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, Inc. is a vertically integrated optical components and subsystems
manufacturer focused in three areas: Crystal-based Optical Components and
Assemblies, Custom Optical Components from both glass and metal, and Optical and
Opto-mechanical assemblies.
The Crystal-based Optical Components and Devices category includes the growth
and fabrication of crystalline materials with electro-optic (EO) and non-linear
optical properties for use in both standard and custom products. The majority of
crystal components and assemblies manufactured are used in laser systems,
defense EO systems, medical lasers and R&D applications by engineers within
corporations, universities and national laboratories.
The Optical Components and Assembly categories are focused on custom optics
manufacturing. The Company specializes in high-end precision components and
assemblies. It develops, manufactures and delivers precision custom optics,
optical assemblies and opto-mechanical assemblies through its advanced
manufacturing operations. Glass, metal, and single-crystal substrates are
processed using complex processes and techniques to manufacture components,
deposit optical thin films, and assemble sub-components used in advanced
photonic systems. The majority of custom optical components and assemblies,
along with thin film coatings, are used in inspection applications, process
control systems, defense and aerospace electro-optical systems, laser system
applications, industrial scanners, and medical system applications.
The Company operates a manufacturing facility in Northvale, New Jersey. Its
corporate offices are located in the same facility.
Sales Revenue
Sales for the three months ended June 30, 2021, were $2.9 million, an increase
of 14.2%, or $0.4 million, compared to $2.5 million for the three months ended
June 30, 2020. For the six months ended June 30, 2021, sales were $5.7 million,
an increase of 23.8%, or $1.1 million, compared to sales of $4.6 million for the
six months ended June 30, 2020.
For the three months ended June 30, 2021 and 2020, sales to the
defense/aerospace market were $1.1 million and $0.9 million, respectively. For
the six months ending June 30, 2021 and 2020, sales to the defense/aerospace
market were $2.2 million and $1.8 million, respectively. The increase in sales
in the three months and six months ended June 30, 2021, of $0.2 million, or
22.2% and $0.4 million, or 22.6%, respectively, reflect a continued increase in
demand in this market.
Process control and metrology ("PC&M") sales were $1.2 million for the three
months ended June 30, 2021, an increase of $0.1 million, or 0.7%, from $1.1
million for the three months ended June 30, 2020, reflecting stronger sales in
the semi-conductor industry. For the six months ended June 30, 2021, sales
increased 15.6% or $0.3 million to $2.3 million from $2.0 million for the six
months ended June 30, 2020. Sales in the PC&M market continue to increase due to
demand in the semi-conductor industry.
For the three months ended June 30, 2021 and 2020, sales to customers in the
laser systems market were $0.3 million and $0.2 million, respectively. The
increase of $0.1 million, or 83.8%, reflects an increase in demand for
laser-based products. Sales for the six months ended June 30, 2021 and 2020,
were $0.4 million in each period.
Sales to customers in the Scientific/R&D market were $0.4 million and $0.3
million for the three months ended June 30, 2021 and 2020, respectively, an
increase of $0.1 million, or 11.1%. The increase reflects stronger demand from
national laboratories. For the six-month period ending June 30, 2021, sales
increased $0.4 million to $0.8 million, compared to $0.4 million for six months
ended June 30, 2020. The increase in sales for the six-month period ending June
30, 2021, largely reflects the revenues from a federal government R&D contract
completed in the first quarter of 2021.
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For each of the three months ended June 30, 2021 and 2020, three customers
represented 10% or more of sales. For the six months ended June 30, 2021, two
customers represented 10.0% or more of sales, compared to one customer
representing 10.0% of sales for the six months ended June 30, 2020.
The Company's top five customers represented 57.4% of sales in the three-month
period ended June 30, 2021, compared to 50.9% in the same period in 2020. For
the six-month period ended June 30, 2021 and 2020, the Company's top five
customers represented 50.0% and 44.4% of sales, respectively.
Orders booked during the first six months of 2021, totaled $9.1 million,
compared to $5.9 million for the same period last year. Order backlog at June
30, 2021 and 2020, was $9.4 million and $6.4 million, respectively.
Cost of Goods Sold
For the three months ended June 30, 2021 and 2020, cost of goods sold was $1.8
million and $1.8 million, or 63.3% and 70.7% of total revenues, respectively.
Cost of goods sold in the three-month period ending June 30, 2021, was lower as
a percentage of sales due to lower material and services costs, indirect labor
costs, and employee related costs. Direct labor, manufacturing expenses were
higher in the three-month period ending June 30, 2021. Cost of goods sold for
the six months ended June 30, 2021 and 2020, were $3.8 million and $3.4 million,
respectively. Cost of goods sold increased 10.9% or $0.4 million reflecting
higher material and outside services costs, direct labor, and manufacturing
expenses, offset by a decrease in employee related costs and indirect labor.
Gross profit for the three months ended June 30, 2021, was $1.1 million or 36.7%
of sales, compared to $0.7 million or 29.3% of sales in the same quarter last
year. Gross profit for the year-to-date period ending June 30, 2021, was $1.9
million or 33.0% of sales, an increase of $0.7 million, compared to $1.2 million
or 25.3% of sales, for the six-month period ending June 30, 2020. The increase
in gross profit for the three and six months ended June 30, 2021, compared to
the three and six months ended June 30, 2020, is due to higher sales revenues
combined with material costs reflective of sales mix and lower employee related
costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A" expenses) were $0.6 million
in the three months ended June 30, 2021, or 22.2% of sales and 0.7 million, or
26.8% of sales, in the three months ended June 30, 2020. The decrease in SG&A
expenses in the three months ended June 30, 2021, reflects a reduction in travel
and entertainment costs, marketing related costs due to restrictions on travel
related to COVID-19, and employee related expenses. SG&A expenses for the
six-month period ending June 30, 2021 and 2020, were $1.2 million, or 22.0% of
sales, and $1.4 million or 30.1% of sales, respectively. The decrease in SG&A
expenses for the year-to-date period reflects a reduction in travel and
entertainment costs, marketing related costs due to restrictions on travel
related to COVID-19, and employee related expenses.
Income (Loss) from Operations
The Company realized net income from operations of $0.4 million for the three
months ended June 30, 2021, compared with net income from operations of $0.1
million in the three months ended June 30, 2020. The increase in income
primarily reflects an increase in sales coupled with lower SG&A expenses. The
Company incurred net income from operations of $0.6 million for the six months
ended June 30, 2021,compared to a net loss from operations for the six months
ended June 30, 2020, of $0.2 million. The increase in net income from operations
is primarily due to an increase in revenues coupled with a decrease in SG&A
expenses.
Other Income and Expense
There was no significant change in net interest expense for the three months or
six months periods ended June 30, 2021 compared to the same periods ended June
30, 2020. Other income reflects the gain on the forgiveness of the PPP loan of
$1.0 million in the six months ended June 30, 2021.
Income Taxes
For the three months and six months ended June 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.
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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.
Net Income (Loss)
The Company had a net income of $0.4 million for the three months ended June 30,
2021, compared to net income of less than $0.1 million for the three months
ended June 30, 2020. The change primarily reflects an increase in sales coupled
with a reduction in SG&A costs. For the six months ended June 30, 2021, the
Company recorded net income of $1.5 million compared to a net loss of $0.3
million for the six months ended June 30, 2020. The increase in net income
reflects higher sales, lower SG&A costs, 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, for payment of accrued and
current interest on convertible debt, for servicing of long-term debt, and for
capital expenditures.
As of June 30, 2021 and December 31, 2020, the Company had cash and cash
equivalents of $1.4 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 June 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 six months ended June 30, 2021 and
2020:
Six Months Ended
June 30,
2021 2020
(in thousands)
Net cash provided by operating activities $ 379 $ 204
Net cash (used in) investing activities (14) (100)
Net cash provided by financing activities
- 967
Net increase in cash and cash equivalents $ 365 $ 1,071
Net cash provided by operating activities was $379,000 for the six months ended
June 30, 2021, compared to net cash provided by operating activities of $204,000
for the same period last year. The net cash provided by operating activities in
the six months ended June 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, an increase in accounts receivable and decreases in
accounts payable and contract liabilities. Net cash used in operating activities
during the six months ended June 30, 2020, resulted from a reduction in accounts
receivable and an increase in accounts payable and contract liabilities, offset
by an increase in inventory.
Net cash used in investing activities was $14,000 during the six months ended
June 30, 2021, compared to $100,000 in the same period last year reflecting
capital expenditures in both periods.
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Net cash provided by financing activities reflects the PPP Loan proceeds
received during the six months ended June 30, 2020.
Overall, cash and cash equivalents increased by $365,000 and $1,071,000 for the
six months ended June 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 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 six months ended June 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. 
