INRD Inrad Optics Inc (PK)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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(201) 767-1910

Registrant’s Telephone Number, Including Area Code

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

Securities registered pursuant to Section 12(b) of the Act: None.

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒     No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐    No ☒

The number of shares of the registrant’s common stock outstanding, $0.01 par value, as of May 15, 2023, was 14,200,975.

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INRAD OPTICS, INC AND SUBSIDIARIES

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INDEX

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See Notes to Condensed Consolidated Financial Statements (Unaudited)

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See Notes to Condensed Consolidated Financial Statements (Unaudited)

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See Notes to Condensed Consolidated Financial Statements (Unaudited)

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See Notes to Condensed Consolidated Financial Statements (Unaudited)

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INRAD OPTICS, INC. AND SUBSIDIARIES

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Inventories are comprised of the following and are shown net of inventory reserves of $2,530,000 and $2,398,000 at March 31, 2023 and December 31, 2022, respectively:

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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, 2022. 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, 2023, 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 deferred tax asset balance of $2,967,000, 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, 2023 and 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.

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, 2023, 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, 161,000 common stock options were excluded from the computation of basic and diluted net income per common share because their effect is anti-dilutive.

For the three months ended March 31, 2022, 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, 162,500 common stock options were excluded from basic and diluted net income per common share because their effect is anti-dilutive.

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A reconciliation of the shares used in the calculation of basic and diluted earnings (loss) per common share is as follows:

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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 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.

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NOTE 2 – CONCENTRATION OF CASH

The Company is subject to credit risk due to the concentration of cash balances that exceed the federally insured limits by approximately $1.75 million at March 31, 2023 and December 31, 2022, on cash balances of approximately $2.0 million at March 31, 2023 and December 31, 2022.

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NOTE 3 – 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 majority of the Company’s revenue is from products and services transferred to customers at a point in time and was 100% of revenue for each of the three months ended March 31, 2023 and 2022, respectively. The Company recognizes revenue at the point in

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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:

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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.

On March 31, 2023, the Company had approximately $19.5 million of performance obligations, which is also referred to as backlog. Approximately 16.1% of the March 31, 2023, backlog is related to projects that will extend beyond March 31, 2024.

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NOTE 4- EQUITY COMPENSATION PROGRAM AND STOCK BASED COMPENSATION

a)    Stock Option Expense

The Company’s results of operations for the three months ended March 31, 2023 and 2022, include stock-based compensation expense for stock option grants totaling $34,203 and $21,558, 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, 2023 and 2022:

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As of March 31, 2023 and 2022, there were $208,000 and $299,000 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 1.26 years and 1.54 years respectively.

There were 20,000 stock options granted during the three months ended March 31, 2023, and 200,000 stock options granted during the three months ended March 31, 2022. 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, 2023 and 2022:

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b)    Stock Option Activity

The following table represents stock options granted, exercised, and forfeited during the three months ended March 31, 2023:

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The following table represents non-vested stock options granted, vested, and forfeited for the three months ended March 31, 2023:

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NOTE 5 - STOCKHOLDERS’ EQUITY

The Company approved a matching contribution to participants in the Inrad Optics 401k Plan (the “Plan”) for the year ended December 31, 2022, in February 2023. The Company contributed 33,332 common shares of Inrad Optics, Inc., and cash of $82,000 to the Plan in February 2023.

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NOTE 6 – 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, 2024 to April 1, 2027.

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NOTE 8 – LEASE AMENDMENT

The Company entered into an amendment and extension of its building lease on July 25, 2022, retroactive to June 1, 2022. Under the guidance of ASU 2016-02, Leases (Topic 842), the Company must determine 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 approximately $0.9 million was recognized as a non-cash asset addition with the signing of the July 29, 2022, lease amendment. Cash paid for amounts included in the present value of the operating lease liability was $0.2 million during the year ended December 31, 2022, and is included in operating cash flows.

Operating lease costs were $0.1 million during each of the three months ended March 31, 2023 and 2022, respectively.

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Revenue

Sales for the three months ended March 31, 2023, were $2.8 million, an increase of 15.2%, or $0.4 million, compared to $2.4 million for the three months ended March 31, 2022.

Sales to the defense/aerospace market decreased by $0.4 million or 47.5% to $0.4 million in the three months ended March 31, 2023, compared to $0.8 million for the three months ended March 31, 2022. The decrease in sales in the defense/aerospace market was due to timing of deliveries.

Process control and metrology (“PC&M”) sales were $2.2 million for the three months ended March 31, 2023, an increase of $0.8 million, or 59.0%, from $1.4 million for the three months ended March 31, 2022. 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, 2023, compared to the three months ended March 31, 2022.

Sales to customers in the laser systems market were $43,000 for the three months ended March 31, 2023, compared to $65,000 for the three months ended March 31, 2022. 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 each of the three months ended March 31, 2023 and 2022.

In each three-month period ended March 31, 2023 and 2022, three customers represented 10% or more of revenues.

The Company’s top five customers represented 79.8% of sales in the three-month period ended March 31, 2023, compared to 64.7% in the same period in 2022.

Orders booked during the first three months of 2023, totaled $1.8 million, compared to $7.4 million for the same period last year, a decrease of 75.7%. The decrease in bookings is due to extraordinary demand from several key customers in the period ended March 31, 2022, seeking to secure capacity through 2023. Order backlog at March 31, 2023 and 2022, was $19.5 million and $17.4 million, respectively. We anticipate shipping a significant portion of the present backlog during fiscal year 2023. 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, 2023 and 2022, cost of goods sold were $1.9 million and $1.7 million, or 68.6% and 68.8% of total revenues, respectively. Cost of goods sold increased as a result of increased sales.

Gross profit for each of the three months ended March 31, 2023 and 2022, was $0.9 million and $0.8 million. Gross profit was 31.4% of sales in the three months ended March 31, 2023, and 31.2% of sales in the three months ended March 31, 2022.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A” expenses) in the three months ended March 31, 2023, amounted to $0.8 million, or 26.7% of sales compared to $0.7 million, or 27.8% of sales, for the same period a year ago. The increase in SG&A expenses reflects an increase in personnel related costs, legal fees, travel, and sales related expenses.

Income from Operations

The Company had operating income of $0.1 million in each of the three months ended March 31, 2023 and 2022. Operating income reflects the increase in sales in the three months ended March 30, 2023, offset by an increase in cost of goods sold and SG&A expenses, compared to the same period last year.

Other Income (Expense)

Other income reflects the interest expense on the Company’s related party convertible notes and the financing of certain equipment purchases.

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Income Taxes

For the three months ended March 31, 2023 and 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.

Net Income

The Company had net income of $92,000 for the three months ended March 31, 2023, compared to net income of $42,000 for the three months ended March 31, 2022.

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, 2023 and December 31, 2022, the Company had cash and cash equivalents of $2.0 million. The Company is subject to credit risk due to the concentration of cash balances that exceed the federally insure limits by approximately $1.75 million at March 31, 2023 and December 31, 2022.

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 29, 2022, retroactive to June 1, 2022, for an additional three-year term. The current lease term expires on May 31, 2025. 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.

The following table summarizes net cash (used in) operating, investing, and financing activities for the three months ended March 31, 2023 and 2022:

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Net cash provided by operating activities was $164,000 for the three months ended March 31, 2023, compared to net cash provided by operating activities of $293,000 in the same period last year. Net cash provided by operating activities in the three months ended March 31, 2023, resulted primarily from a decrease in other current and non-current assets, an increase in accounts payable and accrued liabilities, and an increase in contract liabilities offset by an increase in inventories, net, and an increase in accounts receivable.

Net cash used in investing activities was $188,000 during the three months ended March 31, 2023, compared to $246,000 in the same period last year reflecting capital expenditures in both periods.

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In the three months ended March 31, 2023, proceeds from financing activities included cash received for the issuance of common stock. In the three months ended March 31, 2022, the Company purchased certain equipment financing approximately $270,000 at a fixed annual interest rate of 6.1% for five years payable in equal monthly installments.

Overall, cash and cash equivalents decreased by $9,000 and $8,000 for the three months ended March 31, 2023 and 2022, respectively.

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 15, 2024.

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