Caution Regarding Forward Looking Statements
This Quarterly Report contains forward-looking statements as that term is
defined in the federal securities laws. The Company wishes to ensure that any
forward-looking statements are accompanied by meaningful cautionary statements
in order to comply with the terms of the safe harbor provided by the Private
Securities Litigation Reform Act of 1995. The events described in the
forward-looking statements contained in this Quarterly Report may not occur.
Generally, these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of the Company's plans or strategies,
projected or anticipated benefits of acquisitions made by the Company,
projections involving anticipated revenues, earnings, or other aspects of the
Company's operating results. The words "may," "will," "expect," "believe,"
"anticipate," "project," "plan," "intend," "estimate," and "continue," and their
opposites and similar expressions are intended to identify forward-looking
statements. The Company cautions you that these statements are not guarantees of
future performance or events and are subject to a number of uncertainties,
risks, and other influences, many of which are beyond the Company's control,
that may influence the accuracy of the statements and the projections upon which
the statements are based. Factors which may affect the Company's results
include, but are not limited to, the risks and uncertainties discussed in Items
1A and 7 of the Company's most recent Annual Report on Form 10-K for the year
ended December 31, 2020, as filed with the Securities and Exchange Commission on
March 30, 2021. Any one or more of these uncertainties, risks, and other
influences could materially affect the Company's results of operations and
whether forward-looking statements made by the Company ultimately prove to be
accurate. Readers are further cautioned that the Company's financial results can
vary from quarter to quarter, and the financial results for any period may not
necessarily be indicative of future results. The foregoing is not intended to be
an exhaustive list of all factors that could cause actual results to differ
materially from those expressed in forward-looking statements made by the
Company. The Company's actual results, performance and achievements could differ
materially from those expressed or implied in these forward-looking statements.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether from new information, future events, or
otherwise.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 1 of the accompanying
condensed consolidated financial statements and further discussed in our annual
financial statements included in our annual report on Form 10-K for the year
ended December 31, 2020. In preparing our unaudited condensed consolidated
financial statements, we made estimates and judgments that affect the results of
our operations and the value of assets and liabilities we report. Our
inventories are stated at the lower of cost (first-in-first-out basis) and net
realizable value. The Company records a reserve for slow moving inventory as a
charge against earnings for all products identified as surplus, slow-moving or
discontinued. Excess work-in-process costs are charged against earnings whenever
estimated costs-of-completion exceed unbilled revenues. The Company's estimates
also include the amount and timing of future taxable income in determining the
valuation allowance for deferred income tax assets. Our actual results may
differ from these estimates under different assumptions or conditions.
For additional information regarding our critical accounting policies and
estimates, see the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our annual report filed with
the Securities and Exchange Commission on Form 10-K for the year ended December
31, 2020.
Impact of COVID-19
We are conducting business to ensure the safety of our employees and associates
actively and earnestly, following all best practice CDC guidelines for
prevention in the workplace. We have applied social distancing in our operations
and implemented a connected, remote workforce where practicable. We cannot
predict what actions may be required by federal, state, or local authorities in
the future, nor can we predict what actions any new mandates may have on our
customers and suppliers. It is not clear what the potential effects any such
alterations or modifications may have on our business, including the effects on
our financial results. We will continue to actively monitor the situation and
may be required to take further actions that alter our business operations or
that we determine are in the best interests of our employees, customers,
partners, suppliers and shareholders. The total impact of the global emergence
of COVID-19 on our business and financial results are not completely known, and
we cannot predict what impact it may have on our continuing operations and the
effect to our financial results.
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Total sales for the year ended December 31, 2020 were negatively impacted by
business factors resulting from COVID-19 and governmental restrictions,
including disruptions to our customers' and suppliers' operations. Our sales and
marketing efforts were negatively impacted due to travel and other operational
restrictions. While the Company has seen improved results, the total impact of
the global emergence of COVID-19 on our business and financial results are not
completely known, and we cannot predict what impact it may have on our
continuing operations and the effect to our financial results in the future.
Results of Operations
Inrad Optics is a vertically integrated manufacturer specializing in glass,
crystal, and metal based optical components and subassemblies. Manufacturing
capabilities include crystal growth, extensive optical fabrication capacity,
super-precision optical surfacing, handling of large form factor optics,
precision diamond turning, proprietary optical contacting processes, thin film
coatings, and high resolution in-process metrology.
The majority of the Company's custom optical components and assemblies are used
in optical inspection applications, process control systems, defense and
aerospace systems, laser systems, industrial scanners, medical applications, and
in physics research.
Inrad Optics' customers include leading photonics enabled corporations in the
defense, aerospace, process control and metrology sectors, as well as the U.S.
Government, National Laboratories and universities worldwide.
Manufacturing, engineering and administrative operations are in a 42,000 square
foot building located in Northvale, New Jersey.
Sales Revenue
Sales for the three months ended September 30, 2021, were $2.8 million, an
increase of 26.1%, or $0.6 million, compared to $2.2 million for the three
months ended September 30, 2020. For the nine months ended September 30, 2021,
sales were $8.5 million, an increase of 24.5%, or $1.7 million, compared to
sales of $6.8 million for the nine months ended September 30, 2020.
For the three months ended September 30, 2021 and 2020, sales to the
defense/aerospace market were $0.6 million and $0.9 million, respectively. This
28.6% decrease of $0.3 million is the result of the timing of delivery schedules
and a large program that was completed and shipped in the third quarter of 2020.
For the nine months ending September 30, 2021 and 2020, sales to the
defense/aerospace market were $2.9 million and $2.7 million, respectively. The
increase in sales of $0.2 million, or 6.3%, reflects an increase in demand.
Process control and metrology ("PC&M") sales were $1.8 million for the three
months ended September 30, 2021, an increase of $1.0 million, or 120.9%, from
$0.8 million for the three months ended September 30, 2020. The increase
reflects strong sales to the semi-conductor industry. For the nine months ended
September 30, 2021, sales increased 47.0% or $1.3 million to $4.1 million from
$2.8 million for the nine months ended September 30, 2020. Sales in the PC&M
market continue to increase due to demand in the semi-conductor industry.
For the three months ended September 30, 2021 and 2020, sales to customers in
the laser systems market were $0.2 million in each period. Sales for the nine
months ended September 30, 2021 and 2020, were $0.6 million and $0.5 million,
respectively. The $0.1 million, or 3.7%, increase reflects an increase in demand
for our laser products.
Sales to customers in the Scientific/R&D market were $0.2 million and $0.4
million for the three months ended September 30, 2021 and 2020, respectively, a
decrease of $0.2 million, or 41.6%. The decrease reflects timing of deliveries
in this market. For the nine-month period ending September 30, 2021, sales
increased $0.2 million to $1.0 million, compared to $0.8 million for nine months
ended September 30, 2020. The increase in sales for the nine-month period ended
September 30, 2021, reflects the revenues from a federal government R&D contract
completed in the first quarter of 2021 and stronger sales to national
laboratories.
For the three months ended September 30, 2021, three customers represented 10%
or more of sales. For the three months ended September 2020, only one customer
represented 10% or more of sales. For the nine months ended September 30, 2021,
two customers represented 10.0% or more of sales, and for the nine months ended
September 30, 2020 no customer represented 10.0% or more of sales.
The Company's top five customers represented 67.1% of sales in the three-month
period ended September 30, 2021, compared to 44.1% in the same period in 2020.
For the nine-month period ended September 30, 2021 and 2020, the Company's top
five customers represented 50.5% and 37.5% of sales, respectively.
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Orders booked during the first nine months of 2021, totaled $12.4 million,
compared to $8.2 million for the same period last year. Order backlog at
September 30, 2021 and 2020, was $9.8 million and $6.4 million, respectively.
Cost of Goods Sold
For the three months ended September 30, 2021 and 2020, cost of goods sold was
$2.0 million and $1.8 million, or 69.3% and 81.3% of total revenues,
respectively. Cost of goods sold in the three-month period ending September 30,
2021, was lower as a percentage of sales due to lower direct and indirect labor
costs, lower employee related costs, and lower manufacturing depreciation,
offset by higher material and outside service costs. Cost of goods sold for the
nine months ended September 30, 2021 and 2020, were $5.7 million and $5.2
million, respectively. Cost of goods sold increased 9.7% or $0.5 million
reflecting higher material and outside services costs, and manufacturing
expenses and overhead, offset by a decrease in direct and indirect labor and
related employee costs.
Gross profit for the three months ended September 30, 2021, was $0.9 million or
30.7% of sales, compared to $0.4 million or 18.7% of sales in the same quarter
last year. Gross profit for the year-to-date period ending September 30, 2021,
was $2.7 million or 32.3% of sales, an increase of $1.1 million, compared to
$1.6 million or 23.1% of sales, for the nine-month period ending September 30,
2020. The increase in gross profit for the three and nine months ended September
30, 2021, compared to the three and nine months ended September 30, 2020, is due
to higher sales revenues combined with lower employee related costs offset by
the material costs reflective of sales mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A" expenses) were $0.7 million
in the three months ended September 30, 2021, or 24.2% of sales and $0.5
million, or 24.4% of sales, in the three months ended September 30, 2020. The
increase in SG&A expenses in the three months ended September 30, 2021, reflects
an increase in travel and entertainment costs, and marketing costs due to the
easing of travel related restrictions due to COVID-19. SG&A expenses for the
nine-month period ending September 30, 2021 and 2020, were $1.9 million, or
22.8% of sales, and $1.9 million or 28.2% of sales, respectively. The decrease
in SG&A expenses as a percentage of sales for the year-to-date period is
reflective of reduced travel and entertainment costs as well as employee-related
expenses.
Income (Loss) from Operations
The Company realized net income from operations of $0.2 million for the three
months ended September 30, 2021, compared with a net loss from operations of
$0.1 million in the three months ended September 30, 2020. The increase in
income primarily reflects an increase in sales. The Company incurred net income
from operations of $0.8 million for the nine months ended September 30, 2021,
compared to a net loss from operations for the nine months ended September 30,
2020, of $0.3 million. The increase in net income from operations is primarily
due to an increase in revenues and increased gross profit margins, coupled with
a decrease in employee-related costs.
Other Income and Expense
There was no significant change in net interest expense for the three months or
nine months periods ended September 30, 2021, compared to the same periods ended
September 30, 2020. Other income reflects the gain on the forgiveness of the PPP
loan of $1.0 million in the nine months ended September 30, 2021.
Income Taxes
For the three months and nine months ended September 30, 2021, the Company did
not record a current provision for income taxes due to the availability of net
operating loss carryforwards to offset taxable income for both federal and state
tax purposes.
For the three and nine months ended September 30, 2020, the Company did not
record a current provision for either state tax or federal alternative minimum
tax due to the losses incurred for both income tax and financial reporting
purposes.
Net Income (Loss)
The Company had a net income of $0.1 million for the three months ended
September 30, 2021, compared to net loss of $0.2 million for the three months
ended September 30, 2020. The change primarily reflects an increase in sales and
higher gross profit percentage. For the nine months ended September 30, 2021,
the Company recorded net income of $1.7 million compared to a net loss of $0.5
million
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for the nine months ended September 30, 2020. The increase in net income
reflects higher sales, increased gross profit, and the gain resulting from
forgiveness of the PPP loan.
Liquidity and Capital Resources
The Company's primary source of liquidity is cash and cash equivalents and
on-going collection of accounts receivable. The Company's major use of cash in
recent years has been for financing operations, payment of accrued and current
interest on convertible debt, servicing of long-term debt, and capital
expenditures.
As of September 30, 2021 and December 31, 2020, the Company had cash and cash
equivalents of $1.8 million and $1.1 million, respectively.
The Company occupies approximately 42,000 square feet of space located at 181
Legrand Avenue, Northvale, New Jersey pursuant to a net lease which was amended
on July 8, 2019, retroactive to June 1, 2019, for an additional three-year term.
Under the terms of the lease, the Company is obligated for all real estate
taxes, maintenance and operating costs of the facility.
On July 22, 2020, the maturity dates of a $1,500,000 Subordinated Convertible
Promissory Note to Clarex Limited ("Clarex") and a $1,000,000 Subordinated
Convertible Promissory Note to an affiliate of Clarex were each extended to
April 1, 2024, from April 1, 2021. The notes bear interest at an annual rate of
6%. Interest accrues yearly and is payable on maturity. Unpaid interest, along
with principal, may be converted into securities of the Company as follows: the
notes are convertible in the aggregate into 1,500,000 units and 1,000,000 units,
respectively, with each unit consisting of one share of common stock and one
warrant. Each warrant allows the holder to acquire 0.75 shares of common stock
at a price of $1.35 per share. As part of the agreement, the expiration dates of
the warrants were extended from April 1, 2024 to April 1, 2027. As of September
30, 2021, the Company had accrued interest in the amount of $37,500 associated
with these notes.
The following table summarizes net cash provided by (used in) operating,
investing and financing activities for the nine months ended September 30, 2021
and 2020:
Nine Months Ended
September 30,
2021 2020
(in thousands)
Net cash provided by (used in) operating activities $ 731 $ (153)
Net cash used in investing activities
(41) (159)
Net cash provided by financing activities - 966
Net increase in cash and cash equivalents $ 690 $ 654Net cash provided by operating activities was $731,000 for the nine months ended
September 30, 2021, compared to net cash used by operating activities of
$153,000 for the same period last year. The net cash provided by operating
activities in the nine months ended September 30, 2021, resulted primarily from
operating income and a reduction in inventories and other assets, offset by the
gain on the forgiveness of the PPP loan, reductions in accounts payable and
contract liabilities and an increase in accounts receivable. Net cash used in
operating activities during the nine months ended September 30, 2020, resulted
primarily from the loss incurred for the period and an increase in inventory, a
decrease in accounts payable, combined with an increase in contract liabilities.
Net cash used in investing activities was $41,000 during the nine months ended
September 30, 2021, compared to $159,000 in the same period last year reflecting
capital expenditures in both periods.
Net cash provided by financing activities reflects the PPP Loan proceeds
received during the nine months ended September 30, 2020.
Overall, cash and cash equivalents increased by $690,000 and $654,000 for the
nine months ended September 30, 2021 and 2020, respectively.
On May 6, 2020, the Company received loan proceeds of approximately $973,000
(the "PPP Loan"), under the Paycheck Protection Program ("PPP"). The PPP was
established as part of the Coronavirus Aid, Relief and Economic Security Act
("CARES Act") which
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was enacted March 27, 2020. The PPP Loan, which was in the form of a promissory
note, dated May 4, 2020, issued by the Company, originally matured on May 4,
2022, and bore an interest at a rate of 1.0% per annum.
The CARES Act and the PPP provide a mechanism for forgiveness of up to the full
amount borrowed. The amount of loan proceeds eligible for forgiveness is based
on a formula that takes into account a number of factors, including the amount
of loan proceeds used by the Company during the 24-week period after the loan
origination for certain eligible purposes including payroll costs, interest on
certain mortgage obligations, rent payments on certain leases, and certain
qualified utility payments, provided that at least 60% of the loan amount is
used for eligible payroll costs; the employer maintaining or rehiring employees
and maintaining salaries at certain levels; and other factors. Subject to the
other requirements and limitations on loan forgiveness, only loan proceeds spent
on payroll and other eligible costs during a covered eight-week or
twenty-four-week period qualify for forgiveness. Any forgiveness of the PPP Loan
is subject to approval by the Small Business Administration. At December 31,
2020, the PPP Loan is included in other long-term notes on the accompanying
balance sheet.
On January 19, 2021, the Company received notification from the Small Business
Administration that the Company's Forgiveness Application of the PPP Loan and
accrued interest, totaling $980,000, was approved in full, and the Company had
no further obligations related to the PPP Loan. Accordingly, the Company
recognized a gain from forgiveness on PPP Loan in the nine months ended
September 30, 2021.
Management believes, based on the Company's operations and its existing working
capital resources together with existing cash flows, that the Company has
sufficient cash flows to fund operations through at least the third quarter of
2022.
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INRAD OPTICS, INC. 
