidated financial statements and currently believes it will not have a material impact.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Standards (continued)

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

NOTE 3: CONCENTRATION OF CREDIT RISK

Cash and cash equivalents

The Company had cash and cash equivalents of $17.4 million and $7.7 million at September 30, 2021 and December 31, 2020, 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 $7.0 million at September 30, 2021 and December 31, 2020, 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, 2021 and December 31, 2020 was $9,294,000 and $5,822,000, respectively.

Sales concentration

Revenue from a single customer in any one period can exceed 10% of our total revenues. During the three months ended September 30, 2021, two customers exceeded 10% of revenues, representing 15.6% and 11.8% of revenues, and during the nine months ended September 30, 2021 two customers exceeded 10%, representing 12.0% and 11.7% of revenues. During the three months ended September 30, 2020, two customers exceeded 10%, representing 13.5% and 12.5% of revenues, and during the nine months ended September 30, 2020, three customers exceeded 10% of revenues, representing 21.0%, 12.8% and 12.0% of revenues.

Accounts receivable

The Company sells products and services to various companies across several industries in the ordinary course of business. The Company performs ongoing credit evaluations to assess the probability of accounts receivable collection based on a number of factors, including past transaction experience, evaluation of their credit history and review of the invoicing terms of the contract to determine the financial strength of its customers. The Company also maintains allowances for anticipated losses. At September 30, 2021, one customer exceeded 10% of the accounts receivable balance representing 28.7%, and at December 31, 2020 two customers exceeded 10% of the accounts receivable balance, representing 35.0% 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, 2021 and 2020 (in thousands):

	Three Month's Ending September 30, 2021

	Over time		Point in time		Total
Aerospace	$	-	$	574	$	574
Industrial	$	1,551	$	1,205	$	2,756
Research	$	612	$	388	$	1,000
Total	$	2,163	$	2,167	$	4,330

	Three Month's Ending September 30, 2020

	Over time		Point in time		Total
Aerospace	$	181	$	1,252	$	1,433
Industrial	$	322	$	1,346	$	1,668
Research	$	582	$	310	$	892
Total	$	1,085	$	2,908	$	3,993

	Nine Month's Ending September 30, 2021

	Over time		Point in time		Total
Aerospace	$	386	$	1,677	$	2,063
Industrial	$	4,147	$	3,173	$	7,320
Research	$	1,164	$	1,183	$	2,347
Total	$	5,697	$	6,033	$	11,730

	Nine Month's Ending September 30, 2020

	Over time		Point in time		Total
Aerospace	$	1,480	$	5,136	$	6,616
Industrial	$	708	$	2,830	$	3,538
Research	$	1,671	$	1,923	$	3,594
Total	$	3,859	$	9,889	$	13,748

NOTE 4: REVENUE DISAGGREGATION (continued)

The Company has unrecognized contract revenue of approximately $5.7 million at September 30, 2021, 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, 2021 and 2020, the increase in contract assets of approximately $1.1 million and $.5 million, respectively, was the result of work performed in excess of billings which are based upon project milestones.

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

	2021
Costs incurred on contracts in progress	$	5,762,058
Estimated earnings		3,868,499
		9,630,557
Billings to date		(9,168,780	)
	$	461,777
Deferred revenue related to non-systems contracts		(337,954	)
		123,823
Included in accompanying balance sheets
Under the following captions:
Contract assets	$	1,628,168
Contract liabilities	$	(1,504,345	)

NOTE 5: INVENTORIES, NET

Inventories consist of:
	September 30, 2021		December 31, 2020

Raw materials	$	1,168,237	$	928,221
Work-in-process		297,507		195,618
Inventories	$	1,465,744	$	1,123,839

NOTE 6: ACCOUNTS RECEIVABLE, NET

Accounts receivable are presented net of an allowance for doubtful accounts of approximately $59,000 and $164,000 as of September 30, 2021 and December 31, 2020, respectively. The allowance is based on prior experience and management’s evaluation of the collectability of accounts receivable. Management believes the allowance is adequate. However, future estimates may change based on changes in future economic conditions.

NOTE 7: LONG-TERM DEBT

The Company has a loan agreement with HSBC which is secured by a mortgage against its 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, 2021 and December 31, 2020 were approximately $1.8 million and $2.1 million respectively. Interest accrues on the loan, at our option, at the variable rate of LIBOR plus 1.75% or Prime less 0.5% (1.85% and 1.89% at September 30, 2021 and December 31, 2020, respectively). The Company is in compliance with its financial covenant under the mortgage at September 30, 2021.

On November 30, 2017, the Company purchased the premises located at 555 North Research Place, Central Islip, NY (the “555 Building”). The purchase price of the building was $13,850,000 exclusive of closing costs. The Company’s wholly-owned subsidiary, 555 N Research Corporation (the “Assignee”) and the Islip IDA, entered into a Fee and Leasehold Mortgage and Security Agreement (the “Loan”) with HSBC in the amount of $10,387,500, which was used to finance a portion of the purchase price to acquire the premises located at 555 North Research Place, Central Islip, New York. On July 26, 2021, the Company closed on the sale of the 555 Building and satisfied the loan. (see Note 13)

NOTE 7: LONG-TERM DEBT (continued)

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

The PPP loan, the obligation of which is represented by a note issued by the Company, was to mature on April 21, 2022 and bore interest at a rate of 1% per annum. The note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Under the terms of the PPP, all or a portion 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. The Company filed an application for forgiveness in April 2021 and on June 14, 2021 the Company received a notification from its lender that on June 10, 2021 the SBA approved the Company’s PPP Loan forgiveness application and remitted payment to the lender for the entire principal amount of the PPP Loan and accrued interest. As a result, the Company has recognized in the nine months ended September 30, 2021 Gain on Debt Extinguishment in the amount of $2,443,418.

NOTE 8: STOCK-BASED COMPENSATION EXPENSE

The Company recorded, as part of general and administrative expense, $81,000 and $193,000 during the three and nine months ended September 30, 2021, respectively, and during the three and nine months ended September 30, 2020, $65,000 and $206,000, respectively, for the cost of employee and director services received in exchange for equity instruments based on the grant-date fair value of those instruments.

NOTE 8: STOCK-BASED COMPENSATION EXPENSE (continued)

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

2001 Non-Qualified Stock Option Plan
	Beginning		Granted		Exercised		Canceled			Ending
	Balance		During		During		During			Balance
	Outstanding		Period		Period		Period			Outstanding		Exercisable

Number of shares		7,000		-		-		(7,000	)		-		-
Weighted average exercise price per share	$	7.90		-		-	$	7.90			-		-

2007 Share Incentive Plan
	*Beginning*		*Granted*		*Exercised*		*Canceled*			*Ending*
	*Balance*		*During*		*During*		*During*			*Balance*
	*Outstanding*		*Period*		*Period*		*Period*			*Outstanding*		*Exercisable*

Number of shares		345,000		-		-		-			345,000		325,000
Weighted average exercise price per share	$	12.33		-		-		-		$	12.33	$	12.46

2016 Share Incentive Plan
	*Beginning*		*Granted*		*Exercised*		*Canceled*			*Ending*
	*Balance*		*During*		*During*		*During*			*Balance*
	*Outstanding*		*Period*		*Period*		*Period*			*Outstanding*		*Exercisable*

Number of shares		65,000		328,500		-		-			393,500		65,000
Weighted average exercise price per share	$	5.94	$	4.13		-		-		$	4.43	$	5.94

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

	June 2021 Grant			3^rd quarter 2021 Grant
	150,000 Stock Options			178,500 Stock Options
Stock Price	$	4.26		$	4.01
Exercise Price	$	4.26		$	4.01
Dividend yield		0	%		0	%
Expected volatility		67	%		67	%
Risk-Free interest rate		1.35	%		1.35	%
Expected life (in years)		6.00			6.00

NOTE 8: STOCK-BASED COMPENSATION EXPENSE (continued)

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

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

				Options Outstanding								Options Exercisable
						Weighted		Weighted						Weighted
						Average		Average						Average
*Exercise*				*Number*		*Remaining*		*Exercise*		*Intrinsic*		*Number*		*Exercise*		*Intrinsic*
*Price Range*				*Outstanding*		*Contractual*		*Price*		*Value*		*Exercisable*		*Price*		*Value*
$	4.00	-	7.00		373,500		9.6	$	4.13	$	149,000		45,000	$	5.00	$	0
$	7.01	-	10.00		20,000		6.6	$	8.07	$	0		20,000	$	8.07	$	0
$	10.01	-	12.00		220,000		2.1	$	10.81	$	0		200,000	$	10.87	$	0
$	12.01	-	15.00		125,000		.7	$	15.00	$	0		125,000	$	15.00	$	0

No options were exercised during the nine months ended September 30, 2021. As of September 30, 2021, there was $772,000 of unrecognized compensation costs related to stock options expected to be recognized over a weighted average period of 3.6 years.

Restricted Stock Awards

The following table summarizes restricted stock awards for the nine months ended September 30, 2021:

	Shares of Restricted Stock			Weighted Average Grant Date Fair Value
Unvested outstanding at December 31, 2020		-			-
Granted		42,800		$	4.65
Vested		-			-
Forfeited/Cancelled		(7,646	)	$	4.90
Unvested outstanding at September 30, 2021		35,154		$	4.59

The fair value of the outstanding restricted stock awards will be recorded as stock compensation expense over the vesting period. As of September 30, 2021, there was $37,000 of total unrecognized compensation costs related to restricted stock awards, which is expected to be recognized over a weighted-average period of .25 years.

NOTE 8: STOCK-BASED COMPENSATION EXPENSE (continued)

Restricted Stock Units

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

				Weighted
	Shares of			Average Grant
	Restricted			Date Fair
	Stock Units			Value
Unvested outstanding at December 31, 2020		8,750		$	5.00
Granted		2,333		$	5.36
Vested		(5,583	)	$	5.32
Forfeited/Cancelled		-		$	- -

Unvested outstanding at September 30, 2021		5,500		$	4.83

The total fair value of vested restricted stock units was $29,700 for the nine months ended September 30, 2021.

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

NOTE 9: INCOME TAXES

As of September 30, 2021 and December 31, 2020, 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 three years of operating losses, that it is more likely than not that the net deferred tax assets may not be realized in the future. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted by the United States Congress. As a result of the enactment of the CARES Act, net operating losses (“NOL’s”) generated in 2018-2020 can now be carried back for five years and resulted in the Company recognizing approximately $1.5 million of a tax benefit, of which $.7 million is a receivable at September 30, 2021 and December 31, 2020. Management continues to evaluate for potential utilization of the Company’s deferred tax asset, which has been fully reserved for, on a quarterly basis, reviewing our economic models, including projections and timing of orders, and cost containment measures.

NOTE 10: EARNINGS PER SHARE

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

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

	Three months ended Sept. 30,				Nine months ended Sept. 30,
	2021		2020		2021		2020

Basic weighted average common shares outstanding		6,685,599		6,640,228		6,683,407		6,633,694
Dilutive effect of options and unvested restricted shares		22,284		-		8,406		-
Diluted weighted average shares outstanding

SEC Form 10-Q filed by CVD Equipment Corporation