NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements include the accounts of Inrad Optics, Inc. and its subsidiaries (collectively, the “Company”).
All significant intercompany balances and transactions have been eliminated.
The condensed consolidated financial statements
have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial
information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management,
all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. The results
of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal
year. For further information, refer to the consolidated financial statements and accompanying footnotes included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
In preparing these unaudited condensed
consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through
the date the unaudited condensed consolidated financial statements were issued.
Management Estimates
These unaudited condensed consolidated
financial statements and related disclosures have been prepared in conformity with U.S. GAAP, which requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses reported in those financial statements.
Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including
the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their
effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions.
Significant changes, if any, in those estimates resulting from continuing changes in the economic environment will be reflected
in the consolidated financial statements in future periods.
Accounts Receivable
Accounts receivable are carried at net
realizable value, net of write-offs and allowances. The Company establishes an allowance for doubtful accounts based on estimates
as to the collectability of accounts receivable. Management specifically analyzes past-due accounts receivable balances and, additionally,
considers bad debt history, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating
the adequacy of the allowance for doubtful accounts. Uncollectible accounts receivable are written-off when it is determined that
the balance will not be collected. Reserves for uncollectible accounts receivable are recorded as part of selling, general and
administrative expenses in the Consolidated Statements of Operations, and were $45,000 at June 30, 2020, and $15,000 at December 31,
2019.
Inventories
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.
Inventories are comprised of the following
and are shown net of inventory reserves of $2,485,000 and $2,489,000 at June 30, 2020 and December 31, 2019, respectively:
|
|
2020
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
Raw materials
|
|
$
|
1,251
|
|
|
$
|
1,248
|
|
Work in process, including manufactured parts and components
|
|
|
1,416
|
|
|
|
1,090
|
|
Finished goods
|
|
|
551
|
|
|
|
496
|
|
|
|
$
|
3,218
|
|
|
$
|
2,834
|
|
Income Taxes
The Company recognizes deferred tax assets
and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements
or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statements carrying
amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the year in which the differences are
expected to reverse.
In evaluating the Company’s ability
to recover deferred tax assets in future periods, management considers the available positive and negative factors, including the
Company’s recent operating results, the existence of cumulative losses and near term forecasts of future taxable income consistent
with the plans and estimates that management uses to manage the underlying business. A significant piece of objective negative
evidence evaluated was the cumulative loss incurred by the Company over the three year period ended December 31, 2019. Such
objective evidence limits the ability to consider other subjective evidence such as our projections for future growth.
On the basis of this evaluation as of June 30,
2020, the Company’s management concluded that it is more likely than not that the Company will not be able to realize any
portion of the benefit on the net deferred tax asset balance of $3,416,000 and therefore the Company continues to maintain a valuation
allowance for the full amount of the net deferred tax asset balance. When sufficient positive evidence exists, the Company’s
income tax expense will be charged with the increase or decrease in its valuation allowance. An increase or reversal of the Company’s
valuation allowance could have a significant negative or positive impact on the Company’s future earnings.
For the three months ended June 30,
2020, 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 six months ended June 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.
For the three months and six months ended
June 30, 2019, 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) per Common Share
Basic net income (loss) per common share
is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted
net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares and
common stock equivalents outstanding, calculated on the treasury stock method for options, stock grants and warrants using the
average market prices during the period, including potential common shares issuable upon conversion of outstanding convertible
notes, except if the effect on the per share amounts is anti-dilutive.
For the three months and six months ended
June 30, 2020, a total of 2,500,000 common shares and 1,875,000 common shares from warrants issuable upon conversion of outstanding
related party convertible notes in addition to 368,400 and 1,160,567 common stock options in each respective period, were excluded
from the computation of basic and diluted net income per common share because their effect is anti-dilutive.
For the three months and six months ended
June 30, 2019, all common stock equivalents were excluded from the computation of diluted net loss per share because their
effect is anti-dilutive. This included 2,500,000 common shares and 1,875,000 common shares from warrants issuable upon conversion
of outstanding related party convertible notes. In addition, 1,218,367 and 1,228,267 common stock options in each respective period,
were excluded from the computation of basic and diluted net income per common share because their effect is anti-dilutive.
A reconciliation of the shares used in
the calculation of basic and diluted earnings (loss) per common share is as follows:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
|
Income(Loss)
|
|
|
Shares
|
|
|
Per Share
|
|
|
Income(Loss)
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Basic Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
25,795
|
|
|
|
13,745,536
|
|
|
$
|
0.00
|
|
|
$
|
(341,210
|
)
|
|
|
13,653,353
|
|
|
$
|
(0.02
|
)
|
Effect of dilutive securities:
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Convertible Notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Accrued Interest on Convertible Notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock Options
|
|
|
-
|
|
|
|
400,373
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted Income (Loss) Per Share:
|
|
$
|
25,795
|
|
|
|
14,145,909
|
|
|
$
|
0.00
|
|
|
$
|
(341,210
|
)
|
|
|
13,653,353
|
|
|
$
|
(0.02
|
)
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
|
Income(Loss)
|
|
|
Shares
|
|
|
Per Share
|
|
|
Income(Loss)
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Basic Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(298,692
|
)
|
|
|
13,734,851
|
|
|
$
|
(0.02
|
)
|
|
$
|
(377,346
|
)
|
|
|
13,641,664
|
|
|
$
|
(0.03
|
)
|
Effect of dilutive securities:
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Convertible Notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Accrued Interest on Convertible Notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock Options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted Income (Loss) Per Share:
|
|
$
|
(298,692
|
)
|
|
|
13,734,851
|
|
|
$
|
(0.02
|
)
|
|
$
|
(377,346
|
)
|
|
|
13,641,664
|
|
|
$
|
(0.03
|
)
|
Stock-Based Compensation
Stock-based compensation expense is estimated
at the grant date based on the fair value of the award. The Company estimates the fair value of stock options granted using the
Black-Scholes option pricing model. The fair value of restricted stock units granted is based on the closing market price of the
Company’s common stock on the date of the grant. The fair value of these awards, adjusted for estimated forfeitures, is amortized
over the requisite service period of the award, which is generally the vesting period.
Recent Accounting Standards
In June 2016, the FASB issued ASU
2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments" (“ASU 2016-13”)
which amended guidance on the accounting for credit losses on financial instruments within its scope. The guidance introduces an
expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment
model for available-for-sale debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent
recoveries). The new guidance is effective for interim and annual periods beginning in 2023. The Company is currently evaluating
the impact of adoption on its consolidated financial statements and does not expect the adoption of ASU 2016-13 to have a material
impact on the Company’s statements of operations or cash flows.
In February 2016, the FASB issued
ASU 2016-02, “Leases” (ASC 842), and subsequently issued updates as part of ASU 2018-11, “Leases,
Targeted Improvements.” The new guidance requires organizations that lease assets with lease terms of more than 12 months
to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. The Company
adopted ASC 842, effective January 1, 2019. The Company entered into an amendment and extension of its building lease on July 8,
2019, retroactive to June 1, 2019, and accordingly recorded an initial right-of-use asset of $0.8 million. See Note 8. Lease
Commitments. The adoption of ASU 842 and ASU 2018-11 did not have a material impact on the Company’s statements of operations
or cash flows.
In June 2018, the FASB issued ASU
2018-07, Compensation-Stock Compensation: Improvements to Nonemployee Shared-Based Payment Accounting. The ASU update expands
the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company
adopted ASU 2018-07 effective January 1, 2019. The adoption did not have a material impact on its financial statements and
related disclosures.
In December 2019, the FASB issued
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2020 on a prospective basis, with early adoption permitted. The Company is currently evaluating the impact
of adoption of this guidance and does not expect the adoption of this guidance to have a material impact on the Company’s
consolidated financial statements.
NOTE 2 – REVENUE
The Company’s revenues are
comprised of the sales of products and services including, products and services provided under long-term
government contracts with its customers. All revenue is recognized when the Company satisfies its performance
obligation(s) under the contract (either implicit or explicit) by transferring the promised product or service to its
customer either when (or as) its customer obtains control of the product or service. A performance obligation is a promise in
a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each
distinct performance obligation. The majority of the Company’s contracts have a single performance obligation, as the
promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore,
not distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction
price to each performance obligation using the Company’s best estimate of a standalone selling price for each distinct
product or service in the contract, which is generally based on an observable price.
Revenue is measured as the amount of consideration
the Company expects to receive in exchange for transferring products or providing services. As such, revenue is recorded net of
returns, allowances, customer discounts, and incentives. Sales, value add, and other taxes collected from customers and remitted
to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included
in cost of goods sold.
The Company’s performance obligations
under long-term government contracts are generally satisfied over time. Revenue from products or services transferred to customers
under these performance obligations accounted for approximately 0% of revenue for the three and six months ended June 20,
2020, and 4.0%, of revenue for the three months and six months ended June 30, 2019. This revenue is generally recognized using
an input measure based upon the proportion of actual costs incurred to estimated total project costs, which is a method used to
best depict the Company’s performance to date under the terms of the contract.
Accounting for these long-term government
contracts involves the use of various techniques to estimate total revenue and costs. The Company estimates profit on these long-term
government contracts as the difference between total estimated revenue and expected costs to complete a contract and recognizes
that profit over the life of the contract. Contract estimates are based on various assumptions to project the outcome of future
events that may span several years. These assumptions include, among other things, labor productivity, costs and availability of
materials, and timing of funding by the U.S. government. The nature of these long-term agreements may give rise to several types
of variable consideration, such as claims, awards and incentive fees. Historically, these amounts of variable consideration are
not considered significant. Additionally, contract estimates may include additional revenue for submitted contract modifications
if there exists an enforceable right to the modification, the amount can be reasonably estimated and its realization is probable.
These estimates are based on historical collection experience, anticipated performance, and the Company’s best judgement
at the time. These amounts are generally included in the contract’s transaction price and are allocated over the remaining
performance obligations. Changes in judgments on these above estimates could impact the timing and amount of revenue recognized
with a resulting impact on the timing and amount of associated income. Under these long-term government contracts, the Company
may receive payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to
consideration becomes unconditional. In the event a contract loss becomes known, the entire amount of the estimated loss is recognized
in the Consolidated Statements of Operations.
The majority of the Company’s revenue
is from products and services transferred to customers at a point in time and was approximately 100% and 96.0% of revenue for the
six months ended June 30, 2020 and 2019, respectively. The Company recognizes revenue at the point in time in which the customer
obtains control of the product or service, which is generally when product title passes to the customer upon shipment. In limited
cases, title does not transfer and revenue is not recognized until the customer has received the products at its physical location.
The following table summarizes the Company’s
sales by market area:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Aerospace & Defense
|
|
$
|
940,727
|
|
|
$
|
979,004
|
|
|
$
|
1,820,639
|
|
|
$
|
2,019,561
|
|
Process Control & Metrology
|
|
|
1,093,022
|
|
|
|
993,355
|
|
|
|
1,945,397
|
|
|
|
2,114,342
|
|
Laser Systems
|
|
|
150,451
|
|
|
|
324,282
|
|
|
|
361,493
|
|
|
|
609,272
|
|
Scientific / R&D
|
|
|
339,790
|
|
|
|
322,982
|
|
|
|
446,956
|
|
|
|
477,508
|
|
Total
|
|
$
|
2,523,990
|
|
|
$
|
2,619,623
|
|
|
$
|
4,574,485
|
|
|
$
|
5,220,683
|
|
Net sales by timing of transfers of goods
and services is as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Transfer at point in time
|
|
$
|
2,523,990
|
|
|
$
|
2,506,028
|
|
|
$
|
4,574,485
|
|
|
$
|
5,013,534
|
|
Transfer over time
|
|
|
-
|
|
|
|
113,595
|
|
|
|
-
|
|
|
|
207,149
|
|
Total net sales
|
|
$
|
2,523,990
|
|
|
$
|
2,619,623
|
|
|
$
|
4,574,485
|
|
|
$
|
5,220,683
|
|
The timing of revenue recognition, billings
and cash collections results in billed receivables, costs in excess of billings (contract assets), and billings in excess of costs
(contract liabilities, previously deferred revenue) on the Consolidated Balance Sheet. Contract liabilities also include customer
advances or prepayments. Costs in excess of billings and billings in excess of costs associated with long-term government contracts
were not significant at June 30, 2020 or 2019. At June 30, 2020 and 2019, the remaining revenue to be recognized from
the long-term government contracts was $0 and $105,000, respectively.
On June 30, 2020, the Company had
approximately $6.4 million of performance obligations, which is also referred to as backlog. Approximately 4.0% of the June 30,
2020 backlog, is related to projects that will extend beyond June 30, 2021.
NOTE 3 - EQUITY COMPENSATION PROGRAM AND STOCK BASED
COMPENSATION
The Company's results of operations for
the three months ended June 30, 2020 and 2019, include stock-based compensation expense for stock option grants totaling $28,157
and $33,591, respectively. For the six months ended June 30, 2020 and 2019, stock-based compensation expense for stock option
grants totaled $56,137 and $62,719, respectively. The following table shows the amounts for stock-based compensation included in
cost of sales and selling, general and administrative expense for the three months and six months ended June 30, 2020 and
2019:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Cost of sales
|
|
$
|
7,201
|
|
|
$
|
9,493
|
|
|
$
|
14,402
|
|
|
$
|
17,719
|
|
Selling, general and administrative
|
|
|
20,956
|
|
|
|
24,098
|
|
|
|
41,735
|
|
|
|
45,000
|
|
Total stock-based compensation expense
|
|
$
|
28,157
|
|
|
$
|
33,591
|
|
|
$
|
56,137
|
|
|
$
|
62,719
|
|
As of June 30, 2020 and 2019, there
were $153,000 and $100,000 of unrecognized compensation cost, net of estimated forfeitures, related to non-vested stock options,
which are expected to be recognized over a weighted average period of approximately 1.16 years and 1.95 years, respectively.
There were 22,500 stock options granted
during the six months ended June 30, 2020, and 200,000 stock options granted during the six months ended June 30, 2019.
The following range of weighted-average assumptions were used to determine the fair value of stock option grants during the six
months ended June 30, 2020 and 2019:
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Expected Dividend yield
|
|
|
-
|
%
|
|
|
-
|
%
|
Expected Volatility
|
|
|
122
|
%
|
|
|
125
|
%
|
Risk-free interest rate
|
|
|
1.96
|
%
|
|
|
2.83
|
%
|
Expected term
|
|
|
10 years
|
|
|
|
10 years
|
|
The following table represents stock options
granted, exercised and forfeited during the six months ended June 30, 2020:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Price per
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Stock Options
|
|
Options
|
|
|
Option
|
|
|
Term (years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2020
|
|
|
1,147,267
|
|
|
$
|
0.63
|
|
|
|
6.29
|
|
|
$
|
718,840
|
|
Granted
|
|
|
22,500
|
|
|
|
1.48
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
(9,200
|
)
|
|
|
0.98
|
|
|
|
|
|
|
|
|
|
Outstanding March 31, 2020
|
|
|
1,160,567
|
|
|
$
|
0.65
|
|
|
|
6.47
|
|
|
$
|
1,222,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2020
|
|
|
812,852
|
|
|
$
|
0.56
|
|
|
|
4.84
|
|
|
$
|
734,355
|
|
The following table represents non-vested
stock options granted, vested and forfeited for the three months ended June 30, 2020:
|
|
Weighted-average
|
|
|
|
Grant-date Fair Value
|
|
|
|
Options
|
|
|
($)
|
|
Non-Vested - January 1, 2020
|
|
|
371,669
|
|
|
|
0.80
|
|
Granted
|
|
|
22,500
|
|
|
|
1.41
|
|
Vested
|
|
|
(46,454
|
)
|
|
|
0.77
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Non-Vested - June 30, 2020
|
|
|
347,715
|
|
|
|
0.84
|
|
NOTE 4 - STOCKHOLDERS’ EQUITY
The Company approved a matching contribution
to participants in the Inrad Optics 401k Plan (the “Plan”) for the year ended December 31, 2019, in February 2020.
A total of 89,751 common shares of Inrad Optics, Inc. were contributed to the Plan in June, 2020.
NOTE 5 – RELATED PARTY TRANSACTIONS
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, 2022 to April 1, 2027. As of June 30, 2020, the Company had accrued
interest in the amount of $187,500 associated with these notes.
NOTE 6 – OTHER LONG TERM NOTES
Other Long Term Notes consist of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(in thousands)
|
|
U.S. Small Business Administration term
note payable in equal monthly installments of $1,922 and bearing an interest rate of 4.0% and expiring in
July 2029.
|
|
$
|
175
|
|
|
$
|
183
|
|
Less current portion
|
|
|
(16
|
)
|
|
|
(16
|
)
|
Long-term debt, excluding current portion
|
|
$
|
160
|
|
|
$
|
167
|
|
NOTE 7 – PAYROLL PROTECTION PROGRAM
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 was enacted
March 27, 2020. The PPP Loan, which is in the form of a promissory note, dated May 4, 2020, issued by the Company, matures on May
4, 2022, and bears interest at a rate of 1.0% per annum, payable monthly commencing on December 4, 2020.
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 will qualify for forgiveness. The Company intends to
use the entire loan amount for qualifying expenses. Any forgiveness of the PPP Loan will be subject to approval by the Small Business
Association, and no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. At June
30, 2020, the PPP Loan is included in other long term notes on the accompanying balance sheet.
NOTE 8 – LEASES
Under
the guidance of ASU 2016-02, Leases (Topic 842), the Company determines if such an arrangement contains a lease and whether
that lease meets the classification criteria of a finance or operating lease at inception of the arrangement.
a)
|
Equipment Financing Lease
|
The Company entered into an equipment lease
on January 17, 2020, commencing in March for certain computer equipment, with a bargain purchase option of $1.00 at the
end of the lease for a term of 36 months. The lease is classified as a financing lease under the guidance of Topic 842. The present
value of the lease payments, discounted at 3.99%, is $45,000, which initial value is recorded in Plant and Equipment on the Company’s
Condensed Consolidated Balance Sheet (unaudited).
The undiscounted cash flow principal payments
for the remaining term of the lease will be as follows:
Maturity of Lease Liability
|
|
(in thousands)
|
|
2020 (Remaining)
|
|
$
|
8
|
|
2021
|
|
|
16
|
|
2022 and beyond
|
|
|
18
|
|
Total undiscounted operating lease payments
|
|
|
42
|
|
|
|
|
|
|
Less: imputed interest
|
|
|
(1
|
)
|
Present value of financing lease liability
|
|
$
|
41
|
|
b)
|
Facility Lease Amendment
|
The Company entered into an amendment and
extension of its building lease on July 8, 2019, retroactive to June 1, 2019. The Company determined that this lease
is an operating lease and presented as a right-of-use lease asset, short term lease liability and long term lease liability on
the consolidated balance sheet. These assets and liabilities are recognized at the commencement date based on the present
value of remaining lease payments over the lease term using the Company’s incremental borrowing rate.
Lease expense is recognized on a straight-line
basis over the lease term and is included in cost of sales and general and administrative expenses on the consolidated statement
of operations.
An initial right-of-use asset of $0.8 million
was recognized as a non-cash asset addition with the signing of the July 8, 2019, office lease. Cash paid for amounts included
in the present value of operating lease liability was $0.1 million during the three months ended June 30, 2020, and is included
in operating cash flows.
Operating lease costs were $0.1 million
and $0.2 million during the three months and six months ended June 30, 2020.
NOTE 9 – IMPACT OF COVID-19
On March 11, 2020, the World Health
Organization declared the global novel coronavirus disease (“COVID-19”) a pandemic. The Company’s operations
are considered essential business under the Executive Orders of New Jersey’s Governor and the Company’s operations
have been identified as critical infrastructure, as defined by the U.S. Department of Homeland Security. Companies aligned with
the essential critical infrastructure workforce definition have a special responsibility to maintain normal work schedules. We
are conducting our 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 these mandates may have on our customers and suppliers, operating
results, or financial condition. However 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, and partners.
The Company has taken additional steps to protect our employees in the event of infection in our offices and production facility
and continues to enhance its business continuity plans.
The COVID-19 pandemic has caused uncertainty
and disruption in the global economy and businesses worldwide. Despite these circumstances, orders booked in the six months ended
June 30, 2020, were up 63% over the same period in 2019, reflecting stronger orders in the defense and aerospace market. The Company’s
other segments have suffered some contraction and certain customers have pushed orders to the latter part of 2020 and early 2021.
We cannot predict whether there will be further push outs and/or softening in the non-defense markets we serve and what impact
this may have on our results of operations, financial position, and liquidity.
The Company has taken steps to preserve
cash and has deferred interest payments on its related party notes through June 30, 2020, but has elected to discontinue deferment
for the remainder of 2020. However, as the outbreak continues, there is uncertainty around sales, cash collections, and costs related
to our mediation efforts. These uncertainties include the duration and severity of the pandemic, and how compliance with containment
measures will impact our day-to-day operations as well as that of our key customers, suppliers and other partners.