INRAD OPTICS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,465,145
|
|
|
$
|
3,089,013
|
|
Accounts receivable (net of allowance for doubtful accounts
of $15,000 in 2013 and 2012)
|
|
|
1,372,270
|
|
|
|
1,557,930
|
|
Inventories, net
|
|
|
3,396,253
|
|
|
|
3,596,646
|
|
Other current assets
|
|
|
111,945
|
|
|
|
158,742
|
|
Total current
assets
|
|
|
7,345,613
|
|
|
|
8,402,331
|
|
Plant and equipment:
|
|
|
|
|
|
|
|
|
Plant and equipment, at cost
|
|
|
16,124,802
|
|
|
|
15,446,826
|
|
Less: Accumulated depreciation and
amortization
|
|
|
(14,133,460
|
)
|
|
|
(14,182,712
|
)
|
Total plant and equipment
|
|
|
1,991,342
|
|
|
|
1,264,114
|
|
Precious Metals
|
|
|
474,960
|
|
|
|
474,960
|
|
Goodwill
|
|
|
311,572
|
|
|
|
311,572
|
|
Intangible Assets, net
|
|
|
398,042
|
|
|
|
437,324
|
|
Other Assets
|
|
|
34,838
|
|
|
|
534,838
|
|
Total Assets
|
|
$
|
10,556,367
|
|
|
$
|
11,425,139
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Current portion of other long term notes
|
|
$
|
150,200
|
|
|
$
|
150,200
|
|
Accounts payable and accrued liabilities
|
|
|
787,526
|
|
|
|
813,705
|
|
Customer advances
|
|
|
184,739
|
|
|
|
297,251
|
|
Total current
liabilities
|
|
|
1,122,465
|
|
|
|
1,261,156
|
|
|
|
|
|
|
|
|
|
|
Related Party Convertible Notes Payable
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
Other Long Term
Notes, net of current portion
|
|
|
794,966
|
|
|
|
869,135
|
|
Total liabilities
|
|
|
4,417,431
|
|
|
|
4,630,291
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
Common stock: $.01 par value; 60,000,000 authorized shares; 12,050,603
shares issued at June 30, 2013 and 11,881,724 issued at December 31, 2012
|
|
|
120,508
|
|
|
|
118,819
|
|
Capital in excess of par value
|
|
|
18,236,035
|
|
|
|
18,076,518
|
|
Accumulated deficit
|
|
|
(12,202,657
|
)
|
|
|
(11,385,539
|
)
|
|
|
|
6,153,886
|
|
|
|
6,809,798
|
|
Less - Common stock in treasury,
at cost (4,600 shares)
|
|
|
(14,950
|
)
|
|
|
(14,950
|
)
|
Total shareholders’
equity
|
|
|
6,138,936
|
|
|
|
6,794,848
|
|
Total Liabilities and Shareholders’ Equity
|
|
$
|
10,556,367
|
|
|
$
|
11,425,139
|
|
See Notes to Condensed Consolidated Financial
Statements (Unaudited)
INRAD OPTICS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended June
30,
|
|
|
Six Months Ended June
30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
2,694,598
|
|
|
$
|
2,880,448
|
|
|
$
|
5,771,724
|
|
|
$
|
5,721,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
2,386,866
|
|
|
|
2,312,614
|
|
|
|
4,764,894
|
|
|
|
4,413,339
|
|
Selling, general and administrative
expenses
|
|
|
909,664
|
|
|
|
864,804
|
|
|
|
1,763,472
|
|
|
|
1,719,093
|
|
|
|
|
3,296,530
|
|
|
|
3,177,418
|
|
|
|
6,528,366
|
|
|
|
6,132,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(601,932
|
)
|
|
|
(296,970
|
)
|
|
|
(756,642
|
)
|
|
|
(411,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense—net
|
|
|
(45,832
|
)
|
|
|
(36,113
|
)
|
|
|
(91,476
|
)
|
|
|
(70,739
|
)
|
Gain on sale of plant and equipment
|
|
|
—
|
|
|
|
—
|
|
|
|
31,000
|
|
|
|
—
|
|
|
|
|
(45,832
|
)
|
|
|
(36,113
|
)
|
|
|
(60,476
|
)
|
|
|
(70,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(647,764
|
)
|
|
|
(333,083
|
)
|
|
|
(817,118
|
)
|
|
|
(482,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (provision) benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(647,764
|
)
|
|
$
|
(333,083
|
)
|
|
$
|
(817,118
|
)
|
|
$
|
(482,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share—basic and diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding—basic and diluted
|
|
|
12,046,003
|
|
|
|
11,875,874
|
|
|
|
11,926,328
|
|
|
|
11,786,207
|
|
See Notes to Condensed Consolidated Financial
Statements (Unaudited)
INRAD OPTICS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
|
|
Six Months Ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(817,118
|
)
|
|
$
|
(482,042
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
259,094
|
|
|
|
319,576
|
|
401K common stock contribution
|
|
|
80,922
|
|
|
|
151,775
|
|
(Gain) on sale of plant and equipment
|
|
|
(31,000
|
)
|
|
|
—
|
|
Stock based compensation
|
|
|
80,284
|
|
|
|
106,646
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
185,660
|
|
|
|
233,291
|
|
Inventories, net
|
|
|
200,393
|
|
|
|
(413,289
|
)
|
Other current assets
|
|
|
46,797
|
|
|
|
64,540
|
|
Accounts payable and accrued liabilities
|
|
|
(26,180
|
)
|
|
|
(30,973
|
)
|
Customer advances
|
|
|
(112,512
|
)
|
|
|
(45,803
|
)
|
Total adjustments and changes
|
|
|
683,458
|
|
|
|
385,763
|
|
Net cash (used
in) operating activities
|
|
|
(133,660
|
)
|
|
|
(96,279
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(447,039
|
)
|
|
|
(180,832
|
)
|
Proceeds from sale of plant and
equipment
|
|
|
31,000
|
|
|
|
—
|
|
Net cash (used
in) investing activities
|
|
|
(416,039
|
)
|
|
|
(180,832
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
—
|
|
|
|
5,349
|
|
Principal payments on notes payable-other
|
|
|
(74,169
|
)
|
|
|
(4,844
|
)
|
Net cash (used
in) provided by financing activities
|
|
|
(74,169
|
)
|
|
|
505
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) in cash and cash equivalents
|
|
|
(623,868
|
)
|
|
|
(276,606
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning
of period
|
|
|
3,089,013
|
|
|
|
3,400,205
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end of period
|
|
$
|
2,465,145
|
|
|
$
|
3,123,599
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
59,000
|
|
|
$
|
82,000
|
|
Income taxes paid
|
|
$
|
2,000
|
|
|
$
|
5,000
|
|
See Notes to Condensed Consolidated Financial
Statements (Unaudited)
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 of 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, 2012.
In preparing these consolidated financial
statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the 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.
Inventories
Inventories are stated at the lower of
cost (first-in-first-out basis) or market. 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.
Inventories are comprised of the following
and are shown net of inventory reserves, in thousands:
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Raw materials
|
|
$
|
1,163
|
|
|
$
|
1,267
|
|
Work in process, including manufactured parts and components
|
|
|
1,123
|
|
|
|
1,291
|
|
Finished goods
|
|
|
1,110
|
|
|
|
1,039
|
|
|
|
$
|
3,396
|
|
|
$
|
3,597
|
|
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 years in which the differences
are expected to reverse.
For the three and six months ended June
30, 2013 and 2012, the Company did not record a current provision for either state or federal income tax due to the losses incurred
for both income tax and financial reporting purposes or the availability of net operating loss carry-forwards to offset against
federal and state income tax.
In evaluating the Company’s ability
to recover deferred tax assets in future periods, management considers the available positive and negative factors, including
the Company’s recent operating results, the existence of cumulative losses and near term forecasts of future taxable income
consistent with the plans and estimates that management uses to manage the underlying business. A significant piece of objective
negative evidence evaluated was the cumulative loss incurred by the Company over the three-year period ended December 31, 2012
as well as the six months ended June 30, 2013. 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
June 30, 2013, 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 net deferred tax balance of $3,445,000 and therefore the Company continues to maintain a valuation
allowance for the full amount of the net deferred tax 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.
Net (Loss) Income per Common Share
Basic net (loss) income per common share
is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted
net (loss) income per common share is computed by dividing net (loss) income 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 six months ended June
30, 2013, all common stock equivalents were excluded from the computation of diluted net loss per share because their effect is
anti-dilutive. This included 970,211 common stock equivalents related to outstanding options and grants, in each respective period.
In addition, there were 2,500,000 common shares and 1,875,000 warrants issuable upon conversion of outstanding related party convertible
notes in each period which were anti-dilutive.
For the three and six months ended June
30, 2012, all common stock equivalents were excluded from the computation of diluted net loss per share because their effect is
anti-dilutive. This included 942,823 common stock equivalents related to outstanding options and grants, in each respective period.
In addition, there were 2,500,000 common shares and 1,875,000 warrants issuable upon conversion of outstanding related party convertible
notes in each period which were anti-dilutive.
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.
Recently Adopted Accounting Standards
In July 2013, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11, “Presentation of an
Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.”
ASU 2013-11 clarifies the financial statement presentation of unrecognized tax benefits when a net operating loss carryforward,
a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 is effective for interim and annual reporting periods beginning
after December 15, 2013 and should be applied prospectively to all unrecognized tax benefits that exist at the effective
date. Management does not expect the adoption of ASU 2013-11 to have a material impact on the Company’s financial position,
results of operations or cash flows.
NOTE 2- EQUITY COMPENSATION PROGRAM AND STOCK BASED COMPENSATION
The Company's results of operations for
the three months ended June 30, 2013 and 2012 include stock-based compensation expense for stock option grants totaling $38,930
and $45,749, respectively. Such amounts have been included in the accompanying Condensed Consolidated Statements of Operations
within cost of goods sold in the amount of $20,314 ($24,821 for 2012), and selling, general and administrative expenses in the
amount of $18,616 ($20,928 for 2012).
The Company's results of operations for
the six months ended June 30, 2013 and 2012 include stock-based compensation expense for stock option grants totaling $77,860
and $104,222, respectively. Such amounts have been included in the accompanying Condensed Consolidated Statements of Operations
within cost of goods sold in the amount of $40,628 ($50,697 for 2012), and selling, general and administrative expenses in the
amount of $37,232 ($53,525 for 2012).
As of June 30, 2013 and 2012, there were
$148,232 and $278,006 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 1.4 years and 2.2 years, respectively.
There were 80,000 stock options granted
during the six months ended June 30, 2013. There were no stock options granted during the six months ended June 30, 2012. The
following range of weighted-average assumptions were used to determine the fair value of stock option grants during the six months
ended June 30, 2013:
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
Expected Dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Expected Volatility
|
|
|
98.1 - 110
|
%
|
|
|
—
|
%
|
Risk-free interest rate
|
|
|
1.9 - 2.1
|
%
|
|
|
—
|
%
|
Expected term
|
|
|
8 - 10 years
|
|
|
|
—
|
|
The following table represents stock options
granted, exercised and forfeited during the six month period ended June 30, 2013:
Stock Options
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price per Option
|
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at January 1, 2013
|
|
|
961,823
|
|
|
$
|
1.00
|
|
|
|
6.7
|
|
|
$
|
—
|
|
Granted
|
|
|
80,000
|
|
|
|
.32
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
(76,602
|
)
|
|
|
.67
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2013
|
|
|
965,221
|
|
|
$
|
.97
|
|
|
|
6.4
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2013
|
|
|
709,357
|
|
|
$
|
1.06
|
|
|
|
5.7
|
|
|
$
|
—
|
|
The following table represents
non-vested stock options granted, vested and forfeited for the six months ended June 30, 2013.
|
|
Options
|
|
|
Weighted-Average Grant-Date
Fair Value
|
|
Non-vested - January 1, 2013
|
|
|
298,678
|
|
|
$
|
0.82
|
|
Granted
|
|
|
80,000
|
|
|
$
|
0.28
|
|
Vested
|
|
|
(95,112
|
)
|
|
$
|
0.85
|
|
Forfeited
|
|
|
(27,702
|
)
|
|
$
|
0.86
|
|
Non-vested – June 30, 2013
|
|
|
255,864
|
|
|
$
|
0.63
|
|
The total fair value of options vested
during the six months ended June 30, 2013 and 2012 was $81,133 and $111,662, respectively.
|
c)
|
Restricted Stock Unit Awards
|
There were no grants of restricted stock
units granted under the 2010 Equity Compensation Program during the six months ended June 30, 2013 and 2012.
Restricted stock units granted usually
vest over a three year period at the rate of one-third per year, contingent on continued employment or service during the vesting
period.
The Company's results of operations for
the three months ended June 30, 2013 and 2012 include stock-based compensation expense for restricted stock unit grants totaling
$1,212 and $1,212, respectively, and such amounts have been included in the accompanying Consolidated Statements of Operations
within selling, general and administrative expenses.
The Company's results of operations for
the six months ended June 30, 2013 and 2012 include stock-based compensation expense for restricted stock unit grants totaling
$2,424 and $2,424, respectively, and such amounts have been included in the accompanying Consolidated Statements of Operations
within selling, general and administrative expenses.
A summary of the Company’s non-vested
restricted stock units at June 30, 2013 is presented below:
|
|
Restricted Stock Units
|
|
|
Weighted-Average Grant-Date
Fair Value
|
|
Non-vested - January 1, 2013
|
|
|
10,000
|
|
|
$
|
0.97
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(5,000
|
)
|
|
$
|
0.97
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Non-vested – June 30, 2013
|
|
|
5,000
|
|
|
$
|
0.97
|
|
NOTE 3- STOCKHOLDERS’ EQUITY
For the six months ended June 30, 2013,
the Company issued 5,000 common shares on vesting of restricted stock awards. In April 2013, the Company issued an additional
163,879 common shares to the Inrad Optics 401k plan as a match to employee contributions for 2012.
NOTE 4 – OTHER LONG TERM NOTES
On July 26, 2012, the Company entered
into a term loan agreement in the amount of $750,000 with Valley National Bank, Wayne, NJ. The loan is payable in equal monthly
installments over five years beginning in August 2012 and bears an interest rate of 4.35% annually. The loan is secured with a
security interest in new equipment. In 2012, the Company made a down-payment of $500,000 on the equipment and included the payment
in Other Assets at December 31, 2012. In March 2013, the Company made an installment payment in the amount of $242,500. During
the second quarter of 2013, the installation of the equipment was completed and the final installment payment was made. The cost
of the equipment including the down-payments and the associated installation costs were capitalized in the second quarter of 2013.
The Company also has a note payable to
the U.S. Small Business Administration which bears interest at the rate of 4.0% and is due in 2032.
Other Long Term Notes consist of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
Term Note Payable, payable in equal monthly installments of $13,953 and bearing an interest rate of 4.35% and expiring in July 2017
|
|
$
|
625
|
|
|
$
|
694
|
|
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 April 2032.
|
|
$
|
320
|
|
|
$
|
325
|
|
|
|
|
945
|
|
|
|
1,019
|
|
Less current portion
|
|
|
(150
|
)
|
|
|
(150
|
)
|
Long-term debt, excluding current portion
|
|
$
|
795
|
|
|
$
|
869
|
|
NOTE 5 – WORKFORCE REDUCTION
In the first quarter of 2013, the Company
instituted a plan to reduce its combined headcount by approximately 11%, in order to reduce costs and align its workforce with
current business requirements while ensuring the Company would continue to meet its customers’ needs. The reductions affected
both the Company’s Northvale, NJ and the Sarasota, FL operations. Annualized savings from the reductions are expected to
be approximately $700,000. Severance and other separation costs of $112,000 and $29,000 were expensed in the first quarter and
second quarters and offset payroll savings of approximately $45,000 and $175,000 respectively. Accrued severance payments were
$39,000 and $71,000 in the first and second quarters of 2013, and additional payments of $31,000 are expected in the third quarter
of 2013.
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 insure 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, 2012, as filed with the Securities and Exchange Commission on April 1, 2013. Any one or more of these uncertainties,
risks, and other influences could materially affect the Company’s results of operations and whether forward-looking statements
made by the Company ultimately prove to be accurate. Readers are further cautioned that the Company’s financial results
can vary from quarter to quarter, and the financial results for any period may not necessarily be indicative of future results.
The foregoing is not intended to be an exhaustive list of all factors that could cause actual results to differ materially from
those expressed in forward-looking statements made by the Company. The Company’s actual results, performance and achievements
could differ materially from those expressed or implied in these forward-looking statements. The Company undertakes no obligation
to publicly update or revise any forward looking statements, whether from new information, future events, or otherwise.
Critical Accounting Policies and
Estimates
Our significant accounting policies are
described in Note 1 of the accompanying 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, 2012. In preparing our 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. These include estimates used in evaluating goodwill and intangibles for impairment such as market multiples used in
determining the fair value of reporting units, discount rates applicable in determining net present values of future cash flows,
projections of future sales, earnings and cash flow and capital expenditures. It also includes estimates about the amount and
timing of future taxable income in determining the Company’s 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, 2012.
Results of Operations
Inrad Optics, Inc.’s business falls
into two main categories: Optical Components and Laser System Devices and 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 Optics and Metal Optics operations. Glass, metal,
and crystal substrates are processed using modern manufacturing equipment, 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 System Devices and 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 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 manufacturing facilities
in New Jersey and Florida.
Revenue
Sales for the three months ended June
30, 2013 were $2,695,000, a decrease of 6.4%, compared to $2,880,000 for the three months ended June 30,
2012. Sales for the six months ended June 30, 2013 were $5,771,000, a slight increase from $5,721,000 for the six months
ended June 30, 2012. Sales in the Optical Components category increased 4.2% for the six months ended June 30, 2013 compared with
the prior year. Sales of Laser Systems Devices and Instrumentation decreased 5.2% over the same period.
Shipments to customers in the universities
& national laboratories market increased. This was offset by decreased shipments in the process control & metrology markets,
the laser systems market and the defense/aerospace market which was spread across most of the Company’s existing customers
in those markets with the exception of a few customers that recorded sales increases.
Sales to major customers defined as those
who represent more than 10% of period sales, were down as a percentage of total sales in the first six months of 2013 compared
with the same period in 2012. This was due to lower sales to one large laser systems market customer that was partially offset
by an increase in sales to one large defense market customer compared to the same period in the prior year.
The Company’s top five customers
represented 34.3% of total sales in the six month period ended June 30, 2013, down from 43.4% in the same period in 2012.
Orders during the first six months of
2013 compared to 2012, decreased to $4.8 million compared to $6.3 million last year
Order backlog was $4.9 million at June
30, 2013, down compared to $5.9 million at December 31, 2012 and $5.6 million at June 30, 2012.
Cost of Goods Sold
Cost of goods sold was $2,387,000 for
the three months ended June 30, 2013 compared to $2,313,000 in the same quarter in 2012, an increase of $74,000 or 3.2%. For the
six months ended June 30, 2013, cost of goods sold increased by $352,000 or 8.0% to $4,765,000 compared to $4,413,000 in the same
period in 2012.
As a percentage of sales, cost of goods
sold increased to 88.6% compared to 80.3% in 2012 for the three months ended June 30, 2013. For the six months ended June 30,
2013, cost of goods sold as a percentage of sales was 82.6% compared to 77.1% in the same period in 2012.
Manufacturing wages and salaries, including
related fringe benefits, increased by 1.5% and 7.2%, respectively, during the three and six months ended June 30, 2013, compared
to same period last year, as a result of the shift in our historical customer mix discussed above.
The impact of the Company’s work
force reduction in March and April, 2013 had a net positive impact over the six months ended June 30, 2013. Severance costs included
in cost of goods sold were $29,000 and $141,000 in the three and six months ended June 30, 2013. These costs were offset by associated
payroll savings which amounted to approximately $175,000 and $220,000 in the respective periods.
Material costs decreased 28.7% and 11.7%
during the three and six months ended June 30, 2013, respectively, compared with the same periods in 2012, mainly due to the change
in sales mix, discussed above.
Gross margin decreased for the three and
six month period ended June 30, 2013 as a result of the factors discussed above. Gross margin in the second quarter of 2013 was
$308,000 or 11.4% versus $567,000 or 19.7% in the same period in 2012. For the six months ended June 30, 2013, gross margin decreased
to $1,007,000 or 17.4% compared with $1,308,000 or 22.9% in the comparable period in 2012.
Selling, General and Administrative
Expenses
Selling, general and administrative expenses
(“SG&A” expenses) in the three and six months ended June 30, 2013 amounted to $910,000 or 33.8% of sales and $1,763,000
or 30.5% of sales, respectively, compared to $865,000 or 30.0% of sales and $1,719,000 or 30.0% of sales, respectively, for the
same periods in 2012. For the three and six months ended June 30, 2013, SG&A expenses included approximately $29,000 and $75,000
in severance costs related to the workforce reduction discussed in Note 5 to the Condensed Consolidated Financial Statements.
Associated payroll savings from the workforce reduction was $69,000 and $85,000 for the three and six months ended June 30, 2013.
(Loss) from Operations
The Company had an operating loss of $602,000
in the three months ended June 30, 2013 compared with an operating loss of $297,000 in the three months ended June 30, 2012. For
the six months ended June 30, 2013, the Company had an operating loss of $757,000 compared with an operating loss of $411,000
in the same period last year. The operating losses in 2013 and 2012 primarily reflect the impact of the level of sales on the
Company’s relatively fixed cost structure.
Other Income and Expense
For the three months ended June 30, 2013,
net interest expense was $46,000, up from $36,000 in the same period in 2012. For the six months ended June 30, 2013, net interest
expense was $91,000, up from $71,000 in the same period in 2012.
Interest expense for the three months
ended June 30, 2013 increased to $48,000 compared to $41,000 in the same period in 2012. Interest expenses for the six months
ended June 30, 2013 increased to $96,000 compared to $82,000 in the same period in 2012. The increase in both periods is mainly
attributable to the addition of a term note with Valley National Bank in the third quarter of 2012.
Interest income during the three and six
months ended June 30, 2013 was $2,000 and $5,000, respectively, compared with $5,000 and $11,000, respectively, in the comparable
periods in 2012, and results from lower average cash balances in interest bearing accounts over the comparable periods.
In the first quarter of 2013, the Company
sold surplus machinery and recorded a gain of $31,000.
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 years in which the differences
are expected to reverse.
For the three and six months ended June
30, 2013 and 2012, the Company did not record a current provision for either state or federal income tax due to the losses incurred
for both income tax and financial reporting purposes or the availability of net operating loss carry-forwards to offset against
federal and state income tax.
In evaluating the Company’s ability
to recover deferred tax assets in future periods, management considers the available positive and negative factors, including
the Company’s recent operating results, the existence of cumulative losses and near term forecasts of future taxable income
consistent with the plans and estimates that management uses to manage the underlying business. A significant piece of objective
negative evidence evaluated was the cumulative loss incurred by the Company over the three-year period ended December 31, 2012
as well as the six months ended June 30, 2013. 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
June 30, 2013, 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 net deferred tax balance of $3,445,000. As a result, the Company maintains a valuation allowance
for the full amount of the net deferred tax 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.
Net (Loss)
For the three and six months ended June
30, 2013, the Company had a net loss of $648,000 and $817,000, respectively, compared to a net loss of $333,000 and $482,000,
respectively, for the same periods in 2012.
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 the payment of accrued and current interest on convertible debt, the servicing of long term debt and
for capital expenditures.
As of June 30, 2013 and December 31, 2012,
the Company had cash and cash equivalents of $2,465,000 and $3,089,000, respectively.
On July 26, 2012, the Company entered
into a term loan agreement with Valley National Bank, Wayne, NJ, in the amount of $750,000. The loan is secured with a security
interest in new equipment acquired by the Company in the amount of $825,000 which will enhance the Company’s thin film coating
capabilities. The loan is repayable in equal monthly installments over five years beginning in August 2012 and bears an interest
rate of 4.35% annually. In 2012, the Company made a down-payment of $500,000 on the equipment and included the payment in Other
Assets at December 31, 2012. In March 2013, the Company made an installment payment in the amount of $242,500. During the second
quarter of 2013, the installation of the equipment was completed and the final installment payment of $82,500 was made. The cost
of the equipment including installment payments and associated installation costs were capitalized in the second quarter of 2013
in the amount of $897,000 with an additional $70,000 capitalized for leasehold improvements associated with the equipment.
We believe that existing cash resources
held by the Company and anticipated to be generated from future operating activities are sufficient to meet working capital requirements,
anticipated capital expenditures, debt servicing payments and other contractual obligations over the next 12 months.
On July 31, 2012, 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, 2015 from April 1, 2013. 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 and expire on April 1, 2018. The Company paid current interest of $37,500 in each
quarter during the six months ended June 30, 2013 and 2012. The Company expects to make interest payments of $37,500 in the remaining
quarters of 2013 and in each quarter through the maturity date of the notes to satisfy the amounts of interest accruing in each
quarter.
The following table summarizes net cash
(used in) operating, investing and financing activities for the six months ended June 30, 2013 and 2012:
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net cash (used in) operating activities
|
|
$
|
(134
|
)
|
|
$
|
(96
|
)
|
Net cash (used in) investing activities
|
|
|
(416
|
)
|
|
|
(181
|
)
|
Net cash (used in) financing activities
|
|
|
(74
|
)
|
|
|
-
|
|
Net (decrease) in cash and cash equivalents
|
|
$
|
(624
|
)
|
|
$
|
(277
|
)
|
Net cash used in operating activities
was $134,000 for the six months ended June 30, 2013 compared to $96,000 in the same period last year. The decrease in net cash
from operating activities in the first six months of 2013 compared to 2012 resulted primarily from the higher net loss generated
in the current period.
Accounts receivables decreased by $186,000
at June 30, 2013 compared to a decrease of $233,000 the same period last year. The decrease was mainly the result of the timing
of shipments and the collection of balances during the six months ended June 30, 2013 compared to the prior year.
Inventory balances decreased by $200,000
in the six months ended June 30, 2013 compared to an increase of $413,000 in the six months ended June 30, 2012 which was the
result of planned reductions in 2013 primarily attributable to the reduction in orders placed in the current year.
Accounts payable and accrued liabilities
decreased by $26,000 in the six months ended June 30, 2013 compared to a decrease of $31,000 in 2012 principally due to the timing
of payments as the Company continues to optimize its use of cash.
Non-cash items consist of depreciation
and amortization, stock based compensation expense and the Company’s annual 401K matching stock contribution for the six
months ended June 30, 2013 and 2012.
Net cash used in investing activities
was $416,000 during the six months ended June 30, 2013 versus $181,000 last year. Capital expenditures for the six months ended
June 30, 2013 and 2012 were $447,000 and $181,000, respectively. The expenditures in 2013 were primarily for the balance owed
on new equipment purchased to enhance the Company’s thin film coating capabilities and the associated installation costs
at the Northvale facility. The expenditures in 2012 were primarily incurred to refurbish operating facilities in New Jersey and
Florida and to purchase manufacturing equipment. The Company also sold surplus machinery during the six months ended June 30,
2013 and received net proceeds of $31,000.
Net cash used in financing activities
during the six months ended June 30, 2013 totaled $74,000 compared to net cash provided of $500 in the comparable period in 2012.
The increase in cash used in 2013 is mainly attributable to the principal payments made on the term loan with Valley National
Bank that the Company entered into in the third quarter of 2012 to finance the acquisition of new equipment. The net cash provided
in 2012 consisted primarily of proceeds from the
exercise of stock options for $5,500, offset
by principal payments on long term notes of $5,000.
Overall, the Company had a net decrease
in cash and cash equivalents of $624,000 in the six months ended June 30, 2013 compared with a decrease of $277,000 in the corresponding
period last year.