Executive Summary

For the year ended December 31, 2022, we had total revenue of $23,467,030 compared to $13,448,021 for the year ended December 31, 2021. Higher pricing, primarily attributable to raw material costs, higher volume and product mix were key factors that contributed to the increase.

Gross profit was $4,786,955 for 2022 compared to $3,529,255 for 2021. The increase was attributable to higher revenue as well as favorable product mix and improved manufacturing efficiency. The year ended December 31, 2021 included a reduction of costs of approximately $323,000 related to the Employee Retention Credit ("ERC") enacted in 2020.

Operating expenses were $2,306,737 and $1,751,349 for 2022, and 2021, respectively. The year ended December 31, 2021 included a reduction of expenses of approximately $238,000 related to the ERC.

Income from operations was $2,480,218 and $1,777,906 for 2022 and 2021, respectively

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.


                                       16

Table of Contents

Several issues continue to affect national and global market conditions. First, inflation remains at historically high levels, impacting labor, 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 into 2023. 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, including identifying additional suppliers and adapting to our customers' specific circumstances and forecasts.

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 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.

RESULTS OF OPERATIONS

Year 2022 compared to Year 2021

Revenue

For the year ended December 31, 2022, we had total revenue of $23,467,030, compared to $13,448,021 for the year ended December 31, 2021. This was an increase of $10,019,009. Higher raw material pricing was the most significant factor for the increase in revenue. In addition, higher volume and product mix contributed to the increase.

Gross profit

Gross profit was $4,786,955 for 2022 compared to $3,529,255 for 2021. The increase was attributable to higher revenue as well as improved manufacturing efficiency. The year ended December 31, 2021 included a reduction of costs of approximately $323,000 related to the Employee Retention Credit ("ERC"). Gross profit as a percentage of revenue (gross margin) was 20.4% and 26.2% for 2022 and 2021, respectively. The lower gross margin in 2022 compared to a year ago was due to higher raw material costs and product mix during 2022 as well as the ERC recognized in 2021.

General and administrative expense

General and administrative expense for 2022 and 2021, was $1,549,696 and $1,280,579, respectively, an increase of 21.0%. During 2022 there was an increase in compensation of $151,771, which included an increase in staff. Business liability insurance (due to higher revenue) increased $48,892. The year 2021 also benefited from the ERC of approximately $78,000.

Included in general and administrative expense was $260,826 and $270,609 for professional fees during 2022 and 2021, respectively. These expenses were primarily related to SEC compliance costs for legal, accounting and stockholder relations fees.

Research and development expense

Research and development expense for 2022 was $375,728, compared to $235,679 for 2021, an increase of 59.4%. The ERC of approximately $89,000 was included in the twelve months ended December 31, 2021. Additional research supplies also contributed to the increase in expenses in 2022. 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.



                                       17

  Table of Contents

Marketing and sales expense

Marketing and sales expense was $381,313, and $235,091 during 2022 and 2021, respectively. This was an increase of $146,222, or 62.2%. During 2022 there was an increase in compensation of $45,632 which was partially offset by a reduction in outside consulting expenses of $23,500. Travel expenses increased $43,474 as we resumed in-person meetings with some customers and participated onsite in additional industry trade shows. The ERC of approximately $71,000 reduced expenses in 2021.

Stock compensation expense

Included in total expenses were non-cash stock-based compensation costs of $49,321 and $47,903 for 2022 and 2021, respectively. The non-employee board members received compensation of 8,755 and 9,165 shares of common stock of the Company during 2022 and 2021, respectively. The stock had an aggregate value of $29,967 and $29,963 for the year ended December 31, 2022, and 2021, respectively, and was recorded as non-cash stock compensation expense in the financial statements. Beginning January 1, 2023, non-employee board members will receive their entire compensation in cash. 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 $1,576 as of December 31, 2022, and will be recognized through April 2023

Interest

Interest income was $19,201 for the year ended December 31, 2022 and interest expense was $32,140 for the year ended December 31, 2021. The improvement was due to our investment into marketable securities and the overall increase in interest rates during the second half of 2022 and the final payments of multiple finance leases during 2021.

Income taxes

Income tax expense was $542,395 and $392,242 for the twelve months ended December 31, 2022 and 2021, respectively. At December 31, 2021, the deferred tax asset was $663,820. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. Accordingly, management determined that no valuation allowance was necessary, and the deferred tax asset was $151,164 at December 31, 2022.

Income applicable to common stock

Income applicable to common stock for 2022 and 2021 was $1,957,024 and $1,654,672, respectively. The increase was primarily the result of higher revenue and gross profit. Included in the year 2021 was the ERC which reduced overall expenses by approximately $561,000 and the forgiveness of our Payroll Protection Plan loan of $325,300.

Liquidity and Capital Resources

Cash

As of December 31, 2022, cash on hand was $3,947,966 compared to $4,140,942 at December 31, 2021. We purchased marketable securities of $1,989,265 and production equipment of $536,313 during 2022 which slightly reduced our year-end cash balance.

Working capital

At December 31, 2022, working capital was $5,211,625 compared to $3,907,135 at December 31, 2021, an increase of $1,304,490 or 33.4%. The increase was primarily due to the increase in inventory and investment in marketable securities noted above.



                                       18

  Table of Contents

Cash from operations

Net cash provided by operating activities during 2022 was $2,398,155 and $2,610,548 during 2021. In addition to the net income generated, this included depreciation and amortization of $519,031 and $516,579, and noncash stock-based compensation costs of $49,321 and $47,903 for the twelve months ended December 31, 2022, and 2021, respectively. The decrease in prepaid expenses was related to inventory paid for in December 2021 and received in January 2022. Inventories and accounts payable increased due to orders received during the fourth quarter and throughout 2022. Customer orders remain strong, and deposits increased slightly as customers have monitored inventory more closely with continued emphasis on intra-quarter shipments.

Cash from investing activities

Cash of $536,313 and $706,242 was used in investing activities during the twelve months ended December 31, 2022, and 2021, respectively, for the acquisition of production equipment. This included a vacuum hot press that enables production of higher temperature materials with increased capacity. It was purchased and installed for approximately $500,000. A deposit of $220,075 was paid in the first quarter of 2021 for this vacuum hot press and the remaining amount was paid in cash during the third quarter of 2022. As previously mentioned, we purchased marketable securities of $1,989,265 during 2022.

Cash from financing activities

Cash of $96,702 and $160,416 was used in financing activities for principal payments to third parties for finance lease obligations during 2022 and 2021, respectively. The decrease was due to final payments of multiple finance leases during 2021. 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. An annual dividend payment of $24,152 was previously made to owners of this stock during the second quarter of 2021.

Debt outstanding

Total debt outstanding decreased to $146,516 at December 31, 2022, from $243,218 at December 31, 2021, a decrease of 40%. As previously mentioned, cash of $96,702 was used for principal payments for finance lease obligations during 2022.

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, 2022, 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 expected 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 expected losses, 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.



                                       19

  Table of Contents

Inflation

While there was not a significant impact from inflation on our operations during the past three fiscal years, we experienced increased costs during 2022 that are expected to continue into 2023.

© Edgar Online, source Glimpses