Executive Summary
For the year ended December 31, 2022, we had total revenue of $23,467,030
compared to $13,448,021 for the year ended December 31, 2021. Higher pricing,
primarily attributable to raw material costs, higher volume and product mix were
key factors that contributed to the increase.
Gross profit was $4,786,955 for 2022 compared to $3,529,255 for 2021. The
increase was attributable to higher revenue as well as favorable product mix and
improved manufacturing efficiency. The year ended December 31, 2021 included a
reduction of costs of approximately $323,000 related to the Employee Retention
Credit ("ERC") enacted in 2020.
Operating expenses were $2,306,737 and $1,751,349 for 2022, and 2021,
respectively. The year ended December 31, 2021 included a reduction of expenses
of approximately $238,000 related to the ERC.
Income from operations was $2,480,218 and $1,777,906 for 2022 and 2021,
respectively
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 increased production and 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 specialty bonding processes for Aerospace customers. Those
products involve research and development expense to accelerate time to market.
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Several issues continue to affect national and global market conditions. First,
inflation remains at historically high levels, impacting labor, raw material
costs and transportation expenses. We have generally been able to pass on these
increases to customers but are unable to predict how future or sustained
inflationary pressure may impact our results. Second, supply chain disruptions
are adversely impacting customers in certain markets. Thus far, we have not
experienced material adverse effects regarding product shipments; however,
timely deliveries and sourcing of certain materials is of increased concern.
Third, published articles and corporate announcements continue to address the
global semiconductor chip shortage, which is anticipated to continue into 2023.
This shortage is affecting some of our customers which could impact the
Company's revenue, volume, and profitability. Fourth, there are increased
political uncertainties affecting global markets. Although we currently have no
customers or vendors in Russia or Ukraine, we continue to monitor the situation
as some raw material comes from Russia for the PVD industry. We continue to
actively monitor these developments, including ongoing contact with our
suppliers and customers, including identifying additional suppliers and adapting
to our customers' specific circumstances and forecasts.
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. Based on ongoing conversations with customers, we do not expect to
experience any material impairments or changes in accounting judgements related
to COVID-19. We continue to follow practical safety procedures as needed. During
2022, we resumed in-person meetings, participated onsite in industry trade
shows, and continue to maintain regular contact, via phone and other electronic
means, with all customers and suppliers.
RESULTS OF OPERATIONS
Year 2022 compared to Year 2021
Revenue
For the year ended December 31, 2022, we had total revenue of $23,467,030,
compared to $13,448,021 for the year ended December 31, 2021. This was an
increase of $10,019,009. Higher raw material pricing was the most significant
factor for the increase in revenue. In addition, higher volume and product mix
contributed to the increase.
Gross profit
Gross profit was $4,786,955 for 2022 compared to $3,529,255 for 2021. The
increase was attributable to higher revenue as well as improved manufacturing
efficiency. The year ended December 31, 2021 included a reduction of costs of
approximately $323,000 related to the Employee Retention Credit ("ERC"). Gross
profit as a percentage of revenue (gross margin) was 20.4% and 26.2% for 2022
and 2021, respectively. The lower gross margin in 2022 compared to a year ago
was due to higher raw material costs and product mix during 2022 as well as the
ERC recognized in 2021.
General and administrative expense
General and administrative expense for 2022 and 2021, was $1,549,696 and
$1,280,579, respectively, an increase of 21.0%. During 2022 there was an
increase in compensation of $151,771, which included an increase in staff.
Business liability insurance (due to higher revenue) increased $48,892. The year
2021 also benefited from the ERC of approximately $78,000.
Included in general and administrative expense was $260,826 and $270,609 for
professional fees during 2022 and 2021, 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 2022 was $375,728, compared to $235,679 for
2021, an increase of 59.4%. The ERC of approximately $89,000 was included in the
twelve months ended December 31, 2021. Additional research supplies also
contributed to the increase in expenses in 2022. 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.
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Marketing and sales expense
Marketing and sales expense was $381,313, and $235,091 during 2022 and 2021,
respectively. This was an increase of $146,222, or 62.2%. During 2022 there was
an increase in compensation of $45,632 which was partially offset by a reduction
in outside consulting expenses of $23,500. Travel expenses increased $43,474 as
we resumed in-person meetings with some customers and participated onsite in
additional industry trade shows. The ERC of approximately $71,000 reduced
expenses in 2021.
Stock compensation expense
Included in total expenses were non-cash stock-based compensation costs of
$49,321 and $47,903 for 2022 and 2021, respectively. The non-employee board
members received compensation of 8,755 and 9,165 shares of common stock of the
Company during 2022 and 2021, respectively. The stock had an aggregate value of
$29,967 and $29,963 for the year ended December 31, 2022, and 2021,
respectively, and was recorded as non-cash stock compensation expense in the
financial statements. Beginning January 1, 2023, non-employee board members will
receive their entire compensation in cash. 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 $1,576 as of December 31, 2022, and will be recognized
through April 2023
Interest
Interest income was $19,201 for the year ended December 31, 2022 and interest
expense was $32,140 for the year ended December 31, 2021. The improvement was
due to our investment into marketable securities and the overall increase in
interest rates during the second half of 2022 and the final payments of multiple
finance leases during 2021.
Income taxes
Income tax expense was $542,395 and $392,242 for the twelve months ended
December 31, 2022 and 2021, respectively. At December 31, 2021, the deferred tax
asset was $663,820. As of each reporting date, management considers new
evidence, both positive and negative, that could affect its view of the future
realization of deferred tax assets. Accordingly, management determined that no
valuation allowance was necessary, and the deferred tax asset was $151,164 at
December 31, 2022.
Income applicable to common stock
Income applicable to common stock for 2022 and 2021 was $1,957,024 and
$1,654,672, respectively. The increase was primarily the result of higher
revenue and gross profit. Included in the year 2021 was the ERC which reduced
overall expenses by approximately $561,000 and the forgiveness of our Payroll
Protection Plan loan of $325,300.
Liquidity and Capital Resources
Cash
As of December 31, 2022, cash on hand was $3,947,966 compared to $4,140,942 at
December 31, 2021. We purchased marketable securities of $1,989,265 and
production equipment of $536,313 during 2022 which slightly reduced our year-end
cash balance.
Working capital
At December 31, 2022, working capital was $5,211,625 compared to $3,907,135 at
December 31, 2021, an increase of $1,304,490 or 33.4%. The increase was
primarily due to the increase in inventory and investment in marketable
securities noted above.
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Cash from operations
Net cash provided by operating activities during 2022 was $2,398,155 and
$2,610,548 during 2021. In addition to the net income generated, this included
depreciation and amortization of $519,031 and $516,579, and noncash stock-based
compensation costs of $49,321 and $47,903 for the twelve months ended December
31, 2022, and 2021, respectively. The decrease in prepaid expenses was related
to inventory paid for in December 2021 and received in January 2022. Inventories
and accounts payable increased due to orders received during the fourth quarter
and throughout 2022. Customer orders remain strong, and deposits increased
slightly as customers have monitored inventory more closely with continued
emphasis on intra-quarter shipments.
Cash from investing activities
Cash of $536,313 and $706,242 was used in investing activities during the
twelve months ended December 31, 2022, and 2021, respectively, for the
acquisition of production equipment. This included a vacuum hot press that
enables production of higher temperature materials with increased capacity. It
was purchased and installed for approximately $500,000. A deposit of $220,075
was paid in the first quarter of 2021 for this vacuum hot press and the
remaining amount was paid in cash during the third quarter of 2022. As
previously mentioned, we purchased marketable securities of $1,989,265 during
2022.
Cash from financing activities
Cash of $96,702 and $160,416 was used in financing activities for principal
payments to third parties for finance lease obligations during 2022 and 2021,
respectively. The decrease was due to final payments of multiple finance leases
during 2021. On December 31, 2021, we redeemed all 24,152 shares of our
Convertible Preferred Stock, Series B. The redemption included cash payments of
$248,766 plus unpaid annual dividends of $265,672. An annual dividend payment of
$24,152 was previously made to owners of this stock during the second quarter of
2021.
Debt outstanding
Total debt outstanding decreased to $146,516 at December 31, 2022, from $243,218
at December 31, 2021, a decrease of 40%. As previously mentioned, cash of
$96,702 was used for principal payments for finance lease obligations during
2022.
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, 2022, 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 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 expected
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 expected losses, 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.
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Inflation
While there was not a significant impact from inflation on our operations during
the past three fiscal years, we experienced increased costs during 2022 that are
expected to continue into 2023.
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