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, 2020.
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, 2020, 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
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 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.
Based on recent conversations with customers, we do not expect to experience any
material impairments or changes in accounting judgements related to COVID-19. We
are not experiencing any material adverse impact in our supply chain and remain
in frequent contact with our suppliers. 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.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
There have been public reports and announcements of a global semiconductor chip
shortage that is anticipated to continue into at least early 2022. It is
affecting companies across a wide range of industries, including some of our
customers, which could temporarily 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.
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 June 30, 2021, as Tax
Receivable, and as a credit to wages in the Statement of Operations during the
six months ended June 30, 2021.
The Relief Act extended and enhanced the Employee Retention Credit 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 is available for all four
quarters of 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
this credit. 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 the six months ended June 30, 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 the three and six months ended June 30, 2021.
$80,448 was applied as a credit to payroll taxes throughout the second quarter
and the remainder appears on the balance sheet as Tax Receivable as of June 30,
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
this credit 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. Thus, we expect to be eligible for this credit for a
similar amount during the third quarter of 2021.
For the three months ended June 30, 2021, we had total revenue of $1,972,049.
This was a decrease of $634,538 or 24.3%, compared to the three months ended
June 30, 2020. For the six months ended June 30, 2021, we had total revenue of
$4,994,359. This was a decrease of $1,051,023, or 17.4%, compared to the six
months ended June 30, 2020. The decrease was principally due to lower pricing in
the three and six months ended June 30, 2021, which was partially offset by
higher volume and product mix.
Gross profit was $562,554 for the three months ended June 30, 2021, compared to
$437,784 for the same three months in 2020 and $1,365,590 and $947,122 for the
six months ended June 30, 2021, and 2020, respectively. This increase was due to
volume, product mix, and improved manufacturing efficiency. In addition, $87,287
and $238,275 was related to the Employee Retention Credit for the three and six
months ended June 30, 2021, respectively.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Operating expenses were $384,519, and $410,024 for the three months ended June
30, 2021, and 2020, respectively and $762,012 and $831,877 for the six months
ended June 30, 2021, and 2020, respectively.
Income from operations was $178,035 and $27,760 for the three months ended June
30, 2021, and 2020, respectively, which included $151,701 related to the
Employee Retention Credit during the second quarter of 2021. Income from
operations was $603,578 and $115,245 for the six months ended June 30, 2021, and
2020, respectively, which included $407,207 related to the Employee Retention
Credit.
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 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
transparent conductive oxide systems for the solar and display markets as well
as with our transparent electronic products. Those products involve research and
development expense to accelerate time to market.
RESULTS OF OPERATIONS
Three and six months ended June 30, 2021 (unaudited) compared to three and six
months ended June 30, 2020 (unaudited):
Revenue
For the three months ended June 30, 2021, we had total revenue of $1,972,049.
This was a decrease of $634,538, or 24.3%, compared to the three months ended
June 30, 2020. For the six months ended June 30, 2021, we had total revenue of
$4,994,359. This was a decrease of $1,051,023, or 17.4%, compared to the six
months ended June 30, 2020. These increases were principally due to lower
pricing in 2021, which was partially offset by higher volume and product mix. We
anticipate revenue to increase significantly during the third quarter of 2021
based on orders received during the first half of 2021.
Gross profit
Gross profit was $562,554 for the three months ended June 30, 2021, compared to
$437,784 for the same three months in 2020. This was an increase of $124,770, or
28.5%. Gross profit as a percentage of revenue (gross margin) was 28.5% for the
second quarter of 2021 compared to 16.8% for the same period in 2020. Gross
profit was $1,365,590 for the six months ended June 30, 2021, compared to
$947,122 for the first six months of 2020. This was an increase of $418,468 or
44.2%. Gross margin was 27.3% for the first six months of 2021 compared to
15.7% for the same period in 2020. These increases were due to volume, product
mix, and improved manufacturing efficiency. In addition, $87,287 and $238,275
was related to the Employee Retention Credit for the three and six months ended
June 30, 2021, respectively. While we expect revenue and gross profit to
increase during the third quarter of 2021, it is anticipated that gross margin
will decrease due to higher raw material cost.
General and administrative expense
General and administrative expense for the three months ended June 30, 2021, and
2020, was $283,708 and $272,216, respectively, an increase of 4.2%. General and
administrative expense for the six months ended June 30, 2021, and 2020, was
$571,589 and $555,381, respectively, an increase of 2.9%. Increase in
compensation was offset by the Employee Retention Credit of $21,000 during the
second quarter of 2021 and $57,000 for the six months ended June 30, 2021.
Included in general and administrative expense was $53,561 and $56,555 for
professional fees for the three months ended June 30, 2021, and 2020,
respectively and $124,759 and $120,137 for the six months ended June 30, 2021,
and 2020, respectively. These continued expenses were primarily related to SEC
compliance costs for legal, accounting and stockholder relations fees.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Research and development expense
Research and development expense for the three months ended June 30, 2021, was
$54,377 compared to $90,421 for the same period in 2020, a decrease of 39.9%.
Research and development expense for the six months ended June 30, 2021, was
$92,596 compared to $177,325 for the same period in 2020, a decrease of 47.8%.
This decrease is primarily related to the Employee Retention Credit of $22,750
during the second quarter of 2021 and $61,750 during the first six months of
2021. 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 $46,434 and $47,387 for the three months ended
June 30, 2021, and 2020, respectively. This was a decrease of 2.0%. Compensation
expense related to an increase in staff in 2021 was offset by the Employee
Retention Credit of approximately $20,663.
Marketing and sales expense was $97,827 and $99,171 for the six months ended
June 30, 2021, and 2020, respectively. This was a decrease of 1.4%. Higher
outside consulting expense and compensation expense related to an increase in
staff in 2021 were offset by the Employee Retention Credit of $50,183, as well
as lower travel expense.
Stock compensation expense
Included in total expenses were noncash stock-based compensation costs of $8,675
and $31,182 for the three months ended June 30, 2021, and 2020, respectively,
and $30,563 and $62,362 for the six months ended June 30, 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 $8,669 as of June 30,
2021, and will be recognized through 2023.
Interest
Interest expense was $9,014 for the three months ended June 30, 2021, and $7,300
for the three months ended June 30, 2020. Interest expense was $16,652 for the
six months ended June 30, 2021, and $11,369 for the six months ended June 30,
2020. Lower interest income during the first half of 2021 resulted in an
increase to overall interest expense.
Income taxes
Income tax expense was $47,473 and $0 for the three months ended June 30, 2021,
and 2020, respectively, and $138,093 and $1,900 for the six months ended June
30, 2021, and 2020, respectively. 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. Management considered new evidence, both positive and
negative, during the first half of 2021 that could affect its view of the future
realization of deferred tax assets and determined that no valuation allowance
was necessary at June 30, 2021, and the deferred tax asset was $888,315 at June
30, 2021.
Income applicable to common stock
Income applicable to common stock for the three months ended June 30, 2021, and
2020, was $115,510 and $14,422, respectively. Income applicable to common stock
for the six months ended June 30, 2021, and 2020 was $762,057 and $89,900,
respectively. The increase was primarily the result of higher gross profit and
the Employee Retention Credit for the three and six months ended June 30, 2021,
as well as forgiveness of the PPP Loan in the first quarter of this year.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Liquidity and Capital Resources
Cash
As of June 30, 2021, cash on hand was $3,497,202 compared to $2,917,551 at
December 31, 2020, an increase of 19.9%.
Working capital
At June 30, 2021, working capital was $3,269,696 compared to $2,810,629 at
December 31, 2020, an increase of $459,067, or 16.3%, primarily due to the
increase in cash of $579,651.
Cash from operations
Net cash provided by operating activities during the six months ended June 30,
2021, was $1,249,462 and $8,818 for the six months ended June 30, 2020. This
included depreciation and amortization of $273,688 and $266,486, and noncash
stock-based compensation costs of $30,563 and $62,362 for the six months ended
June 30, 2021, and 2020, respectively. Due to orders received during the first
half of 2021, inventories increased $3,065,409, accrued expenses and customer
deposits increased $3,477,435 and accounts payable increased $286,866.
Cash from investing activities
Cash of $558,828 and $167,999 was used in investing activities during the six
months ended June 30, 2021, and June 30, 2020, respectively, for the acquisition
of production equipment.
Cash from financing activities
Cash of $87,422 and $48,620 was used in financing activities for principal
payments to third parties for finance lease obligations during the six months
ended June 30, 2021, and 2020, respectively. The increase is due to the
commencement of a finance lease during the third quarter of 2020 for the rebuild
of production equipment. Also, a dividend payment of $24,152 was made to owners
of our Series B preferred stock during the second quarter of 2021 and 2020.
Debt outstanding
Total debt outstanding decreased to $316,212 at June 30, 2021, from $728,934 at
December 31, 2020, a decrease of 56.6%. As previously mentioned, cash of $87,422
was used for principal payments for finance lease obligations and our PPP loan
of $325,300 was forgiven in full by the SBA.
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, 2020, 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, tax valuation allowance, 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
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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. 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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