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, 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 recent 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.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Two additional issues are affecting 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 into 2022. It 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.
The Employee Retention Credit, 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 September 30, 2021, as Tax
Receivable, and as a credit to wages in the Statement of Operations during the
nine months ended September 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 nine months ended September 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 nine months ended September 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 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 the three and nine months ended September 30,
2021. $73,852 was applied as a credit to payroll taxes throughout the third
quarter and the remainder appears on the balance sheet as Tax Receivable as of
September 30, 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 the three
and nine months ended September 30, 2021.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
For the three months ended September 30, 2021, we had record total revenue of
$5,211,169. This was an increase of $3,717,091 or 248.8%, compared to the three
months ended September 30, 2020. For the nine months ended September 30, 2021,
we had total revenue of $10,205,528. This was an increase of $2,666,068, or
35.4%, compared to the nine months ended September 30, 2020. The increase was
principally due to higher raw material pricing for the 2021 third quarter, in
addition to increased volume and improved product mix throughout the first nine
months of 2021 compared to a year ago.
Gross profit was a record $1,302,368 for the three months ended September 30,
2021, compared to $459,139 for the same three months in 2020 and $2,667,958 and
$1,406,261 for the nine months ended September 30, 2021, and 2020, respectively.
These increases were due to volume, product mix, and improved manufacturing
efficiency. In addition, $90,082 and $328,356 was related to the ERC and ARP
credits for the three and nine months ended September 30, 2021, respectively.
Operating expenses were $425,341 and $391,582 for the three months ended
September 30, 2021, and 2020, respectively and $1,187,353 and $1,223,459 for the
nine months ended September 30, 2021, and 2020, respectively.
Income from operations was $877,027 and $67,557 for the three months ended
September 30, 2021, and 2020, respectively, which included $164,755 related to
the ERC and ARP credits during the third quarter of 2021. Income from operations
was $1,480,605 and $182,802 for the nine months ended September 30, 2021, and
2020, respectively, which included $571,962 related to the ERC and ARP credits
during the first nine months of 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 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 nine months ended September 30, 2021 (unaudited) compared to three and
nine months ended September 30, 2020 (unaudited):
Revenue
For the three months ended September 30, 2021, we had total record revenue of
$5,211,169. This was an increase of $3,717,091 or 248.8%, compared to the three
months ended September 30, 2020. For the nine months ended September 30, 2021,
we had total revenue of $10,205,528. This was an increase of $2,666,068 or
35.4%, compared to the nine months ended September 30, 2020. The increase was
principally due to higher raw material pricing in the 2021 third quarter, in
addition to increased volume and improved product mix throughout the first nine
months of 2021. During 2020, total revenue was adversely impacted by lower
volume, pricing, and COVID-19 related issues. We anticipate revenue for the
fourth quarter of 2021 to be below the 2021 third quarter amount, primarily due
to lower raw material pricing. Volume is expected to remain stable during the
2021 fourth quarter compared to the third quarter of 2021.
Gross profit
Gross profit was a record $1,302,368 for the three months ended September 30,
2021, compared to $459,139 for the same three months in 2020. This was an
increase of $843,229 or 183.7%. Gross profit as a percentage of revenue (gross
margin) was 25.0% for the third quarter of 2021 compared to 30.7% for the same
period in 2020. Gross profit was $2,667,958 for the nine months ended September
30, 2021, compared to $1,406,261 for the first nine months of 2020. This was an
increase of $1,261,697 or 89.7%. Gross margin was 26.1% for the first nine
months of 2021 compared to 18.7% for the same period in 2020. These increases
were due to volume, product mix, and improved manufacturing efficiency. In
addition, $90,082 and $328,356 was related to the ERC and ARP credits for the
three and nine months ended September 30, 2021, respectively.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
General and administrative expense
General and administrative expense for the three months ended September 30,
2021, and 2020, was $306,997 and $263,444, respectively, an increase of 16.5%.
General and administrative expense for the nine months ended September 30, 2021,
and 2020, was $878,586 and $818,825, respectively, an increase of 7.3%. Increase
in compensation, including year-end accruals, was partially offset by the ERC
and ARP credits of $22,354 during the third quarter of 2021 and $79,354 for the
nine months ended September 30, 2021.
Professional fees
Included in total expense was $44,385 and $39,694 for professional fees for the
three months ended September 30, 2021, and 2020, respectively and $169,143 and
$159,831 for the nine months ended September 30, 2021, and 2020, 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 the three months ended September 30, 2021,
was $56,612 compared to $83,276 for the same period in 2020, a decrease of
32.0%. Research and development expense for the nine months ended September 30,
2021, was $149,208 compared to $260,601 for the same period in 2020, a decrease
of 42.7%. This decrease was primarily related to the ERC and ARP credits of
$29,224 during the third quarter of 2021 and $90,974 during the first nine
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 $61,732 and $44,862 for the three months ended
September 30, 2021, and 2020, respectively. This was an increase of $16,870 or
37.6%. Compensation expense related to an increase in staff in 2021 was offset
by the ERC and ARP credits of $23,095. Travel expenses were up slightly as we
were able to attend one tradeshow, but some tradeshows have been cancelled or
moved to virtual, including some scheduled for the fourth quarter of 2021. We
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 due to
the ongoing COVID-19 pandemic.
Marketing and sales expense was $159,559 and $144,033 for the nine months ended
September 30, 2021, and 2020, respectively. This was an increase of 10.8%.
Higher outside consulting expense and compensation expense related to an
increase in staff in 2021 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
$8,670 and $31,182 for the three months ended September 30, 2021, and 2020,
respectively, and $39,233 and $93,544 for the nine months ended September 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
$7,487 as of September 30, 2021, and will be recognized through 2023.
Interest
Interest expense was $8,156 and $9,058 for the three months ended September 30,
2021, and 2020, respectively. Interest expense was $24,808 and $20,427 for the
nine months ended September 30, 2021, and 2020, respectively. Lower interest
income during 2021 resulted in an increase to overall interest expense.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Income taxes
Income tax expense was $200,189 and $0 for the three months ended September 30,
2021, and 2020, respectively, and $338,282 and $1,900 for the nine months ended
September 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 nine months of 2021 that could affect
its view of the future realization of deferred tax assets and determined that no
valuation allowance was necessary at September 30, 2021, and the deferred tax
asset was $703,132 at September 30, 2021.
Income applicable to common shares
Income applicable to common shares for the three months ended September 30,
2021, and 2020, was $662,644 and $52,461, respectively. Income applicable to
common shares for the nine months ended September 30, 2021, and 2020 was
$1,424,701 and $142,361, respectively. These increases were primarily the result
of higher revenue, improved gross profit, and the Employee Retention Credit for
the three and nine months ended September 30, 2021, as well as forgiveness of
the PPP Loan in the first quarter of this year.
Liquidity and Capital Resources
Cash
As of September 30, 2021, cash on hand was $3,953,385 compared to $2,917,551 at
December 31, 2020, an increase of 35.5%.
Working capital
At September 30, 2021, working capital was $4,152,431 compared to $2,810,629 at
December 31, 2020, an increase of $1,341,802, or 47.7%, primarily due to the
increase in cash of $1,035,834.
Cash from operations
Net cash provided by operating activities during the nine months ended September
30, 2021, was $1,780,698 and $504,561 for the nine months ended September 30,
2020. This included depreciation and amortization of $329,104 and $338,616 and
non-cash stock-based compensation costs of $39,233 and $93,544 for the nine
months ended September 30, 2021, and 2020, respectively. In addition, due to
orders received throughout 2021, accrued expenses and customer deposits
increased $887,869, inventory increased $801,669, accounts receivable increased
$298,706 and accounts payable increased $165,371.
Cash from investing activities
Cash of $615,088 and $49,023 was used in investing activities during the nine
months ended September 30, 2021, and 2020, respectively, for the acquisition of
production equipment.
Cash from financing activities
Cash of $123,715 and $84,238 was used in financing activities for principal
payments to third parties for finance lease obligations during the nine months
ended September 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 $279,919 at September 30, 2021, from
$728,934 at December 31, 2020, a decrease of 61.6%. As previously mentioned,
cash of $123,715 was used for principal payments for finance lease obligations
and our PPP loan of $325,300 was forgiven in full by the SBA.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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 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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