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.
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. We continue to comply with executive orders issued in Ohio and U.S.
Centers for Disease Control and Prevention guidelines regarding safety
procedures directly related to the pandemic. 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 encouraging all
employees to obtain a vaccine when available and eligible. We continue to
maintain 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
related to COVID-19. 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 emergence of new variants on our 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 spending, and aligning
inventory to 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.
There have recently been public reports and announcements of a global
semiconductor chip shortage that is anticipated to continue into at least the
second half of 2021. It is impacting companies across a wide range of
industries, including some of our customers, which could temporarily impact the
Company's revenue and volume. 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 is 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 Employee Retention Credit. On March 1, 2021, the IRS
released Notice 2021-20 to provide guidance on the original Employee Retention
Credit, as modified by the Relief Act. During the first quarter of 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 March 31, 2021 as Tax Receivable
and as a credit to wages in the Statement of Operations during the three months
ended March 31, 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.
During the first quarter of 2021, we experienced a decline in gross receipts of
25% compared to the first quarter of 2019 which 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. This receivable
appears on the Balance Sheet as of March 31, 2021 as Tax Receivable and as a
credit to wages in the Statement of Operations during the three months ended
March 31, 2021. As previously mentioned, 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
expect to be eligible for this credit for a similar amount at least through the
second quarter of 2021.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
For the three months ended March 31, 2021, we had total revenue of $3,022,310.
This was a decrease of $416,485, or 12.1%, compared to the three months ended
March 31, 2020. The decrease was principally due to lower pricing in the first
quarter of 2021, which was partially offset by higher volume and product mix.
Gross profit was $803,036 for the three months ended March 31, 2021 compared to
$509,338 for the same three months in 2020. This increase was due to volume,
product mix, improved manufacturing efficiency, and approximately $151,000
related to the Employee Retention Credit.
Operating expenses were $377,493 and $421,853 for the three months ended March
31, 2021 and 2020, respectively.
Income from operations was $425,543 and $87,485 for the three months ended March
31, 2021 and 2020, respectively which included $255,507 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 months ended March 31, 2021 (unaudited) compared to three months ended
March 31, 2020 (unaudited):
Revenue
For the three months ended March 31, 2021, we had total revenue of $3,022,310.
This was a decrease of $416,485, or 12.1%, compared to the three months ended
March 31, 2020. The decrease was principally due to lower pricing in the first
quarter of 2021, which was partially offset by higher volume and product mix.
Gross profit
Gross profit was $803,036 for the three months ended March 31, 2021 compared to
$509,338 for the same three months in 2020. This was an increase of $293,698, or
57.7%. Gross profit as a percentage of revenue (gross margin) was 26.6% for the
first quarter of 2021 compared to 14.8% for the same period in 2020. This
increase was due to volume, product mix, improved manufacturing efficiency and
the Employee Retention Credit of approximately $151,000.
General and administrative expense
General and administrative expense for the three months ended March 31, 2021 and
2020, was $287,881 and $283,165, respectively, an increase of 1.7%. Increases in
compensation and professional fees were offset by the Employee Retention Credit
of $36,000.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Included in general and administrative expense was $62,425 and $63,582 for
professional fees for the three months ended March 31, 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 March 31, 2021, was
$38,219 compared to $86,904 for the same period in 2020, a decrease of
56.0%. This decrease is primarily related to the Employee Retention Credit of
$39,000. 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 $51,393 and $51,784 for the three months ended
March 31, 2021 and 2020, respectively. Higher outside consulting expenses and
compensation related to an increase in staff were offset by the Employee
Retention Credit of approximately $30,000.
Stock compensation expense
Included in total expenses were non-cash stock-based compensation costs of
$21,888 and $31,180 for the three months ended March 31, 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 $9,851 as of March
31, 2021 and will be recognized through 2023.
Interest
Interest expense was $7,638 and $4,069 for the three months ended March 31, 2021
and March 31, 2020, respectively. Lower interest income during the first quarter
of 2021 resulted in an increase to overall interest expense.
Income taxes
Income tax expense was $90,620 and $1,900 for the three months ended March 31,
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 quarter of 2021 that could affect its view of the future realization
of deferred tax assets and determined that no valuation allowance was necessary
at March 31, 2021, and the deferred tax asset was $931,475 at March 31, 2021.
Income Applicable to Common Stock
Income applicable to common stock for the three months ended March 31, 2021 and
2020, was $646,547 and $75,478, respectively. The increase was primarily the
result of higher gross profit, as well as the forgiveness of the PPP Loan, and
the Employee Retention Credit.
Liquidity and Capital Resources
Cash
As of March 31, 2021, cash on hand was $3,006,933 compared to $2,917,551 at
December 31, 2020.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Working capital
At March 31, 2021 working capital was $3,271,993 compared to $2,810,629 at
December 31, 2020, an increase of $461,364 or 16.4%. Cash increased $89,382,
receivables increased $278,476 and short term notes payable (PPP Loan) decreased
$252,577 during the first quarter of 2021. Accounts payable increased $151,304.
Cash from Operations
Net cash provided by operating activities was $452,394 and $170,612 during the
three months ended March 31, 2021 and 2020 respectively. This included
depreciation and amortization of $135,313 and $132,408, and non-cash stock-based
compensation costs of $21,888 and $31,180 for the three months ended March 31,
2021 and 2020, respectively. Due to orders received during the first quarter of
2021 inventories increased $2,250,524 and accrued expenses and customer deposits
increased $2,230,664. In addition, the extinguishment of debt of $325,000
related to the PPP loan occurred during the first quarter of 2021.
Cash from Investing Activities
During the three months ended March 31, 2021, $319,578 was used in investing
activities for the purchase of production equipment. Cash of $157,237 was used
in investing activities during the three months ended March 31, 2020, for the
acquisition of production equipment.
Cash from Financing Activities
Cash of $43,454 and $24,152 was used in financing activities for principal
payments to third parties for finance lease obligations during the three months
ended March 31, 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.
Debt outstanding
Total debt outstanding decreased to $360,179 at March 31, 2021, from $728,934 at
December 31, 2020, a decrease of 50.6%. As previously mentioned, cash of $43,454
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, 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 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. 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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