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, 2019.
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, 2019, 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.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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: 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. While we
may operate below our normal production schedule during the fourth quarter 2020,
and perhaps longer due to these uncertainties, we expect revenue to be
sequentially higher in the fourth quarter 2020 compared to the previous quarter.
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 on our projected customer demand, market
conditions are gradually improving. During 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, 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 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"). We anticipate that most (if not all) of this loan
will be forgiven by the SBA following achievement of the loan requirements. The
application for forgiveness is expected to be submitted during the fourth
quarter of 2020.
For the three months ended September 30, 2020, we had total revenue of
$1,494,078. This was a decrease of $1,761,123 or 54.1%, compared to the three
months ended September 30, 2019. For the nine months ended September 30, 2020,
we had total revenue of $7,539,460. This was a decrease of $2,472,727 or 24.7%,
compared to the nine months ended September 30, 2019. Total revenue was
adversely impacted by lower volume, pricing and COVID-19 related issues compared
to the same periods in 2019.
Gross profit was $459,139 for the three months ended September 30, 2020 compared
to $458,520 for the same three months in 2019 and $1,406,261 and $1,849,491 for
the nine months ended September 30, 2020 and 2019, respectively. The decrease is
due to lower revenue for the nine months ended September 30, 2020 compared to
the previous year.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Operating expenses were $391,582, and $391,649 for the three months ended
September 30, 2020 and 2019, respectively and $1,223,459 and $1,442,519 for the
nine months ended September 30, 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.
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.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
RESULTS OF OPERATIONS
Three and nine months ended September 30, 2020 (unaudited) compared to three and
nine months ended September 30, 2019 (unaudited):
Revenue
For the three months ended September 30, 2020, we had total revenue of
$1,494,078. This was a decrease of $1,761,123 or 54.1%, compared to the three
months ended September 30, 2019. For the nine months ended September 30, 2020,
we had total revenue of $7,539,460. This was a decrease of $2,472,727 or 24.7%,
compared to the nine months ended September 30, 2019. Total revenue was
adversely impacted by lower volume, pricing and COVID-19 related issues compared
to the same periods in 2019.
Gross Profit
Gross profit was $459,139 for the three months ended September 30, 2020 compared
to $458,520 for the same three months in 2019. Gross profit was $1,406,261 for
the nine months ended September 30, 2020 compared to $1,849,491 for the first
nine months of 2019. This was a decrease of $443,230 or 24.0%. The decrease in
gross profit for the first nine months of 2020 was primarily related to the
lower revenue previously mentioned. Gross profit as a percentage of revenue
(gross margin) was 30.7% for the third quarter of 2020 compared to 14.1% for the
same period in 2019. The improved third quarter 2020 gross margin was due to
pricing, product mix and improved manufacturing efficiency. The third quarter of
2019 included more revenue generated from a high priced, low margin raw material
that contributed to the lower gross margin in that period. Gross margin was
18.7% for the first nine months of 2020 compared to 18.5% for the same period in
2019. As we continue to implement our growth strategy in complementary niche
markets, it is anticipated the Company's gross margin will improve from the 2020
year-to-date percentage although it will continue to 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 the three months ended September 30, 2020
and 2019, was $263,444 and $247,984, respectively, an increase of 6.2%. This
increase was related to higher compensation and business insurance expenses in
2020. General and administrative expense for the nine months ended September 30,
2020 and 2019, was $818,825 and $957,420, respectively, a decrease of 14.5%.
This decrease was primarily due to lower compensation of approximately $127,000
in 2020 versus 2019 related to expense incurred during our management transition
in the first half of 2019.
Professional Fees
Included in total expense was $39,694 and $39,799 for professional fees for the
three months ended September 30, 2020 and 2019, respectively and $159,831 and
$160,252 for the nine months ended September 30, 2020 and 2019, 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, 2020,
was $83,276 compared to $80,203 for the same period in 2019, an increase of
3.8%. Research and development expense for the nine months ended September 30,
2020, was $260,601 compared to $283,672 for the same period in 2019, a decrease
of 8.1%. This decrease was primarily related to lower compensation expense due
to staffing levels in 2019. We continue to invest in developing new applications
for our markets including electrically conductive Zinc Tin Oxide for Thin Film
Solar, Architectural Glass and Thin-Film Transistors. Specialty materials are
being researched for use in niche markets such as 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.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Marketing and Sales Expense
Marketing and sales expense was $44,862 and $63,462 for the three months ended
September 30, 2020 and 2019, respectively. This was a decrease of $18,600 or
29.3%. This decrease was primarily related to lower travel expenses of
approximately $22,000 due to the cancellation of tradeshows and limited direct
contact with customers.
Marketing and sales expense was $144,033 and $201,427 for the nine months ended
September 30, 2020 and 2019, respectively. This was a decrease of $57,394 or
28.5%. This decrease was primarily related to lower travel expenses of
approximately $49,000 and lower outside sales commissions of $7,000. Travel was
limited during the first nine months of 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
$31,182 and $32,765 for the three months ended September 30, 2020 and 2019,
respectively, and $93,544 and $98,301 for the nine months ended September 30,
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
$12,216 as of September 30, 2020 and will be recognized through 2023.
Interest
Interest expense was $9,058 and $4,539 for the three months ended September 30,
2020 and 2019, respectively. The third quarter 2020 increase was due to higher
expense related to the rebuild of production equipment. Interest expense was
$20,427 and $18,020 for the nine months ended September 30, 2020 and 2019,
respectively.
Income Applicable to Common Stock
Income applicable to common stock for the three months ended September 30, 2020
and 2019, was $52,461 and $56,294, respectively. Income applicable to common
stock for the nine months ended September 30, 2020 and 2019 was $142,361 and
$365,978, respectively. This decrease was the result of lower gross profit which
was partially offset by lower operating expenses.
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Liquidity and Capital Resources
Cash
As of September 30, 2020, cash on hand was $2,503,908 compared to $1,828,397 at
December 31, 2019. This increase was primarily attributable to funds received in
the second quarter of 2020 from a Paycheck Protection Program loan.
Working Capital
At September 30, 2020 working capital was $2,463,305 compared to $1,992,328 at
December 31, 2019, an increase of $470,977, or 23.6%. The increase was primarily
due to the increase in cash noted above.
Cash from Operations
Net cash provided by operating activities during the nine months ended
September 30, 2020, was $504,561 and $340,194 for the nine months ended
September 30, 2019. This included depreciation and amortization of $338,616 and
$370,106 and non-cash stock-based compensation costs of $93,544 and $98,301 for
the nine months ended September 30, 2020 and 2019, respectively. In addition,
during the first nine months of 2020, accrued expenses and customer deposits
decreased $1,500,314, while inventory decreased $1,520,427, including a
reduction of $132,117 due to current uncertainties regarding product shipments
to international customers.
Cash from Investing Activities
Cash of $49,023 was used in investing activities during the nine months ended
September 30, 2020, for the acquisition of production equipment. During the nine
months ended September 30, 2019, $343,448 was used in investing activities which
included an in-plant office mezzanine in addition to the acquisition of
production equipment.
Cash from Financing Activities
Cash of $84,238 and $95,495 was used in financing activities for principal
payments to third parties for finance lease obligations and notes payable during
the nine months ended September 30, 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 the second quarter of 2020 and
2019.
Debt Outstanding
Total debt outstanding increased to $771,870 at September 30, 2020, from
$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. We
expect to submit our forgiveness application for the entire PPP loan during the
fourth quarter of 2020 with the expectation that the loan will be forgiven by
the SBA.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements including special purpose entities.
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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, 2019, 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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