Executive Summary
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, some federal, state, and local executive orders have been
lifted and we continue to follow practical safety procedures. These procedures
include, but are not limited to wearing masks, social distancing, staggering
start times, and teleconferencing versus in person meetings. Almost all of our
employees have been fully vaccinated. We recently resumed in person meetings
with some customers and continue to maintain regular contact, via phone and
other electronic means, with other customers and suppliers whom we are still
unable to visit in person.
Based on ongoing conversations with customers, we do not expect to experience
any material impairments or changes in accounting judgements related to
COVID-19. Although we continue to face a period of uncertainty regarding the
ongoing impact of the COVID-19 pandemic and emergence of new variants on
projected customer demand, market conditions continue to gradually improve. In
the midst of this challenging environment, we remain focused on taking the
necessary steps to respond quickly to changes in our business through specific
contingency plans including (but not limited to): reviewing and monitoring
planned capital expenditures, reviewing all operating expenses for opportunities
to reduce and/or defer spending, and aligning inventory to planned shipments and
estimated revenue.
We continue to monitor the evolving situation related to COVID-19 including
guidance from federal, state, and local public health authorities and may take
additional actions based on these recommendations. In these circumstances, there
may be developments outside our control requiring us to adjust our operating
plan. As such, given the dynamic nature of this situation, we cannot reasonably
estimate the impacts of COVID-19 or the emergence of new variants on our results
of operations, cash flows and liquidity in the future.
Two additional issues continue to affect national and global market conditions.
First, supply chain disruptions have become more frequent in recent months for
the Company and some of its customers. Thus far, we have not experienced
material adverse effects regarding product shipments; however, timely sourcing
of certain materials is of increased concern. Second, published articles and
corporate announcements continue to address the global semiconductor chip
shortage, which is anticipated to continue in 2022. This shortage is affecting
some of our customers which could impact the Company's revenue, volume, and
profitability. 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.
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The Employee Retention Credit ("ERC"), as originally enacted on March 27, 2020,
by the CARES Act, is a refundable tax credit against certain employment taxes
equal to 50% of the qualified wages an eligible employer pays 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 sheet as of December 31, 2021, as Tax
Receivable, and as a credit to wages in the Statement of Operations during the
twelve months ended December 31, 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 pays 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 quarter of 2021, we experienced a decline in gross receipts of
25% compared to the first quarter of 2019. This decline, along with continued
underutilization of certain manufacturing equipment, reduction in employee's
workloads, travel restrictions and supply chain issues, qualified us to receive
the ERC. We filed Form 941 for the first quarter of 2021 and claimed a credit of
$150,507 on qualified wages paid in the first quarter of 2021. These funds were
received during the second quarter of 2021 and appear as a credit to wages in
the Statement of Operations during 2021. An employer that has a decline
continues to be eligible until the end of the calendar quarter in which gross
receipts are greater than 80% of its 2019 calendar quarter receipts. Thus, we
were eligible for this credit for the second quarter of 2021 in the amount of
$151,701, which appears as a credit to wages in the Statement of Operations for
2021.
During the second quarter of 2021, we experienced a decline in gross receipts of
30% compared to the second quarter of 2019. This decline, along with continued
underutilization of certain manufacturing equipment, reduction in employee's
workloads, travel restrictions and supply chain issues, qualified us to receive
the ERC for the third quarter of 2021. As previously mentioned, an employer that
has a decline in gross receipts continues to be eligible until the end of the
calendar quarter in which gross receipts are greater than 80% of its 2019
calendar quarter receipts. As a result, we were eligible for this credit for the
third quarter of 2021 in the amount of $153,713, which appears as a credit to
wages in the Statement of Operations for 2021.
In addition, the American Rescue Plan Act of 2021 allows eligible employers with
fewer than 500 employees to qualify for a tax credit for providing paid time off
for each employee receiving COVID-19 vaccinations and for any time needed to
recover from the vaccine. The Company received a credit of $11,042 and this
amount appears as a credit to wages in the Statement of Operations for 2021.
For the year ended December 31, 2021, we had total revenue of $13,448,021. This
was an increase of $2,551,992, or 23.4%, compared to 2020. The increase was
primarily due to increased volume and higher raw material pricing. During 2020,
total revenue was adversely impacted by lower volume, pricing, and COVID-19
related issues.
Gross profit was $3,529,255 for 2021 compared to $2,198,290 for 2020. The
increase was attributable to higher revenue as well as product mix and improved
manufacturing efficiency.
Operating expenses were $1,751,349 and $1,681,943 for 2021, and 2020,
respectively.
Income from operations was $1,777,906 and $516,347 for 2021 and 2020,
respectively, which included $571,962 related to the ERC and ARP credits during
2021.
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 involve research and development expense to accelerate time to market.
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RESULTS OF OPERATIONS
Year 2021 compared to Year 2020
Revenue
For the year ended December 31, 2021, we had total revenue of $13,448,021. This
was an increase of $2,551,992, or 23.4%, compared to 2020. The increase was
principally due to increased volume and higher raw material pricing in 2021.
During 2020, total revenue was adversely impacted by lower volume, pricing, and
COVID-19 related issues.
Gross profit
Gross profit was $3,529,255 for 2021 compared to $2,198,290 for 2020. Gross
profit as a percentage of revenue (gross margin) was 26.2% and 20.2% for 2021
and 2020, respectively. The increase in gross profit and gross margin was
attributable to higher revenue as well as product mix and improved manufacturing
efficiency. In addition, $328,356 was related to the ERC and ARP credits
recognized in 2021.
General and administrative expense
General and administrative expense for 2021 and 2020, was $1,280,579 and
$1,148,615, respectively, an increase of 11.5%. Increases in compensation and
professional fees were partially offset by the ERC and ARP credits of $79,354
during 2021.
Included in general and administrative expense was $270,609 and $222,024 for
professional fees during 2021 and 2020, respectively. These expenses were
primarily related to SEC compliance costs for legal, accounting and stockholder
relations fees. Additional fees were incurred during 2021 for the redemption of
the Company's Convertible Preferred Stock, Series B.
Research and development expense
Research and development expense for 2021 was $235,679 compared to $337,823 for
2020, a decrease of 30.2%. This decrease was primarily related to ERC and ARP
credits of $90,974 during 2021. Specialty materials continue to be 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 $235,091 and $195,505 during 2021 and 2020,
respectively. This was an increase of $39,586, or 20.2%. This increase was
primarily related to higher compensation expense related to an increase in
staff, outside consulting expense and increased travel with resumption of
limited in-person meetings and industry tradeshows. These increased expenses
were partially offset by the ERC and ARP credits of $73,278.
Stock compensation expense
Included in total expenses were non-cash stock-based compensation costs of
$47,903 and $124,720 for 2021 and 2020, 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 $6,305 as of December 31, 2021, and will be recognized
through 2023.
Interest
Interest expense was $32,140 and $32,087 for 2021 and 2020, respectively. Lower
lease interest expense attributable to principal payments for lease obligations
for 2021 was offset by less interest income due to lower interest rates during
2021 compared to the prior year.
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Income taxes
Income tax expense was $392,242 for the twelve months ended December 31, 2021.
In December 2020, we reversed in full our valuation allowance that had been
recorded against the unrealizability of the deferred tax asset, which resulted
in the recording of the asset of $1,019,317 at December 31, 2020. An income tax
benefit of $1,017,503 for the year ended December 31, 2020, was recorded on the
Statement of Operations. Management considered new evidence, both positive and
negative, during 2021 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 $663,820 at December 31, 2021.
Income applicable to common stock
Income applicable to common stock for 2021 and 2020 was $1,654,672 and
$1,477,611, respectively. The income in 2021 was primarily the result of higher
revenue, improved gross profit, and the ERC, as well as forgiveness of the PPP
Loan in January 2021. The income tax benefit of $1,017,503 noted above
represented a significant portion of income applicable to common stock for 2020.
Liquidity and Capital Resources
Cash
As of December 31, 2021, cash on hand was $4,140,942 compared to $2,917,551 at
December 31, 2020. This increase of 44% was attributable to higher gross profit
throughout 2021 as well as the ERC.
Working capital
At December 31, 2021, working capital was $3,907,135 compared to $2,810,629 at
December 31, 2020, an increase of $1,096,506 or 39.0%. The increase was
primarily due to the increase in cash noted above.
Cash from operations
Net cash provided by operating activities during 2021 was $2,610,548 and
$991,032 during 2020. These figures represent net income net of noncash items,
such as depreciation and amortization of $516,579 and $532,842 and non-cash
stock-based compensation costs of $47,902 and $124,720 for 2021 and 2020,
respectively. In addition, due to orders received throughout 2021, accrued
expenses and customer deposits increased $834,718, and prepaid expenses
increased $547,023 during 2021. Customer deposits decreased $1,378,531 and
inventory decreased $1,566,457 during 2020. Deferred tax asset decreased
$360,410 in 2021 from the initial amount of $1,017,503 recognized at
December 31, 2020.
Cash from investing activities
Cash of $706,242 and $78,915 was used in investing activities during the
twelve months ended December 31, 2021, and 2020, respectively, for the
acquisition of production equipment. The Company used cash for the acquisition
of production equipment during 2021 rather than utilize an equipment lease line
of credit that was available.
Cash from financing activities
Cash of $160,416 and $127,174 was used in financing activities for principal
payments to third parties for finance lease obligations during 2021 and 2020,
respectively. The increase was due to the commencement of a finance lease during
the second half of 2020 for the rebuild of production equipment. On December 31,
2021, we redeemed all 24,152 shares of our Convertible Preferred Stock,
Series B. The redemption included cash payments of $248,766 plus unpaid annual
dividends of $265,672. A dividend payment of $24,152 was previously made to
owners of this stock during the second quarter of 2021 and 2020. As previously
mentioned, during 2020 we entered into an unsecured promissory note under the
Paycheck Protection Program, with a principal amount of $325,300 which was
forgiven in January 2021.
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Debt outstanding
Total debt outstanding decreased to $243,218 at December 31, 2021, from $728,934
at December 31, 2020, a decrease of 67%. As previously mentioned, cash of
$160,416 was used for principal payments for finance lease obligations and our
PPP loan of $325,300 was forgiven in full by the SBA.
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 the 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, the accounting for the allowance for doubtful accounts,
inventory allowances, property and equipment depreciable lives, patents and
license 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 profit 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 provide benefit. 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.
Inflation
While there was not a significant impact from inflation on our operations during
the past three fiscal years, we experienced increased costs during 2021 that are
expected to continue into 2022.
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