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, 7 and 7A of the Company's most recent Annual Report on Form 10-K for the
year ended December 31, 2021, as filed with the Securities and Exchange
Commission on March 30, 2022. 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, 2021. 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, 2021.
Ongoing Impact of COVID-19
The COVID-19 pandemic has created significant volatility and economic disruption
and the impact on our future consolidated results of operations remains
uncertain. The extent to which COVID-19 impacts our employees, operations,
customers, suppliers and financial results depends on numerous evolving factors
that we may not be able to accurately predict, including: the duration and scope
of the pandemic (and whether there is a resurgence or multiple resurgences in
the future, including the impact of new variants); government actions taken in
response to the pandemic, including required shutdowns, vaccine or testing
mandates; supply chain disruptions; rising inflation; labor shortages; and the
effect on our customers demand for our products. We may also be impacted by
state actions, orders and policies regarding the COVID-19 pandemic. While our
operations were considered essential business under the Executive Orders of New
Jersey's Governor, we cannot predict whether new temporary closures,
shelter-in-place orders, travel, or quarantine policies will have an impact on
our operations.
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Results of Operations
Inrad Optics is a vertically integrated manufacturer specializing in glass,
crystal, and metal based optical components and assemblies. Manufacturing
capabilities include super-precision optical surfacing, precision diamond
turning, the ability to handle large substrates, proprietary optical contacting
processes, thin film coatings, and high resolution in-process metrology. The
Company built its reputation on the growth and fabrication of UV filter crystals
and non-linear crystals and devices. Today, product offerings include optical
components and assemblies for the ultraviolet to infrared range, and bent
crystal assemblies for x-ray applications.
Inrad Optics' customers include leading corporations in semiconductor wafer
inspection, industrial and scientific process control and metrology, defense,
space, and laser systems sectors, as well as the U.S. Government, National
Laboratories and universities and institutions worldwide.
All R&D, engineering, manufacturing and administrative operations are undertaken
in our 42,000 square foot facility in Northvale, New Jersey.
Revenue
Sales for the three months ended March 31, 2022, were $2.4 million, a decrease
of 12.3%, or $0.3 million, compared to $2.8 million for the three months ended
March 31, 2021.
Sales to the defense/aerospace market decreased by $0.3 million or 28.8% to $0.8
million in the three months ended March 31, 2022, compared to $1.2 million for
the three months ended March 31, 2021. The decrease in sales in the
defense/aerospace market was due to timing of deliveries.
Process control and metrology ("PC&M") sales were $1.4 million for the three
months ended March 31, 2022, an increase of $0.3 million, or 30.2%, from $1.1
million for the three months ended March 31, 2021. The increase in demand,
particularly in the semi-conductor industry, has contributed to the increase in
sales in the PC&M market for the three months ended March 31, 2022, compared to
the three months ended March 31, 2021.
Sales to customers in the laser systems market were $0.1 million in each of the
three months ended March 31, 2022 and 2021. Products sold into this market
segment largely consist of legacy materials for replacement units and small
volume buys.
Sales to customers in the Scientific/R&D market were $0.1 million for the three
months ended March 31, 2022, compared to $0.4 million for the three months ended
March 31, 2021. The decrease in sales in the Scientific/R&D market is due to the
completion of a federal government R&D contract that ended in March 2021.
In the three-month period ended March 31, 2022, three customers represented 10%
or more of revenues while only one customer represented 10% or more of revenues
in the three-month period ended March 31, 2021.
The Company's top five customers represented 64.7% of sales in the three-month
period ended March 31, 2022, compared to 51.5% in the same period in 2021.
Orders booked during the first three months of 2022, totaled $7.4 million,
compared to $3.1 million for the same period last year, an increase of 138.7%.
Order backlog at March 31, 2022 and 2021, was $17.4 million and $7.9 million,
respectively. We anticipate shipping a majority of the present backlog during
fiscal year 2022. However, our current backlog consists of orders with delivery
schedules that extend beyond 12 months into the future.
Cost of Goods Sold
For the three months ended March 31, 2022 and 2021, cost of goods sold was $1.7
million and $2.0 million, or 68.8% and 70.8% of total revenues, respectively.
Cost of goods sold decreased as a result of sales mix and lower sales year over
year.
Gross profit for each of the three months ended March 31, 2022 and 2021, was
$0.8 million. Gross profit was 31.2% of sales in the three months ended March
31, 2022, and 29.2% of sales in the three months ended March 31, 2021.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A" expenses) in the three
months ended March 31, 2022, amounted to $0.7 million, or 27.8% of sales
compared to $0.6 million, or 21.9% of sales, for the same period a year ago. The
increase in SG&A expenses reflects an increase in personnel related costs and
insurance, offset by a reduction in uncollectible accounts.
Income from Operations
The Company had operating income of $0.1 million for the three months ended
March 31, 2022, compared to operating income of $0.2 million for the three
months ended March 31, 2021. The decrease in operating income reflects the
impact of the Company's lower sales in the three months ended March 31, 2022,
compared to the same period last year, coupled with an increase in SG&A costs,
partially offset by a decrease in cost of goods sold.
Other Income (Expense)
Other income in 2021 reflects the gain on the forgiveness of the PPP loan of
$1.0 million. There was a slight increase in interest expense for the three
months ended March 31, 2022, compared to the same period in 2021 due to the
financing of new equipment.
Income Taxes
For the three months ended March 31, 2022, 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 income tax and financial
reporting purposes. 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.
Net Income
The Company had net income of $41,000 for the three months ended March 31, 2022,
compared to net income of $1.1 million for the three months ended March 31,
2021. The 2021 results reflect higher sales, and the gain resulting from the PPP
loan forgiveness.
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, for payment of accrued and
current interest on convertible debt, for servicing of long-term debt, and for
capital expenditures.
As of March 31, 2022 and December 31, 2021, the Company had cash and cash
equivalents of $1.8 million and $1.8 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.
The current lease term expires on May 31, 2022. The Company is currently
negotiating an extension of the lease. 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 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, 2024 to April 1, 2027.
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The following table summarizes net cash (used in) operating, investing and
financing activities for the three months ended March 31, 2022 and 2021:
Three Months Ended
March 31,
2022 2021
(in thousands)
Net cash provided by (used in) operating activities $ 249 $ (70)
Net cash (used in) investing activities
(246) (14)
Net cash (used in) by financing activities (12) -
Net (decrease) in cash and cash equivalents $ (8) $ (83)
Net cash provided by operating activities was $249,000 for the three months
ended March 31, 2022, compared to net cash used in operating activities of
$70,000 in the same period last year. Net cash provided by operating activities
in the three months ended March 31, 2022, resulted primarily from an increase in
inventories, an increase in accounts payable and accrued liabilities, and an
increase in contract liabilities.
Net cash used in investing activities was $246,000 during the three months ended
March 31, 2022, compared to $14,000 in the same period last year reflecting
capital expenditures in both periods.
Overall, cash and cash equivalents decreased by $8,000 and $83,000 for the three
months ended March 31, 2022 and 2021, 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 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, initially
matured on May 4, 2022, and bore interest at a rate of 1.0% per annum.
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
recognized a gain from forgiveness on PPP Loan in the three months ended March
31, 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 May 13, 2023.
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