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, 2020.
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 $91,000 at March 31, 2021, and December 31, 2020.
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 $2,779,000 and $2,489,000 at March 31, 2021 and December 31, 2020, respectively:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
1,079
|
|
|
$
|
1,130
|
|
Work in process, including manufactured parts and components
|
|
|
1,582
|
|
|
|
1,718
|
|
Finished goods
|
|
|
367
|
|
|
|
358
|
|
|
|
$
|
3,028
|
|
|
$
|
3,206
|
|
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, 2020. 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 March 31,
2021, 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 $3,585,000 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 March 31, 2021, the
Company did not record a current provision for income taxes due to the permanent difference related to loan forgiveness and the availability
of net operating loss carryforwards to offset taxable income for both income tax and financial reporting purposes.
For the three months ended March 31, 2020, the
Company did not record a current provision for either state tax or federal 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 ended March 31, 2021, 2,500,000
common shares and 1,875,000 common shares from warrants issuable upon conversion of outstanding related party convertible notes were excluded
from the computation of basic and diluted net income per common share because their effect is anti-dilutive. In addition, 476,300 shares
were excluded from basic and diluted net income per common share because their effect is anti-dilutive.
For the three months ended March 31, 2020,
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, 1,228,267 common stock options 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
|
|
|
|
March
31, 2021
|
|
|
March
31, 2020
|
|
|
|
Income(Loss)
|
|
|
Shares
|
|
|
Per
Share
|
|
|
Income(Loss)
|
|
|
Shares
|
|
|
Per
Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Basic
Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
1,140,334
|
|
|
|
13,820,328
|
|
|
$
|
0.08
|
|
|
$
|
(324,487
|
)
|
|
|
13,632,388
|
|
|
$
|
(0.02
|
)
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Accrued
Interest on Convertible Notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock
Options
|
|
|
-
|
|
|
|
278,923
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted
Income (Loss) Per Share:
|
|
$
|
1,140,334
|
|
|
|
14,099,251
|
|
|
$
|
0.08
|
|
|
$
|
(324,487
|
)
|
|
|
13,632,388
|
|
|
$
|
(0.02
|
)
|
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, with earlier application permitted. The Company is currently evaluating the impact of adoption on
its consolidated financial statements.
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 adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06,
Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic
815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU update is intended to simplify
the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics
of liabilities and equity. This guidance is effective for the Company for fiscal years beginning after December 15, 2023, including interim
periods within those fiscal years. The Company does not expect the adoption of this guidance will have a material impact on the Company’s
consolidated financial statements.
NOTE 2 – REVENUE
The Company’s revenues are comprised of
product sales as well as 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 1.5% and 0.0% of revenue for the three months ended March 31, 2021 and 2020, respectively.
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 98.5% and 100.0% of revenue for the three
months ended March 31, 2021 and 2020, 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
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Aerospace & Defense
|
|
$
|
1,176,330
|
|
|
$
|
790,965
|
|
Process Control & Metrology
|
|
|
1,077,376
|
|
|
|
848,375
|
|
Laser Systems
|
|
|
114,746
|
|
|
|
303,990
|
|
Scientific / R&D
|
|
|
411,096
|
|
|
|
107,166
|
|
Total
|
|
$
|
2,779,548
|
|
|
$
|
2,050,496
|
|
Net sales by timing of transfers of goods and
services is as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Transfer at point in time
|
|
$
|
2,739,329
|
|
|
$
|
2,050,496
|
|
Transfer over time
|
|
|
40,219
|
|
|
|
-
|
|
Total net sales
|
|
$
|
2,779,548
|
|
|
$
|
2,050,496
|
|
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 March 31, 2021 or 2020.
At March 31, 2021 and 2020, there was no remaining revenue to be recognized from the long-term government contracts.
On March 31, 2021, the Company had approximately
$7.9 million of performance obligations, which is also referred to as backlog. Approximately 17.0% of the March 31, 2021, backlog is related
to projects that will extend beyond March 31, 2022.
NOTE 3- EQUITY COMPENSATION PROGRAM AND STOCK BASED COMPENSATION
The Company's results of operations for the three
months ended March 31, 2021 and 2020, include stock-based compensation expense for stock option grants totaling $29,303 and 27,980, 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 ended March 31, 2021 and 2020:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Cost of sales
|
|
$
|
7,202
|
|
|
$
|
7,201
|
|
Selling, general and administrative
|
|
|
22,101
|
|
|
|
20,779
|
|
Total stock-based compensation expense
|
|
$
|
29,303
|
|
|
$
|
27,980
|
|
As of March 31, 2021 and 2020, there were $211,000
and $181,000 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 1.57 and 1.12 years, respectively.
There were 200,000 stock options granted during
the three months ended March 31, 2021, and 22,500 stock options granted during the three months ended March 31, 2020. The following range
of weighted-average assumptions were used to determine the fair value of stock option grants during the three months ended March 31, 2021
and 2020:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Expected Dividend yield
|
|
|
-
|
%
|
|
|
-
|
%
|
Expected Volatility
|
|
|
106
|
%
|
|
|
122
|
%
|
Risk-free interest rate
|
|
|
0.86
|
%
|
|
|
1.96
|
%
|
Expected term
|
|
|
10 years
|
|
|
|
10 years
|
|
The following table represents stock options granted,
exercised and forfeited during the three months ended March 31, 2021:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Price per
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Stock Options
|
|
Options
|
|
|
Option
|
|
|
Term (years)
|
|
|
Value
|
|
Outstanding January 1, 2021
|
|
|
1,150,867
|
|
|
$
|
0.64
|
|
|
|
6.61
|
|
|
$
|
107,573
|
|
Granted
|
|
|
200,000
|
|
|
|
0.62
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
(72,400
|
)
|
|
|
0.98
|
|
|
|
|
|
|
|
|
|
Outstanding March 31, 2021
|
|
|
1,278,467
|
|
|
$
|
0.62
|
|
|
|
6.47
|
|
|
$
|
218,520
|
|
Exercisable at March 31, 2021
|
|
|
998,465
|
|
|
$
|
0.60
|
|
|
|
5.85
|
|
|
$
|
200,520
|
|
The following table represents non-vested stock
options granted, vested and forfeited for the three months ended March 31, 2020:
|
|
Weighted-average
|
|
|
|
Grant-date Fair Value
|
|
|
|
Options
|
|
|
($)
|
|
Non-Vested - January 1, 2021
|
|
|
210,840
|
|
|
|
0.89
|
|
Granted
|
|
|
200,000
|
|
|
|
0.57
|
|
Vested
|
|
|
(130,837
|
)
|
|
|
0.90
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Non-Vested - March 31, 2021
|
|
|
280,003
|
|
|
|
0.69
|
|
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, 2020, in February 2021. 142,329 common
shares of Inrad Optics, Inc. and cash of $42,000 are to be contributed to the Plan in May, 2021.
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 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 to extend the maturity date of the notes, the
expiration dates of the warrants were extended from April 1, 2022 to April 1, 2027.
NOTE 6 – OTHER LONG-TERM NOTES
Other Long-Term Notes consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
(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.
|
|
$
|
176
|
|
|
$
|
177
|
|
Less current portion
|
|
|
(16
|
)
|
|
|
(16
|
)
|
Long-term debt, excluding current portion
|
|
$
|
160
|
|
|
$
|
161
|
|
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.
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. 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 Association 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 recorded a gain on the forgiveness of the PPP Loan.
NOTE 8 – LEASE AMENDMENT
The Company entered into an amendment and extension
of its building lease on July 8, 2019, retroactive to June 1, 2019. 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. 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 March 31, 2021, and is included in operating
cash flows.
Operating lease costs were $0.1 million during
the three months ended March 31, 2021 and 2020, respectively.
NOTE
9 – 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. Our operations are considered
essential business under the Executive Orders of New Jersey’s Governor, and we cannot predict what further actions may be required
by federal, state, or local authorities in the future. Nor can we predict what actions these mandates may have on our customers and suppliers.
We 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.