The following discussion should be read in conjunction with the Financial
Statements and Notes contained herein and with those in our Form 10-K for the
year ended December 31, 2021.
Except for the historical information contained herein, the matters discussed in
this Quarterly Report on Form 10-Q include certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. Those statements
include, but may not be limited to, all statements regarding our intent, belief,
and expectations, such as statements concerning our future profitability and
operating and growth strategy. Words such as "believe," "anticipate," "expect,"
"will," "may," "should," "intend," "plan," "estimate," "predict," "potential,"
"continue," "likely" and similar expressions are intended to identify
forward-looking statements. Investors are cautioned that all forward-looking
statements contained in this Quarterly Report on Form 10-Q and in other
statements we make involve risks and uncertainties including, without
limitation, the factors set forth under the caption "Risk Factors" included in
our Annual Report on Form 10-K for the year ended December 31, 2021, and other
factors detailed from time to time in our other filings with the Securities and
Exchange Commission. One or more of these factors have affected, and in the
future could affect our business and financial condition and could cause actual
results to differ materially from plans and projections. Although we believe the
assumptions underlying the forward-looking statements contained herein are
reasonable, there can be no assurance that any of the forward-looking statements
included in this Quarterly Report on Form 10-Q will prove to be accurate. In
light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by us or any other person that our objectives and
plans will be achieved.
Any forward-looking statement speaks only as of the date on which such statement
is made, and we undertake no obligation to update any forward-looking statement
or statements to reflect events or circumstances after the date on which such
statements are made or reflect the occurrence of unanticipated events, unless
necessary to prevent such statements from becoming misleading. New factors
emerge from time to time, and it is not possible for us to predict all factors,
nor can it assess the impact of each such factor on the business or the extent
to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements.
Executive Summary
For the six months ended June 30, 2022, we had record total revenue of
$11,831,437. Higher pricing, primarily attributable to increased raw material
costs, higher volume and product mix were key factors that contributed to the
increase.
Gross profit was $2,371,769 for the six months ended June 30, 2022 compared to
$1,365,590 for the same six months in 2021. The increase was due to higher
volume, favorable product mix, and improved manufacturing efficiency. The first
half of 2021 included a reduction of expenses of approximately $238,000 related
to the Employee Retention Credit ("ERC") enacted in 2020.
Operating expenses were $1,166,033 and $762,012 for the six months ended June
30, 2022 and 2021, respectively. The first six months of 2021 included a
reduction of expenses of approximately $169,000 related to the ERC.
Income from operations was $1,205,736 and $603,578 for the six months ended June
30, 2022 and 2021, respectively.
We expect to receive shipment of additional manufacturing equipment during the
third quarter of 2022. This includes a hot press that will enable production of
higher temperature materials with increased capacity. A final cash payment of
$220,075 was made for the hot press during late July of this year.
In March 2020, the World Health Organization declared the coronavirus disease
(COVID-19) a global pandemic and recommended containment and mitigation measures
worldwide. Since then, most federal, state, and local executive orders have been
lifted. Based on ongoing conversations with customers, we do not expect to
experience any material impairments or changes in accounting judgements related
to COVID-19. We continue to follow practical safety procedures as needed. During
the first half of 2022, we resumed in-person meetings, participated onsite in
industry trade shows, and continue to maintain regular contact, via phone and
other electronic means, with all customers and suppliers.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Several issues continue to affect national and global market conditions. First,
inflation has accelerated, impacting raw material costs and transportation
expenses. We have generally been able to pass on these increases to customers
but are unable to predict how future or sustained inflationary pressure may
impact our results. Second, supply chain disruptions are adversely impacting
customers in certain markets. Thus far, we have not experienced material adverse
effects regarding product shipments; however, timely deliveries and sourcing of
certain materials is of increased concern. Third, published articles and
corporate announcements continue to address the global semiconductor chip
shortage, which is anticipated to continue at least into the fourth quarter of
2022. This shortage is affecting some of our customers which could impact the
Company's revenue, volume, and profitability. Fourth, there are increased
political uncertainties affecting global markets. Although we currently have no
customers or vendors in Russia or Ukraine, we continue to monitor the situation
as some raw material comes from Russia for the PVD industry. We continue to
actively monitor these developments, including ongoing contact with our
suppliers and customers, and adapting to their specific circumstances and
forecasts.
On April 17, 2020, we entered into an unsecured promissory note under the
Paycheck Protection Program (the "PPP"), with a principal amount of $325,300.
The PPP was established under the Coronavirus Aid, Relief, and Economic Security
Act (the "CARES Act") and administered by the U.S. Small Business Administration
(the "SBA"). The SBA approved our Forgiveness Application in full on January 6,
2021 and appears as gain on extinguishment of debt in the Statements of Income
during the six months ended June 30, 2021.
The Employee Retention Credit ("ERC"), as originally enacted on March 27, 2020,
by the CARES Act, was a refundable tax credit against certain employment taxes
equal to 50% of the qualified wages an eligible employer paid to employees after
March 12, 2020, and before January 1, 2021. The Taxpayer Certainty and Disaster
Tax Relief Act (the "Relief Act"), enacted on December 27, 2020, amended, and
extended the ERC. On March 1, 2021, the IRS released Notice 2021-20 to provide
guidance on the original ERC, as modified by the Relief Act. During 2021 we
filed Form 941-X to claim a credit of $105,000 on qualified wages paid in 2020.
This receivable appears on the balance sheets as of June 30, 2022 and December
31, 2021, as Tax Receivable, and as a credit to wages in the Statements of
Income during the six months ended June 30, 2021.
The Relief Act extended and enhanced the ERC for qualified wages paid after
December 31, 2020, through June 30, 2021. Under the Relief Act, eligible
employers may claim a refundable tax credit against certain employment taxes
equal to 70% of the qualified wages an eligible employer paid to employees after
December 31, 2020, through June 30, 2021. As of the March 11, 2021, passage of
the American Rescue Plan Act, the ERC was available for all four quarters of
2021. However, the Infrastructure Investment and Jobs Act enacted on November
15, 2021, ended the ERC effective September 30, 2021.
During the first and second quarter of 2021, we were qualified to receive the
ERC. The ERC of $150,507 and $151,701 on qualified wages paid in the first and
second quarter of 2021, respectively, appears as a credit to wages in the
Statements of Income.
Consistent with our growth strategy, we have identified niche markets that can
benefit from our expertise in custom powder solutions, such as near-infrared
doped phosphors and short-wave infrared applications. These applications enable
extended life of phosphors for specific nighttime identification needs of
defense personnel and first responders.
New initiatives are also being pursued that utilize our vacuum hot press, cold
isostatic press, and kilns for increased production and development projects,
including diffusion bonding. We recently manufactured and sold conductive metal
oxides for direct current sputtering of Tungsten Oxide and Molybdenum Oxide
materials. We continue to invest in developing new products for all our markets
including specialty bonding processes for Aerospace customers. Those products
continue to require research and development expense to accelerate time to
market.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
RESULTS OF OPERATIONS
Three and six months ended June 30, 2022 (unaudited) compared to three and six
months ended June 30, 2021 (unaudited):
Revenue
For the three months ended June 30, 2022, we had record total revenue of
$6,505,005. This was an increase of $4,532,956 compared to the three months
ended June 30, 2021. For the six months ended June 30, 2022, we had record total
revenue of $11,831,437. This was an increase of $6,837,078 compared to the six
months ended June 30, 2021. Higher pricing, primarily attributable to increased
raw material costs, higher volume and product mix were key factors that
contributed to the increase.
Gross profit
Gross profit was $1,377,668 for the three months ended June 30, 2022, compared
to $562,554 for the same three months in 2021, an increase of $815,114. Gross
profit as a percentage of revenue (gross margin) was 21.2% for the second
quarter of 2022 compared to 28.5% for the same period in 2021. Gross profit was
$2,371,769 for the six months ended June 30, 2022, compared to $1,365,590 for
the first six months of 2021, an increase of $1,006,179. Gross margin was 20.0%
for the first six months of 2022 compared to 27.3% for the same period in 2021.
The increases in gross profit were due to higher revenue during 2022. The
Employee Retention Credit (ERC) reduced cost of revenue in the three and six
months ended June 30, 2021, by approximately $87,000 and $238,000, respectively.
The lower gross margin in 2022 compared to a year ago was due to higher raw
material costs in the first half of 2022.
General and administrative expense
General and administrative expense for the three months ended June 30, 2022, and
2021, was $423,401 and $283,708, respectively, an increase of 49.2%. General and
administrative expense for the six months ended June 30, 2022, and 2021, was
$796,589 and $571,589, respectively, an increase of 39.4%. During 2022 there was
an increase in staff resulting in higher compensation of approximately $44,000.
Business liability insurance (due to higher revenue) and professional fees,
primarily related to SEC compliance costs for legal, accounting and stockholder
relations fees, increased approximately $59,000. The three and six months ended
June 30, 2021 included the ERC of $21,000 and $57,000, respectively.
Research and development expense
Research and development expense for the three months ended June 30, 2022, was
$92,085 compared to $54,377 for the same period in 2021, an increase of 69.3%.
Research and development expense for the six months ended June 30, 2022, was
$179,116 compared to $92,596 for the same period in 2021, an increase of 93.4%.
The ERC of $22,750 and $61,750 was included in the three and six months ended
June 30, 2021, respectively. Specialty materials are being researched for use in
niche markets which include custom applications and additive manufacturing. Our
development efforts utilize a disciplined innovation approach focused on
accelerating time to market for these applications and involve ongoing research
and development expense.
Marketing and sales expense
Marketing and sales expense was $108,140 and $46,434 for the three months ended
June 30, 2022, and 2021, respectively. This was an increase of 132.9%. Marketing
and sales expense was $190,328 and $97,827 for the six months ended June 30,
2022, and 2021, respectively, an increase of 94.6%.
Travel expenses increased approximately $22,000 and $39,000 during the three and
six months ended June 30, 2022, respectively, versus the same periods in 2021,
as we resumed in-person meetings with some customers and participated onsite in
industry trade shows. The three and six months ended June 30, 2021, included the
ERC of approximately $21,000 and $50,000, respectively.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Stock compensation expense
Included in total expenses were noncash stock-based compensation costs of $8,673
and $8,675 for the three months ended June 30, 2022, and 2021, respectively, and
$31,972 and $30,563 for the six months ended June 30, 2022, and 2021,
respectively. Compensation expense for all stock-based awards is based on the
grant date fair value and recognized over the required service (vesting) period.
Unrecognized non-cash stock-based compensation expense was $3,941 as of June 30,
2022 and will be recognized through 2023.
Interest
Interest expense was $5,769 for the three months ended June 30, 2022, and $9,014
for the three months ended June 30, 2021. Interest expense was $12,262 for the
six months ended June 30, 2022, and $16,652 for the six months ended June 30,
2021. The decrease was due to final payments of multiple finance leases during
2021.
Income taxes
Income tax expense was $83,400 and $47,473 for the three months ended June 30,
2022, and 2021, respectively, and $144,200 and $138,093 for the six months ended
June 30, 2022, and 2021, respectively. At December 31, 2021, the deferred tax
asset was $663,820. Management considered new evidence, both positive and
negative, during the first half of 2022 that could affect its view of the future
realization of deferred tax assets and determined that no valuation allowance
was necessary, and the deferred tax asset was $531,720 at June 30, 2022.
Income applicable to common stock
Income applicable to common stock for the three months ended June 30, 2022, and
2021, was $664,873 and $115,510, respectively. Income applicable to common stock
for the six months ended June 30, 2022, and 2021, was $1,049,274 and $762,057,
respectively. The increase was primarily the result of higher revenue and gross
profit.
Liquidity and Capital Resources
Cash
As of June 30, 2022, cash on hand was $5,409,210 compared to $4,140,942 at
December 31, 2021. The increase was principally due to record total revenue and
higher gross profit for the first six months of 2022.
Working capital
At June 30, 2022 working capital was $5,085,961 compared to $3,907,135 at
December 31, 2021, an increase of $1,178,826 or 30.2%. Cash increased
$1,268,268, receivables increased $287,692, inventories increased $2,544,430,
customer deposits increased $2,137,883, while prepaid expenses decreased
$632,305.
Cash from operations
Net cash provided by operating activities during the six months ended June 30,
2022, was $1,490,066 and $1,249,462 for the six months ended June 30, 2021. In
addition to the net income generated, this included depreciation and
amortization of $249,992 and $273,688, and noncash stock-based compensation
costs of $31,972 and $30,563 for the six months ended June 30, 2022, and 2021,
respectively.
The decrease in prepaid expenses was related to the receipt of inventory paid
for in December 2021 and received in January 2022. Inventories and customer
deposits increased due to orders received late in 2021 and throughout the first
six months of 2022.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Cash from investing activities
Cash of $179,140 and $558,828 was used in investing activities during the six
months ended June 30, 2022, and June 30, 2021, respectively, for the acquisition
of production equipment.
Cash from financing activities
Cash of $47,824 and $87,422 was used in financing activities for principal
payments to third parties for finance lease obligations during the six months
ended June 30, 2022, and 2021, respectively. The decrease was due to final
payments of multiple finance leases during 2021. A cash dividend payment of
$24,152 was made to owners of our Series B preferred stock during the six months
ended June 30, 2021.
Debt outstanding
Total debt outstanding was $195,392 at June 30, 2022, compared to $243,218 at
December 31, 2021, a decrease of 19.7%. As previously mentioned, cash of $47,824
was used for principal payments for finance lease obligations during 2022.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements including special purpose entities.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make judgments, assumptions and estimates that affect the amounts
reported in the Financial Statements and accompanying notes. Note 2 to the
Financial Statements in our Annual Report on Form 10-K for the year ended
December 31, 2021, describes the significant accounting policies and methods
used in the preparation of the Financial Statements. Estimates are used for, but
not limited to, accounting for the allowance for doubtful accounts, inventory
allowances, property and equipment depreciable lives, patents and licenses
useful lives, revenue recognition, income tax expense, deferred tax assets and
liabilities, realization of deferred tax assets, stock-based compensation and
assessing changes in which impairment of certain long-lived assets may occur.
Actual results could differ from these estimates. The following critical
accounting policies are impacted significantly by judgments, assumptions and
estimates used in the preparation of the Financial Statements. The allowance for
doubtful accounts is based on our assessment of the collectability of specific
customer accounts and the aging of the accounts receivable. If there is a
deterioration of a major customer's credit worthiness or actual defaults are
higher than our historical experience, our estimates of the recoverability of
amounts due us could be adversely affected. Inventory purchases and commitments
are based upon future demand forecasts. If there is a sudden and significant
decrease in demand for our products or there is a higher risk of inventory
obsolescence because of rapidly changing technology and customer requirements,
we may be required to increase our inventory allowances and our gross margin
could be adversely affected. The tax valuation allowance is based on our
consideration of new evidence, both positive and negative, that could affect our
view of the future realization of deferred tax assets. If we were to determine
we would not be able to realize all or part of the deferred tax asset in the
future, an adjustment to the deferred tax asset would be necessary which would
reduce our net income for that period. Depreciable and useful lives estimated
for property and equipment, licenses and patents are based on initial
expectations of the period of time these assets and intangibles will benefit us.
Changes in circumstances related to a change in our business, change in
technology or other factors could result in these assets becoming impaired,
which could adversely affect the value of these assets.
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