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, 2022.
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, 2022, 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 we 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 three months ended March 31, 2023, we had total revenue of $5,797,147
compared to $5,326,432 for the three months ended March 31, 2022. Higher volume
was the key factor that contributed to the increase, despite lower raw material
costs compared to the same period last year.
Gross profit was $1,324,597 for the three months ended March 31, 2023 compared
to $994,101 for the same three months in 2022. The increase was due to higher
revenue and favorable product mix.
Operating expenses were $677,344, and $542,407 for the three months ended March
31, 2023 and 2022, respectively.
Income from operations was $647,253 and $451,694 for the three months ended
March 31, 2023 and 2022, 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 presses, 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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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 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 in 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.
RESULTS OF OPERATIONS
Three months ended March 31, 2023 (unaudited) compared to three months ended
March 31, 2022 (unaudited):
Revenue
For the three months ended March 31, 2023, we had revenue of $5,797,147. This
was an increase of $470,715, compared to the three months ended March 31, 2022.
Higher volume was the key factor that contributed to the increase, despite lower
raw material costs compared to the same period last year.
Gross profit
Gross profit was $1,324,597 for the three months ended March 31, 2023, compared
to $994,101 for the same three months in 2022, an increase of $330,496. The
increase was due to higher revenue and favorable product mix. Gross profit as a
percentage of revenue (gross margin) was 22.8% for the first quarter of 2023
compared to 18.7% for the first quarter of 2022. The improved gross margin in
2023 was due to product mix and lower raw material costs.
General and administrative expense
General and administrative expense for the three months ended March 31, 2023 and
2022, was $432,413, and $373,188, respectively, an increase of 15.9%. This
increase was attributed to higher compensation of $42,119, an increase in
business liability insurance (due to higher revenue) of $12,938, and
professional fees, primarily related to SEC compliance costs for legal,
accounting and stockholder relations fees, of $7,328.
Research and development expense
Research and development expense for the three months ended March 31, 2023, was
$135,360 compared to $87,031 for the same period in 2022, an increase of 55.5%.
This increase was attributed to higher compensation of $19,121, outside
consulting of $16,789 and materials and supplies of $12,614. 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.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Marketing and sales expense
Marketing and sales expense was $109,571 and $82,188 for the three months ended
March 31, 2023, and 2022, respectively. This was an increase of 33.3%.
Compensation expense and travel expense increased $17,525 and $9,225 during the
three months ended March 31, 2023, and 2022, respectively. We exhibited at a
major international photonics trade show for the first time during the first
quarter of 2023.
Stock compensation expense
Included in total expenses were noncash stock-based compensation costs of
$45,090 and $23,299 for the three months ended March 31, 2023 and 2022,
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 $394 as of March 31,
2023 and will be recognized through April of 2023.
Interest
Interest income was $48,977, for the three months ended March 31, 2023. Interest
expense was $6,493 for the three months ended March 31, 2022. The improvement
was due to our approximately $2.0 million investment in marketable securities
and the overall increase in interest rates. Interest expense has decreased as we
continue to reduce our debt outstanding.
Income taxes
Income tax expense was $158,210, and $60,800 for the three months ended March
31, 2023, and 2022, respectively. At December 31, 2022, the deferred tax asset
was $151,164. 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 $34,231 at March 31,
2023.
Net income
Net income for the three months ended March 31, 2023, and 2022, was $538,020,
and $384,401, respectively. The increase was primarily the result of higher
revenue, gross profit and interest income partially offset by higher operating
and income tax expenses.
Liquidity and Capital Resources
Cash
As of March 31, 2023, cash on hand was $4,495,169 compared to $3,947,966 at
December 31, 2022 due to net cash provided by operating activities in
conjunction with investment in our manufacturing footprint and acquisition of
production equipment.
Working capital
At March 31, 2023, working capital was $5,843,578 compared to $5,211,625 at
December 31, 2022, an increase of $631,953 or 12.1%. Cash increased $547,203,
inventories increased $441,214, prepaid expenses increased $200,093 and customer
deposits increased $823,495 while accounts payable decreased $198,002.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Cash from operations
Net cash provided by operating activities during the three months ended March
31, 2023, was $719,764 and $603,992 for the three months ended March 31, 2022.
In addition to the net income generated, this included depreciation and
amortization of $115,591 and $102,350, and noncash stock-based compensation
costs of $45,090 and $23,299 for the three months ended March 31, 2023, and
2022, respectively. The increases in inventories, prepaid expenses, and customer
deposits compared to December 31, 2022, were related to the increase in orders
received during the first quarter. Customer orders remain strong, and customers
continue to monitor inventory closely with continued emphasis on intra-quarter
shipments.
Cash from investing activities
Cash of $147,721 was used in investing activities during the three months ended
March 31, 2023, which included the initial stages of the enclosure of our
ceramic machining area in addition to the acquisition of production equipment.
Cash of $74,676 was used in investing activities during the three months ended
March 31, 2022, for the purchase of production equipment.
Cash from financing activities
Cash of $24,840 and $23,783 was used in financing activities for principal
payments to third parties for finance lease obligations during the three months
ended March 31, 2023, and 2022, respectively.
Debt outstanding
Total debt outstanding, related to finance lease obligations, was $121,676 at
March 31, 2023, compared to $146,516 at December 31, 2022, a decrease of 17.0%.
As previously mentioned, cash of $24,840 was used for principal payments for
finance lease obligations during 2023.
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, 2022, 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 and current
expected credit losses, 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 creditworthiness
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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