Statements contained in this report, which are not historical facts, may be
considered forward-looking information with respect to plans, projections, or
future performance of the Company as defined under the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
risks and uncertainties, which could cause actual results to differ materially
from those projected. The words "anticipate," "believe", "estimate", "expect,"
"objective," and think" or similar expressions used herein are intended to
identify forward-looking statements. The forward-looking statements are based on
the Company's current views and assumptions and involve risks and uncertainties
that include, among other things, the effects of the Company's business, actions
of competitors, changes in laws and regulations, including accounting standards,
employee relations, customer demand, prices of purchased raw material and parts,
domestic economic conditions, including housing starts and changes in consumer
disposable income, and foreign economic conditions, including currency rate
fluctuations. Some or all of the facts are beyond the Company's control.
The following discussion and analysis should be read in conjunction with our
audited financial statements and related footnotes included elsewhere in this
report, which provide additional information concerning the Company's financial
activities and condition.
The Company designs, develops and manufactures printed circuit board connectors
and custom interconnects for high performance applications.
Overview of Business:
All of our connectors utilize the HYPERBOLOID contact design, a rugged,
high-reliability contact system ideally suited for high-stress environments. We
believe we are the only independent producer of HYPERBOLOID printed circuit
board connectors in the United States.
Our customers consist of OEMs (Original Equipment Manufacturers) and
distributors who resell our products to OEMs. We sell our products directly and
through 22 independent sales representatives and distributors located in all
region of the United States, Canada, the European Union, Southeast Asia, Central
Asia and the Middle East.
The customers we service are in the Military, Aerospace, Space, Medical, Oil and
Gas, Industrial, Test Equipment and Commercial Electronics markets. We appear on
the Military Qualified Product Listing ("QPL") to MIL-DTL-55302 and supply
customer requested modifications to this specification. For the fiscal year
ending March 31, 2020, approximately 60% of our sales were for defense
applications, 23% for commercial aerospace, and the remainder in commercial
space launch, medical, oil and gas and industrial markets. For the fiscal year
ending March 29, 2019, approximately 50% of our sales were for defense
applications, 33% for commercial aerospace, and the remainder in commercial
space launch, medical, oil and gas and industrial markets. Our offering of "QPL"
items has recently been expanded to include additional products.
We are exposed to and impacted by macroeconomic factors and U.S., state and
local government policies. Current general economic conditions are highly
volatile due to the COVID-19 pandemic, resulting in both market size
contractions due to economic slowdowns and government restrictions on movement.
We believe, however, that our contract base is insulated from negative impacts
due to the outbreak of COVID-19 as the products we provide to our customers are
largely deemed essential by the customers we support resulting in a stable level
of work. We have adopted particular measures to protect our employees at our
manufacturing operations in Brooklyn, New York, and we expect to execute on our
contracts through carefully designed arrangements.
12
Financial Overview:
Recent Developments:
PPP Loan and Note
On April 13, 2020, the Company entered into an unsecured note (the "PPP Note")
evidencing an unsecured loan ("PPP Loan") in a principal amount of $2,103,885
pursuant to the Payment Protection Program ("PPP") under the Coronavirus Aid
Relief and Economic Security Act ("CARES Act"). The PPP Loan is administered by
the U.S. Small Business Administration and the Company's loan was made through
JP Morgan Chase Bank. The PPP Loan bears interest at a fixed interest rate of
one (1%) percent per year and matures in two (2) years after the issuance date.
Payment of interest is deferred for the first six (6) months. Beginning on the
seventh month following the date of the PPP Note (November 2020), the Company is
required to make 18 payments of equal monthly installments of principal and
interest with the final payment due in April 2022. The PPP Note provides for
customary events of default including, among other things, cross-defaults on any
other loan with JP Morgan Chase Bank. The PPP Loan may be accelerated upon the
occurrence of an event of default. The PPP Note may be prepaid by the Company at
any time with no prepayment penalties applied.
The proceeds of the PPP Loan may be used for payroll costs, costs related to
certain group health care benefits, rent payments, utility payments, mortgage
interest payments, interest payments on other debt obligation that were incurred
before February 15, 2020. The PPP Note contains events of defaults and other
conditions customary for a note of this type.
The PPP Loan is guaranteed by the United States Small Business Administration
("SBA"). The Company may apply to JP Morgan Chase Bank for forgiveness of the
PPP Loan, with the amounts which may be forgiven equal to the sum of payroll
costs, covered rent and mortgage obligations and covered utilities, which
payments were incurred by the Company during the 24-week period beginning on
April 13, 2020 and calculated in accordance with the CARES Act.
Under the terms of the CARES Act, the PPP Loan recipients can apply for and be
granted forgiveness for all or a portion of a loan granted under the PPP with
such forgiveness to be determined subject to limitations based on the use of
loan proceeds for payment of payroll costs and any payments of mortgage,
interest, rent and utilities. The terms of any forgiveness may be subject to
further requirements in any regulations and guidelines the SBA may adopt. While
the Company currently believes that its use of the PPP Note proceeds will meet
the conditions for forgiveness under the PPP, no assurance is provided that the
Company will obtain forgiveness of the PPP Note in whole or in part.
Appointment of New Chief Financial Officer and Treasurer
On August 27, 2020, the Company filed a Form 8-K announcing that William H.
Craig will become the new Chief Financial Officer and Treasurer of the Company.
Mr. Craig will replace Robert Knoth who is officially retiring later this month.
Mr. Craig's appointment was approved by the Board of Directors of the Company
and will become effective on the next business day following the Company's
filing of its Annual Report on Form 10-K for the fiscal year ended March 31,
2020 with the Securities and Exchange Commission and upon Mr. Knoth's official
retirement.
Critical Accounting Policies:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (US GAAP) requires management
to make estimates and assumptions about future events that affect the amounts
reported in the financial statements and accompanying notes. Future events and
their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results
inevitably will differ from those estimates, and such differences may be
material to the financial statements. The most significant accounting estimates
inherent in the preparation of our financial statements include estimates
associated with revenue recognition, depreciation and stock-based compensation.
Our financial position, results of operations and cash flows are impacted by the
accounting policies we have adopted. In order to get a full understanding of our
financial statements, one must have a clear understanding of the accounting
policies employed. A summary of our critical accounting policies is presented
within the footnotes in the financial statements presented within this Annual
Report.
13
Results of Operations:
Fiscal Year End Results: March 31, 2020 and March 29, 2019:
The following table summarizes our results of operations for the fiscal years
ended March 31, 2020 and March 29, 2019:
Fiscal Years Ended
Period-to-Period
March 31, 2020 March 29, 2019 Change
Revenue $ 32,154,549 $ 28,406,666 $ 3,747,883
Operating expenses:
Cost of products sold 21,906,236 16,377,063 5,529,173
Selling, general and
administrative 6,007,241 4,007,145 2,000,096
Depreciation and amortization 955,124 345,840 609,284
Total operating expenses 28,868,601 20,730,048 8,138,553
Operating income 3,285,948 7,676,618 (4,390,670 )
Other expenses:
Other income 26,720 16,559 10,161
Interest Expense (71,595 ) (63,271 ) (8,324 )
Total other (income) expense (44,875 ) (46,712 ) 1,837
Income before provision for
income taxes 3,241,073 7,629,906 (4,388,833 )
Provision for income taxes (683,693 ) (2,469,130 ) 1,785,437
Net Income $ 2,557,380 $ 5,160,776 $ (2,603,396 )
Revenue for the fiscal year ended March 31, 2020 amounted to $32,154,549
reflecting a $3,747,883 increase versus the fiscal year ended March 29, 2019
which amounted to $28,406,666. The increase in revenue is a direct result of the
Company's efforts in increasing sales in both the military and commercial
aerospace sectors.
Cost of products sold amounted to $21,906,236 for the fiscal year ended March
31, 2020, or 68.1% of operating revenues. This reflected a $5,529,173 or 33.8%
increase in the cost of products sold as compared to $16,377,063 or 57.7% of
operating revenues for the fiscal year ended March 29, 2019. The increase in
cost of products sold is due to the increases in costs of goods sold to support
the additional revenues, increases in indirect production costs incurred as part
of management's plan to scale up production capacity and charges to adjust
inventory costs in connection with the implementation of a new inventory system
during the period.
Selling, general and administrative expenses were $6,007,241 and $4,007,145 or
18.7% and 14.1% of net revenues for the fiscal years ended March 31, 2020 and
March 29, 2019, respectively. This category of expenses increased by $2,000,096
or 49.9% from the prior year. This comparative increase can be attributed
primarily to an increase in general and administrative cash compensation of
$264,346 and stock-based compensation expense of $1,385,947.
Depreciation and amortization of $955,124 or 3.0% of net revenues was reported
for the fiscal year ended March 31, 2020 as compared to $345,840 or 1.2% of net
revenues for the fiscal year ended March 29, 2019. The increase was due to the
purchase of additional machinery and equipment during the period and charges to
adjust depreciation expense to conform to the expected lives of each of the
respective asset groups.
For the fiscal year ended March 31, 2020, interest expense was $71,595 or .2% of
net revenues. For the fiscal year ended March 29, 2019, interest expense was
$63,271 or .2% of net revenues. The increase of $8,324 or 13.2% reflects the
additional borrowings from the Financing Company (as defined below) during the
year.
14
Liquidity and Capital Resources:
As of March 31, 2020, the Company's cash on hand was $7,760,057. The Company has
recorded net income of $2,557,380 and $5,160,776 for the fiscal years ended
March 31, 2020 and March 29, 2019, respectively. As of March 31, 2020, the
Company had working capital of $23,506,134 and stockholders' equity of
$26,510,847.
Our principal source of liquidity is cash flows generated by operating
activities.
The Company has an accounts receivable financing agreement with a non-bank
lending institution ("Financing Company") whereby it can borrow up to 80 percent
of its eligible receivables (as defined in such financing agreement) at an
interest rate of 2 ½% above JP Morgan Chase's publicly announced rate with a
minimum interest rate of 6% per annum.
Net cash provided by operating activities was $1,683,413 for the fiscal year
ended March 31, 2020 compared to $6,024,139 for the fiscal year ended March 29,
2019. The decrease in cash provided by operating activities was primarily due to
a decrease of $2,603,396 in net income and an increase in accounts receivable of
$2,469,481, off-set by an increase is stock-based compensation expense of
$1,385,947 and an increase in depreciation and amortization of $609,284.
Net cash used in investing activities was $969,400 for the fiscal year ended
March 31, 2020 compared to $840,292 for the fiscal year ended March 29, 2019.
The increase in cash used in investing activities was due to an increase in the
purchase of property, plant and equipment of $129,108.
Net cash used in financing activities was $34,082 for the fiscal year ended
March 31, 2020 compared to net cash provided by financing activities of $489,266
for the fiscal year ended March 29, 2019. The change in cash used in financing
activities was due to proceeds from the exercise of stock options of $264,000 in
the year ended March 31, 2020, advances of $29,765,459 and repayments of
$30,063,541 for the accounts receivable financing.
PPP Loan and Note
On April 13, 2020, the Company entered into the PPP Note evidencing an unsecured
loan in a principal amount of $2,103,885 pursuant to the PPP under the CARES
Act. The PPP Loan is administered by the U.S. Small Business Administration and
the Company's loan was made through JP Morgan Chase Bank. The PPP Loan bears
interest at a fixed interest rate of one (1%) percent per year and matures in
two (2) years after the issuance date. Payment of interest is deferred for the
first six (6) months. Beginning on the seventh month following the date of the
PPP Note (November 2020), the Company is required to make 18 payments of equal
monthly installments of principal and interest with the final payment due in
April 2022. The PPP Note provides for customary events of default including,
among other things, cross-defaults on any other loan with JP Morgan Chase Bank.
The PPP Loan may be accelerated upon the occurrence of an event of default. The
PPP Note may be prepaid by the Company at any time with no prepayment penalties
applied.
The proceeds of the PPP Loan may be used for payroll costs, costs related to
certain group health care benefits, rent payments, utility payments, mortgage
interest payments, interest payments on other debt obligation that were incurred
before February 15, 2020. The PPP Note contains events of defaults and other
conditions customary for a note of this type.
The PPP Loan is guaranteed by the SBA. The Company may apply to JP Morgan Chase
Bank for forgiveness of the PPP Loan, with the amounts which may be forgiven
equal to the sum of payroll costs, covered rent and mortgage obligations and
covered utilities, which payments were incurred by the Company during the
24-week period beginning on April 13, 2020 and calculated in accordance with the
CARES Act.
Under the terms of the CARES Act, the PPP Loan recipients can apply for and be
granted forgiveness for all or a portion of a loan granted under the PPP with
such forgiveness to be determined subject to limitations based on the use of
loan proceeds for payment of payroll costs and any payments of mortgage,
interest, rent and utilities. The terms of any forgiveness may be subject to
further requirements in any regulations and guidelines the SBA may adopt. While
the Company currently believes that its use of the PPP Note proceeds will meet
the conditions for forgiveness under the PPP, no assurance is provided that the
Company will obtain forgiveness of the PPP Note in whole or in part.
15
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