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. To date, COVID-19 has surfaced in nearly all regions around the world
and resulted in restrictions and shutdowns implemented by national, state, and
local authorities. As a result of the pandemic, we are complying with executive
orders issued in Ohio and U.S. Centers for Disease Control and Prevention
guidelines regarding safety procedures. These procedures include, but are not
limited to: wearing masks, social distancing, staggering start times, remote
working, and teleconferencing versus in person meetings. We are maintaining
regular contact, via phone and other electronic means, with our customers and
suppliers.
Based on recent conversations with customers, we do not expect to experience any
material impairments and do not anticipate any changes in accounting judgements.
We are not aware of any material adverse impact on our supply chain and remain
in contact with our suppliers. Although we continue to face a period of
uncertainty regarding the ongoing impact of the COVID-19 pandemic and potential
emergence of new strains on our projected customer demand, market conditions are
gradually improving. In the midst of this challenging economic environment, we
are focused on continuing to take the necessary steps to respond quickly to
changes in our business and maintaining our financial flexibility in the face of
the unprecedented and continuing impact of COVID-19, through specific
contingency plans including (but not limited to): reviewing and monitoring
planned capital expenditures, reviewing all operating expenses for opportunities
to reduce spending, and aligning inventory to estimated revenue.
We continue to monitor the rapidly 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
strains on our results of operations, cash flows and liquidity in the future.
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 is administered by the U.S. Small Business
Administration (the "SBA"). The SBA approved our Forgiveness Application in full
on January 6, 2021.
For the twelve months ended December 31, 2020, we had total revenue of
$10,896,099. This was a decrease of $2,054,288, or 15.9%, compared to the twelve
months ended December 31, 2019. Total revenue was adversely impacted by lower
volume and COVID-19 related issues compared to 2019.
Gross profit was $2,198,290 and $2,208,563 for the twelve months ended
December 31, 2020 and 2019, respectively.
Operating expenses were $1,681,943 and $1,877,705 for the twelve months ended
December 31, 2020 and 2019, respectively. The decrease was primarily due to
additional expenses incurred during our management transition in the first half
of 2019 as well as lower travel expenses in 2020.
The income tax benefit for the year ended December 31, 2020 was $1,017,503.
Income tax expense for the year ended December 31, 2019 was $3,039. In 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 in the accompanying financial statements of $1,019,317 and a corresponding
income tax benefit of the same amount.
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.
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RESULTS OF OPERATIONS
Year 2020 compared to Year 2019
Revenue
For the year ended December 31, 2020, we had total revenue of $10,896,099. This
was a decrease of $2,054,288, or 15.9%, compared to 2019. Total revenue was
adversely impacted by lower volume and COVID-19 related issues compared to 2019.
Gross Profit
Gross profit was $2,198,290 for 2020 compared to $2,208,563 for 2019. Gross
profit as a percentage of revenue (gross margin) was 20.2% and 17.1% for 2020
and 2019, respectively. The improved 2020 gross margin was due to pricing,
product mix and improved manufacturing efficiency. As we continue to implement
our growth strategy in complementary niche markets, it is anticipated the
Company's gross margin will continue to improve, although it will be influenced
by product mix and price fluctuation of a high priced, low margin raw material
for the foreseeable future.
General and Administrative Expense
General and administrative expense for 2020 and 2019, was $1,148,615 and
$1,261,958, respectively, a decrease of 9.0%. This decrease was primarily due to
lower compensation of approximately $84,000 in 2020 attributable to expenses
incurred during our management transition in the first half of 2019. In
addition, travel expenses were lower by approximately $18,000 in 2020.
Included in general and administrative expense was $222,024, and $218,098 for
professional fees during 2020 and 2019, respectively. These expenses were
primarily related to SEC compliance costs for legal, accounting and stockholder
relations fees as well as costs associated with the Company's President and CEO
transition during 2019.
Research and Development Expense
Research and development expense for 2020 was $337,823, compared to $366,492 for
2019, a decrease of 7.8%. The decrease was primarily related to slightly lower
staffing levels and less outside consulting expense in 2020. 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 $195,505, and $249,255 during 2020 and 2019,
respectively. The decrease of $53,750, or 21.6%, was primarily related to lower
travel expenses of approximately $60,000. Travel was limited during 2020 due to
the cancellation of tradeshows and limited direct contact with customers in
response to COVID-19 orders issued by national health organizations and state
officials.
Stock Compensation Expense
Included in total expenses were non-cash stock-based compensation costs of
$124,720 and $130,009 for 2020 and 2019, 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 $11,033 as of December 31, 2020 and will be recognized
through 2023.
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Interest
Interest expense was $32,087 and $22,468 for 2020 and 2019, respectively.
Interest expense during 2020 was higher due to a new finance lease obligation
related to the rebuild of production equipment.
Income Taxes
Income tax benefit for the year ended December 31, 2020 was $1,017,503. Income
tax expense for the year ended December 31, 2019 was $3,039. In 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 in the accompanying financial statements of $1,019,317 and a
corresponding income tax benefit of the same amount. We assessed the available
positive and negative evidence to estimate whether sufficient future taxable
income generated is more likely than not to permit the realization of the
existing deferred tax asset. The Company has continued to develop more efficient
production methods which helped the Company remain profitable in 2020 despite
the slowdown on the economy by COVID-19. Additionally, we have achieved four
years of pretax income and expect profits to continue for the foreseeable
future. While we have considered future taxable income and used ongoing prudent
and feasible tax planning strategies in assessing the need for valuation
allowances, 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 decrease income in the period such determination was made. We regularly
evaluate the need for a valuation allowance against our deferred tax asset.
Income Applicable to Common Stock
Income applicable to common stock for 2020 and 2019 was $1,477,611 and $281,199,
respectively. The income tax benefit of $1,017,503 noted above increased the
2020 income applicable to common stock.
Liquidity and Capital Resources
Cash
As of December 31, 2020, cash on hand was $2,917,551. Cash on hand was
$1,828,397 at December 31, 2019. This increase was attributable to funds
received in the second quarter of 2020 from the Paycheck Protection Program as
well as increased gross profit during the fourth quarter of 2020.
Working Capital
At December 31, 2020 working capital was $2,810,629 compared to $1,992,328 at
December 31, 2019, an increase of $818,301 or 41.1%. The increase was primarily
due to the increase in cash noted above.
Cash from Operations
Net cash provided by operating activities during 2020 was $991,032 and $532,207
during 2019. These figures represent net income net of non cash items, such as,
depreciation and amortization of $532,842 and $502,673, and non-cash stock-based
compensation costs of $124,720 and $130,009 for 2020 and 2019, respectively. In
addition, accrued expenses and customer deposits decreased $1,378,531 and
$935,447 during 2020 and 2019. In addition, inventory decreased $1,568,678
during 2020 compared to $3,807 during 2019. Deferred tax assets increased
$1,019,317 in 2020 as previously mentioned.
Cash from Investing Activities
During 2020, $75,852 was used in investing activities principally for upgrades
of testing equipment. Cash of $379,603 was used in investing activities during
2019, which included an in-plant office structured mezzanine in addition to
acquisition of production equipment.
Cash from Financing Activities
Cash of $127,174 and $117,846 was used in financing activities for principal
payments to third parties for finance lease obligations and notes payable during
2020 and 2019, respectively. As previously mentioned, during the second quarter
of 2020 we entered into an unsecured promissory note under the Paycheck
Protection Program (the "PPP"), with a principal amount of $325,300. Also, a
dividend payment of $24,152 was made to owners of our Series B preferred stock
during 2020 and 2019.
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Debt Outstanding
Total debt outstanding was $728,934 at December 31, 2020, compared to $223,835
at December 31, 2019. The increase was due to the proceeds received from the
unsecured promissory note under the Paycheck Protection Program (the "PPP") and
a finance lease agreement for the rebuild of production equipment. The SBA
approved our PPP Forgiveness Application in full on January 6, 2021.
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, 2020, 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 asset, 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
We believe there has not been a significant impact from inflation on our
operations during the past three fiscal years.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This document contains forward-looking statements that reflect the views of
management with respect to future events and financial performance. These
forward-looking statements are subject to certain uncertainties and other
factors that could cause actual results to differ materially from such
statements. See "Risk Factors" above. These uncertainties and other factors
include, but are not limited to, the words "anticipates," "believes,"
"estimates," "expects," "plans," "projects," "targets" and similar expressions
which identify forward-looking statements. You should not place undue reliance
on these forward-looking statements, which speak only as of the date the
statements were made. We undertake no obligation to publicly update or revise
any forward-looking statements.
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