Stock-Based Compensation

Stock-based compensation expense is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. The fair value of restricted stock units granted is based on the closing market price of the Company’s common stock on the date of the grant. The fair value of these awards, adjusted for estimated forfeitures, is amortized over the requisite service period of the award, which is generally the vesting period.

Recent Accounting Standards

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments" (“ASU 2016-13”) which amended guidance on the accounting for credit losses on financial instruments within its scope. The guidance introduces an expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for interim and annual periods beginning in 2023, with earlier application permitted in 2019.2023. The Company is currently evaluating the impact of adoption on its consolidated financial statements.statements and does not expect the adoption of ASU 2016-13 to have a material impact on the Company’s statements of operations or cash flows.

In February 2016, the FASB issued ASU 2016-02, “Leases” (ASC 842), and subsequently issued updates as part of ASU 2018-11, “Leases, Targeted Improvements.” The new guidance requires organizations that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. The Company adopted ASC 842, effective January 1, 2019. The Company entered into an amendment and extension of its building lease on July 8, 2019, retroactive to June 1, 2019, and accordingly recorded an initial right-of-use asset of $0.8 million. See Note 11a.8 - Lease Commitments. The adoption of ASU 842 and ASU 2018-11 did not have a material impact on the Company’s statements of operations or cash flows.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation: Improvements to Nonemployee Shared-Based Payment Accounting. The ASU update expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company adopted ASU 2018-07 effective January��January 1, 2019. The adoption did not have a material impact on its financial statements and related disclosures.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, on a prospective basis, with early adoption permitted. The Company is currently evaluating the impact of adoption of this guidance and does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU update is intended to simplify the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. This guidance is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company does not expect the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.

NOTE 2 – REVENUE

The Company’s revenues are comprised of product sales as well asthe sale of products and services including, products and services provided under long-term government contracts with its customers. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract (either implicit or explicit) by transferring the promised product or service to its customer either when (or as) its customer obtains control of the product or service. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of the Company’s contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using the Company’s best estimate of a standalone selling price for each distinct product or service in the contract, which is generally based on an observable price.

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or providing services. As such, revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold.

The Company’s performance obligations under long-term government contracts are generally satisfied over time. Revenue from products or services transferred to customers under these performance obligations accounted for approximately 0%3.4% and 3.6%1.1% of revenue for the three and nine months ended September 30, 2020, and 3.4% and 3.8%, of revenue for the three months and nine months ended March 31, 2020 and 2019, respectively.September 30, 2019. This revenue is generally recognized using an input measure based upon the proportion of actual costs incurred to estimated total project costs, which is a method used to best depict the Company’s performance to date under the terms of the contract.

Accounting for these long-term government contracts involves the use of various techniques to estimate total revenue and costs. The Company estimates profit on these long-term government contracts as the difference between total estimated revenue and expected costs to complete a contract and recognizes that profit over the life of the contract. Contract estimates are based on various assumptions to project the outcome of future events that may span several years. These assumptions include, among other things, labor productivity, costs and availability of materials, and timing of funding by the U.S. government. The nature of these long-term agreements may give rise to several types of variable consideration, such as claims, awards and incentive fees. Historically, these amounts of variable consideration are not considered significant. Additionally, contract estimates may include additional revenue for submitted contract modifications if there exists an enforceable right to the modification, the amount can be reasonably estimated and its realization is probable. These estimates are based on historical collection experience, anticipated performance, and the Company’s best judgement at the time. These amounts are generally included in the contract’s transaction price and are allocated over the remaining performance obligations. Changes in judgments on these above estimates could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated income. Under these long-term government contracts, the Company may receive payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional. In the event a contract loss becomes known, the entire amount of the estimated loss is recognized in the Consolidated Statements of Operations.

The majority of the Company’s revenue is from products and services transferred to customers at a point in time and was approximately 100%99.0% and 96.4%96.0% of revenue for the threenine months ended March 31,September 30, 2020 and 2019, 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:

Net sales by timing of transfers of goods and services is as follows:

The timing of revenue recognition, billings and cash collections results in billed receivables, costs in excess of billings (contract assets), and billings in excess of costs (contract liabilities, previously deferred revenue) on the Consolidated Balance Sheet. Contract liabilities also include customer advances or prepayments. Costs in excess of billings and billings in excess of costs associated with long-term government contracts were not significant at March 31,September 30, 2020 or 2019. At March 31,September 30, 2020 and 2019, the remaining revenue to be recognized from the long-term government contracts was $0$131,000 and $94,000,$29,000, respectively.

On March 31,September 30, 2020, the Company had approximately $6.3$6.4 million of performance obligations, which is also referred to as backlog. Approximately 3.0%4.0% of the March 31,September 30, 2020 backlog, is related to projects that will extend beyond March 31,September 30, 2021.

NOTE 3-3 – EQUITY COMPENSATION PROGRAM AND STOCK BASED COMPENSATION

The Company's results of operations for the three months ended March 31,September 30, 2020 and 2019, include stock-based compensation expense for stock option grants totaling $27,980$27,764 and $29,375,$35,031, respectively. For the nine months ended September 30, 2020 and 2019, stock-based compensation expense for stock option grants totaled $83,901 and $97,750, 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 and nine months ended March 31,September 30, 2020 and 2019:

As of March 31,September 30, 2020, and 2019, there were $181,000$125,399 and $282,000$231,066 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 1.121.16 years and 1.96 years, respectively.

There were 22,500 stock options granted during the threenine months ended March 31,September 30, 2020, and 185,000200,000 stock options granted during the threenine months ended March 31,September 30, 2019. The following range of weighted-average assumptions were used to determine the fair value of stock option grants during the threenine months ended March 31,September 30, 2020 and 2019:

The following table represents stock options granted, exercised and forfeited during the threenine months ended March 31,September 30, 2020:

The following table represents non-vested stock options granted, vested and forfeited for the three months ended March 31,September 30, 2020:

NOTE 4 -– STOCKHOLDERS’ EQUITY

The Company approved a matching contribution to participants in the Inrad Optics 401k Plan (the “Plan”) for the year ended December 31, 2019, in February 2020. A total of 89,751 common shares of Inrad Optics, Inc. are to bewere contributed to the Plan in May,June, 2020.

NOTE 5 – RELATED PARTY TRANSACTIONS

On April 12, 2018,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, 20212024 from April 1, 2018.2021. 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, 2022 to April 1, 2024.2027. As of March 31,September 30, 2020, the Company had accrued interest in the amount of $150,000$37,500 associated with these notes.

NOTE 6 – OTHER LONG TERMLONG-TERM NOTES

Other Long TermLong-Term Notes consist of the following:

NOTE 7 – PAYCHECK PROTECTION PROGRAM

On May 6, 2020, the Company received loans totalingloan proceeds of approximately $973,000 (the “PPP Loan”), under the Paycheck Protection Program (“PPP”). The PPP was established as part of the 2020 Coronavirus Aid, Relief and Economic Stability Act. Please referSecurity Act (“CARES Act”) which was enacted March 27, 2020. The PPP Loan, which is in the form of a promissory note, dated May 4, 2020, issued by the Company, matures on May 4, 2022, and bears interest at a rate of 1.0% per annum, payable monthly commencing on December 4, 2020.

The CARES Act and the PPP provide a mechanism for forgiveness of up to Note 9, “Subsequent Events”the full amount borrowed. The amount of these condensed consolidated financial statementsloan proceeds eligible for additional details.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 will qualify for forgiveness. The Company intends to use the entire loan amount for qualifying expenses. Any forgiveness of the PPP Loan will be subject to approval by the Small Business Association, and no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. At September 30, 2020, the PPP Loan is included in other long-term notes on the accompanying balance sheet.

NOTE 78 – LEASE AMENDMENTLEASES

The Company entered into an amendment and extension of its building lease on July 8, 2019, retroactive to June 1, 2019. Under the guidance of ASU 2016-02, Leases (Topic 842), the Company determines if such an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease at inception of the arrangement.  

The Company entered into an equipment lease on January 17, 2020, commencing in March for certain computer equipment, with a bargain purchase option of $1.00 at the end of the lease for a term of 36 months. The lease is classified as a financing lease under the guidance of Topic 842. The present value of the lease payments, discounted at 3.99%, was $45,000 at inception of the lease, and the initial value recorded in Plant and Equipment on the Company’s Condensed Consolidated Balance Sheet (unaudited).

The undiscounted cash flow principal payments for the remaining term of the lease will be as follows:

The Company entered into an amendment and extension of its building lease on July 8, 2019, retroactive to June 1, 2019. 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 termlong-term lease liability on the consolidated balance sheet.  These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company’s incremental borrowing rate.

Lease expense is recognized on a straight-line basis over the lease term and is included in cost of sales and general and administrative expenses on the consolidated statement of operations.

An initial right-of-use asset of $0.8 million was recognized as a non-cash asset addition with the signing of the July 8, 2019, office lease. Cash paid for amounts included in the present value of operating lease liability was $0.1 million during the three months ended March 31,September 30, 2020, and is included in operating cash flows.

Operating lease costs were $0.1 million and $0.3 million during the three months and nine months ended March 31, 2020 and 2019, respectively.September 30, 2020.

NOTE 89 – IMPACT OF COVID-19

On March 11, 2020, the World Health Organization declared the global novel coronavirus disease (“COVID-19”) a pandemic. The Company’s operations are considered essential business under the Executive Orders of New Jersey’s Governor and the Company’s operations have been identified ascritical infrastructure,, as defined by the U.S. Department of Homeland Security. Companies aligned with the essential critical infrastructure workforce definition have a special responsibility to maintain normal work schedules. We are conducting our 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 a strict mask requirement, social distancing in our operations, cleaning and other safety protocols as well as implemented a connected, remote workforce where practicable. We are also complying with New Jersey Executive Order No. 192 mandating workplace health and safety standards, including daily health certifications by all employees. We cannot predict what actions these mandates may have on our customers and suppliers, operating results, or financial condition. However, 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, and partners. The Company has taken additional steps to protect our employees in the event of infection in our offices and production facility and continues to enhance its business continuity plans.

NOTE 9 – SUBSEQUENT EVENT

On May 6,The COVID-19 pandemic has caused uncertainty and disruption in the global economy and businesses worldwide. Despite these circumstances, orders booked in the nine months ended September 30, 2020, Inrad Optics, Inc. (the “Borrower” orwere up 20% over the “Company”) received loan (the “PPP Loan”) proceeds of approximately $973,000, undersame period in 2019, reflecting stronger orders in the Paycheck Protection Program (“PPP”).defense and aerospace market. The PPP was established asCompany’s other segments have suffered some contraction and certain customers have pushed orders to the latter part of the Coronavirus Aid, Relief2020 and Economic Security Act (“CARES Act”) which was enacted March 27, 2020. The PPP Loan, which isearly 2021. We cannot predict whether there will be further push outs and/or softening in the formnon-defense markets we serve and what impact this may have on our results of a Note dated May 4, 2020, issued by the Borrower, matures on May 4, 2022,operations, financial position, and bears interest at a rate of 1.0% per annum, payable monthly commencing on December 4, 2020.liquidity.

The CARES ActCompany has taken steps to preserve cash 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 eight-week period after the loan origination for certain eligible purposes including payroll costs,has deferred interest on certain mortgage obligations, rent payments on certain leases,its related party notes through September 30, 2020, but has elected to discontinue deferment for the remainder of 2020. However, as the outbreak continues, there is uncertainty around sales, cash collections, and certain qualified utility payments, provided that at least 75%costs related to our mediation efforts. These uncertainties include the duration and severity of the loan amount is used for eligible payroll costs; the employer maintaining or rehiring employeespandemic, and maintaining salaries at certain levels;how compliance with containment measures will impact our day-to-day operations as well as that of our key customers, suppliers and other factors. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible costs during the covered eight-week period will qualify for forgiveness. The Company intends to use the entire loan amount for qualifying expenses. Any forgiveness of the PPP Loan will be subject to approval by the SBA, and no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part.

partners.

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 insureensure 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 7A7 of the Company’s most recent Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on April 14,March 30, 2020. 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 lookingforward-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, 2019. 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, 2019.

Impact of COVID-19

On March 11, 2020, the World Health Organization declared the global novel coronavirus disease (“COVID-19”) a pandemic. The Company’s operations are considered essential business under the Executive Orders of New Jersey’s Governor and the Company’s operations have been identified ascritical infrastructure,, as defined by the U.S. Department of Homeland Security. Companies aligned with the essential critical infrastructure workforce definition have a special responsibility to maintain normal work schedules. We are conducting our 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 a strict mask requirement, social distancing in our operations, cleaning and other safety protocols as well as implemented a connected, remote workforce where practicable. We are also complying with New Jersey Executive Order No. 192 mandating workplace health and safety standards, including daily health certifications by all employees. We cannot predict what actions these mandates may have on our customers and suppliers, howeveroperating results, or financial condition. However, 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, and partners. The Company has taken additional steps to protect our employees in the event of infection in our offices and production facility and continues to enhance its business continuity plans.

The COVID-19 pandemic has caused uncertainty and disruption in the global economy and businesses worldwide. Despite these circumstances, orders booked in the nine months ended September 30, 2020, were up 20% over the same period in 2019, reflecting stronger orders in the defense and aerospace market. The Company’s other segments have suffered some contraction and certain customers have pushed orders to the latter part of 2020 and early 2021. We cannot predict whether there will be further push outs and/or softening in the non-defense markets we serve and what impact this may have on our results of operations, financial position, and liquidity.

The Company has taken steps to preserve cash and has deferred interest payments on its related party notes through September 30, 2020, but has elected to discontinue deferment for the remainder of 2020. However, as the outbreak continues, there is uncertainty around sales, cash collections, and costs related to our mediation efforts. These uncertainties include the duration and severity of the pandemic, and how compliance with containment measures will impact our day-to-day operations as well as that of our key customers, suppliers and other partners.

Results of Operations

Inrad Optics, Inc.’s business falls into two main categories: Optical Components and Laser Devices/Instrumentation.

The Optical Components category is focused on custom optics manufacturing. The Company specializes in high-end precision components. It develops, manufactures and delivers precision custom optics and thin film optical coating services through its Custom and Metal Optics operations. Glass, metal, and 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 optical coating services supplied are used in inspection, process control systems, defense and aerospace electro-optical systems, laser system applications, industrial scanners, and medical system applications.

The Laser Devices/Instrumentation 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. This category also includes the manufactured crystal basedcrystal-based devices and associated instrumentation. The majority of crystals, crystal components and laser devices manufactured are used in laser systems, defense EO systems, medical lasers and R&D applications by engineers within corporations, universities and national laboratories.

The Company operates a manufacturing facility in Northvale, New Jersey, and has its corporate offices in the same location.

Revenue

Sales for the three months ended March 31,September 30, 2020 and 2019, were $2.0$2.2 million in each respective period. For the nine months ended September 30, 2020, sales were $6.8 million, a decrease of 21.2%8.5%, or $0.6 million, compared to $2.6sales of $7.4 million for the nine months ended September 30, 2019.

Sales to the aerospace/defense market increased $0.1 million, or 13.0%, to $0.8 million for the three months ended March 31,September 30, 2020, compared to $0.7 million for the three months ended September 30, 2019.

Sales For the nine months ending September 30, 2020, sales to the defense/aerospace market decreased by $0.2$0.1 million, or 24%3.7%, to $0.8$2.7 million compared to sales of $2.8 million in the three months ended March 31, 2020, compared to $1.0 million fornine-month period ending September 30, 2019. Timing of product shipments impacted sales in both the three months ended March 31, 2019. The decrease in sales in the defense/aerospace market is attributable to production delays in completing two large contracts.and nine-month periods ending September 30, 2020.

Process control and metrology (“PC&M”) sales were $0.8 million for the three months ended March 31,September 30, 2020, a decrease of $0.3$0.2 million, or 24.3%13.0%, from $1.1$1.0 million for the three months ended March 31,September 30, 2019. The continued reduction in demand for certain products in our PC&M market and the delayed delivery schedules from certain customers, particularlydecrease is mainly attributable to sluggish sales in the semi-conductor equipment industry. For the nine months ended September 30, 2020, sales decreased 9.6%, or $0.3 million to $2.7 million, from $3.1 million for the nine months ended September 30, 2019. Timing of sales in the first three quarters of 2020 from the semi-conductor industry has negatively impacted theyear to date sales for the three months ended March 31, 2020, compared to March 31, 2019.from PC&M.

For the three months ended March 31,September 30, 2020 and 2019, sales to customers in the laser systems market were $0.3 million.$0.2 million and $0.4 million, respectively. The decrease of $0.2 million or 50.2% reflects reduced demand for solid-state laser-based products during the quarter. Sales for the nine months ended September 30, 2020 and 2019, were flat$0.5 million and $1.0 million, respectively, a decrease of $0.5 million, or 44.2%. This year over year, as increased sales to customers were offset bydate decrease is reflective of the reduced deliveries of electro-optical crystals to a certain customer.demand in the solid-state laser products market.

Sales to customers in the Scientific/R&D market were $0.1$0.4 million for the three months ended March 31,September 30, 2020 compared toand $0.2 million for the three months ended March 31,September 30, 2019, an increase of $0.2 million, or 136.8%. For the nine-month period ending September 30, 2020, sales increased $0.2 million to $0.8 million, compared to $0.6 million for nine months ended September 30, 2019. The decreaseincrease in sales in the Scientific/R&D market is attributable to the completionaward of a federal government R&D contract in the latter partsecond quarter of 2019.2020.

For the three months ended March 31,September 30, 2020, only one customer represented 10% or more of revenues. For the three months ended March 31,September 30, 2019, there were two customers that represented 10.0% or more of total sales. For the nine months ended September 30, 2020, no customer represented 10.0% or more of total sales, compared to two customers representing 10.0% of sales for the nine months ended September 30, 2019.

The Company’s top five customers represented 49.7%44.1% of sales in the three monththree-month period ended March 31,September 30, 2020, compared to 46.1% in the same period in 2019. For the nine-month period ended September 30, 2020 and 2019, the Company’s top five customers represented 37.5% and 48.3%, respectively.

Orders booked during the first threenine months of 2020, totaled $3.1$8.2 million, compared to $1.9$6.7 million for the same period last year. Order backlog at March 31,September 30, 2020 and 2019, was $6.3$6.4 million and $5.7$5.4 million, respectively. The increase in orders booked reflects orders in the defense/aerospace and PC&M markets.

Cost of Goods Sold

For the three months ended March 31,September 30, 2020 and 2019, cost of goods sold was $1.6$1.8 million, and $2.0$1.9 million, or 79.7%81.3% and 75.2%84.1% of total revenues, respectively. The impact of increased labor and service costs, as well as manufacturing overhead, resulteddecrease in an increase in costscost of goods sold as a percentage of sales.revenues is due to lower material and outside services costs, manufacturing costs, and lower direct labor and related employee costs, offset by an increase in depreciation expense. Cost of goods sold for the nine months ended September 30, 2020 and 2019, were $5.2 million and $6.0 million, or 76.9% and 80.6% of total revenues, respectively. Cost of goods sold decreased 12.7%, or $0.8 million, reflecting lower material and outside services costs, direct labor and related employee costs, and manufacturing expenses, offset by an increase in depreciation expense.

Gross profit for the three months ended March 31,September 30, 2020, was $0.4 million or 20.3%18.7% of sales, compared to $0.6$0.4 million or 24.8%15.9% of sales in the same quarter last year. Gross profit for the year to date period ending September 30, 2020, was $1.6 million or 23.1% of sales, an increase of $0.2 million from $1.4 million or 19.4% of sales for the nine-month period ending September 30, 2019.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A” expenses) were $0.5 million, or 24.4% of sales, and $0.6 million, or 27.4% of sales, in the three months ended March 31,September 30, 2020 amountedand 2019, respectively. SG&A expenses in the three months ended September 30, 2020, reflect a reduction in travel and entertainment costs and marketing related costs due to $0.7restrictions on travel related to COVID-19. Outside services and temporary employee costs, and other administrative costs are also down from the year ago quarter. These reductions are offset by an increase in commissions, other general, insurance, and charges related to uncollectible accounts. SG&A expenses for the nine-month period ending September 30, 2020 and 2019, were $1.9 million and $2.0 million, or 34.7%,30.1% of sales compared to $0.6 million, or 24.7%,and 26.7% of sales, respectively. The SG&A expenses for the sameyear to date period a year ago. The increase in SG&A expenses reflects costs related toreflect the Company’s continued investment in sales an increase in legal and accounting fees, and charges related to uncollectible accounts, offset by a decrease in outside services for temporary employees, and a reductionreductions in other general and administrative expenses.expenses, and a reduction in legal fees.

Income (Loss)Loss from Operations

The Company incurred a net operating loss from operations of $0.1 million for the three months ended September 30, 2020, compared with a net operating loss of $0.3 million for the three months ended March 31, 2020, compared with an operating income of $0.0 million in the three months ended March 31,September 30, 2019. The decrease in incomethe net loss primarily reflects the impact of the Company’s lower salescosts of goods sold and SG&A expenses in the three months ended March 31,September 30, 2020, compared to the same period last year, coupled with relatedyear. The Company incurred a net loss from operations for the nine months ended September 30, 2020 and 2019, of $0.3 million and $0.6 million, respectively. The decrease in the net loss from operations is due to lower cost of goods sold and SG&A costs.expenses.

Other Income and Expense

There was no significant change in net interest expense for the three months ended March 31,September 30, 2020, compared to the same period in 2019, as2019. Although the Company incurred additional debt of $1.0 million due to the loan (the “PPP Loan”) received under the Paycheck Protection Program (the “PPP”), interest has not accrued on this loan and there was no other significant change in the Company’s borrowing level.borrowings. For the nine months ended September 30, 2020, other expense was slightly lower than the nine months ended September 30, 2019, due to the reduction in interest expense.

Income Taxes

For the three months and nine months ended March 31,September 30, 2020 and 2019, 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 three and nine months ended September 30, 2020 and 2019, 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)Loss

The Company had a net loss of $0.2 million for the three months ended September 30, 2020, compared to a net loss of $0.3 million for the three months ended March 31, 2020, compared to a net lossSeptember 30, 2019. The change primarily reflects the decrease in cost of $0.0 milliongoods sold coupled with the decrease in SG&A expenses for the three months ended March 31, 2019. The higher net loss primarily reflects the decrease in sales for the three months ended March 31,September 30, 2020, compared to the 2019 period, combined with relatedperiod. For the nine months ended September 30, 2020 and 2019, the Company recorded a net loss of $0.5 million and $0.7 million, respectively, primarily reflecting lower cost of goods sold and increased SG&A expenses.

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 termlong-term debt, and for capital expenditures. The Company received proceeds from the PPP Loan of approximately $1.0 million in May 2020.

As of March 31,September 30, 2020, and December 31, 2019, the Company had cash and cash equivalents of $0.8$1.6 million and $1.0 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 yearthree-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 April 12, 2018,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, 20212024 from April 1, 2018.2021. 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, 20222024 to April 1, 2024.2027. As of March 31,September 30, 2020, the Company had accrued interest in the amount of $150,000$75,000 associated with these notes.

The following table summarizes net cash provided by (used in) operating, investing and financing activities for the threenine months ended March 31,September 30, 2020 and 2019:

Net cash used in operating activities was $29,000$153,000 for the threenine months ended March 31,September 30, 2020, compared to net cash provided by operations of $2,000 in$11,000 for the same period last year. The net cash used operating activities in the nine months ended September 30, 2020, resulted primarily from the loss incurred for the period and an increase inventory and a decrease in accounts payable offset by an increase in contract liabilities. Net cash used in operating activities in the threenine months ended March 31, 2020,September 30, 2019, resulted primarily from operating losses as well as reductionsthe net loss incurred for the period offset by a reduction in accounts receivable and increases in accounts payable and contract liabilities.receivable. 

Net cash used in investing activities was $82,000$159,000 during the threenine months ended March 31,September 30, 2020, compared to $97,000$291,000 in the same period last year reflecting capital expenditures inincurred for both periods.

Net cash provided by financing activities reflects the PPP Loan proceeds received during the nine months ended September 30, 2020.

Overall, cash and cash equivalents decreasedincreased by $116,000$654,000 for the threenine months ended March 31,September 30, 2020, and decreased $99,000$373,000 in the nine-month period ending March 31,September 30, 2019.

On May 6, 2020, the Company received loan proceeds of approximately $973,000, under the Paycheck Protection Program (“PPP”).PPP. The PPP was established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) which was enacted March 27, 2020. The PPP Loan, which is in the form of a Notepromissory note dated May 4, 2020, issued by the Borrower,Company, matures on May 4, 2022, and bears interest at a rate of 1.0% per annum, payable monthly commencing on December 4, 2020. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible costs during the covered eight-week24-week period will qualify for forgiveness. The Company intends to use the entire loan amount for qualifying expenses. Any forgiveness of the PPP Loan will be subject to approval by the SBA,Small Business Administration, and no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part.

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 14,the third quarter of 2021.

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

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 March 31,September 30, 2020 (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.

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.

None.

Not applicable

None.

None.

Not applicableNone.

NoneNone.

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.