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Inrad Optics, Inc. - Quarter Report: 2023 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number 0-11668

INRAD OPTICS, INC.

(Exact Name of Registrant as Specified in its Charter)

New Jersey

    

22-2003247

State or Other Jurisdiction of
Incorporation or Organization

 

I.R.S. Employer Identification No.

 

 

 

181 Legrand Avenue, Northvale, NJ

 

07647

Address of Principal Executive Offices

 

Zip Code

(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.

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on
which registered

None

None

None

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.

Large accelerated filer 

    

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

 

Emerging growth company 

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 November 14, 2023, was 14,200,975.

Table of Contents

INRAD OPTICS, INC AND SUBSIDIARIES

INDEX

Part I.

CONDENSED FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements:

Condensed consolidated balance sheets as of September 30, 2023 (unaudited) and December 31, 2022

1

Condensed consolidated statements of operations for the three and nine months ended September 30, 2023 and 2022 (unaudited)

2

Condensed consolidated statements of shareholders’ equity for the three and nine months ended September 30, 2023 and 2022 (unaudited)

3

Condensed consolidated statements of cash flows for the three and nine months ended September 30, 2023 and 2022 (unaudited)

4

Notes to condensed consolidated financial statements (unaudited)

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

12

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

16

Item 4.

Controls and Procedures

16

Part II.

OTHER INFORMATION

17

Item 1.

Legal Proceedings

17

Item 1A.

Risk Factors

17

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

17

Item 3.

Defaults upon Senior Securities

17

Item 4.

Mine Safety Disclosures

17

Item 5.

Other Information

17

Item 6.

Exhibits

18

Signatures

19

Table of Contents

INRAD OPTICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 

December 31, 

    

2023

    

2022

    

(Unaudited)

    

Assets

 

 

  

Current assets:

 

 

  

Cash and cash equivalents

$

2,893,041

$

2,003,485

Accounts receivable, net of allowance for credit losses of $46,000

 

2,028,383

 

1,389,867

Inventories, net

 

3,046,316

 

2,825,987

Other current assets

 

352,575

 

309,287

Total current assets

 

8,320,315

 

6,528,626

Plant and equipment:

Plant and equipment, at cost

 

16,287,589

 

15,967,537

Less: Accumulated depreciation and amortization

 

(14,955,432)

 

(14,723,869)

Total plant and equipment

 

1,332,157

 

1,243,668

Precious metals

 

561,909

 

561,909

Lease right-of-use, net

518,516

737,743

Other assets

 

26,993

 

26,993

Total assets

$

10,759,890

$

9,098,939

Liabilities and Shareholders’ Equity

Current liabilities:

Current portion of other long term notes

$

69,411

$

67,513

Accounts payable and accrued liabilities

 

999,060

 

741,281

Contract liabilities

 

1,055,881

 

1,065,173

Current portion of lease obligation

301,869

295,978

Total current liabilities

 

2,426,221

 

2,169,945

Related party convertible notes payable

 

2,500,000

 

2,500,000

Other long term notes, net of current portion

 

264,564

 

316,740

Lease obligation, net of current portion

216,647

444,462

Total liabilities

 

5,407,432

 

5,431,147

Shareholders’ equity:

Common stock: $.01 par value; 60,000,000 authorized shares; 14,205,575 shares issued at September 30, 2023, and 14,092,920 shares issued at December 31, 2022

 

142,057

 

140,931

Capital in excess of par value

 

20,100,245

 

19,925,293

Accumulated deficit

 

(14,874,894)

 

(16,383,482)

 

5,367,408

 

3,682,742

Less - Common stock in treasury, at cost (4,600 shares)

 

(14,950)

 

(14,950)

Total shareholders’ equity

 

5,352,458

 

3,667,792

Total liabilities and shareholders’ equity

$

10,759,890

$

9,098,939

See Notes to Condensed Consolidated Financial Statements (Unaudited)

1

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INRAD OPTICS, INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2023

    

2022

    

2023

    

2022

Total revenue

$

3,367,770

$

2,610,330

$

9,941,313

$

7,787,481

Cost and expenses:

Cost of goods sold

 

1,838,223

 

1,834,401

 

6,097,833

 

5,392,369

Selling, general and administrative expenses

 

776,417

 

722,294

 

2,223,402

 

2,156,665

 

2,614,640

 

2,556,695

 

8,321,235

 

7,549,034

Income from operations

 

753,130

 

53,635

 

1,620,078

 

238,447

Other income (expense):

Interest expense-net

 

(35,689)

 

(41,962)

 

(111,491)

 

(126,427)

 

(35,689)

 

(41,962)

 

(111,491)

 

(126,427)

Income before income taxes

717,441

11,673

1,508,587

112,020

Income tax (provision) benefit

 

 

 

 

Net income

$

717,441

$

11,673

$

1,508,587

$

112,020

Net income per common share - basic

$

0.05

$

$

0.11

$

0.01

Net income per common share - diluted

$

0.04

$

$

0.09

$

0.01

Weighted average shares outstanding - basic

 

14,200,975

 

14,058,320

 

14,194,311

 

14,006,447

Weighted average shares outstanding - diluted

 

17,283,387

 

14,829,573

 

17,290,394

 

14,711,621

See Notes to Condensed Consolidated Financial Statements (Unaudited)

2

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INRAD OPTICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

Capital in

Total

Common Stock

Excess of

Accumulated

Treasury

Shareholders’

    

Shares

    

Amount

    

Par Value

    

Deficit

    

Stock

    

Equity

Balance, January 1, 2022

 

13,967,257

$

139,674

$

19,733,996

$

(16,536,056)

$

(14,950)

$

3,322,664

401K contribution

59,663

597

50,158

50,755

Stock-based compensation expense

21,558

21,558

Net income

41,432

41,432

Balance, March 31, 2022

14,026,920

$

140,271

$

19,805,712

$

(16,494,624)

$

(14,950)

$

3,436,409

Common stock options exercised

21,000

210

4,860

5,070

Stock-based compensation expense

32,604

32,604

Net income

58,915

58,915

Balance, June 30, 2022

14,047,920

$

140,481

$

19,843,176

$

(16,435,709)

$

(14,950)

$

3,532,998

Common stock options exercised

30,000

300

14,700

15,000

Stock-based compensation expense

31,163

31,163

Net income

11,673

11,673

Balance, September 30, 2022

 

14,077,920

$

140,781

$

19,889,039

$

(16,424,036)

$

(14,950)

$

3,590,834

Capital in

Total

Common Stock

Excess of

Accumulated

Treasury

Shareholders’

    

Shares

    

Amount

    

Par Value

    

Deficit

    

Stock

    

Equity

Balance, January 1, 2023

 

14,092,920

$

140,931

$

19,925,293

$

(16,383,482)

$

(14,950)

$

3,667,792

401K contribution

33,322

333

54,388

54,721

Common stock options exercised

79,333

793

30,993

31,786

Stock-based compensation expense

34,203

34,203

Net income

91,528

91,528

Balance, March 31, 2023

14,205,575

$

142,057

$

20,044,877

$

(16,291,954)

$

(14,950)

$

3,880,030

Stock-based compensation expense

27,684

27,684

Net income

699,619

699,619

Balance, June 30, 2023

14,205,575

$

142,057

$

20,072,561

$

(15,592,335)

$

(14,950)

$

4,607,333

Stock-based compensation expense

27,684

27,684

Net income September 30, 2023

717,441

717,441

Balance, September 30, 2023

 

14,205,575

$

142,057

$

20,100,245

$

(14,874,894)

$

(14,950)

$

5,352,458

See Notes to Condensed Consolidated Financial Statements (Unaudited)

3

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INRAD OPTICS, INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Nine Months Ended

September 30, 

    

2023

    

2022

Cash flows from operating activities:

  

  

Net income

$

1,508,587

$

112,020

Adjustments to reconcile net income to net cash (used in) provided by operating activities

Depreciation and amortization

 

231,562

 

181,370

401K common stock contribution - non cash item

54,722

50,755

Stock based compensation

 

89,571

85,325

Change in inventory reserve

(315,684)

(141,405)

Changes in operating assets and liabilities:

Accounts receivable

 

(638,515)

 

188,667

Inventories

 

95,354

 

(350,323)

Other current and noncurrent assets

 

175,940

 

72,065

Accounts payable and accrued liabilities

 

257,779

 

117,470

Contract liabilities

 

(9,293)

 

36,904

Other current and noncurrent liabilities

(221,923)

(11,796)

Total adjustments and changes

(280,487)

229,032

Net cash provided by operating activities

 

1,228,100

 

341,052

Cash flows from investing activities:

Capital expenditures

 

(320,052)

 

(389,377)

Net cash (used in) investing activities

 

(320,052)

 

(389,377)

Cash flows from financing activities:

Proceeds from issuance of common stock

31,786

20,070

Principal payments on notes payable-other

 

(50,278)

 

(43,725)

Net cash (used in) financing activities

 

(18,492)

 

(23,655)

Net increase (decrease) in cash and cash equivalents

 

889,556

 

(71,980)

Cash and cash equivalents at beginning of period

 

2,003,485

 

1,801,188

Cash and cash equivalents at end of period

$

2,893,041

$

1,729,208

Supplemental disclosure of cash flow information:

Interest paid

$

126,657

$

128,586

Income taxes paid

$

$

Significant non-cash activities:

Lease right-of-use asset

$

$

879,300

Supplemental disclosure of non-cash investing and financing activities:

Acquisition of equipment by issuing a note payable

$

$

270,320

See Notes to Condensed Consolidated Financial Statements (Unaudited)

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INRAD OPTICS, INC. AND SUBSIDIARIES

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 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, 2022.

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

Beginning in 2023, the Company adopted Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables.

The Company extends credit to its customers that satisfy pre-defined credit criteria. Accounts receivable is recorded net of an allowance for credit losses. The Company estimates the allowance for credit losses based on an analysis of the aging of accounts receivable, assessment of collectability, including any known or anticipated bankruptcies, customer-specific circumstances, and an evaluation of current economic conditions. Actual write-off of receivables may differ from estimates due to changes in customer and economic circumstances. For the period ended September 30, 2023, there were no changes to the estimate for credit losses. At September 30, 2023, the estimate for credit losses was $46,000.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Cost of manufactured goods includes material, labor, and overhead. 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.

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Inventories are comprised of the following and are shown net of inventory reserves of $2,065,000 and $2,398,000 at September 30, 2023 and December 31, 2022, respectively:

September 30, 

December 31, 

    

2023

    

2022

    

(Unaudited)

    

(in thousands)

Raw materials

$

676

$

1,065

Work in process, including manufactured parts and components

 

1,815

 

1,282

Finished goods

 

555

 

479

$

3,046

$

2,826

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 years 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 September 30, 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 $2,237,000, 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 and nine months ended September 30, 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 and nine months ended September 30, 2023, 2,500,000 common shares issuable upon conversion of outstanding related party convertible notes were included in the computation of basic and diluted net income per common share because their effect is dilutive. For the three and nine months ended September 30, 2023, 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, 57,500 common stock options were excluded from the computation of basic and diluted net income per common share because their effect is anti-dilutive.

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For the three and nine months ended September 30, 2022, 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 15,000 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

September 30, 2023

September 30, 2022

Income(Loss)

Shares

Per Share

Income(Loss)

Shares

Per Share

    

(Numerator)

    

(Denominator)

    

Amount

    

(Numerator)

    

(Denominator)

    

Amount

Basic income per share

 

  

 

  

 

  

 

  

 

  

 

  

Net income

$

717,441

 

14,200,975

$

0.05

$

11,673

 

14,058,320

$

0.00

Effect of dilutive securities:

 

  

 

  

 

  

 

  

 

  

 

  

Convertible notes

 

37,500

 

2,500,000

 

 

 

 

Accrued interest on convertible notes

 

 

 

 

 

 

Warrants

 

 

 

 

 

 

Stock options

 

 

582,412

 

 

 

771,253

 

Diluted income per share

$

754,941

 

17,283,387

$

0.04

$

11,673

 

14,829,573

$

0.00

Nine Months Ended

Nine Months Ended

September 30, 2023

September 30, 2022

Income(Loss)

Shares

Per Share

Income(Loss)

Shares

Per Share

    

(Numerator)

    

(Denominator)

    

Amount

    

(Numerator)

    

(Denominator)

    

Amount

Basic income per share

 

Net income

$

1,508,587

14,194,311

$

0.11

$

112,020

14,006,447

$

0.01

Effect of dilutive securities:

Convertible notes

112,500

2,500,000

Accrued interest on convertible notes

Warrants

Stock options

596,083

705,174

Diluted income per share

$

1,621,087

17,290,394

$

0.09

$

112,020

14,711,621

$

0.01

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.

NOTE 2 – CONCENTRATION OF CASH

In May 2023, the Company entered into an Insured Cash Sweep (“ICS”) agreement with Valley National Bank, where funds are placed at destination institutions through the service of the Promontory Interfinancial Network, LLC. Such funds placed into the deposit account will not exceed the Federal Deposit Insurance Corporation (“FDIC”) standard maximum deposit insurance amount, currently $250,000, at any one destination institution thereby eliminating credit risk on cash balances over $250,000. The Company was subject to credit risk due to the concentration of cash balances that exceeded the federally insured limits by approximately $1.75 million at December 31, 2022, on cash balances of approximately $2.0 million at 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 and nine months ended September 30, 2023 and 2022, 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

Nine Months Ended

September 30, 

September 30, 

    

2023

    

2022

    

2023

    

2022

Aerospace & Defense

$

600,720

$

640,847

$

1,739,831

$

2,262,767

Process Control & Metrology

2,573,632

1,835,117

7,356,376

4,942,711

Laser Systems

9,950

47,874

53,030

151,165

Scientific / R&D

183,468

86,492

792,076

430,838

Total

$

3,367,770

$

2,610,330

$

9,941,313

$

7,787,481

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.

For the three months ended September 30, 2023, two customers represented 10% or more of sales. For the three months ended September 30, 2022, five customers represented 10% or more of sales. For each of the nine months ended September 30, 2023 and 2022, three customers represented 10% or more of sales.

The Company’s top five customers represented 75.2% and 70.7% of sales in the three month periods ended September 30, 2023 and 2022, respectively. The Company’s top five customers represented 73.8% in the nine month period ended September 30, 2023, compared to 66.4% in the nine month period ended September 30, 2022.

On September 30, 2023, the Company had approximately $14.6 million of performance obligations, which is also referred to as backlog. Approximately 8.5% of the September 30, 2023 backlog is related to projects that will extend beyond September 30, 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 September 30, 2023 and 2022, include stock-based compensation expense for stock option grants totaling $27,684 and $31,163, respectively. For the nine months ended September 30, 2023 and 2022, stock-based compensation expense for stock option grants totaled $89,571 and $85,325, 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 and nine months ended September 30, 2023 and 2022:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2023

    

2022

    

2023

    

2022

Cost of sales

$

3,243

$

3,369

$

9,729

$

9,990

Selling, general and administrative

24,441

27,794

79,842

75,335

Total stock-based compensation expense

$

27,684

$

31,163

$

89,571

$

85,325

As of September 30, 2023 and 2022, there were $122,000 and $253,000 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 nine months ended September 30, 2023, and 200,000 stock options granted during the nine months ended September 30, 2022. The following range of weighted-average assumptions were used to determine the fair value of stock option grants during the three and nine months ended September 30, 2023 and 2022:

    

Nine Months Ended

 

September 30, 

 

2023

    

2022

 

Expected Dividend yield

 

%  

%

Expected Volatility

 

92

%  

105

%

Risk-free interest rate

 

0.86

%  

1.54

%

Expected term

 

10

years

10

years

b)    Stock Option Activity

The following table represents stock options granted, exercised, and forfeited during the nine months ended September 30, 2023:

    

    

Weighted

    

Weighted

    

Average

Average

Exercise

Remaining

Aggregate

Number of

Price per

Contractual

Intrinsic

Stock Options

    

Options

    

Option

    

Term (years)

    

Value

Outstanding January 1, 2023

 

1,286,667

$

0.71

 

5.95

$

854,550

Granted

 

20,000

 

1.72

 

 

Exercised

 

(79,333)

 

0.40

 

 

Expired/Forfeited

 

(84,667)

 

0.74

 

 

Outstanding September 30, 2023

 

1,142,667

$

0.74

 

7.82

$

996,110

Exercisable at September 30, 2023

 

935,992

$

0.64

6.96

$

963,694

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The following table represents non-vested stock options granted, vested, and forfeited for the nine months ended September 30, 2023:

Weighted-average

Grant-date Fair Value

    

Options

    

($)

Non-Vested - January 1, 2023

 

340,835

0.89

Granted

 

20,000

 

1.48

Vested

 

(134,160)

 

0.87

Forfeited

 

(20,000)

 

0.91

Non-Vested - September 30, 2023

 

206,675

 

0.98

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 33,322 common shares of Inrad Optics, Inc., and cash of $82,000 to the Plan in February 2023.

NOTE 6 – RELATED PARTY TRANSACTIONS

On October 12, 2023, 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 January 15, 2025, from August 15, 2024. 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. The warrants expire on August 15, 2027.

NOTE 7 – OTHER LONG-TERM NOTES

Other Long-Term Notes consist of the following:

September 30, 

December 31, 

    

2023

    

2022

(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

$

145

$

160

Long-term equipment financing in equal installments of $5,236 and bearing an interest rate of 6.1% and expiring in January 2027 (1)

189

225

Less current portion

 

(69)

 

(68)

Long-term debt, excluding current portion

$

265

$

317

(1)The Company purchased certain equipment in the nine months ended September 30, 2022, financing approximately $270,000 at a fixed annual interest rate of 6.1% for five years payable in equal monthly installments.

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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 the three months periods ended September 30, 2023 and 2022, and $0.2 million during each of the nine months periods ended September 30, 2023 and 2022.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 2022, as filed with the Securities and Exchange Commission on March 30, 2023. 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 the latest 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, 2022. 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, 2022.

Results of Operations

The Company is a vertically integrated manufacturer optical components and sub-assemblies from glass, crystal, and metal. Manufacturing capabilities include super-precision optical surfacing, precision diamond turning, the ability to manage large substrates, proprietary optical contacting processes, thin film coatings, and high resolution in-process metrology.

Inrad Optics’ customers include leading corporations in the semiconductor equipment, process control and metrology, defense, aerospace, and laser systems sectors of the broad set of photonics enabled industries, as well as the U.S. Government, National Laboratories, 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.

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Revenue

Sales for the three months ended September 30, 2023, were $3.4 million, an increase of $0.8 million, or 29.0% compared to $2.6 million, for the three months ended September 30, 2022. For the nine months ended September 30, 2023, sales were $9.9 million, an increase of $2.1 million or 27.7% compared to sales of $7.8 million, for the nine months ended September 30, 2022.

Sales to the defense/aerospace market were $0.6 million in the three months ended September 30, 2023, compared to $0.6 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023, sales to the defense/aerospace market were $1.7 million, a decrease of $0.6 million, or 23.1%, compared to $2.3 million for the nine months ended September 30, 2022. The decrease in sales in the defense/aerospace market for the nine months ended September 30, 2023, was due to manufacturing capacity constraints and the impact of tight labor markets.

Sales to the process control and metrology (“PC&M”) market were $2.6 million for the three months ended September 30, 2023, an increase of $0.8 million or 40.2% compared to sales of $1.8 million in the three months ended September 30, 2022. For the nine months ended September 30, 2023, sales to the PC&M market were $7.4 million, an increase of $2.4 million, or 48.8%, compared to $4.9 million for the nine months ended September 30, 2022. The increase in sales in the PC&M market for the three and nine months ended September 30, 2023, is due to the increase in demand for products used in PC&M applications, especially the semiconductor equipment market.

Sales to customers in the laser systems market were $10,000 for the three months ended September 30, 2023, compared to $48,000 for the three months ended September 30, 2022. Sales to customers in the laser systems market for the nine months ended September 30, 2023 were $53,000, a decrease of $97,000, compared to $151,000 for the nine months ended September 30, 2022. Products sold into this market segment largely consist of legacy materials for replacement units and small volume last time buys.

Sales to customers in the Scientific/R&D market were $0.2 million for the three months ended September 30, 2023, an increase of $0.1 million, or 112.2%, compared to sales in the Scientific/R&D market of $0.1 million for the three months ended September 30, 2022. Sales in the Scientific/R&D market were $0.8 million for the nine months ended September 30, 2023, an increase of $0.4 million, or 83.8%, compared to $0.4 million in sales for the nine months ended September 30, 2022. The increase in sales in the Scientific/R&D sector is due to increased demand for our products from U.S. national labs for energy research purposes.

For the three months ended September 30, 2023, two customers represented 10% or more of sales. For the three months ended September 30, 2022, five customers represented 10% or more of sales. For each of the nine months ended September 30, 2023 and 2022, three customers represented 10% or more of sales.

The Company’s top five customers represented 75.2% and 70.7% of sales in the three month periods ended September 30, 2023 and 2022, respectively. The Company’s top five customers represented 73.8% in the month period ended September 30, 2023, compared to 66.4% in the nine month period ended September 30, 2022.

Orders booked during the nine months ended September 30, 2023 and 2022, totaled $4.0 million and $16.9 million, respectively. The decrease in bookings is due to extraordinary demand from several key customers in the nine month period ended September 30, 2022, seeking to secure multi-year capacity. Order backlog at September 30, 2023 and 2022, was $14.6 million and $21.5 million, respectively. While we anticipate shipping a considerable portion of the present backlog during the remainder of fiscal year 2023 and through September 30, 2024, our current backlog consists of orders with delivery schedules that extend beyond 12 months into the future.

Cost of Goods Sold

For each of the three months ended September 30, 2023 and 2022, cost of goods sold was $1.8 million, or 54.6% and 70.3% of total sales, respectively. Cost of goods sold for the nine months ended September 30, 2023 and 2022, were $6.1 million and $5.4 million, or 61.3% and 69.2% of total sales, respectively. Cost of goods sold during the three months ended September 30, 2023 decreased as a percentage of sales from September 30, 2022, due to a mix in products sold. Cost of goods sold during the nine month period ended September 30, 2023, reflects an increase in materials, direct labor, and overhead as a result of an increase in sales compared to nine month period ended September 30, 2022.

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Gross profit for the three months ended September 30, 2023, was $1.5 million or 45.4% of sales compared to $0.8 million or 29.7% of sales in the same quarter last year. Gross profit for the year-to-date period ending September 30, 2023, was $3.8 million or 38.7% of sales, an increase of $1.4 million, compared to $2.4 million or 30.8% of sales, for the nine-month period ended September 30, 2022. The increase in gross profit for the three and nine months ended September 30, 2023, compared to the three and nine months ended September 30, 2022, is due to higher sales and efficiency gains from strategic product focus and improvements in production processes.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A” expenses) were $0.8 million in the three months ended September 30, 2023, or 23.1% of sales, and $0.7 million, or 27.7% of sales, in the three months ended September 30, 2022. The increase in SG&A expenses in the three months ended September 30, 2023, reflects an increase in employee related expenses and legal fees in that time period. SG&A expenses in each of the nine-month periods ended September 30, 2023 and 2022, were $2.2 million, or 22.4% and 27.7% of sales, respectively.

Income from Operations

The Company realized income from operations of $0.8 million for the three months ended September 30, 2023, compared with income from operations of $0.1 million in the three months ended September 30, 2022. The increase in income primarily reflects an increase in sales coupled with lower costs of goods sold and SG&A expenses as a percentage of sales. The Company realized income from operations of $1.6 million for the nine months ended September 30, 2023, compared income from operations for the nine months ended September 30, 2022, of $0.2 million. The increase in income from operations is primarily due to higher revenues.

Other Income (Expense)

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

Income Taxes

For the three and nine months ended September 30, 2023 and September 30, 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 $0.7 million for the three months ended September 30, 2023, compared to net income of $0.1 million for the three months ended September 30, 2022. The change primarily reflects an increase in sales. For the nine months ended September 30, 2023, the Company recorded net income of $1.5 million compared to net income of $0.1 million for the nine months ended September 30, 2022. The increase in net income reflects higher sales in the nine months ended September 30, 2023.

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 September 30, 2023 and December 31, 2022, the Company had cash and cash equivalents of $2.9 million and $2.0 million, respectively. Although the Company has a concentration of cash balances that exceed the federally insured balances, Inrad Optics entered into an Insured Cash Sweep (“ICS”) agreement with Valley National Bank, where funds are placed at destination institutions through the service of the Promontory Interfinancial Network, LLC each day. Such funds placed into the deposit account will not exceed the Federal Deposit Insurance Corporation (“FDIC”) standard maximum deposit insurance amount, currently $250,000, at any one destination institution.

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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. Under the terms of the lease, the Company is obligated for all real estate taxes, maintenance, and operating costs of the facility.

On October 12, 2023, 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 January 15, 2025, from August 15, 2024. 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. The warrants expire August 15, 2027.

The following table summarizes net cash (used in) operating, investing, and financing activities for the nine months ended September 30, 2023 and 2022:

    

Nine Months Ended

September 30, 

    

2023

    

2022

 

(in thousands)

Net cash provided by operating activities

$

1,228

$

341

Net cash (used in) investing activities

(320)

(389)

Net cash (used in) financing activities

(18)

(24)

Net (decrease) increase in cash and cash equivalents

$

890

$

(72)

Net cash provided by operating activities was $1.2 million for the nine months ended September 30, 2023, compared to net cash provided by operating activities of $0.3 million in the same period last year. Net cash provided by operating activities in the nine months ended September 30, 2023, resulted primarily from an increase in net income coupled with an increase in accounts payable offset by an increase in inventories and accounts receivables. Net cash provided by operating activities in the nine months ended September 30, 2022, resulted primarily from operating income and increases in accounts payable and contract liabilities, offset increases in accounts receivable and inventories.

Net cash used in investing activities was $0.3 million during the nine months ended September 30, 2023, compared to $0.4 million in the same period last year reflecting capital expenditures in both periods.

In the nine months ended September 30, 2023 and 2022, proceeds from financing activities included cash received for the issuance of common stock net of principal payments on notes payable. In the nine months ended September 30, 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 increased by $0.9 million for the nine months ended September 30, 2023. Cash and cash equivalents decreased by $0.1 million in the nine months ended September 30, 2022.

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 November 14, 2024.

15

Table of Contents

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is a smaller reporting company and not required to provide the information required under this item.

ITEM 4.

CONTROLS AND PROCEDURES

a.    Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of September 30, 2023 (the “Evaluation Date”), have concluded that as of the Evaluation Date, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports we file or submit under the Exchange Act (1) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and (2) is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.

b.    Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

16

Table of Contents

PART II.

OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

None.

ITEM 1A.

RISK FACTORS

Not applicable

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On August 10, 2023, 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 August 15, 2024, from April 1, 2024. 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, 2027 to August 15, 2027. On October 12, 2023, the maturity dates of a $1,500,000 Subordinated Convertible Promissory Note to Clarex Limited and a $1,000,000 Subordinated Convertible Promissory Note to an affiliate of Clarex were each extended to January 15, 2025, from August 15, 2024.

ITEM 3.

DEFAULTS UNDER SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable

ITEM 5.

OTHER INFORMATION

None.

17

Table of Contents

ITEM 6.

EXHIBITS

31.1

Certificate of the Registrant’s Chief Executive Officer, Amy Eskilson, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2

Certificate of the Registrant’s Chief Financial Officer, Theresa A. Balog, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1

Certificate of the Registrant’s Chief Executive Officer, Amy Eskilson, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

32.2

Certificate of the Registrant’s Chief Financial Officer, Theresa A. Balog, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

101.INS

Inline XBRL Instance Document*

101.SCH

Inline XBRL Taxonomy Extension Schema*

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase*

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase*

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase*

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase*

104

Cover Page Interactive Data File (embedded within the Inline XBRL and Contained in Exhibit 101)

*Filed herewith

**

Furnished herewith

18

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Inrad Optics, Inc.

 

 

 

 

By:  

/s/ Amy Eskilson

 

 

Amy Eskilson

 

 

President and Chief Executive Officer

 

 

 

 

By:  

/s/ Theresa A. Balog

 

 

Theresa A. Balog

 

 

Chief Financial Officer,

 

 

Secretary and Treasurer

Date: November 14, 2023

 

 

19