SELECTED FINANCIAL INFORMATION
The following table contains selected financial information, for the periods indicated, from our Statements of Comprehensive Income (Loss) expressed as a percentage of net sales.
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Three Months Ended June 30,
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Six Months Ended June 30,
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2020
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2019
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2020
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2019
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Net sales
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100.0
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%
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100.0
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%
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100.0
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%
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100.0
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%
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Cost of goods sold
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47.5
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45.4
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47.8
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46.1
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Gross profit
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52.5
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54.6
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52.2
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53.9
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Operating expenses
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Selling and marketing
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21.2
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22.8
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22.4
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23.4
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General and administrative
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21.0
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18.5
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22.5
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20.9
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Research and development
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9.4
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9.4
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10.3
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9.6
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Total operating expenses
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51.6
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50.7
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55.2
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53.9
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Operating income (loss)
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0.9
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3.9
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(3.0
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0.0
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Non-operating income (expense)
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Interest income
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0.0
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1.8
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0.8
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2.0
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Other income
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0.0
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0.1
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0.0
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0.1
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Total non-operating income, net
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0.0
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1.9
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0.8
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2.1
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Income (loss) before income tax expense (benefit)
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0.9
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5.8
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(2.2
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)
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2.1
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Provision for (benefit of) income taxes
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0.0
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1.2
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(0.4
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0.4
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Net income (loss)
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0.9
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%
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4.6
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%
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(1.8
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%
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1.7
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%
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The following paragraphs discuss the Company’s performance for the three and six months ended June 30, 2020 and 2019.
RESULTS OF OPERATIONS (in thousands)
Net Sales
Net sales for the three-month period ended June 30, 2020 were $2,092, a decrease of $168, or 7.4%, from $2,260 during the comparable period in 2019. Net sales for the six months ended June 30, 2020 were $4,015, a decrease of $253, or 5.9%, over the same period in 2019. The second calendar quarter of 2020 represents the first full quarter impacted by the COVID-19 pandemic, and we believe much of the revenue decrease during the period relates to reduced spending by our customers due to the impact of the pandemic on their business. While customers continued to place orders for smaller projects and maintenance items; many larger capital projects have been paused due to continued uncertainty surrounding the pandemic and its related effects.
Gross Profit
Gross profit for the second quarter of 2020 decreased $137, or 11.1%, over the same period in 2019. Gross profit for the six months ended June 30, 2020 decreased $205, or 8.9%, over the same period in 2019. Gross margin decreased in the second quarter of 2020 to 52.5% from 54.6% during the same period in 2019. Gross margin for the six months ended June 30, 2020 decreased to 52.2% from 53.9% over the same period in 2019.The decrease in gross margin percentage for both periods was primarily due to a change in product mix and higher material costs largely driven by the increase in government tariff charges that began to be assessed during the second half of 2019.
Operating Expenses
Total operating expenses decreased $68, or 5.9%, for the second quarter of 2020 compared to the same period in 2019, but increased as a percentage of net sales to 51.6% from 50.7%. Total operating expenses decreased $81, or 3.5%, for the six months ended June 30, 2020 compared to the same period in 2019, but increased as a percentage of net sales to 55.2% from 53.9%.
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Selling and marketing expenses in the second quarter of 2020 decreased $73, or 14.1%, from the same period in 2019 and decreased as a percentage of net sales to 21.2% from 22.8%. Selling and marketing expenses in the six months ended June 30, 2020 decreased $100, or 10.0%, from the same period in 2019 and decreased as a percentage of net sales to 22.4% from 23.4%. The decrease in the second quarter resulted primarily from lower outside sales representative compensation due to changes in commission plans and decreased net sales and a decrease in travel expenses due to the COVID-19 pandemic. The decrease in the six months resulted primarily from lower outside sales representative compensation due to changes in commission plans, decreased net sales, and fewer manufacturer representatives and decreases in travel and trade show expenses due to cancelled shows both due to the COVID-19 pandemic.
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General and administrative expenses increased $22, or 5.3%, for the second quarter of 2020 compared to the same period in 2019 and increased as a percentage of net sales to 21.0% from 18.5%. General and administrative expenses increased $15, or 1.7%, for the six months ended June 30, 2020 compared to the same period in 2019 and increased as a percentage of net sales to 22.5% from 20.9%. The increase in the second quarter was due primarily to amortization of the communication technology that began in October 2019 and higher legal fees. The increase for the six months was due primarily to the noted amortization and legal fees, partially offset by decreased expenses related to computer supplies, software, and training.
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Research and development expenses decreased $17, or 8.0%, in the second quarter of 2020 from the same period in 2019 and was unchanged as a percentage of net sales at 9.4%. Research and development expenses increased $4, or 1.0%, in the six months ended June 30, 2020 from the same period in 2019 and increased as a percentage of net sales to 10.3% from 9.6%. The decrease for the quarter was due to lower contract engineering costs related to product enhancements. The increase for the six months was due to third party product certification costs, partially offset by lower 2020 contract engineering costs related to product enhancements.
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Non-Operating Income (Net)
Net non-operating income decreased by $43, or 100.0%, for the second quarter of 2020 compared to the same period in 2019. Net non-operating income decreased by $58, or 65.2%, for the six months ended of June 30, 2020 compared to the same period in 2019. The decrease in both periods was primarily a result of less interest income earned as a result of lower interest rates on Treasury Bills.
Income (Loss) Before Income Tax Expense (Benefit)
Income before income tax expense was $19 for the second quarter of 2020, representing a decrease of $112, or 85.5%, compared to $131 for the same period in 2019. Loss before income tax benefit was $91 for the six months ended June 30, 2020, representing a decrease of $182, or 200.0%, compared to an income before income tax expense of $91 for the same period in 2019. The decrease for both periods was primarily the result of the lower net sales and higher cost of sales discussed above.
Income Tax Benefit
The Company's income tax expense decreased to $1, or 0.0% of net sales, in the second quarter of 2020 compared to an expense of $28, or 1.2% of net sales, in the second quarter of 2019. The Company's income tax benefit was $18, or 0.4% of net sales, for the six months ended June 30, 2020 compared to an expense of $19, or 0.4% of net sales, for the six months ended June 30, 2019.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $2,262 at June 30, 2020 and $8,785 at December 31, 2019. The decrease was primarily the result of cash used to purchase treasury bills considered as available-for-sale securities. At December 31, 2019, all of the treasury bills were reported as cash equivalents and as of June 30, 2020, all but one of the treasury bills were reported as investments.
Cash generated from operating activities was $240 for the six months ended June 30, 2020 as compared to cash used in operating activities of $52 for the six months ended June 30, 2019. The $292 increase in cash generated from operations was due to a decrease in trade receivables partially offset by an increase in accounts payable. The decrease in trade receivables was due to decreased net sales and the timing of collections on accounts. The increase in accounts payable was due to timing of inventory purchases and vendor payments.
Cash used in investing activities was $6,760 for the six months ended June 30, 2020 as compared to cash generated from investing activities of $23 for the six months ended June 30, 2019. During the six months ended June 30, 2020, the Company had net purchases of treasury bills of $6,748 compared to net proceeds from maturities of treasury bills of $84 during the six months ended June 30, 2019. In addition, the Company purchased $12 and $61 of property and equipment during the six months ended June 30, 2020 and June 30, 2019, respectively.
Cash used in financing activities in the six months ended June 30, 2020 and 2019 was $3. The cash used in both periods was for principal payments on a financing lease on right-to-use assets. In addition, during the second quarter of 2020, the Company received and subsequently repaid a Payroll Protection Loan of $645 from the Small Business Administration, as discussed in the next paragraph.
As previously disclosed, on May 5, 2020, we entered into a U.S. Small Business Administration Paycheck Protection Program promissory note in the principal amount of $645 (the “PPP Loan”). The PPP Loan was unsecured and was evidenced by a note in favor of US Bank National Association as the lender. Subsequent to receipt of the loan, our Board of Directors continued to monitor both our ongoing performance and the routinely issued clarifying guidance provided by the government. As a result of this analysis, the Board determined that given the strength of our operations and the government issued clarifications, we would repay the entire amount of the PPP Loan. We repaid the PPP Loan in full on June 4, 2020. There were no prepayment penalties in connection with this voluntary repayment.
Subject to the following section, the Company believe its ongoing cash requirements will be primarily for capital expenditures, research and development, working capital, and growth initiatives. Management believes that our cash on hand and any cash generated from operations will be sufficient to meet our cash requirements through at least the next 12 months.
COVID-19 Pandemic Discussion
As a result of the COVID-19 pandemic, we experienced weaker than anticipated performance in the first and second quarters of 2020. Due to the ongoing uncertainty about the severity and duration associated with the COVID-19 pandemic, we considered furloughing or eliminating employees and taking other measures to reduce operating costs until there was more certainty about the short-term and long-term effects of the COVID-19 pandemic on the nation’s economy and the Company’s business.
As of the end of July 2020, however, we have not furloughed any employees. We expect our third quarter financial results to continue to be negatively affected, potentially to a material degree, as the effects of the pandemic continue to permeate the economy. Reductions in net sales have not been offset by a proportional decrease in expense, as we continue to incur cost related to employee compensation and operating expenses, resulting in a negative effect on the relationship between our costs and net sales.
We believe the pandemic will continue to slow larger orders as customers delay projects in order to conserve cash, which will weaken the demand for our products.
We, typically, have multiple sources for components. Although we have experienced some extended delivery times as vendors have difficulty sourcing components, we continue to believe we have adequate sources for our key components to meet anticipated demand.
As of the date of this filing, we expect our business will continue to be negatively affected, but cannot currently determine the significance and duration of the pandemic on our business.
Future Business Development Activities
The Company continues to seek growth opportunities, both internally through the Company’s existing portfolio of products, technologies and markets, as well as externally through technology partnerships or related-product acquisitions.
Off-balance Sheet Arrangements
As of June 30, 2020, the Company had no off-balance sheet arrangements or transactions.